Taxpayer Relief Act of 1997
PL 105-34 (H.R.2014), enacted 08/05/1997

I l l STAT. 788 
PUBLIC LAW 105-34—AUG. 5, 1997 
* Public Law 105-34 
105th Congress 
An Act 
Aug. 5, 1997 
To provide for reconciliation pursuant to subsections (b)(2) and (d) of section 105 
[H.R. 2014] 
of the concurrent resolution on the budget for fiscal year 1998. 
Be it enacted by the Senate and House of Representatives 
of 
Taxpayer Relief 
the United States of America in Congress assembled. 
Art nf 1QQ7 
ACT 011»» 
SECTION 1. S H O R T TITLE; ETC. 
26 use 1 note. 
(a) SHORT TiTLE.—^This Act may be cited as the "Taxpayer 
ReliefActof 1997". 
(b) AMENDMENT OF 1986 CODE.—Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed 
in terms of an amendment to, or repeal of, a section or other 
provision, the reference shall be considered to be made to a section 
or other provision of the Internal Revenue Code of 1986. 
26 use 15 note. 
(c) SECTION 15 NOT To APPLY.—No amendment made by this 
Act shall be treated as a change in a rate of tax for purposes 
of section 15 of the Internal Revenue Code of 1986. 
26 u s e 6654 
(d) 
WAIVER 
OF ESTIMATED 
TAX P E N A L T I E S . — N o 
a d d i t i o n 
tO 
note. 
tax shall be made under section 6654 or 6655 of the Internal 
Revenue Code of 1986 for any period before January 1, 1998, 
for any payment the due date of which is before January 16, 
1998, with respect to any underpayment attributable to such period 
to the extent such underpayment was created or increased by 
any provision of this Act. 
(e) TABLE OF CONTENTS.—The table of contents for this Act 
is as follows: 
Sec. 1. Short title; etc. 
TITLE I—CHILD TAX CREDIT 
Sec. 101. Child tax credit. 
TITLE II—EDUCATION INCENTIVES 
Subtitle A—^Tax Benefits Relating to Education Expenses 
Sec. 201. Hope and lifetime learning credits. 
Sec. 202. Deduction for interest on education loans. 
Sec. 203. Penalty-free withdrawals from individual retirement plans for higher edu-
cation expenses. 
Subtitle B—Expanded Education Investment Savings Opportunities 
PART I—QUALIFIED TUITION PROGRAMS 
Sec. 211. Modifications of qualified State tuition programs. 
PART II—EDUCATION INDIVIDUAL RETIREMENT ACCOUNTS 
Sec. 213. Education individual retirement accounts. 
Subtitle C—Other Education Initiatives 
Sec. 221. Extension of exclusion for employer-provided educational assistance. 
*Note: This law contains items that were cancelled by the President pursuant to the Line 
Item Veto Act. For more information, see the Federal Register entry under "LEGISLATIVE 
HISTORY" at the end of this law. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 789 
Sec. 222. Repeal of limitation on qualified 501(c)(3) bonds other than hospital 
bonds. 
Sec. 223. Increase in arbitrage rebate exception for governmental bonds used to fi-
nance education facilities. 
Sec. 224. Contributions of computer technology and equipment for elementary or 
secondary school purposes. 
Sec. 225. Treatment of cancellation of certain student loans. 
Sec. 226. Incentives for education zones. 
TITLE III—SAVINGS AND INVESTMENT INCENTIVES 
Subtitle A—Retirement Savings 
Sec. 301. Restoration of IRA deduction for certain taxpayers. 
Sec. 302. Establishment of nondeductible tax-free individual retirement accounts. 
Sec. 303. Distributions from certain plans may be used without penalty to purchase 
first homes. 
Sec. 304. Certain bullion not treated as collectibles. 
Subtitle B—Capital Gains 
Sec. 311. 20 percent maximum capital gains rate for individuals. 
Sec. 312. Exemption from tax for gain on sale of principal residence. 
Sec. 313. Rollover of gain from sale of qualified stock. 
Sec. 314. Amount of net capital gain taken into account in computing alternative 
tax on capital gains for corporations not to exceed taxable income of the 
corporation. 
TITLE IV—ALTERNATIVE MINIMUM TAX REFORM 
Sec. 401. Exemption from alternative minimum tax for small corporations. 
Sec. 402. Repeal of separate depreciation lives for minimum tax purposes. 
Sec. 403. Minimum tax not to apply to farmers' installment sales. 
TITLE V—ESTATE, GIFT, AND GENERATION-SKIPPING TAX PROVISIONS 
Subtitle A—Estate and Gift Tax Provisions 
Sec. 501. Cost-of-living adjustments relating to estate and gift tax provisions. 
Sec. 502. Famihr-owned business exclusion. 
Sec. 503. Modifications to rate of interest on portion of estate tax extended under 
section 6166. 
Sec. 504. Extension of treatment of certain rents under section 2032A to lineal de-
scendants. 
Sec. 505. Clarification of judicial review of eligibility for extension of time for pay-
ment of estate tax. 
Sec. 506. Gifts may not be revalued for estate tax purposes after expiration of stat-
ute of limitations. 
Sec. 507. Repeal of throwback rules applicable to certain domestic trusts. 
Sec. 508. Treatment of land subject to a qualified conservation easement. 
Subtitle B—Greneration-Skipping Tax Provision 
Sec. 511. Expansion of exception from generation-skipping transfer tax for trans-
fers to individuals with deceased parents. 
TITLE VI—EXTENSIONS 
Sec. 601. Research tax credit. 
Sec. 602. Contributions of stock to private foundations. 
Sec. 603. Work opportunity tax credit. 
Sec. 604. Orphan drug tax credit. 
TITLE VII—INCENTIVES FOR REVITALIZATION OF THE DISTRICT OF 
COLUMBIA 
Sec. 701. Tax incentives for revitalization of the District of Columbia. 
TITLE VIII—WELFARE-TO-WORK INCENTIVES 
Sec. 801. Incentives for employing long-term family assistance recipients. 
TITLE K—MISCELLANEOUS PROVISIONS 
Subtitle A—Provisions Relating to Excise Taxes 
Sec. 901. General revenue portion of highway motor fuels taxes deposited into 
Highway Trust Fund. 
Sec. 902. Repeal of tax on diesel fuel used in recreational boats. 
Ill STAT. 790 
PUBLIC LAW 105-34—AUG. 5, 1997 
Sec. 903. Continued application of tax on imported recycled Halon-1211. 
Sec. 904. Uniform rate of tax on vaccines. 
Sec. 905. Operators of multiple gasoline retail outlets treated as wholesale distribu-
tor for refund purposes. 
Sec. 906. Exemption of electric and other clean-fuel motor vehicles from luxury 
automobile classification. 
Sec. 907. Rate of tax on certain special fuels determined on basis of BTU equiva-
lency with gasoline. 
Sec. 908. Modification of tax treatment of hard cider. 
Sec. 909. Study of feasibility of moving collection point for distilled spirits excise 
tax. 
Sec. 910. Clarification of authority to use semi-generic designations on wine labels. 
Subtitle B—^Revisions Relating to Disasters 
Sec. 911. Authority to postpone certain tax-related deadlines by reason of presi-
dentially declared disaster. 
Sec. 912. Use of certain appraisals to establish amount of disaster loss. 
Sec. 913. Treatment of livestock sold on account of weather-related conditions. 
Sec. 914. Mortgage financing for residences located in disaster areas. 
Sec. 915. Abatement of interest on underpayments by taxpayers in presidentially 
declared disaster areas. 
Subtitle C—Provisions Relating to Employment Taxes 
Sec. 921. Clarification of standard to be used in determining employment tax sta-
tus of securities brokers. 
Sec. 922. Clarification of exemption from self-employment tax for certain termi-
nation payments received by former insurance salesmen. 
Subtitle D—Provisions Relating to Small Businesses 
Sec. 931. Waiver of penalty through June 30, 1998, on small businesses failing to 
make electronic fund transfers of taxes. 
Sec. 932. Clarification of treatment of home office use for administrative and man-
agement activities. 
Sec. 933. Averaging of farm income over 3 years. 
Sec. 934. Increase in deduction for health insurance costs of self-employed individ-
uals. 
Sec. 935. Moratorium on certain regulations. 
Subtitle E—Brownfields 
Sec. 941. Expensing of environmental remediation costs. 
Subtitle F—Empowerment Zones, Enterprise Communities, Brownfields, and 
Community Development Financial Institutions 
CHAPTER 1—ADDITIONAL EMPOWERMENT ZONES 
Sec. 951. Additional empowerment zones. 
CHAPTER 2—NEW EMPOWERMENT ZONES 
Sec. 952. Designation of new empowerment zones. 
Sec. 953. Volume cap not to apply to enterprise zone facility bonds with respect to 
new empowerment zones. 
Sec. 954. Modification to eligibility criteria for designation of future enterprise 
zones in Alaska or Hawaii. 
CHAPTER 3—TREATMENT O F EMPOWERMENT ZONES AND ENTERPRISE COMMUNITIES 
Sec. 955. Modifications to enterprise zone facility bond rules for all empowerment 
zones and enterprise communities. 
Sec. 956. Modifications to enterprise zone business definition for all empowerment 
zones and enterprise communities. 
Subtitle G—Other Provisions 
Sec. 961. Use of estimates of shrinkage for inventory accounting. 
Sec. 962. Assignment of workmen's compensation liability eligible for exclusion re-
lating to personal injury liability assignments. 
Sec. 963. Tax-exempt status for certain State worker's compensation act companies. 
Sec. 964. Election tor 1987 partnerships to continue exception from treatment of 
publicly traded partnerships as corporations. 
Sec. 965. Exclusion from unrelated business taxable income for certain sponsorship 
payments. 
Sec. 966. Associations of holders of timeshare interests to be taxed like other home-
owners associations. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 791 
Sec. 967. Additional advance refunding of certain Virgin Island bonds. 
Sec. 968. Nonrecognition of gain on sale of stock to certain farmers' cooperatives. 
Sec. 969. Increased deductibility of business meal expenses for individuals subject 
to Federal hours of service. 
Sec. 970. Clarification of de minimis fringe benefit rules to no-charge employee 
meals. 
Sec. 971. Exemption of the incremental cost of a clean fuel vehicle from the limits 
on depreciation for vehicles. 
Sec. 972. Temporary suspension of taxable income limit on percentage depletion for 
marginal production. 
Sec. 973. Increase in standard mileage rate expense deduction for charitable use of 
f
>assenger automobile, 
arification of treatment of certain receivables purchased by cooperative 
hospital service organizations. 
Sec. 975. Deduction in computing adjusted gross income for expenses in connection 
with service performed by certain officials. 
Sec. 976. Combined employment tax reporting demonstration project. 
Sec. 977. Elective carryback of existing carryovers of National Railroad Passenger 
Corporation. 
Subtitle H—Extension of Duty-Free Treatment Under Generalized System of 
Preferences 
Sec. 981. Generalized System of Preferences. 
TITLE X—REVENUES 
Subtitle A—Financial Products 
Sec. 1001. Constructive sales treatment for appreciated financial positions. 
Sec. 1002. Limitation on exception for investment companies under section 351. 
Sec. 1003. Gains and losses from certain terminations with respect to property. 
Sec. 1004. Determination of original issue discount where pooled debt obligations 
subject to acceleration. 
Sec. 1005. Denial of interest deductions on certain debt instruments. 
Subtitle B—Corporate Organizations and Reorganizations 
Sec. 1011. Tax treatment of certain extraordinary dividends. 
Sec. 1012. Application of section 355 to distributions in connection with acquisi-
tions and to intragroup transactions. 
Sec. 1013. Tax treatment of redemptions involving related corporations. 
Sec. 1014. Certain preferred stock treated as boot. 
Sec. 1015. Modification of holding period applicable to dividends received deduc-
tion. 
Subtitle C—^Administrative Provisions 
Sec. 1021. Reporting of certain pavments made to attorneys. 
Sec. 1022. Decrease of threshold ror reporting payments to corporations performing 
services for Federal agencies. 
Sec. 1023. Disclosure of return information for administration of certain veterans 
programs. 
Sec. 1024. Continuous levy on certain payments. 
Sec. 1025. Modification of levy exemption. 
Sec. 1026. Confidentiality and disclosure of returns and return information. 
Sec. 1027. Returns of beneficiaries of estates and trusts required to file returns con-
sistent with estate or trust return or to notify Secretary of inconsist-
ency. 
Sec. 1028. Registration and other provisions relating to confidential corporate tax 
shelters. 
Subtitle D—Excise and Employment Tax Provisions 
Sec. 1031. Extension and modification of taxes funding Airport and Airway Trust 
Fund; increased dei>osit8 into such Fund. 
Sec. 1032. Kerosene taxed as diesel fuel. 
Sec. 1033. Restoration of Leaking Underground Storage Tank Trust Fund taxes. 
Sec. 1034. Application of communications tax to prepaid telephone cards. 
Sec. 1035. Extension of temporary unemployment tax. 
Subtitle E—Provisions Relating to Tax-Exempt Entities 
Sec. 1041. Expansion of look-thru rule for interest, annuities, royalties, and rents 
derived by subsidiaries of tax-exempt organizations. 
Sec. 1042. Termination of certain exceptions from rules relating to exempt organi-
zations which provide commercial-type insurance. 
Ill STAT. 792 
PUBLIC LAW 105-34—AUG. 5, 1997 
Subtitle F—Foreign Provisions 
Sec. 1051. Definition of foreign personal holding company income. 
Sec. 1052. Personal property used predominantly in the United States treated as 
not property of a like kind with respect to property used predominantly 
outside the United States. 
Sec. 1053. Holding period requirement for certain foreign taxes. 
Sec. 1054. Denial of treaty benefits for certain payments through hybrid entities. 
Sec. 1055. Interest on underpajonents not reduced by foreign tax credit carrybacks. 
Sec. 1056. Clarification of period of limitations on claim for credit or refund attrib-
utable to foreign tax credit carryforward. 
Sec. 1057. Repeal of exception to alternative minimum foreign tax credit limit. 
Subtitle G—Partnership Provisions 
Sec. 1061. Allocation of basis among properties distributed by partnership. 
Sec. 1062. Repeal of requirement that inventory be substantially appreciated with 
respect to sale or exchange of partnership interest. 
Sec. 1063. Extension of time for taxing precontribution gain. 
Subtitle H—Pension Provisions 
Sec. 1071. Pension accrued benefit distributable without consent increased to 
$5,000. 
Sec. 1072. Election to receive taxable cash compensation in lieu of nontaxable park-
ing benefits. 
Sec. 1073. Repeal of excess distribution and excess retirement accumulation tax. 
Sec. 1074. Increase in tax on prohibited transactions. 
Sec. 1075. Basis recovery rules for annuities over more than one life. 
Subtitle I—Other Revenue Provisions 
Sec. 1081. Termination of suspense accounts for family corporations required to use 
accrual method of accounting. 
Sec. 1082. Modification of taxable years to which net operating losses may be car-
ried. 
Sec. 1083. Modifications to taxable years to which unused credits may be carried. 
Sec. 1084. Expansion of denial of deduction for certain amounts paid in connection 
with insurance. 
Sec. 1085. Improved enforcement of the application of the earned income credit. 
Sec. 1086. Limitation on property for which income forecast method may be used. 
Sec. 1087. Expansion of requirement that involuntarily converted property be re-
placed with property acquired from an unrelated person. 
Sec. 1088. Treatment of exception from installment sales rules for sales of property 
by a manufacturer to a dealer. 
Sec. 1089. Limitations on charitable remainder trust eligibility for certain trusts. 
Sec. 1090. Expanded SSA records for tax enforcement. 
Sec. 1091. Modification of estimated tax safe harbors. 
TITLE XI—SIMPLIFICATION AND OTHER FOREIGN-RELATED PROVISIONS 
Subtitle A—General Provisions 
Sec. 1101. Certain individuals exempt from foreign tax credit limitation. 
Sec. 1102. Exchange rate used in translating foreign taxes. 
Sec. 1103. Election to use simplified section 904 limitation for alternative minimum 
tax. 
Sec. 1104. Treatment of personal transactions by individuals under foreign cur-
rency rules. 
Sec. 1105. Foreign teix credit treatment of dividends from noncontroUed section 902 
corporations. 
Subtitle B—Treatment of Controlled Foreign Corporations 
Sec. 1111. Gain on certain stock sales by controlled foreign corporations treated as 
dividends. 
Sec. 1112. Miscellaneous modifications to subpart F. 
Sec. 1113. Indirect foreign tax credit allowed tor certain lower tier companies. 
Subtitle C—^Treatment of Passive Foreign Investment Companies 
Sec. 1121. United States shareholders of controlled foreign corporations not subject 
to PFIC inclusion. 
Sec. 1122. Election of mark to market for marketable stock in passive foreign in-
vestment company. 
Sec. 1123. Valuation of assets for passive foreign investment company determina-
tion. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 793 
Sec. 1124. Effective date. 
Subtitle D—Repeal of Excise Tax on Transfers to Foreign Entities 
Sec. 1131. Repeal of excise tax on transfers to foreign entities; recognition of gain 
on certain transfers to foreign trusts and estates. 
Subtitle E—Information Reporting 
Sec. 1141. Clarification of application of return requirement to foreign partner-
ships. 
Sec. 1142. Controlled foreign partnerships subject to information reporting com-
S
arable to information reporting for controlled foreign corporations, 
.odifications relating to returns required to be filed by reason of 
changes in ownership interests in foreign partnership. 
Sec. 1144. Transfers of property to foreign partnerships subject to information re-
porting comparaole to information reporting for such transfers to foreign 
corporations. 
Sec. 1145. Extension of statute of limitations for foreign transfers. 
Sec. 1146. Increase in filing thresholds for returns as to organization of foreign cor-
porations and acquisitions of stock in such corporations. 
Subtitle F—Determination of Foreign or Domestic Status of Partnerships 
Sec. 1151. Determination of foreign or domestic status of partnerships. 
Subtitle G—Other Simplification Provisions 
Sec. 1161. Transition rule for certain trusts. 
Sec. 1162. Repeal of stock and securities safe harbor requirement that principal of-
fice be outside the United States. 
Sec. 1163. Miscellaneous clarifications. 
Subtitle H—Other Provisions 
Sec. 1171. Treatment of computer software as FSC ejcport property. 
Sec. 1172. Adjustment of dollar limitation on section 911 exclusion. 
Sec. 1173. United States property not to include certain assets acquired by dealers 
in ordinary course of trade or business. 
Sec. 1174. Treatment of nonresident aliens engaged in international transportation 
services. 
Sec. 1175. Exemption for active financing income. 
TITLE XII—SIMPLIFICATION PROVISIONS RELATING TO INDIVIDUALS AND 
BUSINESSES 
Subtitle A—Provisions Relating to Individuals 
Sec. 1201. Basic standard deduction and minimum tax exemption amount for cer-
tain dependents. 
Sec. 1202. Increase in amount of tax exempt from estimated tax requirements. 
Sec. 1203. Treatment of certain reimbursed expenses of rural mail carriers. 
Sec. 1204. Treatment of traveling expenses of certain Federal employees engaged 
in criminal investigations. 
Sec. 1205. Payment of tax by commercially acceptable means. 
Subtitle B—Provisions Relating to Businesses Generally 
Sec. 1211. Modifications to look-back method for long-term contracts. 
Sec. 1212. Minimum tax treatment of certain property and casualty insurance com-
panies. 
Sec. 1213. Qualified lessee construction allowances for short-term leases. 
Subtitle C—Simplification Relating to Electing Large Partnerships 
PART I—GENERAL PROVISIONS 
Sec. 1221. Simplified flow-through for electing large partnerships. 
Sec. 1222. Simplified audit procedures for electing large partnerships. 
Sec. 1223. Due date for furnishing information to partners of electing large part-
nerships. 
Sec. 1224. Returns required on magnetic media. 
Sec. 1225. Treatment of partnership items of individual retirement accounts. 
Sec. 1226. Effective date. 
PART II—PROVISIONS RELATED TO T E F R A PARTNERSHIP PROCEEDINGS 
Sec. 1231. Treatment of partnership items in deficiencrj'proceedings. 
Sec. 1232. Partnership return to be determinative of audit procedures to be fol-
lowed. 
I l l STAT. 794 
PUBLIC LAW 105-34—AUG. 5, 1997 
Sec. 1233. Provisions relating to statute of limitations. 
Sec. 1234. Expansion of small partnership exception. 
Sec. 1235. Exclusion of partial settlements from 1-year limitation on assessment. 
Sec. 1236. Extension of time for filing a request for administrative adjustment. 
Sec. 1237. Availability of innocent spouse relief in context of partnership proceed-
ings. 
Sec. 1238. Determination of penalties at partnership level. 
Sec. 1239. Provisions relating to court jurisdiction, etc. 
Sec. 1240. Treatment of premature petitions filed by notice partners or 5-percent 
groups. 
Sec. 1241. Bonds in case of appeals from certain proceeding. 
Sec. 1242. Suspension of interest where delay in computational adjustment result-
ing from certain settlements. 
Sec. 1243. Special rules for administrative adjustment requests with respect to bad 
debts or worthless securities. 
PART III—PROVISION RELATING TO CLOSING OF PARTNERSHIP TAXABLE YEAR WITH 
RESPECT TO DECEASED PARTNER, ETC. 
Sec. 1246. Closing of partnership taxable year with respect to deceased partner, 
etc. 
Subtitle D—Provisions Relating to Real Estate Investment Trusts 
Sec. 1251. Clarification of limitation on maximum number of shareholders. 
Sec. 1252. De minimis rule for tenant services income. 
Sec. 1253. Attribution rules applicable to stock ownership. 
Sec. 1254. Credit for tax paid by REIT on retained capital gains. 
Sec. 1255. Repeal of 30-percent gross income requirement. 
Sec. 1256. Modification of earnings and profits rules for determining whether REIT 
has earnings and profits from non-REIT year. 
Sec. 1257. Treatment of foreclosure property. 
Sec. 1258. Payments under hedging instruments. 
Sec. 1259. Excess noncash income. 
Sec. 1260. Prohibited transaction safe harbor. 
Sec. 1261. Shared appreciation mortgages. 
Sec. 1262. Wholly owned subsidiaries. 
Sec. 1263. Effective date. 
Subtitle E—Provisions Relating to Regulated Investment Companies 
Sec. 1271. Repeal of 30-percent gross income limitation. 
Subtitle F—^Taxpayer Protections 
Sec. 1281. Reasonable cause exception for certain penalties. 
Sec. 1282. Clarification of period for filing claims tor refunds. 
Sec. 1283. Repeal of authority to disclose whether prospective juror has been au-
dited. 
Sec. 1284. Clarification of statute of limitations. 
Sec. 1285. Awarding of administrative costs. 
TITLE XIII—SIMPLIFICATION PROVISIONS RELATING TO ESTATE AND GIFT 
TAXES 
Sec. 1301. Gifts to charities exempt from gift tax filing requirements. 
Sec. 1302. Clarification of waiver of certsdn rights of recovery. 
Sec. 1303. Transitional rule under section 2056A. 
Sec. 1304. Treatment for estate tax purposes of short-term obligations held by non-
resident aliens. 
Sec. 1305. Certain revocable trusts treated as part of estate. 
Sec. 1306. Distributions during first 65 days of taxable year of estate. 
Sec. 1307. Separate share rules available to estates. 
Sec. 1308. Executor of estate and beneficiaries treated as related persons for dis-
allowance of losses, ete. 
Sec. 1309. Treatment of funeral trusts. 
Sec. 1310. Adjustments for gifts within 3 years of decedent's death. 
Sec. 1311. Clarification of treatment of survivor annuities under qualified 
ter-
minable interest rules. 
Sec. 1312. Treatment under qualified domestic trust rules of forms of ownership 
which are not trusts. 
Sec. 1313. Opportunity to correct certain failures under section 2032A. 
Sec. 1314. Authority to waive requirement of United States trustee for qualified do-
mestic trusts. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 795 
TITLE XIV—SIMPLIFICATION PROVISIONS RELATING TO EXCISE TAXES, 
TAX-EXEMPT BONDS, AND OTHER MATTERS 
Subtitle A—Excise Tax Simplification 
PART I—EXCISE TAXES ON HEAVY TRUCKS AND LUXURY CARS 
Sec. 1401. Increase in de minimis limit for after-market alterations for heavy 
trucks and luxury cars. 
Sec. 1402. Credit for tire tax in lieu of exclusion of value of tires in computing 
price. 
PART II—PROVISIONS RELATED TO DISTILLED SPIRITS, WINES, AND BEER 
Sec. 1411. Credit or refund for imported bottled distilled spirits returned to dis-
tilled spirits plant. 
Sec. 1412. Authority to cancel or credit export bonds without submission of records. 
Sec. 1413. Repeal of required maintenance of records on premises of distilled spirits 
plant. 
Sec. 1414. Fermented material from any brewery may be received at a distilled 
spirits plant. 
Sec. 1415. Repeal of requirement for wholesale dealers in liquors to post sign. 
Sec. 1416. Refund of tax to wine returned to bond not limited to unmerchantable 
wine. 
Sec. 1417. Use of additional ameliorating material in certain wines. 
Sec. 1418. Domestically produced beer may be withdrawn free of tax for use of for-
eign embassies, legations, etc. 
Sec. 1419. Beer may be withdrawn free of tax for destruction. 
Sec. 1420. Authority to allow drawback on exported beer without submission of 
records. 
Sec. 1421. Transfer to brewery of beer imported in bulk without payment of tax. 
Sec. 1422. Transfer to bonded wine cellars of wine imported in bulk without pay-
ment of tax. 
PART III—OTHER EXCISE TAX PROVISIONS 
Sec. 1431. Authority to ^ a n t exemptions from registration requirements. 
Sec. 1432. Repeal of expired provisions. 
Sec. 1433. Simplification of imposition of excise tax on arrows. 
Sec. 1434. Modifications to retail tax on heavy trucks. 
Sec. 1435. Skydiving flights exempt from tax on transportation of persons by air. 
Sec. 1436. Allowance or credit of refund for tax-paid aviation fuel purchased by reg-
istered producer of aviation fuel. 
Subtitle B—Tax-Exempt Bond Provisions 
Sec. 1441. Repeal of $100,000 limitation on unspent proceeds under 1-year excep-
tion from rebate. 
Sec. 1442. Exception from rebate for earnings on bona fide debt service fund under 
construction bond rules. 
Sec. 1443. Repeal of debt service-based limitation on investment in certain nonpur-
pose investments. 
Sec. 1444. Repeal of expired provisions. 
Sec. 1445. Effective date. 
Subtitle C—Tax Court Procedures 
Sec. 1451. Overpayment determinations of Tax Court. 
Sec. 1452. Redetermination of interest pursuant to motion. 
Sec. 1453. Application of net worth requirement for awards of litigation costs. 
Sec. 1454. Proceedings for determination of employment status. 
Subtitle D—Other Provisions 
Sec. 1461. Extension of due date of first quarter estimated tax payment by private 
foundations. 
Sec. 1462. Clarification of authority to withhold Puerto Rico income taxes from sal-
aries of Federal employees. 
Sec. 1463. Certain notices disregarded under provision increasing interest rate on 
large corporate underpayments. 
TITLE XV—PENSIONS AND EMPLOYEE BENEFITS 
Subtitle A—Simplification 
Sec. 1501. Matching contributions of self-employed individuals not treated as elec-
tive employer contributions. 
I l l STAT. 796 
PUBLIC LAW 105-34—AUG. 5, 1997 
Sec. 1502. Modification of prohibition of assignment or alienation. 
Sec. 1503. Elimination of paperwork burdens on plans. 
Sec. 1504. Modification oi 403(b) exclusion allowance to conform to 415 modifica-
tions. 
Sec. 1505. Extension of moratorium on application of certain nondiscrimination 
rules to State and local governments. 
Sec. 1506. Clarification of certain rules relating to employee stock ownership plans 
of S corporations. 
Sec. 1507. Modification of 10-percent tax for nondeductible contributions. 
Sec. 1508. Modification of funding requirements for certain plans. 
Sec. 1509. Clarification of disqualification rules relating to acceptance of rollover 
contributions. 
Sec. 1510. New technologies in retirement plans. 
Subtitle B—Other Provisions Relating to Pensions and Employee Benefits 
Sec. 1521. Increase in current liability funding limit. 
Sec. 1522. Special rules for church plans. 
Sec. 1523. Ptepeal of application of unrelated business income tax to ESOPs. 
Sec. 1524. Diversification of section 401(k) plan investments. 
Sec. 1525. Section 401(k) plans for certain irrigation and drainage entities. 
Sec. 1526. Portability of permissive service credit under governmental pension 
plans. 
Sec. 1527. Removal of dollar limitation on benefit payments from a defined benefit 
plan maintained for certain police and fire employees. 
Sec. 1528. Survivor benefits for public safety officers killed in the line of duty. 
Sec. 1529. Treatment of certain disability benefits received by former police officers 
or firefighters. 
Sec. 1530. Gratuitous transfers for the benefit of employees. 
Subtitle C—Provisions Relating to Certain Health Acts 
Sec. 1531. Amendments to the Internal Revenue Code of 1986 to implement the 
Newborns' and Mothers' Health Protection Act of 1996 and the Mental 
Health Parity Act of 1996. 
Sec. 1532. Special rules relating to church plans. 
Subtitle D—Provisions Relating to Plan Amendments 
Sec. 1541. Provisions relating to plan amendments. 
TITLE XVI—TECHNICAL AMENDMENTS RELATED TO SMALL BUSINESS 
JOB PROTECTION ACT OF 1996 AND OTHER LEGISLATION 
Sec. 1600. Coordination with other titles. 
Sec. 1601. Amendments related to Small Business Job Protection Act of 1996. 
Sec. 1602. Amendments related to Health Insurance Portability and Accountability 
Act of 1996. 
Sec. 1603. Amendments related to Taxpayer Bill of Rights 2. 
Sec. 1604. Miscellaneous provisions. 
TITLE XVII—IDENTIFICATION OF LIMITED TAX BENEFITS SUBJECT TO 
LINE ITEM VETO 
Sec. 1701. Identification of limited tax benefits subject to line item veto. 
TITLE I—CHILD TAX CREDIT 
SEC. 101. CHILD TAX CREDIT. 
(a) IN GENERAL.—Subpart A of part IV of subchapter A of 
chapter 1 (relating to nonrefundable personal credits) is amended 
by inserting after section 23 the following new section: 
"SEC. 24. CHILD TAX CREDIT. 
"(a) ALLOWANCE OF CREDIT.—There shall be allowed as a credit 
against the tax imposed by this chapter for the taxable year with 
respect to each qualifying child of the taxpayer an amount equal 
to $500 ($400 in the case of taxable years beginning in 1998). 
"(b) LIMITATION BASED ON ADJUSTED GROSS INCOME.— 
"(1) IN GENERAL.—The amount of the credit allowable under 
subsection (a) shall be reduced (but not below zero) by $50 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 797 
for each $1,000 (or fraction thereof) by which the taxpayer's 
modified adjusted gross income exceeds the threshold amount. 
For purposes of the preceding sentence, the term 'modified 
adjusted gross income' means adjusted gross income increased 
by any amount excluded from gross income under section 911, 
931, or 933. 
"(2) THRESHOLD AMOUNT.—For purposes of paragraph (1), 
the term 'threshold amount' means— 
"(A) $110,000 in the case of a joint return, 
"(B) $75,000 in the case of an individual who is not 
married, and 
"(C) $55,000 in the case of a married individual filing 
a separate return. 
For purposes of this paragraph, marital status shall be deter-
mined under section 7703. 
"(c) QUALIFYING CHILD.—For purposes of this section— 
"(1) IN GENERAL.—The term 'qualifying child' means any 
individual if— 
"(A) the taxpayer is allowed a deduction under section 
151 with respect to such individual for the taxable year, 
"(B) such individual has not attained the age of 17 
as of the close of the calendar year in which the taxable 
year of the taxpayer begins, and 
"(C) such individual bears a relationship to the t£ix-
payer described in section 32(c)(3)(B). 
"(2) 
EXCEPTION FOR CERTAIN NONCITIZENS.—The term 
'qualifying child' shall not include any individual who would 
not be a dependent if the first sentence of section 152(b)(3) 
were applied without regard to all that follows 'resident of 
the United States'. 
"(d) ADDITIONAL CREDIT FOR FAMILIES WITH 3 OR MORE CHIL-
DREN.— 
"(1) IN GENERAL.—In the case of a taxpayer with 3 or 
more qualifying children for any taxable year, the amount 
of the credit allowed under this section shall be equal to the 
greater of— 
"(A) the amount of the credit allowed under this section 
(without regard to this subsection and after application 
of the limitation under section 26), or 
"(B) the alternative credit amount determined under 
paragraph (2). 
"(2) ALTERNATIVE CREDIT AMOUNT.—For purposes of this 
subsection, the alternative credit amount is the amount of 
the credit which would be allowed under this section if the 
limitation under paragraph (3) were applied in lieu of the 
limitation under section 26. 
"(3) LIMITATION.—The limitation under this paragraph for 
any taxable year is the limitation under section 26 (without 
regard to this subsection)— 
"(A) increased by the taxpayer's social security taxes 
for such taxable year, and 
"(B) reduced by the sum of— 
"(i) the credits allowed under this part other than 
under subpart C or this section, and 
"(ii) the credit allowed under section 32 without 
regard to subsection (m) thereof. 
Ill STAT. 798 
PUBLIC LAW l©5-34—AUG. 5, 1997 
"(4) UNUSED CREDIT TO BE REFUNDABLE.—If the amount 
of the credit under paragraph (1)(B) exceeds the amount of 
the credit under paragraph (1)(A), such excess shall be treated 
as a credit to which subpart C applies. The rule of section 
32(h) shall apply to such excess. 
"(5) SOCIAL SECURITY TAXES.—For purposes of paragraph 
(3)— 
"(A) IN GENERAL.—The term 'social security taxes' 
mesins, with respect to any taxpayer for any taxable year— 
"(i) the amount of the taxes imposed by sections 
3101 and 3201(a) on amounts received by the taxpayer 
during the calendar year in which the taxable year 
begins, 
"(ii) 50 percent of the taxes imposed by section 
1401 on the self-employment income of the taxpayer 
for the taxable year, and 
"(iii) 50 percent of the taxes imposed by section 
3211(a)(1) on amounts received by the taxpayer during 
the calendar year in which the taxable year begins. 
"(B) COORDINATION WITH SPECIAL REFUND OF SOCLVL 
SECURITY TAXES.—The term 'social security taxes' shall not 
include any taxes to the extent the taxpayer is entitled 
to a special refund of such taxes under section 6413(c). 
"(C) SPECIAL RULE.—^Any amoimts paid pursuant to 
an agreement under section 3121(1) (relating to agreements 
entered into by American employers with respect to foreign 
affiliates) which are equivalent to the taxes referred to 
in subparagraph (A)(i) shall be treated as taxes referred 
to in such subparagraph. 
"(e) IDENTIFICATION REQUIREMENT.—No credit shall be allowed 
under this section to a taxpayer with respect to any qualifying 
child imless the taxpayer includes the name and taxpayer identifica-
tion number of such qualifying child on the return of tax for the 
taxable year. 
"(f) TAXABLE YEAR MUST B E FULL TAXABLE YEAR.—Except 
in the case of a taxable year closed by reason of the death of 
the tgixpayer, no credit shall be allowable under this section in 
the case of a taxable year covering a period of less than 12 months.", 
(b) SUPPLEMENTAL CREDIT.—Section 32 is amended by adding 
at the end the following new subsection: 
"(m) SUPPLEMENTAL CHILD CREDIT.— 
"(1) IN GENERAL.—In the case of a taxpayer with respect 
to whom a credit is allowed under section 24 for the taxable 
year, there shall be allowed as a credit under this section 
an amount equal to the supplemental child credit (if any) 
determined for such taxpayer for such taxable year under para-
graph (2). Such credit shall be in addition to the credit allowed 
under subsection (a). 
"(2) SUPPLEMENTAL CHILD CREDIT.—For purposes of this 
subsection, the supplemental child credit is an amount equal 
to the excess (if any) of— 
"(A) the amount determined under section 24(d)(1)(A), 
over 
"(B) the amount determined under section 24(d)(1)(B). 
The amounts referred to in subpeiragraphs (A) and (B) shall 
be determined as if section 24(d) applied to all taxpayers. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 799 
"(3) COORDINATION WITH SECTION 24.—The amount of the 
credit under section 24 shall be reduced by the amount of 
the credit allowed under this subsection.". 
(c) HIGH RISK POOLS PERMITTED TO COVER SPOUSES AND 
DEPENDENTS OF HIGH RISK INDIVIDUALS.—Paragraph (26) of section 
501(c) is amended by adding at the end the following flush sentence: 
"A spouse and any qualifying child (as defined in section 24(c)) 
of an individual described in subparagraph (B) (without regard 
to this sentence) shall be treated as described in subparagraph 
(B).". 
(d) CONFORMING AMENDMENTS.— 
(1) Section 1324(b)(2) of title 31, United States Code, is 
amended by inserting before the period at the end ", or enacted 
by the Taxpayer Relief Act of 1997". 
(2) Paragraph (2) of section 6213(g) (relating to the defini-
tion of mathematical or clerical errors) is amended by striking 
"and" at the end of subparagraph (G), by striking the period 
at the end of subparagraph (H) and inserting ", and', and 
by inserting after subparagraph (H) the following new subpara-
graph: 
"(I) an omission of a correct TIN required under section 
24(e) (relating to child tax credit) to be included on a 
return.". 
(3) The table of sections for subpart A of part IV of sub-
chapter A of chapter 1 is amended by inserting after the item 
relating to section 23 the following new item: 
"Sec. 24. Child tax credit.". 
(e) EFFECTIVE DATE.—The amendments made by this section 26 use 24 note. 
shall apply to taxable years beginning after December 31, 1997. 
TITLE II—EDUCATION INCENTIVES 
Subtitle A—Tax Benefits Relating to 
Education Expenses 
SEC. 201. HOPE AND LIFETIME LEARNING CREDITS. 
(a) IN GENERAL.—Subpart A of part IV of subchapter A of 
chapter 1 (relating to nonrefundable personal credits) is amended 
by inserting after section 25 the following new section: 
"SEC. 25A. HOPE AND LIFETIME LEARNING CREDITS. 
"(a) ALLOWANCE OF CREDIT.—In the case of an individual, there 
shall be allowed as a credit against the tax imposed by this chapter 
for the taxable year the amount equal to the sum of— 
"(1) the Hope Scholarship Credit, plus 
"(2) the Lifetime Learning Credit. 
"(b) HOPE SCHOLARSHIP CREDIT.— 
"(1) PER STUDENT CREDIT.—In the case of any eligible stu-
dent for whom an election is in effect under this section for 
any taxable year, the Hope Scholarship Credit is an amount 
equal to the sum of— 
"(A) 100 percent of so much of the qualified tuition 
and related expenses paid by the taxpayer during the tax-
able year (for education furnished to the eligible student 
I l l STAT. 800 
PUBLIC LAW 105-34—AUG. 5, 1997 
during any academic period beginning in such taxable year) 
as does not exceed $1,000, plus 
"(B) 50 percent of such expenses so paid as exceeds 
$1,000 but does not exceed the applicable limit. 
"(2) 
LIMITATIONS 
APPLICABLE 
TO 
HOPE 
SCHOLARSHIP 
CREDIT.— 
"(A) CREDIT ALLOWED ONLY FOR 2 TAXABLE YEARS.— 
An election to have this section apply with respect to any 
eligible student for purposes of the Hope Scholarship Credit 
under subsection (a)(1) may not be made for any taxable 
year if such an election (by the taxpayer or any other 
individual) is in effect with respect to such student for 
any 2 prior taxable years. 
"(B) CREDIT ALLOWED FOR YEAR ONLY IF INDIVIDUAL 
IS AT L E A S T V2 TIME STUDENT FOR PORTION OF YEAR.— 
The Hope Scholarship Credit under subsection (a)(1) shall 
not be allowed for a taxable year with respect to the quali-
fied tuition and related expenses of an individual unless 
such individual is an eligible student for at least one aca-
demic period which begins during such year. 
"(C) CREDIT ALLOWED ONLY FOR FIRST 2 YEARS OF POST-
SECONDARY EDUCATION.—The Hope Scholarship Credit 
under subsection (a)(1) shall not be allowed for a taxable 
year with respect to the qualified tuition and related 
expenses of an eligible student if the student has completed 
(before the beginning of such taxable year) the first 2 
years of postsecondary education at an eligible educational 
institution. 
"(D) DENIAL OF CREDIT IF STUDENT CONVICTED OF A 
FELONY DRUG OFFENSE.—The Hope Scholarship Credit 
under subsection (a)(1) shall not be allowed for qualified 
tuition and related expenses for the enrollment or attend-
ance of a student for any academic period if such student 
has been convicted of a Federal or State felony offense 
consisting of the possession or distribution of a controlled 
substance before the end of the taxable year with or within 
which such period ends. 
"(3) ELIGIBLE STUDENT.—For purposes of this subsection, 
the term 'eligible student' means, with respect to any academic 
period, a student who— 
"(A) meets the requirements of section 484(a)(1) of 
the Higher Education Act of 1965 (20 U.S.C. 1091(a)(1)), 
as in effiect on the date of the enactment of this section, 
and 
"(B) is carrying at least V2 the normal full-time work 
load for the course of study the student is pursuing. 
"(4) APPLICABLE LIMIT.—For purposes of paragraph (1)(B), 
the applicable limit for any taxable year is an amount equal 
to 2 times the dollar amount in effect under paragraph (1)(A) 
for such taxable year, 
"(c) LIFETIME LEARNING CREDIT.— 
"(1) PER TAXPAYER CREDIT.—The Lifetime Learning Credit 
for any taxpayer for any taxable year is an amount equal 
to 20 percent of so much of the qualified tuition and related 
expenses paid by the taxpayer during the taxable year (for 
education furnished during any academic period beginning in 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 801 
such taxable year) as does not exceed $10,000 ($5,000 in the 
case of taxable years beginning before Jsinuary 1, 2003). 
"(2) SPECIAL RULES FOR DETERMINING EXPENSES.— 
"(A) 
COORDINATION WITH HOPE 
SCHOLARSHIP.—The 
qualified tuition and related expenses with respect to an 
individual who is an eligible student for whom a Hope 
Scholarship Credit under subsection (a)(1) is allowed for 
the taxable year shall not be taken into account under 
this subsection. 
"(B) 
EXPENSES 
ELIGIBLE FOR LIFETIME 
LEARNING 
CREDIT.—For purposes of paragraph (1), qualified tuition 
and related expenses shall include expenses described in 
subsection (f)(1) with respect to any course of instruction 
at an eligible educational institution to acquire or improve 
job skills of the individual. 
"(d) 
LIMITATION 
BASED 
ON MODIFIED 
ADJUSTED 
GROSS 
INCOME.— 
"(1) IN GENERAL.—The amount which would (but for this 
subsection) be taken into account under subsection (a) for the 
taxable year shall be reduced (but not below zero) by the 
amount determined under paragraph (2). 
"(2) AMOUNT OF REDUCTION.—The amount determined 
under this paragraph is the amount which bears the same 
ratio to the amount which would be so taken into account 
as— 
"(A) the excess of— 
"(i) the taxpayer's modified adjusted gross income 
for such taxable year, over 
"(ii) $40,000 ($80,000 in the case of a joint return), 
bears to 
"(B) $10,000 ($20,000 in the case of a joint return). 
"(3) MODIFIED ADJUSTED GROSS INCOME.—The term 'modi-
fied adjusted gross income' means the adjusted gross income 
of the taxpayer for the taxable year increased by any amount 
excluded from gross income under section 911, 931, or 933. 
"(e) ELECTION TO HAVE SECTION APPLY.— 
"(1) IN GENERAL.—No credit shall be allowed under sub-
section (a) for a taxable year with respect to the qualified 
tuition and related expenses of an individual unless the tax-
payer elects to have this section apply with respect to such 
individual for such year. 
"(2) COORDINATION WITH EXCLUSIONS.—An election imder 
this subsection shall not take effect with respect to an individ-
ual for any taxable year if any portion of any distribution 
during such taxable year from an education individual retire-
ment account is excluded from gross income under section 
530(d)(2). 
"(f) DEFINITIONS.—For purposes of this section— 
"(1) QUALIFIED TUITION AND RELATED EXPENSES.— 
"(A) IN GENERAL.—The term 'qualified tuition and 
related expenses' means tuition and fees required for the 
enrollment or attendance o
f
— 
"(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 
section 151, 
I l l STAT. 802 
PUBLIC LAW 105-34—AUG. 5, 1997 
at an eligible educational institution for courses of instruc-
tion of such individual at such institution. 
"(B) 
EXCEPTION FOR EDUCATION INVOLVING SPORTS, 
ETC.—Such term does not include expenses with respect 
to any course or other education involving sports, games, 
or hobbies, unless, such course or other education is part 
of the individual's degree program. 
"(C) EXCEPTION FOR NONACADEMIC FEES.—Such term 
does not include student activity fees, athletic fees, insur-
ance expenses, or other expenses unrelated to an individ-
ual's academic course of instruction. 
"(2) 
ELIGIBLE 
EDUCATIONAL 
INSTITUTION.—The 
term 
'eligible educational institution' means an institution— 
"(A) which is described in section 481 of the Higher 
Education Act of 1965 (20 U.S.C. 1088), as in effect on 
the date of the enactment of this section, and 
"(B) which is eligible to participate in a program under 
title IV of such Act. 
"(g) SPECIAL RULES.— 
"(1) IDENTIFICATION REQUIREMENT.—No credit shall be 
allowed under subsection (a) to a taxpayer with respect to 
the qualified tuition and related expenses of an individual 
unless the taxpayer includes the name and taxpayer identifica-
tion number of such individual on the return of tax for the 
taxable year. 
"(2) ADJUSTMENT FOR CERTAIN SCHOLARSHIPS, ETC.—The 
Eimount of qualified tuition and related expenses otherwise 
taken into account under subsection (a) with respect to an 
individual for an academic period shall be reduced (before the 
application of subsections (b), (c), and (d)) by the sum of any 
amounts paid for the benefit of such individual which are 
allocable to such period as— 
"(A) a qualified scholarship which is excludable fi-om 
gross income under section 117, 
"(B) an educationed assistance allowance under chapter 
30, 31, 32, 34, or 35 of title 38, United States Code, or 
under chapter 1606 of title 10, United States Code, and 
"(C) a payment (other than a gift, bequest, devise, 
or inheritance within the meaning of section 102(a)) for 
such individual's educational expenses, or attributable to 
such individual's enrollment at an eligible educational 
institution, which is excludable from gross income under 
any law of the United States. 
"(3) TREATMENT OF EXPENSES PAID BY DEPENDENT.—If a 
deduction under section 151 with respect to an individual is 
allowed to another taxpayer for a taxable year beginning in 
the calendar year in which such individual's taxable year 
begins— 
"(A) no credit shall be allowed under subsection (a) 
to such individual for such individual's taxable year, and 
"(B) qualified tuition and related expenses paid by 
such individual during such individual's taxable year shall 
be treated for purposes of this section as paid by such 
other taxpayer. 
"(4) TREATMENT OF CERTAIN PREPAYMENTS.—If qualified 
tuition and related expenses are paid by the taxpayer during 
a taxable year for an academic period which begins during 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 803 
the first 3 months following such tsixable year, such academic 
period shall be treated for purposes of this section as beginning 
during such taxable year. 
"(5) DENIAL OF DOUBLE BENEFIT.—No credit shall be 
allowed under this section for any expense for which a deduction 
is allowed under any other provision of this chapter. 
"(6) No CREDIT 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 the taxpayer's spouse file a joint return for the 
taxable year. 
"(7) NONRESIDENT ALIENS.—If the taxpayer is a nonresident 
alien individual for any portion of the taxable year, this section 
shall apply only if such individual is treated as a resident 
alien of the United States for purposes of this chapter by 
reason of an election under subsection (g) or (h) of section 
6013. 
"(h) INFLATION ADJUSTMENTS.— 
"(1) DOLLAR LIMITATION ON AMOUNT OF CREDIT.— 
"(A) IN GENERAL.—In the case of a taxable year begin-
ning after 2001, each of the $1,000 amounts under sub-
section (b)(1) shall be increased by an amount equal to— 
"(i) such dollar amount, multiplied by 
"(ii) the cost-of-living 
adjustment 
determined 
under section 1(f)(3) for the calendar year in which 
the taxable year iDegins, determined by substituting 
'calendar year 2000' for 'calendar year 1992' in 
subparagraph (B) thereof. 
"(B) ROUNDING.—If any amount as adjusted under 
subparagraph (A) is not a multiple of $100, such amount 
shall be rounded to the next lowest multiple of $100. 
"(2) INCOME LIMITS.— 
"(A) IN GENERAL.—In the case of a tsixable year begin-
ning after 2001, the $40,000 and $80,000 amounts in sub-
section (d)(2) shall each be increased by an amount equal 
to— 
"(i) such dollar amount, multiplied by 
"(ii) the cost-of-living 
adjustment 
determined 
under section 1(f)(3) for the calendar year in which 
the taxable year begins, determined by substituting 
'calendar year 2000' for 'calendar year 1992' in 
subparagraph (B) thereof. 
"(B) ROUNDING.—If any amount as adjusted under 
subparagraph (A) is not a multiple of $1,000, such amount 
shall be rounded to the next lowest multiple of $1,000. 
"(i) REGULATIONS.—The Secretary may prescribe such regula-
tions as may be necessary or appropriate to carry out this section, 
including regulations providing for a recapture of the credit allowed 
luider this section in cases where there is a refund in a subsequent 
taxable year of any amount which was taken into account in deter-
mining the amount of such credit.". 
(b) EXTENSION OF PROCEDURES APPLICABLE TO MATHEMATICAL 
OR CLERICAL ERRORS.—Paragraph (2) of section 6213(g) (relating 
to the definition of mathematical or clerical errors), as amended 
by section 101, is amended by striking "and" at the end of subpara-
graph (H), by striking the period at the end of subparagraph (I) 
I l l STAT. 804 
PUBLIC LAW 105-34—AUG. 5, 1997 
and inserting ", and", and by inserting after subparagraph (I) the 
following new subparagraph: 
"(J) an omission of a correct TIN required under section 
25A(g)(l) (relating to higher education tuition and related 
expenses) to be included on a return.". 
(c) RETURNS RELATING TO TUITION AND RELATED EXPENSES.— 
(1) IN GENERAL.—Subpart B of part III of subchapter A 
of chapter 61 (relating to information concerning transactions 
with other persons) is amended by inserting after section 6050R 
the following new section: 
"SEC. 6050S. RETURNS RELATING TO HIGHER EDUCATION TUITION 
AND RELATED EXPENSES. 
"(a) IN GENERAL.—Any person— 
"(1) which is an eligible educational institution which 
receives payments for qualified tuition and related expenses 
with respect to any individual for any calendar year, or 
"(2) which is engaged in a trade or business and which, 
in the course of such trade or business, makes payments during 
any calendar year to any individual which constitute reimburse-
ments or refunds (or similar amounts) of qualified tuition and 
related expenses of such individual, 
shall make the return described in subsection (b) with respect 
to the individual at such time as the Secretary may by regulations 
prescribe. 
"(b) FORM AND MANNER OF RETURNS.—A return is described 
in this subsection if such return— 
"(1) is in such form as the Secretary may prescribe, 
"(2) contains— 
"(A) the neime, address, and TIN of the individual 
with respect to whom pa5mtients described in subsection 
(a) were received from (or were paid to), 
"(B) the name, address, and TIN of any individual 
certified by the individual described in subparagraph (A) 
as the taxpayer who will claim the individual as a depend-
ent for purposes of the deduction allowable under section 
151 for any tsixable year ending with or within the calendar 
year, and 
"(C) the— 
"(i) aggregate amount of payments for qualified 
tuition and related expenses received with respect to 
the individual described in subparagraph (A) during 
the calendar year, and 
"(ii) aggregate amount of reimbursements or 
refunds (or similar amounts) paid to such individual 
during the calendar year, and 
"(D) such other information as the Secretary may pre-
scribe. 
"(c) APPLICATION TO GOVERNMENTAL UNITS.—For purposes of 
this section— 
"(1) a governmental unit or any agency or instnmientality 
thereof shsdl be treated as a person, and 
"(2) any return required under subsection (a) by such 
governmental entity shall be made by the officer or employee 
appropriately designated for the purpose of making such return. 
"(d) STATEMENTS TO B E FURNISHED TO INDIVIDUALS WITH 
RESPECT TO WHOM INFORMATION IS REQUIRED.—Every person 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 805 
required to make a return under subsection (a) shall furnish to 
each individual whose name is required to be set forth in such 
return under subparagraph (A) or (B) of subsection (b)(2) a written 
statement showing— 
"(1) the name, address, and phone number of the informa-
tion contact of the person required to make such return, and 
"(2) the aggregate amounts described in subparagraph (C) 
of subsection (bX2). 
The written statement required under the preceding sentence shall 
be furnished on or before January 31 of the year following the 
calendar year for which the return under subsection (a) was 
required to be made. 
"(e) DEFINITIONS.—For purposes of this section, the terms 
'eligible educational institution' and 'qualified tuition and related 
expenses' have the meanings given such terms by section 25A. 
"(f) RETURNS WHICH WOULD B E REQUIRED TO B E MADE BY 
2 OR MORE PERSONS.—Except to the extent provided in regulations 
prescribed by the Secretary, in the case of any amount received 
by any person on behalf of another person, only the person first 
receiving such amount shall be required to make the return under 
subsection (a). 
"(g) REGULATIONS.—The Secretary shall prescribe such regula-
tions as may be necessary to carry out the provisions of this section. 
No penalties shall be imposed under part II of subchapter B of 
chapter 68 with respect to any return or statement required under 
this section until such time as such regulations are issued.". 
(2) ASSESSABLE PENALTIES.— 
(A) Subparagraph (B) of section 6724(d)(1) (relating 
to definitions) is amended by redesignating clauses (ix) 
through (xiv) as clauses (x) tlu*ough (xv), respectively, and 
by inserting after clause (viii) the following new clause: 
"(ix) section 6050S (relating to returns relating 
to 
payments for qualified 
tuition 
and related 
expenses),". 
(B) Paragraph (2) of section 6724(d) is amended by 
striking "or" at the end of the next to last subparagraph, 
by striking the period at the end of the last subparagraph 
and inserting ", or", and by adding at the end the following 
new subparagraph: 
"(Z) section 6050S(d) (relating to returns relating to 
qualified tuition and related expenses).". 
(3) CLERICAL AMENDMENT.—The table of sections for sub-
part B of part III of subchapter A of chapter 61 is amended 
by inserting after the item relating to section 6050R the follow-
ing new item: 
"Sec. 6050S. Returns relating to higher education tuition and related ex-
penses.". 
(d) COORDINATION WITH SECTION 135.—Subsection (d) of section 
135 is amended by redesignating paragraphs (2) and (3) as para-
graphs (3) and (4), respectively, and by inserting after paragraph 
(1) the following new paragraph: 
"(2) COORDINATION WITH HIGHER EDUCATION CREDIT.—The 
amount of the qualified higher education expenses otherwise 
taken into account under subsection (a) with respect to the 
education of an individual shall be reduced (before the applica-
tion of subsection (b)) by the amount of such expenses which 
are taken into account in determining the credit allowable 
I l l STAT. 806 
PUBLIC LAW 105-34—AUG. 5, 1997 
to the taxpayer or any other person under section 25A with 
respect to such expenses.". 
(e) CLERICAL AMENDMENT.—The table of sections for subpart 
A of part IV of subchapter A of chapter 1 is amended by inserting 
after the item relating to section 25 the following new item: 
"Sec. 25A. Higher education tuition and related expenses.". 
26 use 25A note. 
(f) EFFECTIVE DATES.— 
(1) IN GENERAL.—^The amendments made by this section 
shall apply to expenses paid after December 31,1997 (in taxable 
years ending after such date), for education furnished in aca-
demic periods beginning after such date. 
(2) LIFETIME LEARNING CREDIT.—Section 25A(a)(2) of the 
Internal Revenue Code of 1986 shall apply to expenses paid 
£ifter June 30, 1998 (in taxable years ending after such date), 
for education furnished in academic periods beginning Eifter 
such dates. 
SEC. 202. DEDUCTION FOR INTEREST ON EDUCATION LOANS. 
(a) IN GENERAL.—Part VII of subchapter B of chapter 1 (relating 
to additional itemized deductions for individuals) is amended by 
redesignating section 221 as section 222 and by inserting after 
section 220 the following new section: 
••SEC. 221. INTEREST ON EDUCATION LOANS. 
"(a) ALLOWANCE OF DEDUCTION.—In the case of an individual, 
there shall be allowed as a deduction for the taxable year an 
amount equal to the interest paid by the taxpayer during the 
taxable year on any qualified education loan. 
"(b) MAXIMUM DEDUCTION.— 
"(1) IN GENERAL.—Except as provided in paragraph (2), 
the deduction allowed by subsection (a) for the taxable year 
shall not exceed the amount determined in accordance with 
the following table: 
••In the case of taxable years 
The dollar 
beginning in: 
amount is: 
1998 
$1,000 
1999 
$1,500 
2000 
$2,000 
2001 or thereafter 
$2,500. 
"(2) 
LIMITATION BASED ON MODIFIED ADJUSTED GROSS 
INCOME.— 
"(A) IN GENERAL.—The amount which would (but for 
this paragraph) be allowable as a deduction under this 
section shall be reduced (but not below zero) by the Eunount 
determined under subparagraph (B). 
"(B) AMOUNT OF REDUCTION.—The amount determined 
imder this subparagraph is the amount which bears the 
same ratio to the amount which would be so taken into 
account as— 
"(i) the excess of— 
"(I) the taxpayer's modified adjusted gross 
income for such taxable year, over 
"(II) $40,000 ($60,000 in the case of a joint 
return), bears to 
"(ii) $15,000. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 807 
"(C) MODIFIED ADJUSTED GROSS INCOME.—The term 
'modified adjusted gross income' means adjusted gross 
income determined— 
"(i) without regard to this section and sections 
135, 137, 911, 931, and 933, and 
"(ii) after appHcation of sections 86, 219, and 469. 
For purposes of sections 86, 135, 137, 219, and 469, 
adjusted gross income shall be determined without regard 
to the deduction allowed under this section. 
"(c) DEPENDENTS NOT ELIGIBLE FOR DEDUCTION.—No deduction 
shall be allowed by this section to an individual for the taxable 
year if a deduction under section 151 with respect to such individual 
is allowed to another taxpayer for the taxable year beginning in 
the calendar year in which such individual's taxable year begins. 
"(d) LIMIT ON PERIOD DEDUCTION ALLOWED.—A deduction shall 
be allowed under this section only with respect to interest paid 
on any qualified education loan during the first 60 months (whether 
or not consecutive) in which interest pajnments are required. For 
f
mrposes of this paragraph, any loan and all refinancings of such 
oan shall be treated as 1 loan. 
"(e) DEFINITIONS.—For purposes of this section— 
"(1) QUALIFIED EDUCATION LOAN.—The term 'quahfied edu-
cation loan' means any indebtedness incurred to pay qualified 
higher education expenses— 
"(A) which are incurred on behalf of the taxpayer, 
the taxpayer's spouse, or any dependent of the taxpayer 
as of the time the indebtedness was incurred, 
"(B) which are paid or incurred within a reasonable 
period of time before or after the indebtedness is incurred, 
and 
"(C) which £ire attributable to education furnished dur-
ing a period during which the recipient was an eligible 
student. 
Such term includes indebtedness used to refinance indebtedness 
which qualifies as a qualified education loan. The term 'quali-
fied education loan' shall not include any indebtedness owed 
to a person who is related (within the meaning of section 
267(b) or 707(b)(1)) to the taxpayer. 
"(2) QUALIFIED HIGHER EDUCATION EXPENSES.—The term 
'qualified higher education expenses' means the cost of attend-
ance (as defined in section 472 of the Higher Education Act 
of 1965, 20 U.S.C. 108711, as in effect on the day before the 
date of the enactment of this Act) at an eligible educational 
institution, reduced by the sum o
f
— 
"(A) the amount excluded from gross income under 
section 127, 135, or 530 by reason of such expenses, and 
"(B) the amount of any scholarship, allowance, or pay-
ment described in section 25A(g)(2). 
For purposes of the preceding sentence, the term 'eligible edu-
cational institution' has the same meaning given such term 
by section 25A(f)(2), except that such term shall also include 
an institution conducting an internship or residency program 
leading to a degree or certificate awarded by an institution 
of higher education, a hospital, or a health care facility which 
offers postgraduate training. 
"(3) ELIGIBLE STUDENT.—The term 'eligible student' has 
the meaning given such term by section 25A(b)(3). 
I l l STAT. 808 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(4) DEPENDENT.—The term 'dependent' has the meaning 
given such term by section 152. 
"(f) SPECIAL RULES.— 
"(1) DENIAL OF DOUBLE BENEFIT.—NO deduction shall be 
allowed under this section for £iny amount for which a deduction 
is allowable under any other provision of this chapter. 
"(2) MARRIED COUPLES MUST FILE JOINT RETURN.—If the 
taxpayer is married at the close of the taxable year, the deduc-
tion shall be allowed under subsection (a) only if the taxpayer 
and the taxpayer's spouse file a joint return for the taxable 
year. 
"(3) MARITAL STATUS.—Marital status shall be determined 
in accordance with section 7703. 
"(g) INFLATION ADJUSTMENTS.— 
"(1) IN GENERAL.—In the case of a taxable year beginning 
after 2002, the $40,000 and $60,000 amounts in subsection 
(b)(2) shall each be increased by an amount equal to— 
"(A) such dollar amount, multiplied by 
"(B) the cost-of-living adjustment determined under 
section 1(f)(3) for the calendar year in which the taxable 
year begins, determined by substituting 'calendar year 
2001' for 'calendar year 1992' in subparagraph (B) thereof. 
"(2) ROUNDING.—If any amount as adjusted under para-
graph (1) is not a multiple of $5,000, such amount shall be 
rounded to the next lowest multiple of $5,000.". 
(b) DEDUCTION ALLOWED WHETHER OR NOT TAXPAYER ITEMIZES 
OTHER DEDUCTIONS.—Subsection (a) of section 62 is amended by 
inserting after paragraph (16) the following new paragraph: 
"(17) 
INTEREST ON EDUCATION LOANS.—The 
deduction 
allowed by section 221.". 
(c) REPORTING REQUIREMENT.— 
(1) IN GENERAL.—Section 6050S(a)(2) (relating to returns 
relating to higher education tuition and related expenses) is 
amended to read as follows: 
"(2) which is engaged in a trade or business and which, 
in the course of such trade or business— 
"(A) makes payments during any calendar year to any 
individual which constitutes reimbursements or refunds 
(or similar amounts) of qualified tuition and related 
expenses of such individual, or 
"(B) except as provided in regulations, receives from 
any individual interest aggregating $600 or more for any 
calendar year on 1 or more qualified education loans,". 
(2) INFORMATION.—Section 6050S(b)(2) is amended— 
(A) by inserting "or interest" after "payments" in 
subparagraph (A), and 
(B) in subparagraph (C), by striking "and" at the end 
of clause (i), by inserting "and" at the end of clause (ii), 
and by inserting after clause (ii) the following: 
"(iii) aggregate amount of interest received for the 
calendar year from such individual,". 
(3) DEFINITION.—Section 6050S(e) is amended by inserting 
", and except as provided in regulations, the term 'qualified 
education loan' has the meaning given such term by section 
221(e)(1)" after "section 25A". 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 809 
(d) CLERICAL AMENDMENT.—The table of sections for part VII 
of subchapter B of chapter 1 is amended by striking the last 
item and inserting the following new items: 
"Sec. 221. Interest on education loans. 
"Sec. 222. Cross reference.". 
(e) EFFECTIVE DATE.—The amendments made by this section 26 use 62 note. 
shall apply to any qualified education loan (as defined in section 
221(e)(1) of the Internal Revenue Code of 1986, as added by this 
section) incurred on, before, or after the date of the enactment 
of this Act, but only with respect to— 
(1) any loan interest payment due and paid after December 
31, 1997, and 
(2) the portion of the 60-month period referred to in section 
221(d) of the Internal Revenue Code of 1986 (as added by 
this section) after December 31,1997. 
SEC. 203. PENALTY-FREE WITHDRAWALS FROM INDIVTOUAL RETIRE-
MENT PLANS FOR HIGHER EDUCATION EXPENSES. 
(a) IN GENERAL.—Paragraph (2) of section 72(t) (relating to 
exceptions to 10-percent additional tax on early distributions from 
qualified retirement plans) is amended by adding at the end the 
following new subparagraph: 
"(E) 
DISTRIBUTIONS FROM 
INDIVIDUAL RETIREMENT 
PLANS FOR HIGHER EDUCATION EXPENSES.—Distributions to 
an individual from an individual retirement plan to the 
extent such distributions do not exceed the qualified higher 
education expenses (as defined in paragraph (7)) of the 
taxpayer for the taxable year. Distributions shall not be 
taken into account under the preceding sentence if such 
distributions are described in subparagraph (A), (C), or 
(D) or to the extent paragraph (1) does not apply to such 
distributions by reason of subparagraph (B).". 
(b) DEFINITION.—Section 72(t) is amended by adding at the 
end the following new paragraph: 
"(7) QUALIFIED HIGHER EDUCATION EXPENSES.—For pur-
poses of paragraph (2)(E)— 
"(A) IN GENERAL.—The term 'qualified higher education 
expenses' means qualified higher education expenses (as 
defined in section 529(e)(3)) for education furnished to— 
"(i) the taxpayer, 
"(ii) the taxpayer's spouse, or 
"(iii) any child (as defined in section 151(c)(3)) 
or grandchild of the taxpayer or the taxpayer's spouse, 
at an eligible educational institution (as defined in section 
529(e)(5)). 
"(B) 
COORDINATION 
WITH 
OTHER 
BENEFITS.—The 
amount of qualified higher education expenses for any tax-
able year shall be reduced as provided in section 25A(g)(2).". 
(c) EFFECTIVE DATE.—The amendments made by this section 26 use 72 note. 
shall apply to distributions after December 31, 1997, with respect 
to expenses paid after such date (in taxable years ending after 
such date), for education furnished in academic periods beginning 
after such date. 
39-194 O - 97 - 27 ; QL 3 Part 1 
I l l STAT. 810 
PUBLIC LAW 105-34—AUG. 5, 1997 
Subtitle B—Expanded Education 
Investment Savings Opportunities 
PART I—QUALIFIED TUITION PROGRAMS 
SEC. 211. MODIFICATIONS OF QUALIFIED STATE TUITION PROGRAMS. 
(a) QUALIFIED HIGHER EDUCATION EXPENSES TO INCLUDE ROOM 
AND BOARD.—Paragraph (3) of section 529(e) (defining qualified 
higher education expenses) is amended to read as follows: 
"(3) QUALIFIED HIGHER EDUCATION EXPENSES.— 
"(A) IN GENERAL.—The term 'qualified higher education 
expenses' means tuition, fees, books, supplies, and equip-
ment required for the enrollment or attendance of a des-
ignated beneficiary at an eligible educational institution. 
"(B) ROOM AND BOARD INCLUDED FOR STUDENTS UNDER 
GUARANTEED PLANS WHO ARE AT LEAST HALF-TIME.— 
"(i) IN GENERAL.—In the case of an individual who 
is an eligible student (as defined in section 25A(b)(3)) 
for any academic period, such term shall also include 
reasonable costs for such period (as determined under 
the qualified State tuition program) incurred by the 
designated beneficiary for room and board while 
attending such institution. For purposes of subsection 
(b)(7), a designated beneficiary shall be treated as 
meeting the requirements of this clause. 
"(ii) LIMITATION.—The amount treated as qualified 
higher education expenses by reason of the preceding 
sentence shall not exceed the minimum 
amount 
(applicable to the student) included for room and board 
for such period in the cost of attendEince (as defined 
in section 472 of the Higher Education Act of 1965, 
20 U.S.C. 108711, as in effect on the date of the enact-
ment of this paragraph) for the eligible educational 
institution for such period.". 
(b) ADDITIONAL MODIFICATIONS.— 
(1) MEMBER OF FAMILY.—Paragraph (2) of section 529(e) 
(relating to other definitions and special rules) is amended 
to read as follows: 
"(2) MEMBER OF FAMILY.—The term 'member of the family' 
means— 
"(A) an individual who bears a relationship to another 
individual which is a relationship described in paragraphs 
(1) through (8) of section 152(a), and 
"(B) the spouse of any individual described in subpara-
graph (A).". 
(2) ELIGIBLE EDUCATIONAL INSTITUTION.—Section 529(e) is 
amended by adding at the end the following: 
"(5) 
ELIGIBLE 
EDUCATIONAL 
INSTITUTION.—The term 
'eligible educational institution' means an institution— 
"(A) which is described in section 481 of the Higher 
Education Act of 1965 (20 U.S.C. 1088), as in effect on 
the date of the enactment of this paragraph, and 
"(B) which is eligible to participate in a program under 
title IV of such Act.". 
(3) 
ESTATE 
AND 
GIFT 
TAX 
TREATMENT.— 
(A) 
GIFT 
TAX 
TREATMENT.— 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 811 
(i) Paragraph (2) of section 529(c) is amended to 
read as follows: 
"(2) GIFT TAX TREATMENT OF CONTRIBUTIONS.—For purposes 
of chapters 12 and 13— 
"(A) IN GENERAL.—Any contribution to a qualified tui-
tion program on behalf of any designated beneficiary— 
"(i) shall be treated as a completed gift to such 
beneficiary which is not a future interest in property, 
and 
"(ii) shall not be treated as a qualified transfer 
under section 2503(e). 
"(B) 
TREATMENT OF EXCESS CONTRIBUTIONS.—If 
the 
aggregate amount of contributions described in subpara-
graph (A) during the calendar year by a donor exceeds 
the limitation for such year under section 2503(b), such 
aggregate amount shall, at the election of the donor, be 
t5cen into account for purposes of such section ratably 
over the 5-year period beginning with such calendar year.", 
(ii) Paragraph (5) of section 529(c) is amended 
to read as follows: 
"(5) OTHER GIFT TAX RULES.—For purposes of chapters 12 
and 13— 
"(A) TREATMENT OF DISTRIBUTIONS.—Except as pro-
vided in subparagraph (B), in no event shall a distribution 
from a qualified tuition program be treated as a taxable 
gift. 
"(B) 
TREATMENT 
OF DESIGNATION 
OF NEW 
BENE-
FICIARY.—The taxes imposed by chapters 12 and 13 shall 
apply to a transfer by reason of a change in the designated 
beneficiary under the program (or a rollover to the account 
of a new beneficiary) only if the new beneficiary is a genera-
tion below the generation of the old beneficiary (determined 
in accordance with section 2651).". 
(B) ESTATE TAX TREATMENT.—Paragraph (4) of section 
529(c) is amended to read as follows: 
"(4) ESTATE TAX TREATMENT.— 
"(A) IN GENERAL.—No amount shall be includible in 
the gross estate of any individual for purposes of chapter 
11 by reason of an interest in a qualified tuition program. 
"(B) AMOUNTS INCLUDIBLE IN ESTATE OF DESIGNATED 
BENEFICIARY IN CERTAIN CASES.—Subparagraph (A) shall 
not apply to amounts distributed on account of the death 
of a beneficiary. 
"(C) AMOUNTS INCLUDIBLE IN ESTATE OF DONOR MAKING 
EXCESS CONTRIBUTIONS.—In the case of a donor who makes 
the election described in paragraph (2)(B) and who dies 
before the close of the 5-year period referred to in such 
paragraph, notwithstanding subparagraph (A), the gross 
estate of the donor shall include the portion of such con-
tributions properly allocable to periods after the date of 
death of the donor.". 
(4) PROHIBITION AGAINST INVESTMENT DIRECTION.—Section 
529(b)(5) is amended by inserting "directly or indirectly" after 
"may not". 
(c) COORDINATION WITH EDUCATION SAVINGS BOND.—Section 
135(c)(2) (defining qualified higher education expenses) is amended 
by adding at the end the following: 
I l l STAT. 812 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(C) CONTRIBUTIONS TO QUALIFIED STATE TUITION PRO-
GRAM.—Such term shall include any contribution to a quali-
fied State tuition program (as defined in section 529) on 
behalf of a designated beneficiaiy (as defined in such sec-
tion) who is an individual described in subparagraph (A); 
but there shall be no increase in the investment in the 
contract for purposes of applying section 529(c)(3)(A) by 
reason of any portion of such contribution which is not 
includible in gross income by reason of this subparagraph.". 
(d) CLARIFICATION OF TAXATION OF DISTRIBUTIONS.—Subpara-
graph (A) of section 529(c)(3) is amended by striking "section 72" 
and inserting "section 72(b)". 
(e) TECHNICAL AMENDMENTS.— 
(1)(A) The heading for part VIII of subchapter F of chapter 
1 is amended to read as follows: 
"PART VIII—HIGHER EDUCATION SAVINGS 
ENTITIES". 
(B) The table of parts for subchapter F of chapter 1 is 
amended by striking the item relating to part VIII and insert-
ing: 
"Part VIII. Higher education savings entities.". 
(2)(A) Section 529(d) is amended to read as follows: 
"(d) REPORTS.—Each officer or employee having control of the 
qualified State tuition program or their designee shall make such 
reports regarding such program to the Secretary and to designated 
beneficiaries with respect to contributions, distributions, and such 
other matters as the Secretary may require. The reports required 
by this subsection shall be filed at such time and in such manner 
and furnished to such individuals at such time and in such manner 
as may be required by the Secretary.". 
(B) Paragraph (2) of section 6693(a) (relating to failure 
to provide reports on individual retirement accounts or annu-
ities) is amended by striking "and" at the end of subparagraph 
(A), by striking the period at the end of subparagraph (B) 
and inserting ", and", and by adding at the end the following 
new subparagraph: 
"(C) Section 529(d) (relating to qualified State tuition 
programs).". 
(C) The section heading for section 6693 is amended by 
striking "INDIVIDUAL RETIREMENT" and inserting "CERTAIN TAX-
FAVORED", 
(D) The item relating to section 6693 in the table of sections 
for part I of subchapter B of chapter 68 is amended by striking 
"individual retirement" and inserting "certain tax-favored". 
26 u s e 529 note. 
(f) EFFECTIVE DATES.— 
(1) IN GENERAL.—Except as otherwise provided in this sub-
section, the amendments made by this section shall take effect 
on January 1, 1998. 
(2) EXPENSES TO INCLUDE ROOM AND BOARD.—The amend-
ment made by subsection (a) shall take effect as if included 
in the amendments made by section 1806 of the Small Business 
Job Protection Act of 1996. 
(3) ELIGIBLE EDUCATIONAL INSTITUTION.—The amendment 
made by subsection (b)(2) shall apply to distributions after 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 813 
December 31, 1997, with respect to expenses paid after such 
date (in taxable years ending after such date), for education 
furnished in academic periods beginning after such date. 
(4) COORDINATION WITH EDUCATION SAVINGS BONDS.—The 
amendment made by subsection (c) shall apply to taxable years 
beginning after December 31, 1997. 
(5) ESTATE AND GIFT TAX CHANGES.— 
i'A) GIFT TAX CHANGES.—Paragraphs (2) and (5) of sec-
tion 529(c) of the Internal Revenue Code of 1986, as amend-
ed by this section, shall apply to transfers (including des-
ignations of new beneficiaries) made after the date of the 
enactment of this Act. 
(B) ESTATE TAX CHANGES.—Paragraph (4) of such sec-
tion 529(c) shall apply to estates of decedents djdng after 
June 8, 1997. 
(6) TRANSITION RULE FOR PRE-AUGUST 20, i996 CONTRACTS.— 
In the case of any contract issued prior to August 20, 1996, 
section 529(c)(3)(C) of the Internal Revenue Code of 1986 shall 
be applied for taxable years ending after August 20, 1996, 
without regard to the requirement that a distribution be trans-
ferred to a member of the family or the requirement that 
a change in beneficiaries may be made only to a member 
of the family, 
PART II—EDUCATION INDIVIDUAL 
RETIREMENT ACCOUNTS 
SEC. 213. EDUCATION INDIVTOUAL RETIREMENT ACCOUNTS. 
(a) IN GENERAL.—Part VIII of subchapter F of chapter 1 (relat-
ing to qualified State tuition programs) is amended by adding 
at the end the following new section: 
"SEC. 530. EDUCATION INDIVIDUAL RETIREMENT ACCOUNTS. 
"(a) 
GENERAL 
RULE.—An education individual 
retirement 
account shall be exempt from taxation under this subtitle. Notwith-
stEinding the preceding sentence, the education individual retire-
ment account shall be subject to the taxes imposed by section 
511 (relating to imposition of tax on unrelated business income 
of charitable organizations). 
"(b) DEFINITIONS AND SPECIAL RULES.—For purposes of this 
section— 
"(1) EDUCATION INDIVIDUAL RETIREMENT ACCOUNT.—The 
term 'education individual retirement account' means a trust 
created or organized in the United States exclusively for the 
purpose of paying the qualified higher education expenses of 
the designated beneficiary of the trust (and designated as an 
education individual retirement account at the time created 
or organized), but only if the written governing instrument 
creating the trust meets the following requirements: 
"(A) No contribution will be accepted— 
"(i) unless it is in cash, 
"(ii) after the date on which such beneficiary 
attains age 18, or 
"(iii) except in the case of rollover contributions, 
if such contribution would result in aggregate contribu-
tions for the taxable year exceeding $500. 
I l l STAT. 814 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(B) The trustee is a bank (as defined in section 408(n)) 
or another person who demonstrates to the satisfaction 
of the Secretary that the memner in which that person 
will administer the trust will be consistent with the require-
ments of this section or who has so demonstrated with 
respect to einy individual retirement plan. 
"(C) No part of the trust assets will be invested in 
life insurance contracts. 
"(D) The assets of the trust shall not be commingled 
with other property except in a common trust fund or 
common investment fiind. 
"(E) Upon the death of the designated beneficiary, any 
balance to the credit of the beneficiary shall be distributed 
within 30 days after the date of death to the estate of 
such beneficiary. 
"(2) QUALIFIED HIGHER EDUCATION EXPENSES.— 
"(A) IN GENERAL.—The term 'qualified higher education 
expenses' has the meaning given such term by section 
529(e)(3), reduced as provided in section 25A(g)(2). 
"(B) QUALIFIED STATE TUITION PROGRAMS.—Such term 
shall include amoimts paid or incurred to purchase tuition 
credits or certificates, or to make contributions to an 
account, under a qualified State tuition program (as defined 
in section 529(b)) for the benefit of the beneficiary of the 
account. 
"(3) 
ELIGIBLE 
EDUCATIONAL 
INSTITUTION.—The 
term 
'eligible educational institution' has the meaning given such 
term by section 529(e)(5). 
"(c) 
REDUCTION IN 
PERMITTED CONTRIBUTIONS BASED ON 
ADJUSTED GROSS INCOME.— 
"(1) IN GENERAL.—The maximum amount which a contribu-
tor could otherwise make to an account under this section 
shall be reduced by an amount which bears the same ratio 
to such maximum amount as— 
"(A) the excess of— 
"(i) the contributor's modified adjusted 
gross 
income for such taxable year, over 
"(ii) $95,000 ($150,000 in the case of a joint return), 
bears to 
"(B) $15,000 ($10,000 in the case of a joint return). 
"(2) MODIFIED ADJUSTED GROSS INCOME.—For purposes of 
paragraph (1), the term 'modified adjusted gross income' means 
the adjusted gross income of the taxpayer for the taxable year 
increased by any amount excluded from gross income under 
section 911, 931, or 933. 
"(d) TAX TREATMENT OF DISTRIBUTIONS.— 
"(1) IN GENERAL.—^Any distribution shall be includible in 
the gross income of the distributee in the manner as provided 
in section 72(b). 
"(2) 
DISTRIBUTIONS FOR QUALIFIED HIGHER EDUCATION 
EXPENSES.— 
"(A) IN GENERAL.—No amount shall be includible in 
gross income under paragraph (1) if the qualified higher 
education expenses of the designated beneficiary during 
the taxable year are not less than the aggregate distribu-
tions during the taxable year. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 815 
"(B) DISTRIBUTIONS IN EXCESS OF EXPENSES.—If such 
aggregate distributions exceed such expenses during the 
taxable year, the amount otherwise includible in gross 
income under paragraph (1) shall be reduced by the amount 
which bears the same ratio to the amount which would 
be includible in gross income under paragraph (1) (without 
regard to this subparagraph) as the qualified higher edu-
cation expenses bear to such aggregate distributions. 
"(C) ELECTION TO WAIVE EXCLUSION.—A taxpayer may 
elect to waive the application of this paragraph for any 
taxable year. 
"(3) SPECIAL RULES FOR APPLYING ESTATE AND GIFT TAXES 
WITH RESPECT TO ACCOUNT.—Rules similar to the rules of para-
graphs (2), (4), and (5) of section 529(c) shall apply for purposes 
of this section. 
"(4) ADDITIONAL TAX FOR DISTRIBUTIONS NOT USED FOR 
EDUCATIONAL EXPENSES.— 
"(A) IN GENERAL.—The tax imposed by this chapter 
for £iny taxable year on any taxpayer who receives a pay-
ment or distribution from an education individual retire-
ment account which is includible in gross income shall 
be increased by 10 percent of the amount which is so 
includible. 
"(B) EXCEPTIONS.—Subparagraph (A) shall not apply 
if the payment or distribution is— 
"(i) made to a beneficiary (or to the estate of the 
designated beneficiary) on or after the death of the 
designated beneficiary, 
"(ii) attributable to the designated beneficiary's 
being disabled (within the meaning of section 72(m)(7)), 
or 
"(iii) made on account of a scholarship, allowance, 
or payment described in section 25A(g)(2) received by 
the account holder to the extent the amount of the 
payment or distribution does not exceed the amount 
of the scholarship, allowance, or payment. 
"(C) 
EXCESS CONTRIBUTIONS RETURNED BEFORE DUE 
DATE OF RETURN.—Subparagraph (A) shall not apply to 
the distribution of any contribution made during a taxable 
year on behalf of a designated beneficiary to the extent 
that such contribution exceeds $500 if— 
"(i) such distribution is received on or before the 
day prescribed by law (including extensions of time) 
for filing such contributor's return for such taxable 
year, and 
"(ii) such distribution is accompanied by the 
amount of net income attributable to such excess con-
tribution. 
Any net income described in clause (ii) shall be included 
in gross income for the taxable year in which such excess 
contribution was made. 
"(5) ROLLOVER CONTRIBUTIONS.—Paragraph (1) shall not 
apply to any amount paid or distributed from an education 
individual retirement account to the extent that the amoimt 
received is paid into another education individual retirement 
account for the benefit of the same beneficiary or a member 
of the family (within the meaning of section 529(e)(2)) of such 
I l l STAT. 816 
PUBLIC LAW 105-34—AUG. 5, 1997 
beneficiary not later than the 60th day after the date of such 
payment or distribution. The preceding sentence shall not apply 
to any pa3mient or distribution if it applied to any prior payment 
or distribution during the 12-month period ending on the date 
of the payment or distribution. 
"(6) CHANGE IN BENEFICIARY.—Any change in the bene-
ficiary of an education individual retirement account shall not 
be treated as a distribution for purposes of paragraph (1) if 
the new beneficiary is a member of the family (as so defined) 
of the old beneficiary. 
"(7) SPECIAL RULES FOR DEATH AND DIVORCE.—Rules similar 
to the rules of paragraphs (7) and (8) of section 220(f) shall 
apply. 
"(e) TAX TREATMENT OF ACCOUNTS.—Rules similar to the rules 
of paragraphs (2) and (4) of section 408(e) shall apply to any 
education individual retirement account. 
"(f) COMMUNITY PROPERTY LAWS.—This section shall be applied 
without regard to £iny community property laws. 
"(g) CUSTODIAL ACCOUNTS.—For purposes of this section, a 
custodial account shall be treated as a trust if the assets of such 
account are held by a bank (as defined in section 408(n)) or another 
person who demonstrates, to the satisfaction of the Secretary, that 
the manner in which he will administer the account will be consist-
ent with the requirements of this section, and if the custodial 
account would, except for the fact that it is not a trust, constitute 
an account described in subsection (b)(1). For purposes of this 
title, in the case of a custodial account treated as a trust by 
reason of the preceding sentence, the custodian of such account 
shall be treated as the trustee thereof. 
"(h) REPORTS.—^The trustee of an education individual retire-
ment account shall make such reports regarding such account to 
the Secretary and to the beneficiary of the account with respect 
to contributions, distributions, and such other matters as the Sec-
retary may require. The reports required by this subsection shall 
be filed at such time and in such manner and furnished to such 
individuals at such time and in such manner as may be required.". 
(b) TAX ON PROHIBITED TRANSACTIONS.— 
(1) IN GENERAL.—Paragraph (1) of section 4975(e) (relating 
to prohibited transactions) is amended by striking "or" at the 
end of subparagraph (D), by redesignating subparagraph (E) 
as subparagraph (F), and by inserting after subparagraph (D) 
the following new subparagraph: 
"(E) an 
education 
individual 
retirement 
account 
described in section 530, or". 
(2) SPECL\L RULE.—Subsection (c) of section 4975 is amend-
ed by adding at the end of subsection (c) the following new 
paragraph: 
"(5) SPECIAL RULE FOR EDUCATION INDIVIDUAL RETIREMENT 
ACCOUNTS.—An individual for whose benefit an education 
individual retirement account is established and any contribu-
tor to such account shall be exempt from the tax imposed 
by this section with respect to any transaction concerning such 
account (which would otherwise be taxable under this section) 
if section 530(d) applies with respect to such transaction.". 
(c) FAILURE TO PROVIDE REPORTS ON EDUCATION INDIVIDUAL 
RETIREMENT ACCOUNTS.—Paragraph (2) of section 6693(a) (relating 
to failure to provide reports on individual retirement accounts or 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 817 
annuities) is amended by striking "and" at the end of subparagraph 
(B), by striking the period at the end of subparagraph (C) and 
inserting ", and", and by adding at the end the following new 
subparagraph: 
"(D) Section 530(h) (relating to education individual 
retirement accounts).". 
(d) TAX ON EXCESS CONTRIBUTIONS.— 
(1) IN GENERAL.—Subsection (a) of section 4973 is amended 
by striking "or" at the end of paragraph (2), by adding "or" 
at the end of paragraph (3), and by inserting after paragraph 
(3) the following new paragraph: 
"(4) an education individual retirement account (as defined 
in section 530),". 
(2) 
EXCESS 
CONTRIBUTIONS DEFINED.—Section 4973 is 
amended by adding at the end the following new subsection: 
"(e) EXCESS CONTRIBUTIONS TO EDUCATION INDIVIDUAL RETIRE-
MENT ACCOUNTS.—For purposes of this section— 
"(1) IN GENERAL.—In the case of education individual retire-
ment accounts maintained for the benefit of any 1 beneficiary, 
the term 'excess contributions' means— 
"(A) the amount by which the amount contributed for 
the taxable year to such accounts exceeds $500, and 
"(B) any amount contributed to such accounts for any 
taxable year if any amount is contributed during such 
year to a qualified State tuition program for the benefit 
of such beneficiary. 
"(2) SPECIAL RULES.—For purposes of paragraph (1), the 
following contributions shall not be taken into account: 
"(A) Any contribution which is distributed out of the 
education individual retirement account in a distribution 
to which section 530(d)(4)(C) applies. 
"(B) Any contribution described in section 530(b)(2)(B) 
to a qualified State tuition program. 
"(C) Any rollover contribution.". 
(e) TECHNICAL AMENDMENTS.— 
(1) Section 26(b)(2) is amended by redesignating subpara-
graphs (E) through (P) as subparagraphs (F) through (Q), 
respectively, and by inserting after subparagraph (D) the follow-
ing new subparagraph: 
"(E) section 530(d)(3) (relating to additional tax on 
certain distributions fi*om education individual retirement 
accounts),". 
(2) Subparagraph (C) of section 135(c)(2), as added by the 
preceding section, is amended by inserting ", or to an education 
individual retirement account (as defined in section 530) on 
behalf of an account beneficiary," after "(as defined in such 
section)". 
(3) The table of sections for part VIII of subchapter F 
of chapter 1 is amended by adding at the end the following 
new item: 
"Sec. 530. Education individual retirement accounts.". 
(f) EFFECTIVE DATE.—The amendments made by this section 26USC26note. 
shall apply to taxable years beginning after December 31, 1997. 
I l l STAT. 818 
PUBLIC LAW 105-34—AUG. 5, 1997 
Subtitle C—Other Education Initiatives 
SEC. 221. EXTENSION OF EXCLUSION FOR EMPLOYER-PROVIDED EDU-
CATIONAL ASSISTANCE. 
(a) IN GENERAL.—Subsection (d) of section 127 (relating to 
educational assistance programs) is amended to read as follows: 
"(d) TERMINATION.T—Tlus section shall not apply to expenses 
paid with respect to courses beginning after May 31, 2000.". 
26 use 127 note. 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31, 1996. 
SEC. 222. REPEAL OF LIMITATION ON QUALIFIED 501(c)(3) BONDS 
OTHER THAN HOSPITAL BONDS. 
Section 145(b) (relating to qualified 501(c)(3) bond) is amended 
by adding at the end the following new paragraph: 
"(5) TERMINATION OF LIMITATION.—This subsection shall 
not apply with respect to bonds issued after the date of the 
enactment of this paragraph as part of an issue 95 percent 
or more of the net proceeds of which are to be used to finance 
capital expenditures incurred after such date.". 
SEC. 223. INCREASE IN ARBITRAGE REBATE EXCEPTION FOR GOVERN-
MENTAL BONDS USED TO FINANCE EDUCATION FACILI-
TIES. 
(a) IN GENERAL.—Section 148(f)(4)(D) (relating to exception for 
governmental units issuing $5,000,000 or less of bonds) is amended 
by adding at the end the following new clause: 
"(vii) INCREASE IN EXCEPTION FOR BONDS FINANC-
ING PUBLIC SCHOOL CAPITAL EXPENDITURES.—Each of 
the $5,000,000 amounts in the preceding provisions 
of this subparagraph shall be increased by the lesser 
of $5,000,000 or so much of the aggregate face amoimt 
of the bonds as are attributable to financing the 
construction (within the meaning of subparagraph 
(C)(iv)) of public school facilities.". 
26USCl48note. 
(b) EFFECTIVE DATE.—The amendments made by this section 
shall apply to bonds issued after December 31,1997. 
SEC. 224. CONTRIBUTIONS OF COMPUTER TECHNOLOGY AND EQUIP-
MENT FOR ELEMENTARY OR SECONDARY SCHOOL PUR-
POSES. 
(a) CONTRIBUTIONS OF COMPUTER TECHNOLOGY AND EQUIPMENT 
FOR ELEMENTARY OR SECONDARY SCHOOL PURPOSES.—Subsection 
(e) of section 170 is amended by adding at the end the following 
new paragraph: 
"(6) SPECIAL RULE FOR CONTRIBUTIONS OF COMPUTER TECH-
NOLOGY AND EQUIPMENT FOR ELEMENTARY OR SECONDARY 
SCHOOL PURPOSES.— 
"(A) LIMIT ON REDUCTION.—In the case of a qualified 
elementary or secondary educational contribution, the 
reduction under paragraph (1)(A) shall be no greater than 
the amount determined under paragraph (3)(B). 
"(B) 
QUALIFIED 
ELEMENTARY OR SECONDARY 
EDU-
CATIONAL CONTRIBUTION.—For purposes of this paragraph, 
the term 'qualified elementary or secondary educational 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 819 
contribution' means a charitable contribution by a corpora-
tion of any computer technology or equipment, but only 
if— 
"(i) the contribution is to— 
"(I) an educational organization described in 
subsection (b)(l)(A)(ii), or 
"(II) an entity described in section 501(c)(3) 
and exempt from tax under section 501(a) (other 
than an entity described in subclause (I)) that 
is organized primarily for purposes of supporting 
elementary and secondary education, 
"(ii) the contribution is made not later than 2 
years after the date the taxpayer acquired the property 
(or in the case of property constructed by the taxpayer, 
the date the construction of the property is substan-
tially completed), 
"(iii) the original use of the property is by the 
donor or the donee, 
"(iv) substantially all of the use of the property 
by the donee is for use within the United States for 
educational purposes in any of the grades K-12 that 
are related to the purpose or function of the organiza-
tion or entity, 
"(v) the property is not transferred by the donee 
in exchange for money, other property, or services, 
except for shipping, installation and transfer costs, 
"(vi) the property will fit productively into the 
entity's education plan, and 
"(vii) the entity's use and disposition of the prop-
erty will be in accordance with the provisions of clauses 
(iv) and (v). 
"(C) CONTRIBUTION TO PRIVATE FOUNDATION.—A con-
tribution by a corporation of any computer technology or 
equipment to a private foundation (as defined in section 
509) shall be treated as a qualified elementary or secondary 
educational contribution for purposes of this paragraph 
if— 
"(i) the contribution to the private foundation satis-
fies the requirements of clauses (ii) and (v) of subpara-
graph (B), and 
"(ii) within 30 days after such contribution, the 
private foundation— 
"(I) contributes the property to an entity 
described in clause (i) of subparagraph (B) that 
satisfies the requirements of clauses (iv) through 
(vii) of subparagraph (B), and 
"(II) notifies the donor of such contribution. 
"(D) 
SPECIAL RULE RELATING TO CONSTRUCTION OF 
PROPERTY.—For the purposes of this paragraph, the rules 
of paragraph (4)(C) shall apply. 
"(E) DEFINITIONS.—For the purposes of this para-
graph— 
"(i) COMPUTER TECHNOLOGY OR EQUIPMENT.—The 
term 'computer technology or equipment' means com-
puter software (as defined by section 197(e)(3)(B)), com-
puter or peripheral equipment (as defined lay section 
I l l STAT. 820 
PUBLIC LAW 105-34—AUG. 5, 1997 
168(i)(2)(B)), and fiber optic cable related to computer 
use. 
"(ii) CORPORATION.—The term 'corporation' has the 
meaning given to such term by paragraph (4)(D). 
"(F) TERMINATION.—This paragraph shall not apply 
to any contribution made during any taxable year begin-
ning after December 31, 1999.". 
26 use 170 note. 
(b) EFFECTIVE DATE.—The amendment made by this section 
shall apply to taxable years beginning after December 31, 1997. 
SEC. 2
2
5
. 
TREATMENT OF CANCELLATION OF CERTAIN STUDENT 
LOANS. 
(a) CERTAIN LOANS BY EXEMPT ORGANIZATIONS.— 
(1) IN GENERAL.—Paragraph (2) of section 108(f) (defining 
student loan) is amended by striking "or" at the end of subpara-
graph (B) and by striking subparagraph (D) and inserting the 
following: 
"(D) any educational organization described in section 
170(b)(l)(A)(ii) if such loan is made— 
"(i) pursuant to an agreement with any entity 
described in subparagraph (A), (B), or (C) under which 
the funds from which the loan was made were provided 
to such educational organization, or 
"(ii) pursuant to a program of such educational 
organization which is designed to encourage its stu-
dents to serve in occupations with unmet needs or 
in areas with unmet needs £ind under which the serv-
ices provided by the students (or former students) are 
for or under the direction of a governmental unit or 
an organization described in section 501(c)(3) and 
exempt from tax under section 501(a). 
The term 'student loan' includes any loan made by an edu-
cational organization so described or by an organization exempt 
from tax under section 501(a) to refinance a loan meeting 
the requirements of the preceding sentence.". 
(2) EXCEPTION FOR DISCHARGES ON ACCOUNT OF SERVICES 
PERFORMED FOR CERTAIN LENDERS.—Subsection (f) of section 
108 is amended by adding at the end the following new para-
graph: 
"(3) EXCEPTION FOR DISCHARGES ON ACCOUNT OF SERVICES 
PERFORMED FOR CERTAIN LENDERS.—Paragraph (1) shall not 
apply to the discharge of a loan made by an organization 
described in paragraph (2)(D) (or by an organization described 
in paragraph (2)(E) from funds provided by an organization 
described in paragraph (2)(D)) if the discharge is on account 
of services performed for either such organization.". 
26 use 108 note. 
(b) EFFECTIVE DATE.—The amendments made by this section 
shall apply to discharges of indebtedness after the date of the 
enactment of this Act. 
SEC. 226. INCENTIVES FOR EDUCATION ZONES. 
(a) IN GENERAL.—Subchapter U of chapter 1 (relating to addi-
tional incentives for empowerment zones) is amended by redesignat-
ing part IV as part V, by redesignating section 1397E as section 
26 use 1397D, 
1397F, and by inserting after part III the following new part: 
1397F. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 821 
"PART IV—INCENTIVES FOR EDUCATION 
ZONES 
"Sec. 1397E. Credit to holders of qualified zone academy bonds.". 
"SEC. 1397E. CREDIT TO HOIJ)ERS OF QUALIFIED ZONE ACADEMY 
BONDS. 
"(a) ALLOWANCE OF CREDIT.—In the case of an eligible taxpayer 
who holds a qualified zone academy bond on the credit allowance 
date of such bond which occurs during the taxable year, there 
shall be allowed as a credit against the tax imposed by this chapter 
for such taxable year the amount determined under subsection 
(b). 
"(b) AMOUNT OF CREDIT.— 
"(1) IN GENERAL.—The amount of the credit determined 
under this subsection with respect to any qualified zone acad-
emy bond is the amount equal to the product o
f
— 
"(A) the credit rate determined by the Secretary under 
paragraph (2) for the month in which such bond was issued, 
multiplied by 
"(B) the face amount of the bond held by the taxpayer 
on the credit allowance date. 
"(2) DETERMINATION.—During each calendar month, the 
Secretary shall determine a credit rate which shall apply to 
bonds issued during the following calendar month. The credit 
rate for any month is the percentage which the Secretary 
estimates will permit the issuance of qualified zone academy 
bonds without discount and without interest cost to the issuer. 
"(c) LIMITATION BASED ON AMOUNT OF TAX.—The credit allowed 
under subsection (a) for any taxable year shall not exceed the 
excess of— 
"(1) the sum of the regular tax liability (as defined in 
section 26(b)) plus the tax imposed by section 55, over 
"(2) the sum of the credits allowable under part IV of 
subchapter A (other than subpart C thereof, relating to refund-
able credits). 
"(d) QUALIFIED ZONE ACADEMY BOND.—For purposes of this 
section— 
"(1) IN GENERAL.—The term 'qualified zone academy bond' 
means any bond issued as part of an issue if— 
"(A) 95 percent or more of the proceeds of such issue 
are to be used for a qualified purpose with respect to 
a qualified zone academy established by an eligible local 
education agency, 
"(B) the bond is issued by a State or local government 
within the jurisdiction of which such academy is located, 
"(C) the issuer— 
"(i) designates such bond for purposes of this sec-
tion, 
"(ii) certifies that it has written assurances that 
the private business contribution requirement of para-
graph (2) will be met with respect to such academy, 
and 
"(iii) certifies that it has the written approval of 
the eligible local education agency for such bond issu-
ance, and 
Ill STAT. 822 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(D) the term of each bond which is part of such 
issue does not exceed the maximum term permitted under 
paragraph (3). 
"(2) PRIVATE BUSINESS CONTRIBUTION REQUIREMENT,— 
"(A) IN GENERAL.—For purposes of paragraph (1), the 
private business contribution requirement of this para-
graph is met with respect to any issue if the eUgible local 
education agency that established the qualified zone acad-
emy has written commitments fi*om private entities to 
make qualified contributions having a present value (as 
of the date of issuance of the issue) of not less than 10 
percent of the proceeds of the issue. 
"(B) 
QUALIFIED 
CONTRIBUTIONS.—For purposes 
of 
subparagraph (A), the term 'qualified contribution' means 
any contribution (of a t5T)e and quality acceptable to the 
eligible local education agency) o
f
— 
"(i) equipment for use in the qualified zone acad-
emy (including state-of-the-art technology and voca-
tional equipment), 
"(ii) technical assistance in developing curriculum 
or in training teachers in order to promote appropriate 
market driven technology in the classroom, 
"(iii) services of employees as volunteer mentors, 
"(iv) internships, field trips, or other educational 
opportunities outside the academy for students, or 
"(v) any other property or service specified by the 
eligible local education agency. 
"(3) TERM REQUIREMENT.—During each calendar month, 
the Secretary shall determine the maximum term permitted 
under this paragraph for bonds issued during the following 
calendar month. Such maximum term shall be the term which 
the Secretary estimates will result in the present value of 
the obligation to repay the principal on the bond being equal 
to 50 percent of the face amount of the bond. Such present 
value shall be determined using as a discount rate the average 
annual interest rate of tax-exempt obligations having a term 
of 10 years or more which are issued during the month. If 
the term as so determined is not a multiple of a whole year, 
such term shall be rounded to the next highest whole year. 
"(4) QUALIFIED ZONE ACADEMY.— 
"(A) IN GENERAL.—The term 'qualified zone academy* 
means any public school (or academic program within a 
public school) which is established by and operated under 
the supervision of an eligible local education agency to 
provide education or training below the postsecondary level 
if— 
"(i) such public school or program (as the case 
may be) is designed in cooperation with business to 
enhance the academic curriculum, increase graduation 
and employment rates, and better prepare students 
for the rigors of college and the increasingly complex 
workforce, 
"(ii) students in such public school or program 
(as the case may be) will be subject to the S£une aca-
demic standards and assessments as other students 
educated by the eligible local education agency. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 823 
"(iii) the comprehensive education plan of such 
pubUc school or program is approved by the eligible 
local education agency, £ind 
"(iv)(I) such public school is located in 
an 
empowerment zone or enterprise community (including 
any such zone or community designated after the date 
of the enactment of this section), or 
"(11) there is a reasonable expectation (as of the 
date of issuance of the bonds) that at least 35 percent 
of the students attending such school or participating 
in such program (as the case may be) will be eligible 
for free or reduced-cost lunches under the school lunch 
program established under the National School Lunch 
Act. 
"(B) ELIGIBLE LOCAL EDUCATION AGENCY.—The term 
'eligible local education agency* means any local education 
agency as defined in section 14101 of the Elementary and 
Secondary Education Act of 1965. 
"(5) QUALIFIED PURPOSE.—The term 'qualified purpose' 
means, with respect to any qualified zone academy— 
"(A) rehabilitating or repairing the public school facility 
in which the academy is established, 
"(B) providing equipment for use at such academy, 
"(C) developing course materials for education to be 
provided at such academy, and 
"(D) training teachers and other school personnel in 
such academy. 
"(6) 
ELIGIBLE 
TAXPAYER.—The term 'eligible taxpayer' 
means— 
"(A) a bank (within the meaning of section 581), 
"(B) an insurance company to which subchapter L 
applies, and 
"(C) a corporation actively engaged in the business 
of lending money. 
"(e) LIMITATION ON AMOUNT OF BONDS DESIGNATED.— 
"(1) NATIONAL LIMITATION.—There is a national zone acad-
emy bond limitation for each calendar year. Such limitation 
is $400,000,000 for 1998 and 1999, and, except as provided 
in paragraph (4), zero thereafter. 
"(2) ALLOCATION OF LIMITATION.—The national zone acad-
emy bond limitation for a calendar year shall be allocated 
by the Secretary among the States on the basis of their respec-
tive populations of individuals below the poverty line (as defined 
by the Office of Management and Budget). The limitation 
amount allocated to a State under the preceding sentence shall 
be allocated by the State education agency to qualified zone 
academies within such State. 
"(3) DESIGNATION SUBJECT TO LIMITATION AMOUNT.—The 
maximum aggregate face amount of bonds issued during any 
calendar year which may be designated under subsection (d)(1) 
with respect to any qualified zone academy shall not exceed 
the limitation amount allocated to such academy under para-
graph (2) for such calendar year. 
"(4) CARRYOVER OF UNUSED LIMITATION.—If for any cal-
endar year— 
"(A) the limitation amount for any State, exceeds 
I l l STAT. 824 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(E) the amount of bonds issued during such year 
which are designated under subsection (d)(1) with respect 
to qualified zone academies within such State, 
the Umitation amount for such State for the following calendar 
year shall be increased by the amount of such excess. 
"(f) OTHER DEFINITIONS.—For purposes of this section— 
"(1) CREDIT ALLOWANCE DATE.—The term 'credit allowance 
date' means, with respect to any issue, the last day of the 
1-year period beginning on the date of issuance of such issue 
and the last day of each successive 1-year period thereafter. 
"(2) BOND.—The term 'bond' includes any obligation. 
"(3) STATE.—The term 'State' includes the District of 
Columbia and any possession of the United States. 
"(g) 
CREDIT 
INCLUDED 
IN 
GROSS 
INCOME.—Gross income 
includes the amount of the credit allowed to the taxpayer under 
this section.". 
(b) CONFORMING AMENDMENTS.— 
(1) The table of parts for subchapter U of chapter 1 is 
amended by striking the last item and inserting the following: 
"Part IV. Incentives for education zones. 
"Part V. Regulations.". 
(2) The table of sections for part V, as so redesignated, 
is amended to read as follows: 
"Sec. 1397F. Regulations.". 
26 use 1397E 
(c) EFFECTIVE DATE.—The amendments made by this section 
note. 
shall apply to obligations issued after December 31, 1997. 
TITLE III—SAVINGS AND INVESTMENT 
INCENTIVES 
Subtitle A—^Retirement Savings 
SEC. 301. RESTORATION OF IRA DEDUCTION FOR CERTAIN TAX-
PAYERS. 
(a) INCREASE IN INCOME LIMITS APPLICABLE TO ACTIVE PARTICI-
PANTS.— 
(1) IN GENERAL.—Subparagraph (B) of section 219(g)(3) 
(relating to applicable dollar amount) is amended to read as 
follows: 
"(B) 
APPLICABLE 
DOLLAR 
AMOUNT.—The 
term 
'applicable dollar amount' means the following: 
"(i) In the case of a taxpayer filing a joint return: 
The 
applicable 
T o r taxable years beginning in: 
dollar amount 
is: 
1998 
$50,000 
1999 
$51,000 
2000 
$52,000 
2001 
$53,000 
2002 
$54,000 
2003 
$60,000 
2004 
$65,000 
2005 
$70,000 
2006 
$75,000 
2007 and thereafter 
$80,000. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 825 
"(ii) In the case of any other taxpayer (other than 
a married individual filing a separate return): 
The 
applicable 
Tor taxable years beginning in: 
dollar amount 
is: 
1998 
$30,000 
1999 
$31,000 
2000 
$32,000 
2001 
$33,000 
2002 
$34,000 
2003 
$40,000 
2004 
$45,000 
2005 and thereafter 
$50,000. 
"(iii) In the case of a married individual filing 
a separate return, zero.". 
(2) INCREASE IN PHASE-OUT RANGE FOR JOINT RETURNS.— 
Clause (ii) of section 219(g)(2)(A) is amended by inserting 
"($20,000 in the case of a joint return for a tsixable year begin-
ning after December 31, 2006)". 
(b) LIMITATIONS FOR ACTIVE PARTICIPATION NOT BASED ON 
SPOUSE'S PARTICIPATION.—Section 219(g) (relating to Hmitation on 
deduction for active participants in certain pension plans) is amend-
ed— 
(1) by striking "or the individual's spouse" in paragraph 
(1), and 
(2) by adding at the end the following new paragraph: 
"(7) SPECIAL RULE FOR CERTAIN SPOUSES.—In the case of 
an individual who is an active participant at no time during 
any plan year ending with or within the taxable year but 
whose spouse is an active participant for any part of any 
such plan year— 
"(A) the applicable dollar amount under paragraph 
(3)(B)(i) with respect to the taxpayer shall be $150,000, 
and 
"(B) the Emiount applicable under paragraph (2)(A)(ii) 
shall be $10,000.". 
(c) EFFECTIVE DATE.—^The amendments made by this section 26 use 219 note, 
shall apply to taxable years beginning after December 31, 1997. 
SEC. 302. ESTABLISHMENT OF NONDEDUCTIBLE TAX-FREE INDIVID-
UAL RETIREMENT ACCOUNTS. 
(a) IN GENERAL.—Subpart A of part I of subchapter D of chapter 
1 (relating to pension, profit-sharing, stock bonus plans, etc.) is 
amended by inserting after section 408 the following new section: 
'<SEC. 408A. ROTH IRAS. 
"(a) GENERAL RULE.—Except as provided in this section, a 
Roth IRA shall be treated for purposes of this title in the same 
manner as an individual retirement plan. 
"(b) ROTH IRA.—For purposes of this title, the term 'Roth 
IRA' means an individual retirement plan (as defined in section 
7701(a)(37)) which is designated (in such manner as the Secretary 
may prescribe) at the time of establishment of the plan as a Roth 
IRA. Such designation shall be made in such manner as the Sec-
retary may prescribe. 
"(c) TREATMENT OF CONTRIBUTIONS.— 
"(1) No 
DEDUCTION ALLOWED.—NO deduction shall be 
allowed under section 219 for a contribution to a Roth IRA. 
I l l STAT. 826 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(2) CONTRIBUTION LIMIT.—The aggregate amount of con-
tributions for any taxable year to all Roth IRAs maintained 
for the benefit of an individual shall not exceed the excess 
(if any) o
f
— 
"(A) the maximum amount allowable as a deduction 
under section 219 with respect to such individual for such 
taxable year (computed without regard to subsection (d)(1) 
or (g) of such section), over 
"(B) the aggregate amount of contributions for such 
taxable year to all other individual retirement plans (other 
than Roth IRAs) maintained for the benefit of the individ-
ual. 
"(3) LIMITS BASED ON MODIFIED ADJUSTED GROSS INCOME.— 
"(A) DOLLAR LIMIT.—The amount determined under 
paragraph (2) for any taxable year shall be reduced (but 
not below zero) by the amount which bears the same ratio 
to such amount as— 
"(i) the excess o
f
— 
"(I) the taxpayer's adjusted gross income for 
such taxable year, over 
"(II) the applicable dollar amount, bears to 
"(ii) $15,000 ($10,000 in the case of a joint return). 
The rules of subparagraphs (B) and (C) of section 219(g)(2) 
shall apply to any reduction iinder this subparagraph. 
"(B) ROLLOVER FROM IRA.—A taxpayer shall not be 
allowed to make a qualified rollover contribution to a Roth 
IRA from an individual retirement plan other than a Roth 
IRA during any taxable year if— 
"(i) the taxpayer's adjusted gross income for such 
taxable year exceeds $100,000, or 
"(ii) the taxpayer is a married individual filing 
a separate return. 
"(C) DEFINITIONS.—For purposes of this paragraph— 
"(i) adjusted gross income shall be determined in 
the same manner as under section 219(g)(3), except 
that any amount included in gross income under sub-
section (d)(3) shall not be taken into account and the 
deduction under section 219 shall be taken into 
account, and 
"(ii) the applicable dollar amount is— 
"(I) in the case of a taxpayer filing a joint 
return, $150,000, 
"(II) in the case of any other taxpayer (other 
than a married individual filing a separate return), 
$95,000, and 
"(III) in the case of a married individual filing 
a separate return, zero. 
"(D) MARITAL STATUS.—Section 219(g)(4) shall apply 
for purposes of this paragraph. 
"(4) CONTRIBUTIONS PERMITTED AFTER AGE 70V2.—Contribu-
tions to a Roth IRA may be made even after the individual 
for whom the account is maintained has attained age 7OV2. 
"(5) MANDATORY DISTRIBUTION RULES NOT TO APPLY BEFORE 
DEATH.—Notwithstanding subsections (a)(6) and (b)(3) of section 
408 (relating to required distributions), the following provisions 
shall not apply to any Roth IRA: 
"(A) Section 401(a)(9)(A). 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 827 
"(B) The incidental death benefit requirements of sec-
tion 401(a). 
"(6) ROLLOVER CONTRIBUTIONS.— 
"(A) IN GENERAL.—No rollover contribution may be 
made to a Roth IRA unless it is a qualified rollover con-
tribution. 
"(B) COORDINATION WITH LIMIT.—A qualified rollover 
contribution shall not be t£iken into account for purposes 
of paragraph (2). 
"(7) TIME WHEN CONTRIBUTIONS MADE.—For purposes of 
this section, the rule of section 219(f)(3) shall apply. 
"(d) DISTRIBUTION RULES.—For purposes of this title— 
"(1) GENERAL RULES.— 
"(A) EXCLUSIONS FROM GROSS INCOME.—Any qualified 
distribution from a Roth IRA shall not be includible in 
gross income. 
"(B) NONQUALIFIED DISTRIBUTIONS.—In applying sec-
tion 72 to any distribution from a Roth IRA which is 
not a qualified distribution, such distribution shall be treat-
ed as made fi-om contributions to the Roth IRA to the 
extent that such distribution, when added to all previous 
distributions fi*om the Roth IRA, does not exceed the aggre-
gate amount of contributions to the Roth IRA. 
"(2) QUALIFIED DISTRIBUTION.—For purposes of this sub-
section— 
"(A) IN GENERAL.—The term 'qualified distribution' 
means any pajnnent or distribution— 
"(i) made on or after the date on which the individ-
ual attains age 59V2, 
"(ii) made to a beneficiary (or to the estate of 
the individual) on or after the death of the individual, 
"(iii) attributable to the individual's being disabled 
(within the meaning of section 72(m)(7)), or 
"(iv) which is a qualified special purpose distribu-
tion. 
"(B) CERTAIN DISTRIBUTIONS WITHIN S YEARS.—A pay-
ment or distribution shall not be treated as a qualified 
distribution under subparagraph (A) if— 
"(i) it is made within the 5-taxable year period 
beginning with the 1st taxable year for which the 
individual made a contribution to a Roth IRA (or such 
individual's spouse made a contribution to a Roth IRA) 
established for such individual, or 
"(ii) in the case of a pasrment or distribution proj)-
erly allocable (as determined in the manner prescribed 
by the Secreteiry) to a qualified rollover contribution 
fi*om an individual retirement plan other than a Roth 
IRA (or income allocable thereto), it is made within 
the 5-taxable year period beginning with the taxable 
year in which the rollover contribution was made. 
"(3) ROLLOVERS FROM AN IRA OTHER THAN A ROTH IRA.— 
"(A) IN GENERAL.—Notwithstanding section 408(d)(3), 
in the case of any distribution to which this paragraph 
applies— 
"(i) there shall be included in gross income any 
amount which would be includible were it not part 
of a qualified rollover contribution. 
I l l STAT. 828 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(ii) section 72(t) shall not apply, and 
"(iii) in the case of a distribution before January 
1, 1999, any amount required to be included in gross 
income by reason of this paragraph shall be so included 
ratably over the 4-taxable year period beginning with 
the taxable year in which the payment or distribution 
is made. 
"(B) DISTRIBUTIONS TO WHICH PARAGRAPH APPLIES.— 
This paragraph shall apply to a distribution from an 
individual retirement plan (other than a Roth IRA) main-
tained for the benefit of an individual which is contributed 
to a Roth IRA maintained for the benefit of such individual 
in a qualified rollover contribution. 
"(C) CONVERSIONS.—The conversion of an individual 
retirement plan (other than a Roth IRA) to a Roth IRA 
shall be treated for purposes of this paragraph as a dis-
tribution to which this paragraph applies. 
"(D) 
CONVERSION OF EXCESS CONTRIBUTIONS.—If, no 
later than the due date for filing the return of tax for 
any tsixable year (without regard to extensions), an individ-
ual transfers, fi*om an individual retirement plan (other 
than a Roth IRA), contributions for such taxable year (and 
any earnings allocable thereto) to a Roth IRA, no such 
amount shall be includible in gross income to the extent 
no deduction was allowed with respect to such amount. 
"(E) ADDITIONAL REPORTING REQUIREMENTS.—Trustees 
of Roth IRAs, trustees of individual retirement plans, or 
both, whichever is appropriate, shall include such addi-
tional information in reports required under section 408(i) 
as the Secretary may require to ensure that amounts 
required to be included in gross income under subpara-
graph (A) are so included. 
"(4) 
COORDINATION 
WITH 
INDIVIDUAL 
RETIREMENT 
ACCOUNTS.—Section 408(d)(2) shall be applied separately with 
respect to Roth IRAs and other individual retirement plans. 
"(5) QUALIFIED SPECIAL PURPOSE DISTRIBUTION.—For pur-
poses of this section, the term 'qualified special purpose dis-
tribution' means any distribution to which subparagraph (F) 
of section 72(t)(2) applies. 
"(e) QUALIFIED ROLLOVER CONTRIBUTION.—For purposes of this 
section, the term 'qualified rollover contribution' means a rollover 
contribution to a Roth IRA fi-om another such account, or fi*om 
an individual retirement plan, but only if such rollover contribution 
meets the requirements of section 408(d)(3). For purposes of section 
408(d)(3)(B), there shall be disregarded any qualified rollover con-
tribution fi'om an individual retirement plan (other than a Roth 
IRA) to a Roth IRA.". 
(b) EXCESS CONTRIBUTIONS.—Section 4973(b), as amended by 
title II, is amended by adding at the end the following new sub-
section: 
"(f) EXCESS CONTRIBUTIONS TO ROTH IRAS.—For purposes of 
this section, in the case of contributions to a Roth IRA (within 
the meaning of section 408A(b)), the term 'excess contributions' 
means the sum o
f
— 
"(1) the excess (if any) of— 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 829 
"(A) the amount contributed for the taxable year to 
such accounts (other than a quahfied rollover contribution 
described in section 408A(e)), over 
"(B) the amount allowable as a contribution under 
sections 408A (c)(2) and (c)(3), and 
"(2) the amount determined under this subsection for the 
preceding taxable year, reduced by the sum of— 
(A) the distributions out of the accounts for the taxable 
year, and 
"(B) the excess (if any) of the maximum amount allow-
able as a contribution under sections 408A (c)(2) and (c)(3) 
for the taxable year over the amount contributed to the 
accounts for the taxable year. 
For purposes of this subsection, any contribution which is distrib-
uted from a Roth IRA in a distribution described in section 408(d)(4) 
shall be treated as an amount not contributed.". 
(c) SPOUSAL IRA.—Clause (ii) of section 219(c)(1)(B) is amended 
to read as follows: 
"(ii) the compensation includible in the gross 
income of such individual's spouse for the taxable year 
reduced by— 
"(I) the amount allowed as a deduction under 
subsection (a) to such spouse for such taxable year, 
and 
"(II) the amount of any contribution on behalf 
of such spouse to a Roth IRA under section 408A 
for such taxable year.". 
(d) AUTHORITY TO PRESCRIBE NECESSARY REPORTING.—Section 
408(i) is amended— 
(1) by striking "under regulations", and 
(2) by striking "in such regulations" each place it appears. 
(e) CONFORMING AMENDMENT.—The table of sections for subpart 
A of part I of subchapter D of chapter 1 is amended by inserting 
after the item relating to section 408 the following new item: 
"Sec. 408A. Roth IRAs.". 
(f) EFFECTIVE DATE.—The amendments made by this section 26 USC 219 note. 
shall apply to taxable years beginning after December 31, 1997. 
SEC. 303. DISTRIBUTIONS FROM CERTAIN PLANS M
A
Y BE USED WITH-
OUT PENALTY TO PURCHASE FIRST HOMES. 
(a) IN GENERAL.—Paragraph (2) of section 72(t) (relating to 
exceptions to 10-percent additional tax on early distributions from 
qualified retirement plsms), as amended by section 203, is amended 
by adding at the end the following new subparagraph: 
"(F) DISTRIBUTIONS FROM CERTAIN PLANS FOR FIRST 
HOME PURCHASES.—Distributions to an individual from an 
individual retirement plan which are qualified 
first-time 
homebuyer distributions (as defined in paragraph (8)). Dis-
tributions shall not be taken into account under the preced-
ing sentence if such distributions are described in subpara-
graph (A), (C), (D), or (E) or to the extent paragraph 
(1) does not apply to such distributions by reason of 
subparagraph (B).". 
(b) DEFINITIONS.—Section 72(t), as amended by section 203, 
is amended by adding at the end the following new paragraphs: 
"(8) 
QUALIFIED FIRST-TIME HOMEBUYER DISTRIBUTIONS.— 
For purposes of paragraph (2)(F)— 
I l l STAT. 830 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(A) IN GENERAL.—^The term 'qualified first-time home-
buyer distribution' means any pa3mient or distribution 
received by an individual to the extent such payment or 
distribution is used by the individual before the close of 
the 120th day after the day on which such payment or 
distribution is received to pay qualified acquisition costs 
with respect to a principal residence of a first-time home-
buyer who is such individual, the spouse of such individual, 
or any child, grandchild, or ancestor of such individual 
or the individual's spouse. 
"(B) 
LIFETIME DOLLAR LIMITATION.—The aggregate 
amount of pajmients or distributions received by an individ-
ual which may be treated as qualified first-time homebuyer 
distributions for any taxable year shall not exceed the 
excess (if any) o
f
— 
"(i) $10,000, over 
"(ii) the aggregate amounts treated as qualified 
first-time homebuyer distributions with respect to such 
individual for all prior taxable years. 
"(C) QUALIFIED ACQUISITION COSTS.—For purposes of 
this paragraph, the term 'qualified acquisition costs' means 
the costs of acquiring, constructing, or reconstructing a 
residence. Such term includes any usual or reasonable 
settlement, financing, or other closing costs. 
"(D) FIRST-TIME HOMEBUYER; OTHER DEFINITIONS.—For 
purposes of this paragraph— 
"(i) FIRST-TIME HOMEBUYER.—The term 'first-time 
homebuyer' means any individual if— 
"(I) such individual (and if married, such 
individual's spouse) had no present ownership 
interest in a principal residence during the 2-year 
period ending on the date of acquisition of the 
principal 
residence to which this 
paragraph 
applies, and 
"(II) subsection (h) or (k) of section 1034 (as 
in effect on the day before the date of the enact-
ment of this paragraph) did not suspend the run-
ning of any period of time specified in section 
1034 (as so in effect) with respect to such individ-
ual on the day before the date the distribution 
is applied pursuant to subparagraph (A), 
"(ii) PRINCIPAL RESIDENCE.—The term 'principal 
residence' has the same meaning as when used in 
section 121. 
"(iii) DATE OF ACQUISITION.—The term 'date of 
acquisition' means the date— 
"(I) on which a binding contract to acquire 
the principal residence to which subparagraph (A) 
applies is entered into, or 
"(II) on which construction or reconstruction 
of such a principal residence is commenced. 
"(E) 
SPECIAL RULE WHERE DELAY IN ACQUISITION.— 
If any distribution from any individual retirement plan 
fails to meet the requirements of subparagraph (A) solely 
by reason of a delay or cancellation of the purchase or 
construction of the residence, the amount of the distribution 
may be contributed to an individual retirement plan as 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 831 
provided in section 408(d)(3)(A)(i) (determined by substitut-
ing '120 days' for '60 days' in such section), except that— 
"(i) section 408(d)(3)(B) shall not be applied to 
such contribution, and 
"(ii) such amount shall not be taken into account 
in determining whether section 408(d)(3)(B) applies to 
any other amount.", 
(c) EFFECTIVE DATE.—The amendments made by this section 
26 use 72 note. 
shall apply to payments and distributions in taxable years beginning 
after December 31,1997. 
SEC. 
304. 
CERTAIN 
BULLION 
NOT 
TREATED 
AS 
COLLECTIBLES. 
(a) IN GENERAL.—Paragraph (3) of section 408(m) (relating 
to exception for certain coins) is amended to read as follows: 
"(3) EXCEPTION FOR CERTAIN COINS AND BULLION.—For pur-
poses of this subsection, the term 'collectible' shall not include— 
"(A) any coin which is— 
"(i) a gold coin described in paragraph (7), (8), 
(9), or (10) of section 5112(a) of title 31, United States 
Code, 
"(ii) a silver coin described in section 5112(e) of 
title 31, United States Code, 
"(iii) a platinum coin described in section 5112(k) 
of title 31, United States Code, or 
"(iv) a coin issued under the laws of any State, 
or 
"(B) any gold, silver, platinum, or palladium bullion 
of a fineness equal to or exceeding the minimum fineness 
that a contract market (as described in section 7 of the 
Commodity Exchange Act, 7 U.S.C. 7) requires for metals 
which may be delivered in satisfaction of a regulated 
fiitures contract, 
if such bullion is in the physical possession of a trustee 
described under subsection (a) of this section.". 
(b) EFFECTIVE DATE.—The amendment made by this section 
26 use 408 note. 
shall apply to taxable years beginning after December 31, 1997. 
Subtitle B—Capital Gains 
SEC 311. MAXIMUM CAPITAL GAINS RATES FOR INDIVIDUALS. 
(a) IN GENERAL.—Subsection (h) of section 1 (relating to maxi-
mum capital gains rate) is amended to read as follows: 
"(h) MAXIMUM CAPITAL GAINS RATE.— 
"(1) IN GENERAL.—If a taxpayer has a net capital gain 
for any taxable year, the tax imposed by this section for such 
taxable year shall not exceed the sum of— 
"(A) a tax computed at the rates and in the same 
manner as if this subsection had not been enacted on 
the greater of— 
"(i) taxable income reduced by the net capital gain. 
or 
"(ii) the lesser of— 
"(I) the amoimt of taxable income taxed at 
a rate below 28 percent, or 
"(II) taxable income reduced by the adjusted 
net capital gain, plus 
I l l STAT. 832 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(B) 25 percent of the excess (if any) o
f
— 
"(i) the unrecaptured section 1250 gain (or, if less, 
the net capital gain), over 
"(ii) the excess (if any) o
f
— 
"(I) the sum of the amount on which tax is 
determined under subparagraph (A) plus the net 
capital gain, over 
"(II) taxable income, plus 
"(C) 28 percent of the amount of taxable income in 
excess of the sum o
f
— 
"(i) the adjusted net capital gain, plus 
"(ii) the sum of the amounts on which tax is deter-
mined under subparagraphs (A) and (B), plus 
"(D) 10 percent of so much of the taxpayer's adjusted 
net capital gain (or, if less, taxable income) as does not 
exceed the excess (if any) o
f
— 
"(i) the amount of taxable income which would 
(without regard to this paragraph) be taxed at a rate 
below 28 percent, over 
"(ii) the taxable income reduced by the adjusted 
net capital gain, plus 
"(E) 20 percent of the taxpayer's adjusted net capital 
gain (or, if less, teixable income) in excess of the amount 
on which a tax is determined under subparagraph (D). 
"(2) REDUCED CAPITAL GAIN RATES FOR QUALIFIED 5-YEAR 
GAIN.— 
"(A) REDUCTION IN IO-PERCENT RATE,—In the case of 
any taxable year beginning after December 31, 2000, the 
rate under paragraph (1)(D) shall be 8 percent with respect 
to so much of the amount to which the 10-percent rate 
would otherwise apply as does not exceed qualified 5-year 
gain, and 10 percent with respect to the remainder of 
such amount. 
"(B) REDUCTION IN 20-PERCENT RATE.—The rate under 
paragraph (1)(E) shall be 18 percent with respect to so 
much of the amount to which the 20-percent rate would 
otherwise apply as does not exceed the lesser of— 
"(i) the excess of qualified 5-year gain over the 
amount of such gain taken into account under subpara-
graph (A) of this paragraph, or 
"(ii) the amount of qualified 5-year gain (deter-
mined by taking into account only property the holding 
period for which begins after December 31, 2000), 
and 20 percent with respect to the remainder of such 
amount. For purposes of determining under the preceding 
sentence whether the holding period of property begins 
after December 31, 2000, the holding period of property 
acquired pursuant to the exercise of an option (or other 
right or obligation to acquire property) shall include the 
period such option (or other right or obligation) was held. 
"(3) NET CAPITAL GAIN TAKEN INTO ACCOUNT AS INVESTMENT 
INCOME.—For purposes of this subsection, the net capital gain 
for any taxable year shall be reduced (but not below zero) 
by the amount which the taxpayer takes into account as invest-
ment income under section 163(d)(4)(B)(iii). 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 833 
"(4) ADJUSTED NET CAPITAL GAIN.—For purposes of this 
subsection, the term 'adjusted net capital gain' means net cap-
ital gain determined without regard to— 
"(A) collectibles gain, 
"(B) unrecaptured section 1250 gain, 
"(C) section 1202 gain, and 
"(D) mid-term gain. 
"(5) COLLECTIBLES GAIN.—For purposes of this subsection— 
"(A) IN GENERAL.—The term 'collectibles gain' means 
gain from the sale or exchange of a collectible (as defined 
in section 408(m) without regard to paragraph (3) thereof) 
which is a capital asset held for more than 1 year but 
only to the extent such gain is taken into account in 
computing gross income. 
"(B) PARTNERSHIPS, ETC.—For purposes of subpara-
graph (A), any gain from the sale of an interest in a 
partnership, S corporation, or trust which is attributable 
to unrealized appreciation in the value of collectibles shall 
be treated as gain from the sale or exchange of a collectible. 
Rules similar to the rules of section 751 shall apply for 
purposes of the preceding sentence. 
"(6) UNRECAPTURED SECTION 1250 GAIN.—For purposes of 
this subsection— 
"(A) IN GENERAL.—^The term 'unrecaptured section 
1250 gain' means the amount of long-term capital gain 
which would be treated as ordinary income if— 
"(i) section 1250(b)(1) included all depreciation £uid 
the applicable percentage under section 1250(a) were 
100 percent, and 
"(ii) in the case of gain properly taken into account 
after July 28, 1997, only gain from section 1250 prop-
erty held for more than 18 months were taken into 
account. 
"(B) LIMITATION WITH RESPECT TO SECTION 1231 PROP-
ERTY.—The amount of unrecaptured section 1250 gain from 
sales, exchanges, £ind conversions described in section 
1231(a)(3)(A) for any taxable year shall not exceed the 
excess of the net section 1231 gain (as defined in section 
1231(c)(3)) for such year over the amount treated as ordi-
nary income under section 1231(c)(1) for such year. 
"(C) PRE-MAY 7, 1997, GAIN.—In the case of a taxable 
year which includes May 7, 1997, subparagraph (A) shall 
be applied by taking into account only the gain properly 
taken into account for the portion of the taxable year 
after May 6,1997. 
"(7) SECTION 1202 GAIN.—For purposes of this subsection, 
the term 'section 1202 gain' means an amount equal to the 
gain excluded from gross income under section 1202(a). 
"(8) MID-TERM GAIN.—For purposes of this subsection, the 
term 'mid-term gain' means the amoimt which would be 
adjusted net capital gain for the taxable year i
f
—
-
"(A) adjusted net capital gain were determined by tak-
ing into account only the gain or loss properly taken into 
account after July 28, 1997, from property held for more 
than 1 year but not more than 18 months, and 
"(B) paragraph (3) and section 1212 did not apply. 
I l l STAT. 834 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(9) QUALIFIED 5-YEAR GAIN.—For purposes of this sub-
section, the term, 'quahfied 5-year gain' means the amount 
of long-term capital gain which would be computed for the 
taxable year if only gains from the sale or exchange of property 
held by the taxpayer for more than 5 years were taken into 
account. The determination under the preceding sentence shall 
be made without regard to collectibles gain, unrecaptured sec-
tion 1250 gain (determined without regard to subparagraph 
(B) of paragraph (6)), section 1202 gain, or mid-term gain. 
"(10) PRE-EFFECTIVE DATE GAIN.— 
"(A) IN GENERAL.—In the case of a taxable year which 
includes May 7, 1997, gains and losses properly taken 
into account for the portion of the taxable year before 
May 7, 1997, shall be taken into account in determining 
mid-term gain as if such gains and losses were described 
in paragraph (8)(A). 
"(B) 
SPECIAL 
RULES 
FOR PASS-THRU 
ENTITIES.—In 
applying subparagraph (A) with respect to any pass-thru 
entity, the determination of when gains and loss are prop-
erly taken into account shall be made at the entity level. 
"(C) PASS-THRU ENTITY DEFINED.—For purposes of 
subparagraph (B), the term 'pass-thru entity means— 
"(i) a regulated investment company, 
"(ii) a real estate investment trust, 
"(iii) an S corporation, 
"(iv) a partnership, 
"(v) an estate or trust, and 
"(vi) a common trust fiind. 
"(11) TREATMENT OF PASS-THRU ENTITIES.—The Secretary 
may prescribe such regulations as are appropriate (including 
regulations requiring reporting) to apply this subsection in 
the case of sales and exchanges by pass-thru entities (as defined 
in paragraph (10)(C)) and of interests in such entities.", 
(b) MINIMUM TAX.— 
(1) IN GENERAL.—Subsection (b) of section 55 is amended 
by adding at the end the following new paragraph: 
"(3) MAXIMUM RATE OF TAX ON NET CAPITAL GAIN OF NON-
CORPORATE TAXPAYERS.—The amount determined under the 
first sentence of paragraph (l)(A)(i) shall not exceed the sum 
of— 
"(A) the amount determined under such first sentence 
computed at the rates and in the same manner as if this 
paragraph had not been enacted on the taxable excess 
reduced by the lesser of— 
"(i) the net capital gain, or 
"(ii) the sum of— 
"(I) the adjusted net capital gain, plus 
"(II) the unrecaptured section 1250 gain, plus 
"(B) 25 percent of the lesser o
f
— 
"(i) the unrecaptured section 1250 gain, or 
"(ii) the amount of taxable excess in excess of 
the sum of— 
"(I) the adjusted net capital gain, plus 
"(II) the amount on which a tax is determined 
under subparagraph (A), plus 
"(C) 10 percent of so much of the taxpayer's adjusted 
net capital gain (or, if less, taxable excess) as does not 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 835 
exceed the amount on which a tax is determined under 
section 1(h)(1)(D), plus 
"(D) 20 percent of the taxpayer's adjusted net capital 
gain (or, if less, taxable excess) in excess of the amount 
on which tsix is determined under subparagraph (C). 
In the case of taxable years beginning after December 31, 
2000, rules similar to the rules of section 1(h)(2) shall apply 
for purposes of subparagraphs (C) and (D). Terms used in 
this paragraph which are also used in section 1(h) shall have 
the respective meanings given such terms by section 1(h).". 
(2) CONFORMING AMENDMENTS.— 
(A) Clause (ii) of section 55(b)(1)(A) is amended by 
striking "clause (i)" and inserting "this subsection". 
(B) Paragraph (7) of section 57(a) is amended by strik-
ing "one-half and inserting "42 percent". 
(c) OTHER CONFORMING AMENDMENTS.— 
(1) Paragraph (1) of section 1445(e) is amended by striking 
"28 percent" and inserting "20 percent". 
(2) The second sentence of section 7518(g)(6)(A), and the 
second sentence of section 607(h)(6)(A) of the Merchant Marine 
Act, 1936, are each amended by striking "28 percent" and 46USCapp. 
inserting "20 percent". 
ii'^'^-
(3) Paragraph (2) of section 904(b) is amended by adding 
at the end the following new subparagraph: 
"(C) COORDINATION WITH CAPITAL GAINS RATES.—The 
Secretary may by regulations modify the application of 
this paragraph and paragraph (3) to the extent necessary 
to properly reflect £iny capital g£iin rate differential under 
section 1(h) or 1201(a) and the computation of net capital 
gain.". 
(d) EFFECTIVE DATES.— 
26 use i note. 
(1) IN GENERAL.—Except as provided in paragraph (2), the 
amendments made by this section shall apply to taxable years 
ending after May 6, 1997. 
(2) WITHHOLDING.—The amendment made by subsection 
(c)(1) shall apply only to amounts paid after the date of the 
enactment of this Act. 
(e) ELECTION TO RECOGNIZE GAIN ON ASSETS HELD ON JANUARY 26 use i note. 
1, 2001.—For purposes of the Internal Revenue Code of 1986— 
(1) IN GENERAL.—^A taxpayer other than a corporation may 
elect to treat— 
(A) any readily tradable stock (which is a capital asset) 
held by such taxpayer on January 1, 2001, and not sold 
before the next business day after such date, as having 
been sold on such next business day for an amount equal 
to its closing market price on such next business day (and 
as having been reacquired on such next business day for 
an amount equal to such closing market price), and 
(B) any other capital asset or property used in the 
trade or business (as defined in section 1231(b) of the 
Internal Revenue Code of 1986) held by the taxpayer on 
January 1, 2001, as having been sold on such date for 
an amount equal to its fair market value on such date 
(and as having been reacquired on such date for an amount 
equal to such fair market value). 
(2) TREATMENT OF GAIN OR LOSS.— 
I l l STAT. 836 
PUBLIC LAW 105-34—AUG. 5, 1997 
(A) Any gain resulting from an election under para-
graph (1) shall be treated as received or accrued on the 
date the asset is treated as sold under paragraph (1) and 
shall be recognized notwithstanding any provision of the 
Internal Revenue Code of 1986. 
(B) Any loss resulting from an election under para-
graph (1) shall not be allowed for any taxable year. 
(3) ELECTION.—An election under paragraph (1) shall be 
made in such manner as the Secretary of the Treasury or 
his delegate may prescribe and shall specify the assets for 
which such election is made. Such an election, once made 
with respect to any asset, shall be irrevocable. 
(4) READILY TRADABLE STOCK.—For purposes of this sub-
section, the term "readily tradable stock" means any stock 
which, as of January 1, 2001, is readily tradable on an estab-
lished securities market or otherwise. 
SEC. 312. EXEMPTION FROM TAX FOR GAIN ON SALE OF PRINCIPAL 
RESIDENCE. 
(a) IN GENERAL.—Section 121 (relating to one-time exclusion 
of gain from sale of principal residence by individual who has 
attained age 55) is amended to read as follows: 
"SEC. 121. EXCLUSION OF GAIN FROM SALE OF PRINCIPAL RESIDENCE. 
"(a) EXCLUSION.—Gross income shall not include gain from 
the sale or exchange of property if, during the 5-year period ending 
on the date of the sale or exchange, such property has been owned 
and used by the taxpayer as the taxpayer's principal residence 
for periods aggregating 2 years or more. 
"(b) LIMITATIONS.— 
"(1) IN GENERAL.—The amount of gain excluded from gross 
income under subsection (a) with respect to any sale or 
exchange shall not exceed $250,000. 
"(2) $500,000 LIMITATION FOR CERTAIN JOINT RETURNS.— 
Paragraph (1) shall be applied by substituting '$500,000' for 
'$250,000' if— 
"(A) a husband and wife make a joint return for the 
taxable year of the sale or exchange of the property, 
"(B) either spouse meets the ownership requirements 
of subsection (a) with respect to such property, 
"(C) both spouses meet the use requirements of sub-
section (a) with respect to such property, and 
"(D) neither spouse is ineligible for the benefits of 
subsection (a) with respect to such property by reason 
of paragraph (3). 
"(3) 
APPLICATION TO ONLY i SALE OR EXCHANGE EVERY 
2 YEARS.— 
"(A) IN GENERAL.—Subsection (a) shall not apply to 
any sale or exchange by the taxpayer if, during the 2-
year period ending on the date of such sale or exchange, 
there was any other sale or exchange by the taxpayer 
to which subsection (a) applied. 
"(B) 
PRE-MAY 7, 1997, SALES NOT TAKEN INTO 
ACCOUNT.—Subparagraph (A) shall be applied without 
regard to any sale or exchange before May 7, 1997. 
"(c) 
EXCLUSION FOR TAXPAYERS FAILING TO MEET CERTAIN 
REQUIREMENTS.— 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 837 
"(1) IN GENERAL.—In the case of a sale or exchange to 
which this subsection applies, the ownership and use require-
ments of subsection (a) shall not apply and subsection (b)(3) 
shall not apply; but the amount of gain excluded from gross 
income under subsection (a) with respect to such sale or 
exchange shall not exceed— 
"(A) the amount which bears the same ratio to the 
amount which would be so excluded under this section 
if such requirements had been met, as 
"(B) the shorter of— 
"(i) the aggregate periods, during the 5-year period 
ending on the date of such sale or exchange, such 
property has been owned and used by the taxpayer 
as the taxpayer's principal residence, or 
"(ii) the period after the date of the most recent 
prior sale or exchange by the taxpayer to which sub-
section (a) applied £ind before the date of such sale 
or exchange, 
bears to 2 years. 
"(2) 
SALES 
AND 
EXCHANGES 
TO 
WHICH 
SUBSECTION 
APPLIES.—This subsection shall apply to any sale or exchange 
if— 
"(A) subsection (a) would not (but for this subsection) 
apply to such sale or exchange by reason of— 
"(i) a failure to meet the ownership and use 
requirements of subsection (a), or 
"(ii) subsection (b)(3), and 
"(B) such sale or exchange is by reason of a change 
in place of employment, health, or, to the extent provided 
in regulations, unforeseen circumstances. 
"(d) SPECIAL RULES.— 
"(1) JOINT RETURNS.—If a husband and wife make a joint 
return for the taxable year of the sale or exchange of the 
property, subsections (a) and (c) shall apply if either spouse 
meets the ownership and use requirements of subsection (a) 
with respect to such property. 
"(2) PROPERTY OF DECEASED SPOUSE.—For purposes of this 
section, in the case of an unmarried individual whose spouse 
is deceased on the date of the sale or exchange of property, 
the period such unmarried individual owned and used such 
property shall include the period such deceased spouse owned 
and used such property before death. 
"(3) 
PROPERTY OWNED BY SPOUSE OR FORMER SPOUSE.— 
For purposes of this section— 
"(A) 
PROPERTY TRANSFERRED TO INDIVIDUAL FROM 
SPOUSE OR FORMER SPOUSE.—In the case of an individual 
holding property transferred to such individual in a trans-
action described in section 1041(a), the period such individ-
ual owns such property shall include the period the trans-
feror owned the property. 
"(B) PROPERTY USED BY FORMER SPOUSE PURSUANT TO 
DIVORCE DECREE, ETC.—Solely for purposes of this section, 
an individual shall be treated as using property as such 
individual's principal residence during any period of owner-
ship while such individual's spouse or former spouse is 
granted use of the property under a divorce or separation 
instrument (as defined in section 71(b)(2)). 
I l l STAT. 838 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(4) TENANT-STOCKHOLDER IN COOPERATIVE HOUSING COR-
PORATION.—For purposes of this section, if the taxpayer holds 
stock as a tenant-stockholder (as defined in section 216) in 
a cooperative housing corporation (as defined in such section), 
then— 
"(A) the holding requirements of subsection (a) shall 
be applied to the holding of such stock, and 
"(B) the use requirements of subsection (a) shall be 
applied to the house or apartment which the taxpayer 
was entitled to occupy as such stockholder. 
"(5) INVOLUNTARY CONVERSIONS.— 
"(A) IN GENERAL.—For purposes of this section, the 
destruction, theft, seizure, requisition, or condemnation of 
property shall be treated as the sale of such property. 
"(B) APPLICATION OF SECTION IO33.—In applying section 
1033 (relating to involuntary conversions), the amount 
realized from the sale or exchange of property shall be 
treated as being the amount determined without regard 
to this section, reduced by the amount of gain not included 
in gross income pursuant to this section. 
"(C) PROPERTY ACQUIRED AFTER INVOLUNTARY CONVER-
SION.—If the basis of the property sold or exchanged is 
determined (in whole or in part) under section 1033(b) 
(relating to basis of property acquired through involuntary 
conversion), then the holding and use by the taxpayer 
of the converted property shall be treated as holding and 
use by the taxpayer of the property sold or exchanged. 
"(6) RECOGNITION OF GAIN ATTRIBUTABLE TO DEPRECIA-
TION.—Subsection (a) shall not apply to so much of the gain 
fi-om the sale of any property as does not exceed the portion 
of the depreciation 
adjustments 
(as defined in section 
1250(b)(3)) attributable to periods after May 6, 1997, in respect 
of such property. 
"(7) 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 tax-
payer's principal residence during the 5-year 
period 
described in subsection (a) 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 subdivision to care for an individual 
in the taxpayer's condition. 
"(8) SALES OF REMAINDER INTERESTS.—For purposes of this 
section— 
"(A) IN GENERAL.—At the election of the taxpayer, this 
section shall not fail to apply to the sale or exchange 
of an interest in a principal residence by reason of such 
interest being a remainder interest in such residence, but 
this section shall not apply to any other interest in such 
residence which is sold or exchanged separately. 
"(B) EXCEPTION FOR SALES TO RELATED PARTIES.— 
Subparagraph (A) shall not apply to any sale to, or 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 839 
exchange with, any person who bears a relationship to 
the taxpayer which is described in section 267(b) or 707(b). 
"(e) DENIAL OF EXCLUSION FOR EXPATRIATES.—This section 
shall not apply to any sale or exchange by an individual if the 
treatment provided by section 877(a)(1) applies to such individual. 
"(f) ELECTION TO HAVE SECTION NOT APPLY.—This section shall 
not apply to any sale or exchange with respect to which the taxpayer 
elects not to have this section apply. 
"(g) 
RESIDENCES ACQUIRED IN ROLLOVERS UNDER SECTION 
1034.—For purposes of this section, in the case of property the 
acquisition of which by the taxpayer resulted under section 1034 
(as in effect on the day before the date of the enactment of this 
section) in the nonrecognition of any part of the gain realized 
on the sale or exchange of another residence, in determining the 
period for which the taxpayer has owned and used such property 
as the taxpayer's principal residence, there shall be included the 
aggregate periods for which such other residence (and each prior 
residence taken into account under section 1223(7) in determining 
the holding period of such property) had been so owned and used.". 
(b) REPEAL OF NONRECOGNITION OF GAIN ON ROLLOVER OF 
PRINCIPAL RESIDENCE.—Section 1034 (relating to rollover of gain 
on sale of principal residence) is hereby repealed. 
(c) EXCEPTION FROM REPORTING.—Subsection (e) of section 6045 
(relating to return required in the case of real estate transactions) 
is amended by adding at the end the following new paragraph: 
"(5) EXCEPTION FOR SALES OR EXCHANGES OF CERTAIN PRIN-
CIPAL RESIDENCES.— 
"(A) IN GENERAL.—Paragraph (1) shall not apply to 
any sale or exchange of a residence for $250,000 or less 
if the person referred to in paragraph (2) receives written 
assurance in a form acceptable to the Secretary from the 
seller that— 
"(i) such residence is the principal residence 
(within the meaning of section 121) of the seller, 
"(ii) if the Secretary requires the inclusion on the 
return under subsection (a) of information as to 
whether there is federally subsidized mortgage financ-
ing assistance with respect to the mortgage on resi-
dences, that there is no such assistance with respect 
to the mortgage on such residence, and 
"(iii) the full amount of the gain on such sale 
or exchange is excludable from gross income under 
section 121. 
If such assurance includes an assurance that the seller 
is married, the preceding sentence shall be applied by 
substituting '$500,000' for '$250,000'. 
The Secretary may by regulation increase the dollar amounts 
under this subparagraph if the Secretary determines that such 
an increase will not materially reduce revenues to the Treasury. 
"(B) SELLER.—For purposes of this paragraph, the term 
'seller' includes the person relinquishing the residence in 
an exchange.". 
(d) CONFORMING AMENDMENTS.— 
(1) The following provisions of the Internal Revenue Code 
of 1986 are each amended by striking "section 1034" and insert-
ing "section 121": sections 25(e)(7), 56(e)(1)(A), 56(e)(3)(B)(i), 
I l l STAT. 840 
PUBLIC LAW 105-34—AUG. 5, 1997 
143(i)(l)(C)(i)(I), 163(h)(4)(A)(i)(I), 280A(d)(4)(A), 464(f)(3)(B)(i), 
1033(h)(4), 1274(c)(3)(B), 6334(a)(13), and 7872(f)(ll)(A). 
(2) Paragraph (4) of section 32(c) is amended by striking 
"(as defined in section 1034(h)(3))" and by adding at the end 
the following new sentence: "For purposes of the preceding 
sentence, the term 'extended active duty' means any period 
of active duty pursuant to a call or order to such duty for 
a period in excess of 90 days or for an indefinite period.". 
(3) Subparagraph (A) of 143(m)(6) is amended by inserting 
"(as in effect on the day before the date of the enactment 
of the Taxpayer Relief Act of 1997)" after "1034(e)". 
(4) Subsection (e) of section 216 is amended by striking 
"such exchange qualifies for nonrecognition of gain under sec-
tion 1034(0" and inserting "such dwelling unit is used as his 
principal residence (within the meaning of section 121)". 
(5) Section 512(a)(3)(D) is amended by inserting "(as in 
effect on the day before the date of the enactment of the 
Taxpayer Rehef Act of 1997)" after "1034". 
(6) Paragraph (7) of section 1016(a) is amended by inserting 
"(as in effect on the day before the date of the enactment 
of the Taxpayer Relief Act of 1997)" after "1034" and by insert-
ing "(as so in effect)" after "1034(e)". 
(7) Paragraph (3) of section 1033(k) is amended to read 
as follows: 
"(3) For exclusion from gross income of gain from involun-
tary conversion of principal residence, see section 121.". 
(8) Subsection (e) of section 1038 is amended to read as 
follows: 
"(e) PRINCIPAL RESIDENCES.—If— 
"(1) subsection (a) applies to a reacquisition of real property 
with respect to the sale of which gain was not recognized 
under section 121 (relating to gain on sale of principal resi-
dence); and 
"(2) within 1 year after the date of the reacquisition of 
such property by the seller, such property is resold by him, 
then, under regulations prescribed by the Secretary, subsections 
(b), (c), and (d) of this section shall not apply to the reacquisition 
of such property and, for purposes of applying section 121, the 
resale of such property shall be treated as a part of the transaction 
constituting the original sale of such property.". 
(9) Paragraph (7) of section 1223 is amended by inserting 
"(as in effect on the day before the date of the enactment 
of the Taxpayer Rehef Act of 1997)" after "1034". 
(10)(A) Subsection (d) of section 1250 is amended by strik-
ing paragraph (7) and by redesignating paragraphs (9) and 
(10) as paragraphs (7) and (8), respectively. 
(B) Subsection (e) of section 1250 is amended by striking 
paragraph (3). 
(11) Subsection (c) of section 6012 is amended by striking 
"(relating to one-time exclusion of gain from sale of principal 
residence by individual who has attained age 55)" and inserting 
"(relating to gain from sale of principal residence)". 
(12) Paragraph (2) of section 6212(c) is amended by striking 
subparagraph (C) and by redesignating the succeeding subpara-
graphs accordingly. 
(13) Section 6504 is amended by striking paragraph (4) 
and by redesignating the succeeding paragraphs accordingly. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 841 
(14) The item relating to section 121 in the table of sections 
for part III of subchapter B of chapter 1 is amended to read 
as follows: 
"Sec. 121. Exclusion of gain from sale of principal residence.". 
(15) The table of sections for part III of subchapter O 
of chapter 1 is amended by striking the item relating to section 
1034. 
(d) EFFECTIVE DATE.— 
26 use 121 note. 
(1) IN GENERAL.—The amendments made by this section 
shall apply to sales and exchanges after May 6, 1997. 
(2) SALES BEFORE DATE OF ENACTMENT.—^At the election 
of the taxpayer, the amendments made by this section shall 
not apply to any sale or exchange before the date of the enact-
ment of this Act. 
(3) CERTAIN SALES WITHIN 2 YEARS AFTER DATE OF ENACT-
MENT.—Section 121 of the Internal Revenue Code of 1986 (as 
amended by this section) shall be applied without regard to 
subsection (c)(2)(B) thereof in the case of any sale or exchange 
of property during the 2-year period beginning on the date 
of the enactment of this Act if the taxpayer held such property 
on the date of the enactment of this Act and fails to meet 
the ownership and use requirements of subsection (a) thereof 
with respect to such property. 
(4) BINDING CONTRACTS.—At the election of the taxpayer, 
the amendments made by this section shall not apply to a 
sale or exchange after the date of the enactment of this Act, 
if— 
(A) such sale or exchange is pursuant to a contract 
which was binding on such date, or 
(B) without regard to such amendments, gain would 
not be recognized under section 1034 of the Internal Reve-
nue Code of 1986 (as in effect on the day before the date 
of the enactment of this Act) on such sale or exchange 
by reason of a new residence acquired on or before such 
date or with respect to the acquisition of which by the 
taxpayer a binding contract was in effect on such date. 
This paragraph shall not apply to any sale or exchange by 
an individual if the treatment provided by section 877(a)(1) 
of the Internal Revenue Code of 1986 applies to such individual. 
SEC. 313. ROLLOVER OF GAIN FROM SALE OF QUALIFIED STOCK. 
(a) IN GENERAL.—Part III of subchapter O of chapter 1 is 
amended by adding at the end the following new section: 
"SEC. 1045. ROLLOVER OF GAIN FROM QUALIFIED SMALL BUSINESS 
STOCK TO ANOTHER 
QUALIFIED 
SMALL 
BUSINESS 
STOCK. 
"(a) NONRECOGNITION OF GAIN.—In the case of any sale of 
qualified small business stock held by an individual for more than 
6 months and with respect to which such individual elects the 
application of this section, gain from such sale shall be recognized 
only to the extent that the amount realized on such sale exceeds— 
"(1) the cost of any qualified small business stock purchased 
by the taxpayer during the 60-day period beginning on the 
date of such sale, reduced by 
"(2) any portion of such cost previously taken into account 
under this section. 
39-194 O - 97 - 28 :QL 3 Parti 
I l l STAT. 842 
PUBLIC LAW 105-34—AUG. 5, 1997 
This section shall not apply to any gain which is treated as ordinary 
income for purposes of this title. 
"(b) DEFINITIONS AND SPECIAL RULES.—For purposes of this 
section— 
"(1) QUALIFIED SMALL BUSINESS STOCK.—The term 'quali-
fied small business stock' has the meaning given such term 
by section 1202(c). 
"(2) PURCHASE.—^A taxpayer shall be treated as having 
purchased any property if, but for paragraph (3), the unadjusted 
basis of such property in the hands of the taxpayer would 
be its cost (within the me£ining of section 1012). 
"(3) BASIS ADJUSTMENTS.—If gain from any sale is not 
recognized by reason of subsection (a), such gain shall be 
applied to reduce (in the order acquired) the basis for determin-
ing gain or loss of any qualified small business stock which 
is purchased by the taxpayer during the 60-day period described 
in subsection (a). 
"(4) 
HOLDING 
PERIOD.—For purposes 
of 
determining 
whether the nonrecognition of gain under subsection (a) applies 
to stock which is sold— 
"(A) the taxpayer's holding period for such stock and 
the stock referred to in subsection (a)(1) shall be deter-
mined without regard to section 1223, and 
"(B) only the first 6 months of the taxpayer's holding 
E
eriod for the stock referred to in subsection (a)(1) shall 
e taken into account for purposes of applying section 
1202(c)(2).". 
(b) CONFORMING AMENDMENTS.— 
(1) Section 1016(a)(23) is amended— 
(A) by striking "or 1044" and inserting ", 1044, or 
1045", and 
(B) by striking "or 1044(d)" and inserting ", 1044(d), 
or 1045(b)(4)". 
(2) Section 1223 is amended by redesignating paragraph 
(15) as paragraph (16) and by inserting after paragraph (14) 
the following new paragraph: 
"(15) In determining the period for which the taxpayer 
has held property the acquisition of which resulted under sec-
tion 1045 in the nonrecognition of any part of the gain realized 
on the sale of other property, there shall be included the period 
for which such other property has been held as of the date 
of such sale.". 
(3) The table of sections for part III of subchapter O of 
chapter 1 is amended by adding at the end the following new 
item: 
"Sec. 1045. Rollover of gain from qualified small business stock to another 
qualified small business stock.". 
26 use 1016 
(c) EFFECTIVE DATE.—The amendments made by this section 
note. 
shall apply to sales after the date of enactment of this Act. 
SEC. 314. AMOUNT OF NET CAPITAL GAIN TAKEN INTO ACCOUNT IN 
COMPUTING ALTERNATIVE TAX ON CAPITAL GAINS FOR 
CORPORATIONS NOT TO EXCEED TAXABLE INCOME OF 
THE CORPORATION. 
(a) IN GENERAL.—Paragraph (2) of section 1201(a) is amended 
by inserting before the period "(or, if less, taxable income)". 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 843 
(b) EFFECTIVE DATE.—The amendment made by this section 
26 use 1201 
shall apply to taxable years ending after December 31, 1997. 
note. 
TITLE rV—ALTERNATIVE MINIMUM TAX 
REFORM 
SEC. 401. EXEMPTION FROM ALTERNATIVE MINIMUM TAX FOR SMALL 
CORPORATIONS. 
(a) IN GENERAL.—Section 55 (relating to alternative minimum 
tax imposed) is amended by adding at the end the following new 
subsection: 
"(e) EXEMPTION FOR SMALL CORPORATIONS.— 
"(1) IN GENERAL.—The tentative minimum tax of a corpora-
tion shall be zero for any taxable year if— 
"(A) such corporation met the $5,000,000 gross receipts 
test of section 448(c) for its first taxable year beginning 
after December 31,1996, and 
"(B) such corporation would meet such test for the 
taxable year and all prior taxable years beginning after 
such first taxable year if such test were applied by 
substituting '$7,500,000' for '$5,000,000'. 
"(2) PROSPECTIVE APPLICATION OF MINIMUM TAX IF SMALL 
CORPORATION CEASES TO BE SMALL.—In the case of a corporation 
whose tentative minimum tax is zero for any prior taxable 
year by reason of paragraph (1), the application of this part 
for taxable years beginning with the first taxable year such 
corporation ceases to be described in paragraph (1) shall be 
determined with the following modifications: 
"(A) Section 56(a)(1) (relating to depreciation) and sec-
tion 56(a)(5) (relating to pollution control facilities) shall 
apply only to property placed in service on or after the 
change date. 
"(B) Section 56(a)(2) (relating to mining exploration 
and development costs) shall apply only to costs paid or 
incurred on or after the change date. 
"(C) Section 56(a)(3) (relating to treatment of long-
term contracts) shall apply only to contracts entered into 
on or after the change date. 
"(D) Section 56(a)(4) (relating to alternative net operat-
ing loss deduction) shall apply in the same manner as 
if, in section 56(d)(2), the change date were substituted 
for 'January 1, 1987' and the day before the change date 
were substituted for 'December 31, 1986' each place it 
appears. 
"(E) Section 56(g)(2)(B) (relating to limitation on allow-
ance of negative adjustments based on adjusted current 
earnings) shall apply only to prior taxable years beginning 
on or after the change date. 
"(F) Section 56(g)(4)(A) (relating to adjustment for 
depreciation to adjusted current earnings) shall not apply. 
"(G) Subparagraphs (D) and (F) of section 56(g)(4) 
(relating to other earnings and profits adjustments and 
depletion) shall apply in the same manner as if the day 
before the change date were substituted for 'December 
31, 1989' each place it appears therein. 
I l l STAT. 844 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(3) EXCEPTION.—The modifications in paragraph (2) shall 
not apply to— 
"(A) any item acquired by the corporation in a trans-
action to which section 381 applies, and 
"(B) any property the basis of which in the hands 
of the corporation is determined by reference to the basis 
of the property in the hands of the transferor, 
if such item or property was subject to any provision referred 
to in paragraph (2) while held by the transferor. 
"(4) CHANGE DATE.—For purposes of paragraph (2), the 
change date is the first day of the first taxable year for which 
the taxpayer ceases to be described in paragraph (1). 
"(5) LIMITATION ON USE OF CREDIT FOR PRIOR YEAR MINIMUM 
TAX LIABILITY.—In the case of a taxpayer whose tentative mini-
mum tax for any taxable year is zero by reason of paragraph 
(1), section 53(c) shall be applied for such year by reducing 
the amount otherwise taken into account under section 53(c)(1) 
by 25 percent of so much of such amount as exceeds $25,000. 
Rules similar to the rules of section 38(c)(3)(B) shall apply 
for purposes of the preceding sentence.". 
26 use 55 note. 
(b) EFFECTIVE DATE.—The amendment made by this section 
shall apply to tsixable years beginning after December 31, 1997, 
SEC. 402. REPEAL OF SEPARATE DEPRECIATION LIVES FOR MINIMUM 
TAX PURPOSES. 
(a) IN GENERAL.—Clause (i) of section 56(a)(1)(A) is amended 
by adding at the end the following new sentence: "In the case 
of property placed in service after December 31, 1998, the preceding 
sentence shall not apply but clause (ii) shall continue to apply,". 
(b) POLLUTION CONTROL FACILITIES.—Paragraph (5) of section 
56(a) is amended by adding at the end the following new sentence: 
"In the case of such a facility placed in service after December 
31, 1998, such deduction shall be determined under section 168 
using the straight line method.". 
SEC. 403. MINIMUM TAX NOT TO APPLY TO FARMERS' INSTALLMENT 
SALES. 
(a) IN GENERAL.—Subsection (a) of section 56 is amended by 
striking paragraph (6) (relating to treatment of installment sales) 
and by redesignating paragraphs (7) and (8) as paragraphs (6) 
and (7), respectively. 
26 use 56 note. 
(b) EFFECTIVE DATES.— 
(1) IN GENERAL.—The amendment made by this section 
shall apply to dispositions in taxable years beginning after 
December 31, 1987. 
(2) SPECIAL RULE FOR 1987,—In the case of taxable years 
beginning in 1987, the last sentence of section 56(a)(6) of the 
Internal Revenue Code of 1986 (as in effect for such taxable 
years) shall be applied by inserting "or in the case of a taxpayer 
using the cash receipts and disbursements method of account-
ing, any disposition described in section 453C(e)(l)(B)(ii)" after 
"section 453C(e)(4)", 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 845 
TITLE V—ESTATE, GIFT, AND GENERA-
TION-SKIPPING TAX PROVISIONS 
Subtitle A—^Estate and Gift Tax Provisions 
SEC. 501. COST-OF-LIVING ADJUSTMENTS RELATING TO ESTATE AND 
GIFT TAX PROVISIONS. 
(a) INCREASE IN UNIFIED ESTATE AND GIFT TAX CREDIT.— 
(1) ESTATE TAX CREDIT.— 
(A) IN GENERAL.—Subsection (a) of section 2010 (relat-
ing to unified credit against estate tax) is amended by 
striking "$192,800" and inserting "the applicable credit 
amount". 
(B) 
APPLICABLE CREDIT AMOUNT.—Section 
2010 
is 
amended by redesignating subsection (c) as subsection (d) 
and by inserting after subsection (b) the following new 
subsection: 
"(c) APPLICABLE CREDIT AMOUNT.—For purposes of this section, 
the applicable credit amount is the amount of the tentative tax 
which would be determined under the rate schedule set forth in 
section 2001(c) if the amount with respect to which such tentative 
tax is to be computed were the applicable exclusion amount deter-
mined in accordance with the following table: 
"In the case of estates of decedents 
The applicable 
dying, and gifts made, during: 
exclusion amount is: 
1998 
$625,000 
1999 
$650,000 
2000 and 2001 
$675,000 
2002 and 2003 
$700,000 
2004 
$850,000 
2005 
$950,000 
2006 or thereafter 
$1,000,000.". 
(C) ESTATE TAX RETURNS.—Paragraph (1) of section 
6018(a) is amended by striking "$600,000" and inserting 
"the applicable exclusion amount in effect under section 
2010(c) for the calendar year which includes the date of 
death". 
(D) 
PHASEOUT OF GRADUATED RATES AND UNIFIED 
CREDIT.—Paragraph (2) of section 2001(c) is amended by 
striking "$21,040,000" and inserting "the amount at which 
the average tax rate under this section is 55 percent". 
(E) 
ESTATES 
OF 
NONRESIDENTS NOT CITIZENS.— 
Subparagraph (A) of section 2102(c)(3) is amended by strik-
ing "$192,800" and inserting "the applicable credit amount 
in effect under* section 2010(c) for the calendar year which 
includes the date of death". 
(2) UNIFIED GIFT TAX CREDIT.—Paragraph (1) of section 
2505(a) is amended by striking "$192,800" and inserting "the 
applicable credit amount in effect under section 2010(c) for 
such calendar year". 
(b) ALTERNATE VALUATION OF CERTAIN FARM, ETC., REAL PROP-
ERTY.—Subsection (a) of section 2032A is amended by adding at 
the end the following new paragraph: 
"(3) INFLATION ADJUSTMENT.—In the case of estates of 
decedents dying in a calendar year after 1998, the $750,000 
Ill STAT. 846 
PUBLIC LAW 105-34—AUG. 5, 1997 
amount contained in paragraph (2) shall be increased by an 
amount equal to— 
"(A) $750,000, multiphed by 
"(B) the cost-of-living adjustment determined under 
section 1(f)(3) for such csdendar year by substituting 'cal-
endar year 1997' for 'calendar year 1992' in subparagraph 
(B) thereof. 
If any amount as adjusted under the preceding sentence is 
not a multiple of $10,000, such amount shall be rounded to 
the next lowest multiple of $10,000.". 
(c) ANNUAL GIFT TAX EXCLUSION.—Subsection (b) of section 
2503 is amended— 
(1) by striking the subsection heading and inserting the 
following: 
"(b) EXCLUSIONS FROM GIFTS.— 
"(1) IN GENERAL.—", 
(2) by moving the text 2 ems to the right, and 
(3) by adding at the end the following new paragraph: 
"(2) INFLATION ADJUSTMENT.—In the case of gifts made 
in a calendar year after 1998, the $10,000 amount contained 
in paragraph (1) shall be increased by an amount equal to— 
"(A) $10,000, multiplied by 
"(B) the cost-of-living adjustment determined under 
section 1(f)(3) for such calendar year by substituting 'cal-
endar year 1997' for 'calendar year 1992' in subparagraph 
(B) thereof. 
If any amount as adjusted under the preceding sentence is 
not a multiple of $1,000, such amount shall be rounded to 
the next lowest multiple of $1,000.". 
(d) EXEMPTION FROM GENERATION-SKIPPING TAX.—Section 2631 
(relating to GST exemption) is amended by adding at the end 
the following new subsection: 
"(c) INFLATION ADJUSTMENT.—In the case of an individual who 
dies in any calendar year after 1998, the $1,000,000 amount con-
tained in subsection (a) shall be increased by an amount equal 
to— 
"(1) $1,000,000, multiplied by 
"(2) the cost-of-living adjustment determined under section 
1(f)(3) for such calendar year by substituting 'calendar year 
1997' for 'calendar year 1992' in subparagraph (B) thereof. 
If any amount as adjusted under the preceding sentence is not 
a multiple of $10,000, such amoxmt shall be rounded to the next 
lowest multiple of $10,000.". 
(e) AMOUNT SUBJECT TO REDUCED RATE WHERE EXTENSION 
OF TIME FOR PAYMENT OF ESTATE TAX ON CLOSELY HELD BUSI-
NESS.—Subsection (j) of section 6601 is amended by redesignating 
paragraph (3) as paragraph (4) and by inserting after paragraph 
(2) the following new paragraph: 
"(3) INFLATION ADJUSTMENT.—In the case of estates of 
decedents dying in a calendar year after 1998, the $1,000,000 
amount contained in paragraph (2)(A) shall be increased by 
an Eunount equal to— 
"(A) $1,000,000, multiplied by 
"(B) the cost-of-living adjustment determined under 
section 1(f)(3) for such calendar year by substituting 'cal-
endar year 1997' for 'calendar year 1992' in subparagraph 
(B) thereof 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 847 
If any amount as adjusted under the preceding sentence is 
not a multiple of $10,000, such amount shall be rounded to 
the next lowest multiple of $10,000.". 
(f) EFFECTIVE DATE.—The amendments made by this section 
shall apply to the estates of decedents dying, and gifts made, 
after December 31,1997. 
SEC. 502. FAMILY-OWNED BUSINESS EXCLUSION. 
(a) IN GENERAL.—Part III of subchapter A of chapter 11 (relat-
ing to gross estate) is amended by inserting after section 2033 
the following new section: 
"SEC. 2033A. FAMILY-OWNED BUSINESS EXCLUSION. 
"(a) IN GENERAL.—In the case of an estate of a decedent to 
which this section applies, the value of the gross estate shall not 
include the lesser o
f
— 
"(1) the adjusted value of the qualified family-owned busi-
ness interests of the decedent otherwise includible in the estate, 
or 
"(2) the excess of $1,300,000 over the applicable exclusion 
amount under section 2010(c) with respect to such estate. 
"(b) ESTATES TO WHICH SECTION APPLIES.— 
"(1) IN GENERAL.—This section shall apply to an estate 
if— 
"(A) the decedent was (at the date of the decedent's 
death) a citizen or resident of the United States, 
"(B) the executor elects the application of this section 
and files the agreement referred to in subsection (h), 
"(C) the sum of— 
"(i) the adjusted value of the qualified family-
owned business interests described in paragraph (2), 
plus 
"(ii) the amount of the gifts of such interests deter-
mined under paragraph (3), 
exceeds 50 percent of the adjusted gross estate, and 
"(D) during the 8-year period ending on the date of 
the decedent's death there have been periods aggregating 
5 years or more during which— 
"(i) such interests were owned by the decedent 
or a member of the decedent's family, and 
"(ii) there was material participation (within the 
meaning of section 2032A(e)(6)) by the decedent or 
a member of the decedent's family in the operation 
of the business to which such interests relate. 
"(2) 
INCLUDIBLE 
QUALIFIED 
FAMILY-OWNED 
BUSINESS 
INTERESTS.—The qualified family-owned business interests 
described in this paragraph are the interests which— 
"(A) are included in determining the value of the gross 
estate (without regard to this section), and 
"(B) are acquired by any qualified heir from, or passed 
to any qualified heir from, the decedent (within the mean-
ing of section 2032A(e)(9)). 
"(3) INCLUDIBLE GIFTS OF INTERESTS.—The amount of the 
gifts of qualified family-owned business interests determined 
under this paragraph is the excess o
f
— 
"(A) the sum of— 
I l l STAT. 848 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(i) the amount of such gifts from the decedent 
to members of the decedent's family taken into account 
under subsection 2001(b)(1)(B), plus 
"(ii) the amount of such gifts otherwise excluded 
under section 2503(b), 
to the extent such interests are continuously held by mem-
bers of such family (other than the decedent's spouse) 
between the date of the gift and the date of the decedent's 
death, over 
"(B) the amount of such gifts from the decedent to 
members of the decedent's family otherwise included in 
the gross estate. 
"(c) ADJUSTED GROSS ESTATE.—For purposes of this section, 
the term 'adjusted gross estate' means the value of the gross estate 
(determined without regard to this section)— 
"(1) reduced by any amount deductible under paragraph 
(3) or (4) of section 2053(a), and 
"(2) increased by the excess o
f
— 
"(A) the sum of— 
"(i) the amount of gifts determined under sub-
section (b)(3), plus 
"(ii) the amount (if more than de minimis) of other 
transfers from the decedent to the decedent's spouse 
(at the time of the transfer) within 10 years of the 
date of the decedent's death, plus 
"(iii) the amount of other gifts (not included under 
clause (i) or (ii)) from the decedent within 3 years 
of such date, other than gifts to members of the 
decedent's family otherwise excluded under section 
2503(b), over 
"(B) the sum of the amounts described in clauses (i), 
(ii), and (iii) of subparagraph (A) which are otherwise 
includible in the gross estate. 
For purposes of the preceding sentence, the Secretary may provide 
that de minimis gifts to persons other than members of the 
decedent's family shall not be t£iken into account. 
"(d) ADJUSTED VALUE OF THE QUALIFIED FAMILY-OWNED BUSI-
NESS INTERESTS.—For purposes of this section, the adjusted value 
of any qualified family-owned business interest is the value of 
such interest for purposes of this chapter (determined without 
regard to this section), reduced by the excess of— 
"(1) any amount deductible under paragraph (3) or (4) 
of section 2053(a), over 
"(2) the sum of— 
"(A) any indebtedness on any qualified residence of 
the decedent the interest on which is deductible under 
section 163(h)(3), plus 
"(B) any indebtedness to the extent the taxpayer estab-
lishes that the proceeds of such indebtedness were used 
for the payment of educational and medical expenses of 
the decedent, the decedent's spouse, or the decedent's 
dependents (within the meaning of section 152), plus 
"(C) any indebtedness not described in subparagraph 
(A) or (B), to the extent such indebtedness does not exceed 
$10,000. 
"(e) QUALIFIED FAMILY-OWNED BUSINESS INTEREST.— 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 849 
"(1) IN GENERAL.—For purposes of this section, the term 
'quahfied family-owned business interest' means— 
"(A) an interest as a proprietor in a trade or business 
carried on as a proprietorship, or 
"(B) an interest in an entity canying on a trade or 
business, if— 
"(i) at leasts 
"(I) 50 percent of such entity is owned (directly 
or indirectly) by the decedent and members of 
the decedent's family, 
"(II) 70 percent of such entity is so owned 
by members of 2 families, or 
"(III) 90 percent of such entity is so owned 
by members of 3 families, and 
"(ii) for purposes of subclause (II) or (III) of clause 
(i), at least 30 percent of such entity is so owned 
by the decedent and members of the decedent's family. 
"(2) LIMITATION.—Such term shall not include— 
"(A) any interest in a trade or business the principal 
place of business of which is not located in the United 
States, 
"(B) any interest in an entity, if the stock or debt 
of such entity or a controlled group (as defined in section 
267(f)(1)) of which such entity was a member was readily 
tradable on an established securities market or secondary 
market (as defined by the Secretary) at any time within 
3 years of the date of the decedent's death, 
"(C) any interest in a trade or business not described 
in section 542(c)(2), if more than 35 percent of the adjusted 
ordinary gross income of such trade or business for the 
taxable year which includes the date of the decedent's 
death would qualify as personal holding company income 
(as defined in section 543(a)), 
"(D) that portion of an interest in a trade or business 
that is attributable to— 
"(i) cash or marketable securities, or both, in excess 
of the reasonably expected day-to-day working capital 
needs of such trade or business, and 
"(ii) any other assets of the trade or business (other 
than assets used in the active conduct of a trade or 
business described in section 542(c)(2)), which produce, 
or are held for the production of, income of which 
is described in section 543(a) or in section 954(c)(1) 
(determined without regard to subparagraph (A) 
thereof and by substituting 'trade or business' for 'con-
trolled foreign corporation'). 
"(3) RULES REGARDING OWNERSHIP.— 
"(A) OWNERSHIP OF ENTITIES.—For purposes of para-
graph (1)(B)— 
"(i) CORPORATIONS.—Ownership of a corporation 
shall be determined by the holding of stock possessing 
the appropriate percentage of the total combined voting 
power of all classes of stock entitled to vote and the 
appropriate percentage of the total value of shares 
of all classes of stock. 
I l l STAT. 850 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(ii) PARTNERSHIPS.—Ownership of a partnership 
shall be determined by the owning of the appropriate 
percentage of the capital interest in such partnership. 
"(B) OWNERSHIP OF TIERED ENTITIES.—For purposes 
of this section, if .by reason of holding an interest in a 
trade or business, a decedent, any member of the decedent's 
family, any qualified heir, or any member of any qualified 
heir's family is treated as holding an interest in any other 
trade or business— 
"(i) such ownership interest in the other trade 
or business shall be disregarded in determining if the 
ownership interest in the first trade or business is 
a qualified family-owned business interest, and 
"(ii) this section shall be applied separately in 
determining if such interest in any other trade or 
business is a qualified family-owned business interest. 
"(C) INDIVIDUAL OWNERSHIP RULES.—For purposes of 
this section, an interest owned, directly or indirectly, by 
or for an entity described in paragraph (1)(B) shall be 
considered as being owned proportionately by or for the 
entity's shareholders, partners, or beneficiaries. A person 
shall be treated as a beneficiary of any trust only if such 
person has a present interest in such trust. 
"(f) TAX TREATMENT OF FAILURE TO MATERIALLY PARTICIPATE 
IN BUSINESS OR DISPOSITIONS OF INTERESTS.— 
"(1) IN GENERAL.—There is imposed an additional estate 
tax if, within 10 years after the date of the decedent's death 
and before the date of the qualified heir's death— 
"(A) the material participation requirements described 
in section 2032A(c)(6)(B) are not met with respect to the 
qualified 
family-owned 
business 
interest 
which was 
acquired (or passed) from the decedent, 
"(B) the qualified heir disposes of any portion of a 
qualified family-owned business interest (other than by 
a disposition to a member of the qualified heir's family 
or through a qualified conservation contribution under sec-
tion 170(h)), 
"(C) the qualified heir loses United States citizenship 
(within the meaning of section 877) or with respect to 
whom an event described in subparagraph (A) or (B) of 
section 877(e)(1) occurs, and such heir does not comply 
with the requirements of subsection (g), or 
"(D) the principal place of business of a trade or busi-
ness of the qualified family-owned business interest ceases 
to be located in the United States. 
"(2) ADDITIONAL ESTATE TAX.— 
"(A) IN GENERAL.—The amount of the additional estate 
tax imposed by paragraph (1) shall be equal to— 
"(i) the applicable percentage of the adjusted tax 
difference attributable to the qualified family-owned 
business interest (as determined under rules similar 
to the rules of section 2032A(c)(2)(B)), plus 
"(ii) interest on the amount determined under 
clause (i) at the underpa3nntient rate established under 
section 6621 for the period beginning on the date the 
estate tax liability was due under this chapter and 
ending on the date such additional estate tax is due. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 851 
"(B) APPLICABLE PERCENTAGE.—For purposes of this 
paragraph, the apphcable percentage shall be determined 
under the following table: 
"If the event described in 
paragraph (1) occurs in 
the following year of 
The applicable 
material participation: 
percentage is: 
1 through 6 
100 
7 
80 
8 
60 
9 
40 
10 
20. 
"(g) 
SECURITY REQUIREMENTS FOR NONCITIZEN QUALIFIED 
HEIRS.— 
"(1) IN GENERAL.—Except upon the application of subpara-
graph (F) or (M) of subsection (i)(3), if a qualified heir is 
not a citizen of the United States, any interest under this 
section passing to or acquired by such heir (including any 
interest held by such heir at a time described in subsection 
(f)(1)(C)) shall be treated as a qualified family-owned business 
interest only if the interest passes or is acquired (or is held) 
in a qualified trust. 
"(2) QUALIFIED TRUST.—The term 'qualified trust' means 
a trust— 
"(A) which is organized under, and governed by, the 
laws of the United States or a State, and 
"(B) except as otherwise provided in regulations, with 
respect to which the trust instrument requires that at 
least 1 trustee of the trust be an individual citizen of 
the United States or a domestic corporation. 
"(h) AGREEMENT.—The agreement referred to in this subsection 
is a written agreement signed by each person in being who has 
an interest (whether or not in possession) in any property des-
ignated in such agreement consenting to the application of sub-
section (f) with respect to such property. 
"(i) OTHER DEFINITIONS AND APPLICABLE RULES.—For purposes 
of this section— 
"(1) QUALIFIED HEIR.—The term 'qualified heir'— 
"(A) has the meaning given to such term by section 
2032A(e)(l), and 
"(B) includes any active employee of the trade or busi-
ness to which the qualified family-owned business interest 
relates if such employee has been employed by such trade 
or business for a period of at least 10 years before the 
date of the decedent's death. 
"(2) MEMBER OF THE FAMILY.—The term 'member of the 
family' has the meaning given to such term by section 
2032A(e)(2). 
"(3) APPLICABLE RULES.—Rules similar to the following 
rules shall apply: 
"(A) Section 2032A(b)(4) (relating to decedents who 
are retired or disabled). 
"(B) Section 2032A(b)(5) (relating to special rules for 
surviving spouses). 
"(C) Section 2032A(c)(2)(D) (relating to partial disposi-
tions). 
"(D) Section 2032A(c)(3) (relating to only 1 additional 
tax imposed with respect to any 1 portion). 
I l l STAT. 852 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(E) Section 2032A(c)(4) (relating to due date). 
"(F) Section 2032A(c)(5) (relating to liability for tax; 
furnishing of bond). 
"(G) Section 2032A(c)(7) (relating to no tax if use begins 
within 2 years; active management by eligible qualified 
heir treated as material participation). 
"(H) Paragraphs (1) and (3) of section 2032A(d) (relat-
ing to election; agreement). 
"(I) Section 2032A(e)(10) (relating to community prop-
erty). 
"(J) Section 2032A(e)(14) (relating to treatment of 
replacement property acquired in section 1031 or 1033 
transactions). 
"(K) Section 2032A(f) (relating to statute of limitations). 
"(L) Section 6166(b)(3) (relating to farmhouses and cer-
tain other structures taken into account). 
"(M) Subparagraphs (B), (C), and (D) of section 
6166(g)(1) (relating to acceleration of pa5niient). 
"(N) Section 6324B (relating to special lien for addi-
tional estate tax).", 
(b) CLERICAL AMENDMENT.—The table of sections for part III 
of subchapter A of chapter 11 is amended by inserting after the 
item relating to section 2033 the following new item: 
"Sec. 2033A. Family-owned business exclusion.". 
26USC2033A 
(c) EFFECTIVE DATE.—^The amendments made by this section 
iiote- 
shall apply to estates of decedents djdng after December 31, 1997. 
SEC. 503. MODIFICATIONS TO RATE OF INTEREST ON PORTION OF 
ESTATE TAX EXTENDED UNDER SECTION 6166. 
(a) IN GENERAL.—Paragraphs (1) and (2) of section 6601(j) 
(relating to 4-percent rate on certain portion of estate tax extended 
under section 6166) are amended to read as follows: 
"(1) IN GENERAL.—If the time for payment of an amount 
of tax imposed by chapter 11 is extended as provided in section 
6166, then in lieu of the annual rate provided by subsection 
( a ) -
"(A) interest on the 2-percent portion of such amount 
shall be paid at the rate of 2 percent, and 
"(B) interest on so much of such amount as exceeds 
the 2-percent portion shall be paid at a rate equal to 
45 percent of the annual rate provided by subsection (a). 
For purposes of this subsection, the amount of any deficiency 
which is prorated to installments payable under section 6166 
shall be treated as an amount of tax payable in installments 
under such section. 
"(2) 2-PERCENT PORTION.—For purposes of this subsection, 
the term *2-percent portion' means the lesser of— 
"(AXi) the amount of the tentative tax which would 
be determined under the rate schedule set forth in section 
2001(c) if the amount with respect to which such tentative 
tax is to be computed were the sum of $1,000,000 and 
the applicable exclusion amount in effect under section 
2010(c), reduced by 
"(ii) the applicable credit amount in effect imder section 
2010(c), or 
"(B) the amount of the tax imposed by chapter 11 
which is extended as provided in section 6166.". 
••*l^^fc 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 853 
(b) DISALLOWANCE OF INTEREST DEDUCTION.— 
(1) ESTATE TAX.—Paragraph (1) of section 2053(c) is amend-
ed by adding at the end the following new subparagraph: 
"(D) SECTION eiee INTEREST.—No deduction shall be 
allowed under this section for any interest payable under 
section 6601 on any unpaid portion of the tax imposed 
by section 2001 for the period during which an extension 
of time for pajmient of such tax is in effect under section 
6166.". 
(2) INCOME TAX.— 
(A) Section 163 is amended by redesignating subsection 
(k) as subsection (1) and by inserting after subsection (j) 
the following new subsection: 
"(k) SECTION eiee INTEREST.—No deduction shall be allowed 
under this section for any interest payable under section 6601 
on any unpaid portion of the tax imposed by section 2001 for 
the period during which an extension of time for pajmient of such 
tax is in effect under section 6166.". 
(B) Subparagraph (E) of section 163(h)(2) is amended 
by striking "or 6166" and all that follows and inserting 
a period. 
(c) CONFORMING AMENDMENTS.— 
(1) Paragraphs (7)(A)(iii) and (8)(A)(iii) of section 6166(b) 
are amended by striking "4-percent" each place it appears 
(including the heading) and inserting "2-percent". 
(2) Paragraph (4) of section 660l(j), as redesignated by 
section 501(e), is amended by striking "4-percent" each place 
it appears and inserting "2-percent". 
(3) The subsection heading for section 660l(j) is amended 
by striking "4-PERCENT" and inserting "2-PERCENT". 
(d) EFFECTIVE DATE.— 
26 use 163 note. 
(1) IN GENERAL.—The amendments made by this section 
shall apply to estates of decedents dying after December 31, 
1997. 
(2) ELECTION,—In the case of the estate of any decedent 
d5dng before January 1, 1998, with respect to which there 
is an election under section 6166 of the Internal Revenue Code 
of 1986, the executor of the estate may elect to have the 
amendments made by this section apply with respect to install-
ments due after the effective date of the election; except that 
the 2-percent portion of such installments shall be equal to 
the amount which would be the 4-percent portion of such 
installments without regard to such election. Such an election 
shall be made before January 1, 1999 in the manner prescribed 
by the Secretary of the Treasury and, once made, is irrevocable. 
SEC. 504. EXTENSION OF TREATMENT OF CERTAIN RENTS UNDER SEC-
TION 2032A TO LINEAL DESCENDANTS. 
(a) GENERAL RULE.—Paragraph (7) of section 2032A(c) (relating 
to special rules for tax treatment of dispositions and failures to 
use for qualified use) is amended by adding at the end the following 
new subparagraph: 
"(E) CERTAIN RENTS TREATED AS QUALIFIED USE.—For 
purposes of this subsection, a surviving spouse or lineal 
descendant of the decedent shall not be treated as failing 
to use qualified real property in a qualified use solely 
because such spouse or descendant rents such property 
Ill STAT. 854 
PUBLIC LAW 105-34—AUG. 5, 1997 
to a member of the family of such spouse or descendant 
on a net cash basis. For purposes of the preceding sentence, 
a legally adopted child of an individual shall be treated 
as the child of such individual by blood.", 
(b) 
CONFORMING 
AMENDMENT.—Section 
2032A(b)(5)(A) 
is 
amended by striking the last sentence. 
26 use 2032A 
(c) EFFECTIVE DATE.—^The amendments made by this section 
note. 
shall apply with respect to leases entered into after December 
31,1976. 
SEC. 505. CLARIFICATION OF JUDICIAL REVIEW OF ELIGIBILITY FOR 
EXTENSION OF TIME FOR PAYMENT OF ESTATE TAX. 
(a) IN GENERAL.—Part IV of subchapter C of chapter 76 of 
the Internal Revenue Code of 1986 (relating to declaratory judg-
ments) is amended by adding at the end the following new section: 
"SEC. 7479. DECLARATORY JUDGMENTS RELATING TO ELIGIBILITY OF 
ESTATE WITH RESPECT TO INSTALLMENT PAYMENTS 
UNDER SECTION 6166. 
"(a) CREATION OF REMEDY.—In a case of actual controversy 
involving a determination by the Secretary of (or a failure by 
the Secretary to make a determination with respect to)— 
"(1) whether an election may be made under section 6166 
(relating to extension of time for pa3anent of estate tax where 
estate consists largely of interest in closely held business) with 
respect to an estate, or 
"(2) whether the extension of time for payment of tax 
provided in section 6166(a) has ceased to apply with respect 
to an estate, 
upon the filing of an appropriate pleading, the Tax Court may 
make a declaration with respect to whether such election may 
be made or whether such extension has ceased to apply. Any such 
declaration shall have the force and effect of a decision of the 
Tax Court and shall be reviewable as such. 
"(b) LIMITATIONS.— 
"(1) PETITIONER.—^A pleading may be filed under this sec-
tion, with respect to any estate, only— 
"(A) by the executor of such estate, or 
"(B) by any person who has assumed an obligation 
to make pa3Tiients under section 6166 with respect to such 
estate (but only if each other such person is joined as 
a party). 
"(2) EXHAUSTION OF ADMINISTRATIVE REMEDIES.—The court 
shall not issue a declaratory judgment or decree under this 
section in any proceeding unless it determines that the peti-
tioner has exhausted all available administrative remedies 
within the Internal Revenue Service. A petitioner shall be 
deemed to have exhausted its administrative remedies with 
respect to a failure of the Secretary to make a determination 
at the expiration of 180 days after the date on which the 
request for such determination was made if the petitioner has 
taken, in a timely manner, all reasonable steps to secure such 
determination. 
"(3) TIME FOR BRINGING ACTION.—If the Secretary sends 
by certified or registered mail notice of his determination as 
described in subsection (a) to the petitioner, no proceeding 
may be initiated under this section unless the pleading is 
filed before the 91st day after the date of such mailing.". 
"tr-^^tk,"' 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 855 
(b) CLERICAL AMENDMENT.—The table of sections for part IV 
of subchapter C of chapter 76 of such Code is amended by adding 
at the end the following new item: 
"Sec. 7479. Declaratory judgments relating to eligibility of estate with re-
spect to installment payments under section 6166.". 
(c) EFFECTIVE DATE.—The amendments made by this section 
26 use 7479 
shall apply to the estates of decedents dying after the date of ^°^-
the enactment of this Act. 
SEC. 506. GIFTS MAY NOT BE REVALUED FOR ESTATE TAX PURPOSES 
AFTER EXPIRATION OF STATUTE OF LIMITATIONS. 
(a) IN GENERAL,—Section 2001 (relating to imposition and rate 
of estate tax) is amended by adding at the end the following new 
subsection: 
"(f) VALUATION OF GIFTS.—If— 
"(1) the time has expired within which a tax may be 
assessed under chapter 12 (or under corresponding provisions 
of prior laws) on the transfer of property by gift made during 
a preceding calendar period (as defined in section 2502(b)), 
and 
"(2) the value of such gift is shown on the return for 
such preceding calendar period or is disclosed in such return, 
or in a statement attached to the return, in a manner adequate 
to apprise the Secretary of the nature of such gift, 
the value of such gift shall, for purposes of computing the tax 
under this chapter, be the value of such gift as finally determined 
for purposes of chapter 12.". 
(b) 
MODIFICATION OF APPLICATION OF STATUTE OF LIMITA-
TIONS.—Paragraph (9) of section 6501(c) is amended to read as 
follows: 
"(9) GIFT TAX ON CERTAIN GIFTS NOT SHOWN ON RETURN.— 
If any gift of property the value of which (or any increase 
in taxable gifts required under section 2701(d) which) is 
required to be shown on a return of tax imposed by chapter 
12 (without regard to section 2503(b)), and is not shown on 
such return, any tax imposed by chapter 12 on such gift may 
be assessed, or a proceeding in court for the collection of such 
tax may be begun without assessment, at any time. The preced-
ing sentence shall not apply to £iny item which is disclosed 
in such return, or in a statement attached to the return, in 
a manner adequate to apprise the Secretary of the nature 
of such item. The value of any item which is so disclosed 
may not be redetermined by the Secretary after the expiration 
of the period under subsection (a).". 
(c) 
DECLARATORY JUDGMENT PROCEDURE FOR DETERMINING 
VALUE OF GIFT.— 
(1) IN GENERAL.—Part IV of subchapter C of chapter 76 
is amended by inserting after section 7476 the following new 
section: 
"SEC. 7477. DECLARATORY JUDGMENTS RELATING TO VALUE OF CER-
TAIN GIFTS. 
"(a) CREATION OF REMEDY.—In a case of em actual controversy 
involving a determination by the Secretary of the value of any 
gift shown on the return of tax imposed by chapter 12 or disclosed 
on such return or in any statement attached to such return, upon 
the filing of an appropriate pleading, the Tax Court may make 
I l l STAT. 856 
PUBLIC LAW 105-34—AUG. 5, 1997 
a declaration of the value of such gift. Any such declaration shall 
have the force and effect of a decision of the Tax Court and shall 
be reviewable as such. 
"(b) LIMITATIONS.— 
"(1) PETITIONER.—^A pleading may be filed under this sec-
tion only by the donor. 
"(2) EXHAUSTION OF ADMINISTRATIVE REMEDIES.—The court 
shall not issue a declaratory judgment or decree under this 
section in any proceeding unless it determines that the peti-
tioner has exhausted all available administrative remedies 
within the Internal Revenue Service. 
"(3) TIME FOR BRINGING ACTION.—If the Secretary sends 
by certified or registered mail notice of his determination as 
described in subsection (a) to the petitioner, no proceeding 
may be initiated under this section unless the pleading is 
filed before the 91st day after the date of such mailing.". 
(2) CLERICAL AMENDMENT.—The table of sections for such 
part IV is amended by inserting after the item relating to 
section 7476 the following new item: 
"Sec. 7477. Declaratory judgments relating to value of certain gifts.". 
(d) CONFORMING AMENDMENT.—Subsection (c) of section 2504 
is amended by striking ", and if a tax under this chapter or under 
corresponding provisions of prior laws has been assessed or paid 
for such preceding calendar period". 
(e) EFFECTIVE DATES.— 
26 use 2001 
(1) IN GENERAL.—The amendments made by subsections 
note. 
(a) and (c) shall apply to gifts made after the date of the 
enactment of this Act. 
26 use 6501 
(2) SUBSECTION (b)—The amendment made by subsection 
note. 
(b) shall apply to gifts made in calendar years ending after 
the date of the enactment of this Act. 
SEC. 507. REPEAL OF THROWBACK RULES APPLICABLE TO CERTAIN 
DOMESTIC TRUSTS. 
(a) ACCUMULATION DISTRIBUTIONS.— 
(1) IN GENERAL.—Section 665 is amended by inserting after 
subsection (b) the :^ollowing new subsection: 
"(c) EXCEPTION FOR ACCUMULATION DISTRIBUTIONS FROM CER-
TAIN DOMESTIC TRUSTS.—For purposes of this subpart— 
"(1) IN GENERAL.—In the case of a qualified trust, any 
distribution in any taxable year beginning after the date of 
the enactment of this subsection shall be computed without 
regard to any undistributed net income. 
"(2) QUALIFIED TRUST.—For purposes of this subsection, 
the term 'qualified trust' means any trust other than— 
"(A) a foreign trust (or, except as provided in regula-
tions, a domestic trust which at any time was a foreign 
trust), or 
"(B) a trust created before March 1, 1984, unless it 
is established that the trust would not be aggregated with 
other trusts under section 643(f) if such section applied 
to such trust.". 
(2) CONFORMING AMENDMENTS.—Subsection (b) of section 
665 is amended by inserting "except as provided in subsection 
(c)," after "subpart,". 
(b) REPEAL OF TAX ON TRANSFERS TO TRUSTS AT LESS THAN 
FAIR MARKET VALUE.— 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 857 
(1) Subpart A of part I of subchapter J of chapter 1 is 
amended by striking section 644 and by redesignating section 
645 as section 644. 
(2) Paragraph (5) of section 706(b) is amended by striking 
"section 645" and inserting "section 644". 
(3) The table of sections for such subpart is amended by 
striking the last 2 items and inserting the following new item: 
"Sec. 644. Taxable year of trusts.". 
(c) EFFECTIVE DATES.— 
(1) 
ACCUMULATION 
DISTRIBUTIONS.—The 
amendments 
26 use 665 note. 
made by subsection (a) shall apply to distributions in taxable 
years beginning after the date of the enactment of this Act. 
(2) TRANSFERRED PROPERTY.—The amendments made by 26 use 644 note, 
subsection (b) shall apply to sales or exchanges after the date 
of the enactment of this Act. 
SEC. 508. TREATMENT OF LAND SUBJECT TO A QUALIFIED CONSERVA-
TION EASEMENT. 
(a) ESTATE TAX WITH RESPECT TO LAND SUBJECT TO A QUALI-
FIED CONSERVATION EASEMENT.—Section 2031 (relating to the defi-
nition of gross estate) is amended by redesignating subsection (c) 
as subsection (d) and by inserting after subsection (b) the following 
new subsection: 
"(c) ESTATE TAX WITH RESPECT TO LAND SUBJECT TO A QUALI-
FIED CONSERVATION EASEMENT.— 
"(1) IN GENERAL.—If the executor makes the election 
described in paragraph (6), then, except as otherwise provided 
in this subsection, there shall be excluded fi*om the gross estate 
the lesser of— 
"(A) the applicable percentage of the value of land 
subject to a qualified conservation easement, reduced by 
the amount of any deduction under section 2055(f) with 
respect to such land, or 
"(B) the exclusion limitation. 
"(2) APPLICABLE PERCENTAGE.—For purposes of paragraph 
(1), the term 'applicable percentage' means 40 percent reduced 
(but not below zero) by 2 percentage points for each percentage 
point (or fraction thereof) by which the value of the qualified 
conservation easement is less than 30 percent of the value 
of the land (determined without regard to the value of such 
easement and reduced by the value of any retained development 
right (as defined in paragraph (5)). 
"(3) EXCLUSION LIMITATION.—For purposes of paragraph 
(1), the exclusion limitation is the limitation determined in 
accordance with the following table: 
"In the case of estates of 
The exclusion 
decedents dying during^ 
limitation is: 
1998 
$100,000 
1999 
$200,000 
2000 
$300,000 
2001 
$400,000 
2002 or thereafter 
$500,000. 
"(4) TREATMENT OF CERTAIN INDEBTEDNESS.— 
"(A) IN GENERAL.—The exclusion provided in paragraph 
(1) shall not apply to the extent that the land is debt-
financed property. 
"(B) DEFINITIONS.—For purposes of this paragraph— 
I l l STAT. 858 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(i) DEBT-FINANCED PROPERTY.—The term 'debt-
financed property' means any property with respect 
to which there is an acquisition indebtedness (as 
defined in clause (ii)) on the date of the decedent's 
death. 
"(ii) 
ACQUISITION 
INDEBTEDNESS.—The 
term 
'acquisition indebtedness' means, with respect to debt-
financed property, the unpaid amount of— 
"(I) the indebtedness incurred by the donor 
in acquiring such property, 
"(II) the indebtedness incurred before the 
acquisition of such property if such indebtedness 
would not have been incurred but for such acquisi-
tion, 
"(III) the indebtedness incurred after the 
acquisition of such property if such indebtedness 
would not have been incurred but for such acquisi-
tion £ind the incurrence of such indebtedness was 
reasonably foreseeable at the time of such acquisi-
tion, and 
"(IV) the extension, renewal, or refinancing 
of an acquisition indebtedness. 
"(5) TREATMENT OF RETAINED DEVELOPMENT RIGHT.— 
"(A) IN GENERAL.—Paragraph (1) shall not apply to 
the value of any development right retained by the donor 
in the conveyance of a qualified conservation easement. 
"(B) TERMINATION OF RETAINED DEVELOPMENT RIGHT.— 
If every person in being who has an interest (whether 
or not in possession) in the land executes an agreement 
to extinguish permanently some or all of any development 
rights (as defined in subparagraph (D)) retained by the 
donor on or before the date for filing the return of the 
t£ix imposed by section 2001, then any tax imposed by 
section 2001 shall be reduced accordingly. Such agreement 
shall be filed with the return of the tax imposed by section 
2001. The agreement shall be in such form as the Secretary 
shall prescribe. 
"(C) ADDITIONAL TAX.—Any failure to implement the 
agreement described in subparagraph (B) not later than 
the earlier of— 
"(i) the date which is 2 years after the date of 
the decedent's death, or 
"(ii) the date of the sale of such land subject to 
the qualified conservation easement, 
shall result in the imposition of an additional tax in the 
amount of the tax which would have been due on the 
retained development rights subject to such agreement. 
Such additional tax shall be due and payable on the last 
day of the 6th month following such date. 
"(D) DEVELOPMENT RIGHT DEFINED.—For purposes of 
this paragraph, the term 'development right' megins any 
right to use the land subject to the qualified conservation 
easement in which such right is retained for any commer-
cial purpose which is not subordinate to and directly 
supportive of the use of such land as a farm for farming 
purposes (within the meaning of section 2032A(e)(5)). 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 859 
"(6) ELECTION.—^The election under this subsection shall 
be made on the return of the tax imposed by section 2001. 
Such an election, once made, shall be irrevocable. 
"(7) CALCULATION OF ESTATE TAX DUE.—An executor mak-
ing the election described in paragraph (6) shall, for purposes 
of calculating the amount of tax imposed by section 2001, 
include the value of any development right (as defined in para-
graph (5)) retained by the donor in the conveyance of such 
qualified conservation easement. The computation of tax on 
any retained development right prescribed in this paragraph 
shall be done in such manner and on such forms as the Sec-
retary shall prescribe. 
"(8) DEFINITIONS.—For purposes of this subsection— 
"(A) 
LAND SUBJECT TO A QUALIFIED CONSERVATION 
EASEMENT.—^The term 'land subject to a qualified conserva-
tion easement' means land— 
"(i) which is located— 
"(I) in or within 25 miles of an area which, 
on the date of the decedent's death, is a metropoli-
tan area (as defined by the Office of Management 
and Budget), 
"(II) in or within 25 miles of an area which, 
on the date of the decedent's death, is a national 
park or wilderness area designated as part of the 
National Wilderness Preservation System (unless 
it is determined by the Secretary that land in 
or within 25 miles of such a park or wilderness 
area is not under. significant development pres-
sure), or 
"(HI) in or within 10 miles of an area which, 
on the date of the decedent's death, is an Urban 
National Forest (as designated by the Forest Serv-
ice), 
"(ii) which was owned by the decedent or a member 
of the decedent's family at all times during the 3-
year period ending on the date of the decedent's death, 
and 
"(iii) with respect to which a qualified conservation 
easement has been made by an individual described 
in subparagraph (C), as of the date of the election 
described in paragraph (6). 
"(B) QUALIFIED CONSERVATION EASEMENT.—The term 
'qualified conservation easement' means a qualified con-
servation contribution (as defined in section 170(h)(1)) of 
a quEdified real property interest (as defined in section 
170(h)(2)(C)), except that clause (iv) of section 170(h)(4)(A) 
shall not apply, and the restriction on the use of such 
interest described in section 170(h)(2)(C) shall include a 
prohibition on more than a de minimis use for a commercial 
recreational activity. 
"(C) 
INDIVIDUAL 
DESCRIBED.—An 
individual 
is 
described in this subparagraph if such individual is— 
"(i) the decedent, 
"(ii) a member of the decedent's family, 
"(iii) the executor of the decedent's estate, or 
Ill STAT. 860 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(iv) the trustee of a trust the corpus of which 
includes the Isind to be subject to the quaUfied con-
servation easement. 
"(D) MEMBER OF FAMILY.—The term 'member of the 
decedent's family* means any member of the family (as 
defined in section 2032A(e)(2)) of the decedent. 
"(9) APPLICATION OF THIS SECTION TO INTERESTS IN PART-
NERSHIPS, CORPORATIONS, AND TRUSTS.—This section shall apply 
to £in interest in a partnership, corporation, or trust if at 
least 30 percent of the entity is owned (directly or indirectly) 
by the decedent, as determined under the rules described in 
section 2033A(e)(3).". 
(b) CARRYOVER BASIS.—Section 1014(a) (relating to basis of 
property acquired from a decedent) is amended by striking "or" 
at the end of paragraphs (1) and (2), by striking the period at 
the end of paragraph (3) and inserting ", or" and by adding at 
the end the following new paragraph: 
"(4) to the extent of the applicability of the exclusion 
described in section 2031(c), the basis in the hands of the 
decedent.". 
(c) QUALIFIED CONSERVATION CONTRIBUTION IS NOT A DISPOSI-
TION.—Subsection (c) of section 2032A (relating to alternative valu-
ation method) is amended by adding at the end the following 
new paragraph: 
"(8) QUALIFIED CONSERVATION CONTRIBUTION IS NOT A DIS-
POSITION.—^A qualified conservation contribution (as defined 
in section 170(h)) by gift or otherwise shall not be deemed 
a disposition under subsection (c)(1)(A).". 
(d) QUALIFIED CONSERVATION CONTRIBUTION WHERE SURFACE 
AND 
MINERAL RIGHTS ARE SEPARATED.—Section 170(h)(5)(B)(ii) 
(relating to special rule) is amended to read as follows: 
"(ii) SPECIAL RULE.—With respect to any contribution of 
property in which the ownership of the surface estate and 
mineral interests has been and remains separated, subpara-
graph (A) shall be treated as met if the probability of sirrface 
mining occurring on such property is so remote as to be neg-
ligible.". 
(e) EFFECTIVE DATES.— 
26 use 1014 
(1) EXCLUSION.—The amendments made by subsections (a) 
note. 
and (b) shall apply to estates of decedents dying after December 
31,1997. 
26 use 170 note. 
(2) EASEMENTS.—The amendments made by subsections 
(c) and (d) shall apply to easements granted after December 
31,1997. 
Subtitle B—Generation-Skipping Tax 
Provision 
SEC. 511. EXPANSION OF EXCEPTION FROM GENERATION-SKIPPING 
TRANSFER TAX FOR TRANSFERS TO INDIVIDUALS WITH 
DECEASED PARENTS. 
(a) IN GENERAL.—Section 2651 (relating to generation assign-
ment) is amended by redesignating subsection (e) as subsection 
(f) and by inserting after subsection (d) the following new subsection: 
"(e) SPECIAL RULE FOR PERSONS WITH A DECEASED PARENT.— 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 861 
"(1) IN GENERAL.—For purposes of determining whether 
any transfer is a generation-skipping transfer, if— 
"(A) an individual is a descendant of a parent of the 
transferor (or the transferor's spouse or former spouse), 
and 
"(B) such individual's parent who is a lineal descendant 
of the parent of the transferor (or the transferor's spouse 
or former spouse) is dead at the time the transfer (from 
which an interest of such individual is established or 
derived) is subject to a tax imposed by chapter 11 or 
12 upon the transferor (and if there shall be more than 
1 such time, then at the earliest such time), 
such individual shall be treated as if such individual were 
a member of the generation which is 1 generation below the 
lower of the transferor's generation or the generation assign-
ment of the yoimgest living ancestor of such individual who 
is also a descendant of the parent of the transferor (or the 
transferor's spouse or former spouse), and the generation 
assignment of any descendant of such individual shall be 
adjusted accordingly. 
"(2) LIMITED APPLICATION OF SUBSECTION TO COLLATERAL 
HEIRS.—This subsection shall not apply with respect to a trans-
fer to any individual who is not a lineal descendant of the 
transferor (or the transferor's spouse or former spouse) if, at 
the time of the transfer, such transferor has any living lineal 
descendant.". 
(b) CONFORMING AMENDMENTS.— 
(1) Section 2612(c) (defining direct skip) is amended by 
striking paragraph (2) and by redesignating paragraph (3) as 
paragraph (2). 
(2) Section 2612(c)(2) (as so redesignated) is amended by 
striking "section 2651(e)(2)" and inserting "section 2651(f)(2)". 
(c) EFFECTIVE DATE.—The amendments made by this section 26 use 2612 
shall apply to terminations, distributions, and transfers occurring note. 
after December 31,1997. 
TITLE VI—EXTENSIONS 
SEC. 601. RESEARCH TAX CREDIT. 
(a) IN GENERAL.—Paragraph (1) of section 41(h) (relating to 
termination) is amended— 
(1) by striking "May 31, 1997" and inserting "June 30, 
1998", and 
(2) by striking in the last sentence "during the first 11 
months of such taxable year." and inserting "during the 24-
month period beginning with the first month of such year. 
The 24 months referred to in the preceding sentence shall 
be reduced by the number of full months after June 1996 
(and before the first month of such first taxable year) during 
which the taxpayer paid or incurred any amount which is 
taken into account in determining the credit under this sec-
tion.". 
(b) TECHNICAL AMENDMENTS.— 
(1) Subparagraph (B) of section 41(c)(4) is amended to 
read as follows: 
I l l STAT. 862 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(B) ELECTION.—An election under this paragraph shall 
apply to the taxable year for which made and all succeeding 
taxable years unless revoked with the consent of the Sec-
retary.". 
(2) Paragraph (1) of section 45C(b) is amended by striking 
"May 31, 1997" and inserting "June 30,1998". 
26 use 41 note. 
(c) EFFECTIVE DATE.—The amendments made by this section 
shall apply to amounts paid or incurred after May 31, 1997. 
SEC. 602. CONTRIBUTIONS OF STOCK TO PRIVATE FOUNDATIONS. 
(a) IN GENERAL.—Clause (ii) of section 170(e)(5)(D) (relating 
to termination) is amended by striking "May 31, 1997" and inserting 
"June 30, 1998". 
26 use 170 note. 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to contributions made after May 31, 1997. 
SEC. 603. WORK OPPORTUNITY TAX CREDIT. 
(a) EXTENSION.—Subparagraph (B) of section 51(c)(4) (relating 
to termination) is amended by striking "September 30, 1997" and 
inserting "June 30, 1998". 
(b) 
MODIFICATION OF ELIGIBILITY REQUIREMENT BASED ON 
PERIOD ON WELFARE.— 
(1) IN GENERAL.—Subparagraph (A) of section 51(d)(2) 
(defining qualified IV-A recipient) is amended by striking all 
that follows "a IV-A program and inserting "for any 9 months 
during the 18-month period ending on the hiring date.". 
(2) CONFORMING AMENDMENT.—Subparagraph (A) of section 
51(d)(3) is amended to read as follows: 
"(A) IN GENERAL.—The term 'qualified veteran' means 
any veteran who is certified by the designated local agency 
as being a member of a family receiving assistance under 
a food stamp program under the Food Stamp Act of 1977 
for at least a 3-month period ending during the 12-month 
period ending on the hiring date.". 
(c) QUALIFIED SSI RECIPIENTS TREATED AS MEMBERS OF TAR-
GETED GROUPS.— 
(1) IN GENERAL.—Section 51(d)(1) (relating to members of 
targeted groups) is amended by striking "or" at the end of 
subpara^aph (F), by striking the period at the end of subpara-
graph (G) and inserting ", or", and by adding at the end the 
following new subparagraph: 
"(H) a qualified SSI recipient.". 
(2) QUALIFIED SSI RECIPIENTS.—Section 51(d) is amended 
by redesignating paragraphs (9), (10), and (11) as paragraphs 
(10), (11), and (12), respectively, and by inserting after para-
graph (8) the following new paragraph: 
"(9) QUALIFIED SSI RECIPIENT.—The term 'qualified SSI 
recipient' means any individual who is certified by the des-
ignated local agency as receiving supplemental security income 
benefits under title XVI of the Social Security Act (including 
supplemental security income benefits of the tj^je described 
in section 1616 of such Act or section 212 of Public Law 93-
66) for any month ending within the 60-day period ending 
on the hiring date.". 
(d) PERCENTAGE OF WAGES ALLOWED AS CREDIT.— 
(1) IN GENERAL.—Subsection (a) of section 51 (relating to 
determination of amount) is amended by striking "35 percent" 
and inserting "40 percent". 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 863 
(2) APPLICATION OF CREDIT FOR INDIVIDUALS PERFORMING 
FEWER THAN 400 HOURS OF SERVICES.—Paragraph (3) of section 
51(i) is amended to read as follows: 
"(3) INDIVIDUALS NOT MEETING MINIMUM EMPLOYMENT PERI-
ODS.— 
"(A) REDUCTION OF CREDIT FOR INDIVIDUALS PERFORM-
ING FEWER THAN 400 HOURS OF SERVICE.—In the case of 
an individual who has performed at least 120 hours, but 
less than 400 hours, of service for the employer, subsection 
(a) shall be applied by substituting '25 percent' for *40 
percent'. 
"(B) 
DENIAL OF CREDIT FOR INDIVIDUALS PERFORMING 
FEWER THAN 120 HOURS OF SERVICE.—No wages shall be 
taken into account under subsection (a) with respect to 
any individual imless such individual has performed at 
least 120 hours of service for the employer.", 
(e) EFFECTIVE DATE.—The amendments made by this section 26USC5inote. 
shall apply to individuals who begin work for the employer after 
September 30,1997. 
SEC. 
604. 
ORPHAN 
DRUG 
TAX 
CREDIT. 
(a) IN GENERAL.—Section 45C (relating to clinical testing 
expenses for certain drugs for rare diseases or conditions) is amend-
ed by striking subsection (e). 
(b) EFFECTIVE DATE.—^The amendment made by subsection (a) 
26 use 45C note. 
shall apply to amounts paid or incurred after May 31,1997. 
TITLE VII—INCENTIVES FOR REVITAL-
IZATION OF THE DISTRICT OF COLUM-
BIA 
SEC. 701. TAX INCENTIVES FOR REVITALIZATION OF THE DISTRICT 
OF COLUMBIA. 
(a) IN GENERAL.—Chapter 1 is amended by adding at the 
end the following new subchapter: 
"Subchapter W—District of Columbia Enterprise Zone 
"Sec. 1400. Establishment of DC Zone. 
"Sec. 1400A. Tax-exempt economic development bonds. 
"Sec. 1400B. Zero percent capital gains rate. 
"Sec. 1400C. First-time homebuyer credit for District of Columbia. 
«SEC. 1400. ESTABLISHMENT OF DC ZONE. 
"(a) IN GENERAL.—For purposes of this title— 
"(1) the applicable DC area is hereby designated as the 
District of Columbia Enterprise Zone, and 
"(2) except as otherwise provided in this subchapter, the 
District of Columbia Enterprise Zone shall be treated as an 
empowerment zone designated imder subchapter U. 
"(b) APPLICABLE DC AREA.—For purposes of subsection (a), 
the term 'applicable DC area' means the area consisting of— 
"(1) the census tracts located in the District of Columbia 
which are part of an enterprise community designated under 
subchapter U before the date of the enactment of this sub-
chapter, and 
I l l STAT. 864 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(2) all other census tracts— 
"(A) which are located in the District of Columbia, 
and 
"(B) for which the poverty rate is not less than than 
20 percent. 
"(c) DISTRICT OF COLUMBIA ENTERPRISE ZONE.—For purposes 
of this subchapter, the terms 'District of Columbia Enterprise Zone' 
and *DC Zone' mean the District of Columbia Enterprise Zone 
designated by subsection (a). 
"(d) 
SPECIAL 
RULES 
FOR 
APPLICATION 
OF 
EMPLOYMENT 
CREDIT.— 
"(1) EMPLOYEES WHOSE PRINCIPAL PLACE OF ABODE IS IN 
DISTRICT OF COLUMBIA.—With respect to the DC Zone, section 
1396(d)(1)(B) (relating to empowerment zone employment 
credit) shall be applied by substituting 'the District of Columbia' 
for 'such empowerment zone'. 
"(2) No DECREASE OF PERCENTAGE IN 2002.—In the case 
of the DC Zone, section 1396 (relating to empowerment zone 
employment credit) shall be applied by substituting "20" for 
"15 in the table contained in section 1396(b). The preceding 
sentence shall apply only with respect to qualified zone employ-
ees, as defined in section 1396(d), determined by treating no 
area other than the DC Zone as an empowerment zone or 
enterprise community. 
"(e) SPECLVL RULE FOR APPLICATION OF ENTERPRISE ZONE BUSI-
NESS DEFINITION.—For purposes of this subchapter and for purposes 
of applying subchapter U with respect to the DC Zone, section 
1397B shall be applied without regard to subsections (b)(6) and 
(c)(5) thereof. 
"(f) TIME FOR WHICH DESIGNATION APPLICABLE.— 
"(1) IN GENERAL.—The designation made by subsection (a) 
shall apply for the period beginning on January 1, 1998, and 
ending on December 31, 2002. 
"(2) COORDINATION WITH DC ENTERPRISE COMMUNITY DES-
IGNATED UNDER SUBCHAPTER U.—The designation under sub-
chapter U of the census tracts referred to in subsection (b)(1) 
as an enterprise community shall terminate on December 31, 
2002. 
"SEC. 1400A. TAX-EXEMPT ECONOMIC DEVELOPMENT BONDS. 
"(a) IN GENERAL.—In the case of the District of Columbia 
Enterprise Zone, subparagraph (A) of section 1394(c)(1) (relating 
to limitation on amount of bonds) shall be applied by substituting 
'$15,000,000' for '$3,000,000'. 
"(b) PERIOD OF APPLICABILITY.—This section shall apply to 
bonds issued during the period beginning on January 1, 1998, 
and ending on December 31, 2002. 
"SEC. 1400B. ZERO PERCENT CAPITAL GAINS RATE. 
"(a) EXCLUSION.—Gross income shall not include qualified 
capital gain fi*om the sale or exchange of any DC Zone asset held 
for more than 5 years. 
"(b) DC ZONE ASSET.—For purposes of this section— 
"(1) IN GENERAL.—The term 'DC Zone asset' means— 
"(A) any DC Zone business stock, 
"(B) any DC Zone partnership interest, and 
"(C) any DC Zone business property. 
"(2) DC ZONE BUSINESS STOCK.— 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 865 
"(A) IN GENERAL.—The term 'DC Zone business stock' 
means any stock in a domestic corporation which is origi-
nally issued after December 31, 1997, if— 
"(i) such stock is acquired by the taxpayer, before 
January 1, 2003, at its original issue (directly or 
through an underwriter) solely in exchange for cash, 
"(ii) as of the time such stock was issued, such 
corporation was a DC Zone business (or, in the case 
of a new corporation, such corporation was being orga-
nized for purposes of being a DC Zone business), and 
"(iii) during substantially all of the taxpayer's hold-
ing period for such stock, such corporation qualified 
as a DC Zone business. 
"(B) REDEMPTIONS.—A rule similar to the rule of sec-
tion 1202(c)(3) shall apply for purposes of this paragraph. 
"(3) DC ZONE PARTNERSHIP INTEREST.—The term *DC Zone 
partnership interest' means any capital or profits interest in 
a domestic partnership which is originally issued after Decem-
ber 31,1997, if— 
"(A) such interest is acquired by the taxpayer, before 
January 1, 2003, from the partnership solely in exchange 
for cash, 
"(B) as of the time such interest was acquired, such 
partnership was a DC Zone business (or, in the case of 
a new partnership, such partnership was being organized 
for purposes of being a DC Zone business), and 
"(C) during substantially all of the t£ixpayer's holding 
period for such interest, such partnership qualified as a 
DC Zone business. 
A rule similar to the rule of paragraph (2)(B) shall apply 
for purposes of this paragraph. 
"(4) DC ZONE BUSINESS PROPERTY.— 
"(A) IN GENERAL.—The term 'DC Zone business prop-
erty means tangible property if— 
"(i) such property was acquired by the taxpayer 
by purchase (as defined in section 179(d)(2)) after 
December 31,1997, and before January 1, 2003, 
"(ii) the original use of such property in the DC 
Zone commences with the taxpayer, and 
"(iii) during substantially all of the taxpayer's hold-
ing period for such property, substantially all of the 
use of such property was in a DC Zone business of 
the taxpayer. 
"(B) SPECIAL RULE FOR BUILDINGS WHICH ARE SUBSTAN-
TIALLY IMPROVED.— 
"(i) IN GENERAL.—The requirements of clauses (i) 
and (ii) of subparagraph (A) shall be treated as met 
with respect to— 
"(I) property which is substantially improved 
by the taxpayer before January 1, 2003, and 
"(II) any land on which such property is 
located. 
"(ii) SUBSTANTIAL IMPROVEMENT.—For purposes of 
clause (i), property shall be treated as substantially 
improved by the taxpayer only if, during any 24-month 
period beginning after December 31, 1997, additions 
I l l STAT. 866 
PUBLIC LAW 105-34—AUG. 5, 1997 
to basis with respect to such property in the hands 
of the taxpayer exceed the greater o
f
— 
"(I) an amount equal to the adjusted basis 
of such property at the beginning of such 24-month 
period in the hands of the taxpayer, or 
"(II) $5,000. 
"(6) TREATMENT OF SUBSEQUENT PURCHASERS, ETC.—The 
term 'DC Zone asset' includes any property which would be 
a DC Zone asset but for paragraph (2)(A)(i), (3)(A), or (4)(A)(ii) 
in the hands of the taxpayer if such property was a DC Zone 
asset in the hands of a prior holder. 
"(7) 5-YEAR SAFE HARBOR.—If any property ceases to be 
a DC Zone asset by reason of paragraph (2)(A)(iii), (3)(C), 
or (4)(A)(iii) after the 5-year period beginning on the date 
the taxpayer acquired such property, such property shall con-
tinue to be treated as meeting the requirements of such para-
graph; except that the amount of gain to which subsection 
(a) applies on any sale or exchange of such property shall 
not exceed the amount which would be qualified capital gain 
had such property been sold on the date of such cessation. 
"(c) DC ZONE BUSINESS.—For purposes of this section, the 
term 'DC Zone business' means any entity which is an enterprise 
zone business (as defined in section 1397B), determined— 
"(1) after the application of section 1400(e), 
"(2) by substituting "80 percent" for "50 percent" in sub-
sections (b)(2) and (c)(1) of section 1397B, and 
"(3) by treating no area other than the DC Zone as an 
empowerment zone or enterprise community. 
"(d) TREATMENT OF ZONE AS INCLUDING CENSUS TRACTS WITH 
10 PERCENT POVERTY RATE.—For purposes of applying this section 
(and for purposes of applying this subchapter and subchapter U 
with respect to this section), the DC Zone shall be treated as 
including all census tracts— 
"(1) which are located in the District of Columbia, and 
"(2) for which the poverty rate is not less than 10 percent. 
"(e) OTHER DEFINITIONS AND SPECIAL RULES.—For purposes 
of this section— 
"(1) QUALIFIED CAPITAL GAIN.—Except as otherwise pro-
vided in this subsection, the term 'qualified capital gain' means 
any gain recognized on the sale or exchange of— 
"(A) a capital asset, or 
"(B) property used in the trade or business (as defined 
in section 1231(b)). 
"(2) GAIN BEFORE IQQS OR AFTER 2007 NOT QUALIFIED.— 
The term 'qualified capital gain' shall not include any gain 
attributable to periods before January 1, 1998, or after Decem-
ber 31, 2007. 
"(3) CERTAIN GAIN NOT QUALIFIED.—The term 'qualified 
capital gain' shall not include any gain which would be treated 
as ordinary income under section 1245 or under section 1250 
if section 1250 applied to all depreciation rather than the 
additional depreciation. 
"(4) INTANGIBLES AND LAND NOT INTEGRAL PART OF DC 
ZONE BUSINESS.—^The term 'qualified capital gain' shall not 
include any gain which is attributable to real property, or 
an int£ingible asset, which is not an integral part of a DC 
Zone business. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 867 
"(5) RELATED PARTY TRANSACTIONS.—The term 'qualified 
capital gain' shall not include any gain attributable, directly 
or indirectly, in whole or in part, to a transaction with a 
related person. For purposes of this paragraph, persons are 
related to each other if such persons are described in section 
267(b) or 707(b)(1). 
"(f) CERTAIN OTHER RULES TO APPLY.—Rules similar to 
the 
rules of subsections (g), (h), (i)(2), and (j) of section 1202 shall 
apply for purposes of this section. 
"(g) SALES AND EXCHANGES OF INTERESTS IN PARTNERSHIPS 
AND S CORPORATIONS WHICH ARE DC ZONE BUSINESSES.—In the 
case of the sale or exchange of an interest in a partnership, or 
of stock in an S corporation, which was a DC Zone business during 
substantially all of the period the taxpayer held such interest or 
stock, the amount of qualified capital gain shall be determined 
without regard to— 
"(1) any gain which is attributable to real property, or 
an intangible asset, which is not an integral part of a DC 
Zone business, and 
"(2) any gain attributable to periods before January 1, 
1998, or after December 31, 2007. 
"SEC. 1400C. FIRST-TIME HOMEBUYER CREDIT FOR DISTRICT OF 
COLUMBIA. 
"(a) ALLOWANCE OF CREDIT.—In the case of an individual who 
is a first-time homebuyer of a principal residence in the District 
of Columbia during any taxable year, there shall be allowed as 
a credit against the tax imposed by this chapter for the taxable 
year an amount equal to so much of the purchase price of the 
residence as does not exceed $5,000. 
"(b) 
LIMITATION 
BASED 
ON 
MODIFIED 
ADJUSTED 
GROSS 
INCOME.— 
"(1) IN GENERAL.—The amount allowable as a credit iinder 
subsection (a) (determined without regard to this subsection) 
for the taxable year shall be reduced (but not below zero) 
by the amount which bears the same ratio to the credit so 
allowable as— 
"(A) the excess (if any) of— 
"(i) the taxpayer's modified adjusted gross income 
for such taxable year, over 
"(ii) $70,000 ($110,000 in the case of a joint return), 
bears to 
"(B) $20,000. 
"(2) MODIFIED ADJUSTED GROSS INCOME.—For purposes of 
paragraph (1), the term 'modified adjusted gross income' means 
the adjusted gross income of the taxpayer for the taxable year 
increased by any amount excluded from gross income under 
section 911, 931, or 933. 
"(c) FIRST-TIME HOMEBUYER.—For purposes of this section— 
"(1) IN GENERAL.—The term 'first-time homebuyer' has the 
same meaning as when used in section 72(t)(8)(D)(i), except 
that 'principal residence in the District of Columbia during 
the 1-year period' shall be substituted for 'principal residence 
during the 2-year period' in subclause (I) thereof. 
"(2) ONE-TIME ONLY.—If an individual is treated as a first-
time homebuyer with respect to any principal residence, such 
I l l STAT. 868 
PUBLIC LAW 105-34—AUG. 5, 1997 
individual may not be treated as a first-time homebuyer with 
respect to any other principal residence. 
"(3) PRINCIPAL RESIDENCE.—The term 'principal residence' 
has the same meaning as when used in section 121. 
"(d) CARRYOVER OF CREDIT.—If the credit allowable under sub-
section (a) exceeds the limitation imposed by section 26(a) for such 
taxable year reduced by the sum of the credits allowable under 
subpart A of part IV of subchapter A (other than this section), 
such excess shall be carried to the succeeding taxable year emd 
added to the credit allowable under subsection (a) for such taxable 
year. 
"(e) SPECIAL RULES.—For purposes of this section— 
"(1) ALLOCATION OF DOLLAR LIMITATION.— 
"(A) MARRIED INDIVIDUALS FILING SEPARATELY.—In the 
case of a married individual filing a separate return, sub-
section (a) shall be applied by substituting '$2,500' for 
'$5,000'. 
"(B) OTHER TAXPAYERS.—If 2 or more individuals who 
are not married purchase a principal residence, the amount 
of the credit allowed under subsection (a) shall be allocated 
among such individuals in such manner as the Secretary 
may prescribe, except that the total amount of the credits 
allowed to all such individuals shall not exceed $5,000. 
"(2) PURCHASE.— 
"(A) IN GENERAL.—The term 'purchase' means any 
acquisition, but only if— 
"(i) the property is not acquired from a person 
whose relationship to the person acquiring it would 
result in the disallowance of losses under section 267 
or 707(b) (but, in appljdng section 267 (b) and (c) 
for purposes of this section, paragraph (4) of section 
267(c) shall be treated as providing that the family 
of an individual shall include only his spouse, ances-
tors, and lineal descendants), and 
"(ii) the basis of the property in the hands of 
the person acquiring it is not determined— 
"(I) in whole or in part by reference to the 
adjusted basis of such property in the hands of 
the person from whom acquired, or 
"(II) under section 1014(a) (relating to property 
acquired from a decedent). 
"(B) CONSTRUCTION.—A residence which is constructed 
by the taxpayer shall be treated as purchased by the tax-
payer. 
"(3) PURCHASE PRICE.—The term 'purchase price' means 
the adjusted basis of the principal residence on the date of 
acquisition (within the meaning of section 72(t)(8)(D)(iii)). 
"(f) REPORTING.—If the Secretary requires information reporting 
under section 6045 by a person described in subsection (e)(2) thereof 
to verify the eligibility of taxpayers for the credit allowable by 
this section, the exception provided by section 6045(e)(5) shall not 
apply. 
"(g) CREDIT TREATED AS NONREFUNDABLE PERSONAL CREDIT.— 
For purposes of this title, the credit allowed by this section shall 
be treated as a credit allowable under subpart A of part IV of 
subchapter A of this chapter. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 869 
"(h) BASIS ADJUSTMENT.—For purposes of this subtitle, if a 
credit is allowed under this section with respect to the purchase 
of any residence, the basis of such residence shall be reduced 
by the amount of the credit so allowed. 
"(i) TERMINATION.—This section shall not apply to any property 
purchased after December 31, 2000.". 
(b) CONFORMING AMENDMENTS.— 
(1) Subsection (d) of section 39 is amended by adding 
at the end the following new paragraph: 
"(8) No CARRYBACK OF DC ZONE CREDITS BEFORE EFFECTIVE 
DATE.—No portion of the unused business credit for any taxable 
year which is attributable to the credits allowable under sub-
chapter U by reason of section 1400 may be carried back 
to a taxable year ending before the date of the enactment 
of section 1400.". 
(2) Subsection (a) of section 1016 is amended by striking 
"and" at the end of paragraph (25), by striking the period 
at the end of paragraph (26) and inserting ", and", and by 
adding at the end thereof the following new paragraph: 
"(27) in the case of a residence with respect to which 
a credit was allowed under section 1400C, to the extent pro-
vided in section 1400C(h).". 
(c) CLERICAL AMENDMENT.—The table of subchapters for chap-
ter 1 is amended by adding at the end the following new item: 
"Subchapter W. District of Columbia Enterprise Zone.". 
(d) EFFECTIVE DATE.—Except as provided in subsection (c), 26 use 39 note, 
the amendments made by this section shall take effect on the 
date of the enactment of this Act. 
TITLE VIII—WELFARE-TO-WORK 
INCENTIVES 
SEC. 801. INCENTIVES FOR EMPLOYING LONG-TERM FAMILY ASSIST-
ANCE RECIPIENTS. 
(a) IN GENERAL.—Subpart F of part IV of subchapter A of 
chapter 1 is amended by inserting after section 51 the following 
new section: 
"SEC. 51A. TEMPORARY INCENTIVES FOR EMPLOYING LONG-TERM 
FAMILY ASSISTANCE RECIPIENTS. 
"(a) DETERMINATION OF AMOUNT.—For purposes of section 38, 
the amount of the welfare-to-work credit determined under this 
section for the taxable year shall be equal to— 
"(1) 35 percent of the qualified first-year wages for such 
year, and 
"(2) 50 percent of the qualified second-year wages for such 
year. 
"(b) QUALIFIED WAGES DEFINED.—For purposes of this section— 
"(1) IN GENERAL.—The term 'qualified wages' means the 
wages paid or incurred by the employer during the taxable 
year to individuals who are long-term family assistance recipi-
ents. 
"(2) QUALIFIED FIRST-YEAR WAGES.—The term 'qualified 
first-year wages' means, with respect to any individual, quali-
fied wages attributable to service rendered during the 1-year 
I l l STAT. 870 
PUBLIC LAW 105-34—AUG. 5, 1997 
period beginning with the day the individual begins work for 
the employer. 
"(3) QUALIFIED SECOND-YEAR WAGES.—The term 'qualified 
second-year wages' means, with respect to any individual, quali-
fied wages attributable to service rendered during the 1-year 
period beginning on the day aft;er the last day of the 1-year 
period with respect to such individual determined under para-
graph (2). 
"(4) ONLY FIRST $IO,OOO OF WAGES PER YEAR TAKEN INTO 
ACCOUNT.—The amount of the qualified first-year wages, and 
the amount of qualified second-year wages, which may be taken 
into account with respect to any individual shall not exceed 
$10,000 per year. 
"(5) WAGES.— 
"(A) IN GENERAL.—The term 'wages' has the meaning 
given such term by section 51(c), without regard to para-
graph (4) thereof. 
"(B) CERTAIN AMOUNTS TREATED AS WAGES.—The term 
'wages' includes amounts paid or incurred by the employer 
which are excludable fi*om such recipient's gross income 
under— 
"(i) section 105 (relating to amounts received under 
accident and health plans), 
"(ii) section 106 (relating to contributions by 
employer to accident and health plans), 
"(iii) section 127 (relating to educational assistance 
programs) or would be so excludable but for section 
127(d), but only to the extent paid or incurred to a 
person not related to the employer, or 
"(iv) section 129 (relating to dependent care assist-
ance programs). 
The amount treated as wages by clause (i) or (ii) for any 
period shall be based on the reasonable cost of coverage 
for the period, but shall not exceed the applicable premium 
for the period under section 4980B(f)(4). 
"(C) SPECLU. RULES FOR AGRICULTURAL AND RAILWAY 
LABOR.—If such recipient is an employee to whom subpara-
graph (A) or (B) of section 51(h)(1) applies, rules similar 
to the rules of such subparagraphs shall apply except that— 
"(i) such subparagraph (A) shall be applied by 
substituting '$10,000' for '$6,000', and 
"(ii) such subparagraph (B) shall be applied by 
substituting '$833.33' for '$500'. 
"(c) LONG-TERM FAMILY ASSISTANCE RECIPIENTS.—For purposes 
of this section— 
"(1) IN GENERAL.—The term 'long-term family assistance 
recipient' means any individual who is certified by the des-
ignated local agency (as defined in section 51(d)(10))— 
"(A) as being a member of a family receiving assistance 
under a IV-A program (as defined in section 51(d)(2)(B)) 
for at least the 18-month period ending on the hiring 
date, 
"(B)(i) as being a member of a family receiving such 
assistance for 18 months beginning afl;er the date of the 
enactment of this section, and 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 871 
"(ii) as having a hiring date which is not more than 
2 years after the end of the earhest such 18-month period, 
or 
"(C)(i) as being a member of a family which ceased 
to be eHgible after the date of the enactment of this section 
for such assistance by reason of any Hmitation imposed 
by Federal or State law on the maximum period such 
assistance is payable to a family, and 
"(ii) as having a hiring date which is not more than 
2 years after the date of such cessation. 
"(2) HIRING DATE.—The term liiring date' has the meaning 
given such term by section 51(d). 
"(d) CERTAIN RULES TO APPLY.— 
"(1) IN GENERAL.—Rules similar to the rules of section 
52, and subsections (d)(ll), (f), (g), (i) (as in effect on the 
day before the date of the enactment of the Taxpayer Relief 
Act of 1997), (j), and (k) of section 51, shall apply for purposes 
of this section. 
"(2) CREDIT TO BE PART OF GENERAL BUSINESS CREDIT, 
ETC.—References to section 51 in section 38(b), 280C(a), and 
1396(c)(3) shall be treated as including references to this sec-
tion. 
"(e) COORDINATION WITH WORK OPPORTUNITY CREDIT.—If a 
credit is allowed under this section to an employer with respect 
to an individual for any taxable year, then for purposes of appljdng 
section 51 to such employer, such individual shall not be treated 
as a member of a targeted group for such taxable year. 
"(f) TERMINATION.—This section shall not apply to individuals 
who begin work for the employer after April 30, 1999.". 
(b) CLERICAL AMENDMENT.—The table of sections for subpart 
F of part IV of subchapter A of chapter 1 is amended by inserting 
after the item relating to section 51 the following new item: 
"Sec. 51 
A. Temporary incentives for employing long-term family assistance 
recipients.". 
(c) EFFECTIVE DATE.—The amendments made by this section 26USC5lAnote. 
shall apply to individuals who begin work for the employer after 
December 31, 1997. 
TITLE IX—MISCELLANEOUS 
PROVISIONS 
Subtitle A—Provisions Relating to Excise 
Taxes 
SEC. 901. GENERAL REVENUE PORTION OF HIGHWAY MOTOR FUELS 
TAXES DEPOSITED INTO HIGHWAY TRUST FUND. 
(a) IN GENERAL.—Paragraph (4) of section 9503(b) (relating 
to certain additional taxes not transferred to Highway Trust Fund) 
is amended to read as follows: 
"(4) CERTAIN TAXES NOT TRANSFERRED TO HIGHWAY TRUST 
FUND.—For purposes of paragraphs (1) and (2), there shall 
not be taken into account the taxes imposed by— 
"(A) section 4041(d), 
I l l STAT. 872 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(B) section 4081 to the extent attributable to the 
rate specified in section 4081(a)(2)(B), 
"(C) section 4041 or 4081 to the extent attributable 
to fuel used in a train, 
"(D) in the case of fuels used as described in paragraph 
(4)(D), (5)(B), or (6)(D) of subsection (c), section 4041 or 
4081— 
"(i) with respect to so much of the rate of tax 
on gasoline or special motor fuels as exceeds 11.5 cents 
per gallon, and 
"(ii) with respect to so much of the rate of tax 
on diesel fuel or kerosene as exceeds 17.5 cents per 
gallon, 
"(E) in the 
case of fuels 
described 
in 
section 
4041(b)(2)(A), 4041(k), or 4081(c), section 4041 or 4081 
before October 1, 1999, with respect to a rate equal to 
2.5 cents per gallon, or 
"(F) in the case of fuels described in section 4081(c)(2), 
such section before October 1, 1999, with respect to a 
rate equal to 2.8 cents per gallon.". 
(b) MASS TRANSIT PORTION.—Section 9503(e)(2) (relating to 
transfers to Mass Transit Account) is amended by striking "2 cents" 
and inserting "2.85 cents". 
(c) LIMITATION ON EXPENDITURES.—Subsection (c) of section 
9503 is amended by adding at the end the following new paragraph: 
"(7) LIMITATION ON EXPENDITURES.—Notwithstanding any 
other provision of law, in calculating amounts under section 
157(a) of title 23, United States Code, and sections 1013(c), 
1015(a), and 1015(b) of the Intermodal Surface Transportation 
Efficiency Act of 1991 (Public Law 102-240; 105 Stat. 1914), 
deposits in the Highway Trust Fund resulting from the amend-
ments made by the Taxpayer Relief Act of 1997 shall not 
be taken into account.". 
(d) TECHNICAL AMENDMENTS.— 
(1) Section 9503 is amended by striking subsection (f). 
(2) The last sentence of subparagraph (A) of section 
9503(c)(2) is amended by striking "by taking into account only 
the Highway Trust Fund financing rate applicable to any fuel" 
and inserting "by taking into account only the portion of the 
taxes which are deposited into the Highway Trust Fund". 
(3) Paragraphs (4)(D), (5)(B), and (6)(D) of section 9503(c) 
are each amended by striking "attributable to the Highway 
Trust Fund financing rate" and inserting "deposited into the 
Highway Trust Fund". 
26 use 6302 
(e) DELAYED DEPOSITS OF HIGHWAY MOTOR FUEL TAX REVE-
note. 
NUES.—Notwithstanding section 6302 of the Internal Revenue Code 
of 1986, in the case of deposits of taxes imposed by sections 4041 
and 4081 (other than subsection (a)(2)(A)(ii)) of the Internal Reve-
nue Code of 1986, the due date for any deposit which would (but 
for this subsection) be required to be made after July 31, 1998, 
and before October 1, 1998, shall be October 5, 1998. 
26 use 9503 
(f) EFFECTIVE DATE.—The amendments made by this section 
note. 
shall apply to taxes received in the Treasury after September 30, 
1997. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 873 
SEC. 
902. 
REPEAL 
OF 
TAX 
ON 
DIESEL 
FUEL 
USED 
IN 
RECREATIONAL 
BOATS. 
(a) IN GENERAL.—Subparagraph (B) of section 6421(e)(2) (defin-
ing off-highway business use) is amended by striking clauses (iii) 
and (iv). 
(b) CONFORMING AMENDMENTS.— 
(1) Subparagraph (A) of section 4041(a)(1) is amended— 
(A) by striking ", a diesel-powered train, or a diesel-
powered boat" each place it appears and inserting "or a 
diesel-powered train", and 
(B) by striking 'Vehicle, train, or boat" and inserting 
'Vehicle or train". 
(2) Paragraph (1) of section 4041(a) is amended by striking 
subparagraph (D). 
(3) Paragraph (3) of section 4083(a) is amended by striking 
", a diesel-powered train, or a diesel-powered boat" and insert-
ing "or a diesel-powered train". 
(c) EFFECTIVE DATE.—The amendments made by this section 26USC404i 
shall take effect on January 1, 1998. 
note. 
SEC. 903. CONTINUED APPLICATION OF TAX ON IMPORTED RECYCLED 
HALON-1211. 
(a) IN GENERAL.—Paragraph (1) of section 4682(d) is amended 
by striking "recycled halon" and inserting "recycled Halon-1301 
or recycled Halon-2402". 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 26 use 4682 
shall take effect on the date of the enactment of this Act. 
note. 
SEC. 904. UNIFORM RATE OF TAX ON VACCINES. 
(a) IN GENERAL.—Subsection (b) of section 4131 is amended 
to read as follows: 
"(b) AMOUNT OF TAX.— 
"(1) IN GENERAL.—The amount of the tax imposed by sub-
section (a) shall be 75 cents per dose of any taxable vaccine. 
"(2) COMBINATIONS OF VACCINES.—If any taxable vaccine 
is described in more than 1 subparagraph of section 4132(a)(1), 
the amount of the tax imposed by subsection (a) on such vaccine 
shall be the sum of the amounts for the vaccines which are 
so included.". 
(b) TAXABLE VACCINES.—Paragraph (1) of section 4132(a) is 
amended to read as follows: 
"(1) TAXABLE VACCINE.—The term 'taxable vaccine' means 
any of the following vaccines which are manufactured or pro-
duced in the United States or entered into the United States 
for consumption, use, or warehousing: 
"(A) Any vaccine containing diphtheria toxoid. 
"(B) Any vaccine containing tetanus toxoid. 
"(C) 
Any vaccine 
containing 
pertussis 
bacteria, 
extracted or partial cell bacteria, or specific pertussis anti-
gens. 
"(D) Any vaccine against measles. 
"(E) Any vaccine against mumps. 
"(F) Any vaccine against rubella. 
"(G) Any vaccine containing polio virus. 
"(H) Any HIB vaccine. 
"(I) Any vaccine against hepatitis B. 
"(J) Any vaccine against chicken pox.". 
39-194 O - 97 - 29 ;QL 3 Parti 
I l l STAT. 874 
PUBLIC LAW 105-34—AUG. 5, 1997 
(c) CONFORMING AMENDMENT.—Subsection (a) of section 4132 
is amended by striking paragraphs (2), (3), (4), and (5) and by 
redesignating paragraphs (6) through (8) as paragraphs (2) through 
(4), respectively. 
26 use 4131 
(d) EFFECTIVE DATE.—The amendments made by this section 
note. 
shall take effect on the day after the date of the enactment of 
this Act. 
26 use 4132 
(e) LIMITATION ON CERTAIN CREDITS OR REFUNDS.—For pur-
note- 
poses of appl5dng section 4132(b) of the Internal Revenue Code 
of 1986 with respect to any claim for credit or refund filed before 
January 1, 1999, the amount of tax taken into account shall not 
exceed the tax computed under the rate in effect on the day after 
the date of the enactment of this Act. 
SEC. 905. OPERATORS OF MULTIPLE GASOLINE RETAIL OUTLETS 
TREATED AS WHOLESALE DISTRIBUTOR FOR REFUND 
PURPOSES. 
(a) IN GENERAL.—Subparagraph (B) of section 6416(a)(4) (defin-
ing wholesale distributor) is amended by adding at the end the 
following new sentence: "Such term includes any person who makes 
retail sales of gasoline at 10 or more retail motor fuel outlets.". 
26 use 6416 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
note. 
shall apply to sales after the date of the enactment of this Act. 
SEC. 906. EXEMPTION OF ELECTRIC AND OTHER CLEAN-FUEL MOTOR 
VEHICLES FROM LUXURY AUTOMOBILE CLASSIFICATION. 
(a) IN GENERAL.—Subsection (a) of section 4001 (relating to 
imposition of tax) is amended to read as follows: 
"(a) IMPOSITION OF TAX.— 
"(1) IN GENERAL.—There is hereby imposed on the 1st 
retail sale of any passenger vehicle a tax equal to 10 percent 
of the price for which so sold to the extent such price exceeds 
the applicable amount. 
"(2) APPLICABLE AMOUNT.— 
"(A) IN GENERAL.—Except as provided in subpara-
graphs (B) and (C), the applicable amount is $30,000. 
"(B) QUALIFIED CLEAN-FUEL VEHICLE PROPERTY.—In the 
case of a passenger vehicle which is propelled by a fuel 
which is not a clean-burning fuel and to which is installed 
qualified clean-fuel vehicle property (as defined in section 
179A(c)(l)(A)) for purposes of permitting such vehicle to 
be propelled by a clean-burning fuel, the applicable amount 
is equal to the sum of— 
"(i) the dollar amount in effect under subparagraph 
(A), plus 
"(ii) the increase in the price for which the pas-
senger vehicle was sold (within the meaning of section 
4002) due to the installation of such property. 
"(C) PURPOSE BUILT PASSENGER VEHICLE.— 
"(i) IN GENERAL.—In the case of a purpose built 
passenger vehicle, the applicable amount is equal to 
150 percent of the dollar amount in effect under 
subparagraph (A). 
"(ii) PURPOSE BUILT PASSENGER VEHICLE.—For pur-
poses of clause (i), the term 'purpose built passenger 
vehicle' means a passenger vehicle produced by an 
original equipment manufacturer and designed so that 
the vehicle may be propelled primarily by electricity.". 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 875 
(b) CONFORMING AMENDMENTS.— 
(1) Subsection (e) of section 4001 (relating to inflation 
adjustment) is amended by striking "and section 4003(a)". 
(2) Subsection (f) of section 4001 (relating to phasedown) 
is amended by striking "subsection (a)" and inserting "sub-
section (a)(1)". 
(3) Subparagraph (A) of section 4003(a)(1) is amended by 
inserting 
"(other 
than 
property 
described 
in 
section 
4001(a)(2)(B))" after "part or accessory". 
(4) Subparagraph (B) of section 4003(a)(2) is amended to 
read as follows: 
"(B) the appropriate applicable amount as determined 
under section 4001(a)(2).". 
(c) EFFECTIVE DATE.—The amendments made by this section 26USC4001 
shall apply to sales and installations occurring after the date of "ote. 
the enactment of this Act. 
SEC. 907. RATE OF TAX ON CERTAIN SPECIAL FUELS DETERMINED 
ON BASIS OF BTU EQUIVALENCY WITH GASOLINE. 
(a) SPECIAL MOTOR FUELS.— 
(1) IN GENERAL.—Paragraph (2) of section 4041(a) (relating 
to special motor fuels) is amended to read as follows: 
"(2) SPECIAL MOTOR FUELS.— 
"(A) IN GENERAL.—There is hereby imposed a tax on 
any liquid (other than kerosene, gas oil, ftiel oil, or any 
product taxable under section 4081)— 
"(i) sold by any person to an owner, lessee, or 
other operator of a motor vehicle or motorboat for 
use as a fuel in such motor vehicle or motorboat, or 
"(ii) used by any person as a fuel in a motor 
vehicle or motorboat unless there was a taxable sale 
of such liquid under clause (i). 
"(B) RATE OF TAX.—The rate of the tax imposed by 
this paragraph shall be— 
"(i) except as otherwise provided in this subpara-
graph, 
the 
rate 
of 
tax 
specified 
in 
section 
4081(a)(2)(A)(i) which is in effect at the time of such 
sale or use, 
"(ii) 13.6 cents per gallon in the case of liquefied 
petroleum gas, and 
"(iii) 11.9 cents per gallon in the case of liquefied 
natural gas. 
In the case of any sale or use after September 30, 1999, 
clause (ii) shall be applied by substituting '3.2 cents' for 
'13.6 cents', and clause (iii) shall be applied by substituting 
'2.8 cents' for '11.9 cents'.". 
(2) CONFORMING AMENDMENT.—Paragraph (1) of section 
4041(d) is amended by inserting "and other than liquefied natu-
ral gas" after "liquefied petroleum gas". 
(b) METHANOL FUEL PRODUCED FROM NATURAL GAS.—Subpara-
graph (A) of section 4041(m)(l) is amended to read as follows: 
"(A) the rate of the tax imposed by subsection (a)(2) 
shall be— 
"(i) after September 30, 1997, and before October 
1, 1999— 
I l l STAT. 876 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(I) in the case of fuel none of the alcohol 
in which consists of ethanol, 9.15 cents per gallon, 
and 
"(II) in any other case, 11.3 cents per gallon, 
and 
"(ii) after September 30, 1999— 
"(I) in the case of fiiel none of the alcohol 
in which consists of ethanol, 2.15 cents per gallon, 
and 
"(II) in any other case, 4.3 cents per gallon, 
and". 
26 use 4041 
(c) EFFECTIVE DATE.—The amendments made by this section 
note. 
shall take effect on October 1,1997. 
SEC. 908. MODIFICATION OF TAX TREATMENT OF HARD CIDER. 
(a) HARD CIDER CONTAINING LESS THAN 7 PERCENT ALCOHOL 
TAXED AS WINE.—Subsection (b) of section 5041 (relating to imposi-
tion and rate of tax) is amended by striking "and" at the end 
of paragraph (4), by striking the period at the end of paragraph 
(5) and inserting "; and", and by adding at the end the following 
new paragraph: 
"(6) On hard cider derived primarily from apples or apple 
concentrate and water, containing no other fruit product, and 
containing at least one-half of 1 percent and less than 7 percent 
alcohol by volume, 22.6 cents per wine gallon.". 
(b) APPLICATION OF SMALL PRODUCER CREDIT.—Paragraph (1) 
of section 5041(c) (relating to credit for small domestic producers) 
is amended by adding at the end the following new sentence: 
"In the case of wine described in subsection (b)(6), the preceding 
sentence shall be applied by substituting '5.6 cents' for *90 cents*. , 
26 use 5041 
(c) EFFECTIVE DATE.—^The amendments made by this section 
note. 
shall take effect on October 1,1997. 
SEC. 909. STUDY OF FEASIBILITY OF MOVING COIXECTION POINT FOR 
DISTILLED SPIRITS EXCISE TAX. 
(a) IN GENERAL.—The Secretary of the Treasury or his delegate 
shall conduct a study of options for changing the event on which 
the tax imposed by section 5001 of the Internal Revenue Code 
of 1986 is determined. One such option which shall be studied 
is determining such tax on removal from registered wholesale ware-
houses. In stud3dng each such option, such Secretary shall focus 
on administrative issues including— 
(1) tax compliance, 
(2) the number of taxpayers required to pay the tax, 
(3) the types of financial responsibility requirements that 
might be required, and 
(4) special rec^uirements regarding segregation of non-tax-
paid distilled spirii;s from other products. 
Such study shaU review the effects of each such option on the 
Department of the Treasury (including staffing and other demands 
on budgetary resources) and the change in the period between 
the time such tax is currently p£dd and the time such tax would 
be p£dd under each such option. 
(b) REPORT.—^The report of such study shall be submitted to 
the Committee on Finance of the Senate and the Committee on 
Ways and Means of the House of Representatives not later than 
March 31,1998. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 877 
SEC. 910. CLARIFICATION OF AUTHORITY TO USE SEMI-GENERIC DES-
IGNATIONS ON WINE LABELS. 
(a) IN GENERAL.—Section 5388 (relating to designation of wines) 
is amended by adding at the end the following new subsection: 
"(c) USE OF SEMI-GENERIC DESIGNATIONS.— 
"(1) IN GENERAL.—Semi-generic designations may be used 
to designate wines of an origin other than that indicated by 
such name only if— 
"(A) there appears in direct conjunction therewith an 
appropriate appellation of origin disclosing the true place 
of origin of the wine, and 
"(B) the wine so designated conforms to the standard 
of identity, if any, for such wine contained in the regula-
tions under this section or, if there is no such standard, 
to the trade understanding of such class or tj^e. 
"(2) DETERMINATION OF WHETHER NAME IS SEMI-GENERIC.— 
"(A) IN GENERAL.—Except as provided in subparagraph 
(B), a name of geographic significance, which is also the 
designation of a class or type of wine, shall be deemed 
to have become semi-generic only if so found by the Sec-
retary. 
"(B) CERTAIN NAMES TREATED AS SEMI-GENERIC—The 
following names shall be treated as semi-generic: Angelica, 
Burgundy, Claret, Chablis, Champagne, Chianti, Malaga, 
Marsala, Madeira, Moselle, Port, Rhine Wine or Hock, Sau-
teme, Haut Sauteme, Sherry, Tokay.". 
(b) EFFECTIVE DATE.—The amendment made by this section 26 use 5388 
shall take effect on the date of the enactment of this Act. 
i^ote-
Subtitle B—Revisions Relating to Disasters 
SEC. 911. AUTHORITY TO POSTPONE CERTAIN TAX-RELATED DEAD-
LINES BY REASON OF PRESIDENTIALLY 
DECLARED 
DISASTER. 
(a) IN GENERAL.—Chapter 77 is amended by inserting after 
section 7508 the following new section: 
"SEC. 7508A. AUTHORITY TO POSTPONE CERTAIN TAX-RELATED DEAD-
LINES BY REASON OF PRESIDENTIALLY 
DECLARED 
DISASTER. 
"(a) IN GENERAL.—In the case of a taxpayer determined by 
the Secretary to be affected by a Presidentially declared disaster 
(as defined by section 1033(h)(3)), the Secretary may prescribe 
regulations under which a period of up to 90 days may be dis-
regarded in determining, under the internal revenue laws, in respect 
of any tax liability (including any penalty, additional amount, or 
addition to the tax) of such taxpayer— 
"(1) whether any of the acts described in paragraph (1) 
of section 7508(a) were performed within the time prescribed 
therefor, and 
"(2) the amount of any credit or refund. 
"(b) INTEREST ON OVERPAYMENTS AND UNDERPAYMENTS.—Sub-
section (a) shall not apply for the purpose of determining interest 
on any overpa3anent or underpajonent.". 
Ill STAT. 878 
PUBLIC LAW 105-34—AUG. 5, 1997 
(b) CLERICAL AMENDMENT.—The table of sections for chapter 
77 is amended by inserting after the item relating to section 7508 
the following new item: 
"Sec. 7508A. Authority to postpone certain tax-related deadlines by reason 
of presidentially declared disaster.". 
26USC7508A 
(c) EFFECTIVE DATE.—The amendments made by this section 
note. 
shall apply with respect to any period for performing an act that 
has not expired before the date of the enactment of this Act. 
SEC. 912. USE OF CERTAIN APPRAISALS TO ESTABLISH AMOUNT OF 
DISASTER LOSS. 
(a) IN GENERAL.—Subsection (i) of section 165 is amended 
by adding at the end the following new paragraph: 
"(4) 
USE OF DISASTER LOAN APPRAISALS TO ESTABLISH 
AMOUNT OF LOSS.—Nothing in this title shall be construed 
to prohibit the Secretary from prescribing regulations or other 
guidance under which an appraisal for the purpose of obtaining 
a loan of Federal funds or a loan guarsintee from the Federal 
Government as a result of a Presidentially declared disaster 
(as defined by section 1033(h)(3)) may be used to establish 
the amount of any loss described in paragraph (1) or (2).". 
26 use 165 note. 
(b) EFFECTIVE DATE.—^The amendment made by subsection (a) 
shall take effect on the date of the enactment of this Act. 
SEC. 913. TREATMENT OF LIVESTOCK SOLD ON ACCOUNT OF 
WEATHER-RELATED CONDITIONS. 
(a) DEFERRAL OF INCOME INCLUSION.—Subsection (e) of section 
451 (relating to special rules for proceeds from livestock sold on 
account of drought) is amended— 
(1) by striking "drought conditions, and that these drought 
conditions" in paragraph (1) and inserting "drought, flood, or 
other weather-related conditions, and that such conditions"; 
and 
(2) by inserting ", FLOOD, OR OTHER WEATHER-RELATED 
CONDITIONS" after "DROUGHT" in the subsection heading. 
(b) INVOLUNTARY CONVERSIONS.—Subsection (e) of section 1033 
(relating to livestock sold on account of drought) is amended— 
(1) by inserting ", flood, or other weather-related conditions" 
before the period at the end thereof; and 
(2) by inserting ", FLOOD, OR OTHER WEATHER-RELATED 
CONDITIONS" after "DROUGHT" in the subsection heading. 
26 use 451 note. 
(c) EFFECTIVE DATE.—The amendments made by this section 
shall apply to sales and exchanges after December 31,1996. 
SEC. 914. MORTGAGE FINANCING FOR RESIDENCES LOCATED IN 
DISASTER AREAS. 
Subsection (k) of section 143 (relating to mortgage revenue 
bonds; qualified mortgage bond and qualified veteran's mortgage 
bond) is amended by adding at the end the following new paragraph: 
"(11) SPECIAL RULES FOR RESIDENCES LOCATED IN DISASTER 
AREAS.—In the case of a residence located in an area determined 
by the President to warrant assistance from the Federal 
Government under the Robert T. Stafford Disaster Relief and 
Emergency Assistance Act (as in effect on the date of the 
enactment of the Taxpayer Relief Act of 1997), this section 
shall be applied with the following modifications to financing 
provided with respect to such residence within 2 years after 
the date of the disaster declaration: 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 879 
"(A) Subsection (d) (relating to 3-year requirement) 
shall not apply. 
"(B) Subsections (e) and (f) (relating to purchase price 
requirement and income requirement) shall be applied as 
if such residence were a targeted area residence. 
The preceding sentence shall apply only with respect to bonds 
issued after December 31, 1996, and before January 1, 1999.". 
SEC. 915. ABATEMENT OF INTEREST ON UNDERPAYMENTS BY TAX-
PAYERS IN PRESIDENTIALLY 
DECLARED 
DISASTER 
AREAS. 
(a) IN GENERAL.—If the Secretary of the Treasury extends 
for any period the time for filing income tax returns under section 
6081 of the Internal Revenue Code of 1986 and the time for paying 
income tax with respect to such returns under section 6161 of 
such Code (and waives any penalties relating to the failure to 
so file or so pay) for any individual located in a Presidentially 
declared disaster area, the Secretary shall, notwithstanding section 
7508A(b) of such Code, abate for such period the assessment of 
any interest prescribed imder section 6601 of such Code on such 
income tax. 
(b) PRESIDENTIALLY DECLARED DISASTER AREA.—For purposes 
of subsection (a), the term "Presidentially declared disaster area" 
means, with respect to any individual, any area which the President 
has determined during 1997 warrants assistance by the Federal 
Government under the Robert T. Stafford Disaster Relief and Emer-
gency Assistance Act. 
(c) INDIVIDUAL.—For purposes of this section, the term "individ-
ual" shall not include any estate or trust. 
(d) EFFECTIVE DATE.—This section shall apply to disasters 
declared after December 31, 1996. 
Subtitle C—Provisions Relating to 
Employment Taxes 
SEC. 921. CLARIFICATION OF STANDARD TO BE USED IN DETERMINING 
EMPLOYMENT TAX STATUS OF SECURITIES BROKERS. 
(a) IN GENERAL.—In determining for purposes of the Internal 
Revenue Code of 1986 whether a registered representative of a 
securities broker-dealer is an employee (as defined in section 3121(d) 
of the Internal Revenue Code of 1986), no weight shall be given 
to instructions fi*om the service recipient which are imposed only 
in compliance with investor protection standards imposed by the 
Federal Government, any State government, or a governing body 
pursuant to a delegation by a Federal or State agency. 
(b) EFFECTIVE DATE.—Subsection (a) shall apply to services 
performed after December 31, 1997. 
SEC. 922. CLARIFICATION OF EXEMPTION FROM SELF-EMPLOYMENT 
TAX FOR CERTAIN TERMINATION PAYMENTS RECEIVED 
BY FORMER INSURANCE SALESMEN. 
(a) INTERNAL REVENUE CoDE.—Section 1402 (relating to defini-
tions) is amended by adding at the end the following new subsection: 
"(k) CODIFICATION OF TREATMENT OF CERTAIN TERMINATION 
PAYMENTS RECEIVED BY FORMER INSURANCE SALESMEN.—Nothing 
in subsection (a) shall be construed as including in the net earnings 
Effective date. 
26 use 7508A 
note. 
26 use 3121 
note. 
I l l STAT. 880 
PUBLIC LAW 105-34—AUG. 5, 1997 
from self-emplojmient of an individual any amount received during 
the taxable year from an insurance company on account of services 
performed by such individual as an insurance salesman for such 
company if— 
"(1) such amount is received after termination of such 
individual's agreement to perform such services for such com-
pany, 
"(2) such individual performs no services for such company 
after such termination and before the close of such taxable 
year, 
"(3) such individual enters into a covenant not to compete 
against such company which applies to at least the 1-year 
period beginning on the date of such termination, and 
"(4) the amount of such payment— 
"(A) depends primarily on policies sold by or credited 
to the account of such individual during the last year 
of such agreement or the extent to which such policies 
remain in force for some period after such termination, 
or both, and 
"(B) does not depend to any extent on length of service 
or overall earnings from services performed for such com-
p£iny (without regard to whether eligibility for payment 
depends on length of service).". 
(b) SOCIAL SECURITY ACT.—Section 211 of the Social Security 
42 use 411. 
Act is amended by adding at the end the following new subsection: 
"Codification of Treatment of Certain Termination Pajnnents 
Received by Former Insurance Salesmen 
"(j) Nothing in subsection (a) shall be construed as including 
in the net earnings from self-employment of an individual any 
amount received during the taxable year from an insurance com-
pany on account of services performed by such individual as an 
insurance salesman for such company if— 
"(1) such amount is received after termination of such 
individual's agreement to perform such services for such com-
pany, 
"(2) such individual performs no services for such company 
after such termination and before the close of such taxable 
year, 
"(3) such individual enters into a covenant not to compete 
against such company which applies to at least the l-yesir 
period beginning on the date of such termination, and 
"(4) the amount of such payment— 
"(A) depends primarily on policies sold by or credited 
to the account of such individual during the last year 
of such agreement or the extent to which such policies 
remain in force for some period after such termination, 
or both, and 
"(B) does not depend to any extent on length of service 
or overall earnings from services performed for such com-
pany (without regard to whether eligibility for payment 
depends on length of service).". 
26 use 1402 
(c) EFFECTIVE DATE.—The amendments made by this section 
note. 
shall apply to payments after December 31, 1997. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 881 
Subtitle D—Provisions Relating to Small 
Businesses 
SEC. 931. WAIVER OF PENALTY THROUGH JUNE 30, 1998, ON SMALL 
BUSINESSES FAILING TO MAKE ELECTRONIC FUND 
TRANSFERS OF TAXES. 
No penalty shall be imposed under the Internal Revenue Code 
26 USC 6302 
of 1986 solely by reason of a failure by a person to use the electronic note. 
fund transfer system established under section 6302(h) of such 
Code if— 
(1) such person is a member of a class of taxpayers first 
required to use such system on or after July 1, 1997, and 
(2) such failure occurs before July 1,1998. 
SEC. 932. CLARIFICATION OF TREATMENT OF HOME OFFICE USE FOR 
ADMINISTRATIVE AND MANAGEMENT ACTIVITIES. 
(a) IN GENERAL.—Paragraph (1) of section 280A(c) is amended 
by adding at the end the following new sentence: "For purposes 
of subparagraph (A), the term 'principal place of business' includes 
a place of business which is used by the taxpayer for the administra-
tive or management activities of any trade or business of the 
taxpayer if there is no other fixed location of such trade or business 
where the taxpayer conducts substsuitial administrative or manage-
ment activities of such trade or business.". 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
26 use 280A 
shall apply to taxable years beginning after December 31, 1998. note. 
SEC. 
933. 
AVERAGING 
OF 
FARM 
INCOME 
OVER 
3 
YEARS. 
(a) IN GENERAL.—Subchapter Q of chapter 1 (relating to 
readjustment of tax between years and special limitations) is 
amended by adding the following new part: 
"PART I—INCOME AVERAGING 
"Sec. 1301. Averaging of farm income. 
"SEC. 1301. AVERAGING OF FARM INCOME. 
"(a) IN GENERAL.—At the election of an individual engaged 
in a farming business, the tax imposed by section 1 for such taxable 
year shall be equal to the sum of— 
"(1) a tax computed under such section on taxable income 
reduced by elected farm income, plus 
"(2) the increase in tax imposed by section 1 which would 
result if taxable income for each of the 3 prior taxable years 
were increased by an amount equal to one-third of the elected 
farm income. 
Any adjustment under this section for any taxable year shall be 
taken into account in applying this section for any subsequent 
taxable year. 
"(b) DEFINITIONS.—In this section— 
"(1) ELECTED FARM INCOME.— 
"(A) IN GENERAL.—The term 'elected farm income' 
means so much of the taxable income for the taxable year— 
"(i) which is attributable to any farming business; 
and 
I l l STAT. 882 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(ii) which is specified in the election under sub-
section (a). 
"(B) TREATMENT OF GAINS.—For purposes of subpara-
graph (A), gain from the sale or other disposition of prop-
erty (other than land) regularly used by the taxpayer in 
such a farming business for a substantial period shall 
be treated as attributable to such a farming business. 
"(2) INDIVIDUAL.—The term 'individual' shall not include 
any estate or trust. 
"(3) FARMING BUSINESS.—The term 'farming business' has 
the meaning given such term by section 263A(e)(4). 
"(c) REGULATIONS.—The Secretary shall prescribe such regula-
tions as may be appropriate to carry out the purposes of this 
section, including regulations regarding— 
"(1) the order and manner in which items of income, gain, 
deduction, or loss, or limitations on tax, shall be taken into 
account in computing the tax imposed by this chapter on the 
income of any taxpayer to whom this section applies for any 
taxable year, and 
"(2) the treatment of any short taxable year.". 
(b) CLERICAL AMENDMENT.—The table of parts for such sub-
chapter Q is amended by inserting before the item relating to 
part II the following new item: 
"Part I. Income averaging.". 
26 use 1301 
(c) EFFECTIVE DATE.—The amendments made by this section 
note. 
shall apply to taxable years beginning after December 31, 1997, 
and before January 1, 2001. 
SEC. 934. INCREASE IN DEDUCTION FOR HEALTH INSURANCE COSTS 
OF SELF-EMPLOYED INDIVIDUALS. 
(a) IN GENERAL.—The table contained in section 162(1)(1)(B) 
is amended to read as follows: 
"For taxable years beginning in 
The applicable percentage is— 
calendar year— 
1997 
40 
1998 and 
1999 
45 
2000 
and 
2001 
50 
2002 
60 
2003 
through 
2005 
80 
2006 
90 
2007 and thereafter 
100.". 
26 use 162 note. 
(b) EFFECTIVE DATE.—The amendment made by this section 
shall apply to taxable years beginning after December 31, 1996. 
SEC. 935. MORATORIUM ON CERTAIN REGULATIONS. 
No temporary or final regulation with respect to the definition 
of a limited partner under section 1402(a)(13) of the Internal Reve-
nue Code of 1986 may be issued or made effective before July 
1, 1998. 
Subtitle E—Brownfields 
SEC. 941. EXPENSING OF ENVIRONMENTAL REMEDIATION COSTS. 
(a) IN GENERAL.—Part VI of subchapter B of chapter 1 is 
amended by adding at the end the following new section: 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 883 
"SEC. 198. EXPENSING OF ENVIRONMENTAL REMEDIATION COSTS. 
"(a) IN GENERAL.—^A taxpayer may elect to treat any qualified 
environmental remediation expenditure which is paid or incurred 
by the taxpayer as an expense which is not chargeable to capital 
account, i ^ y expenditure which is so treated shall be allowed 
as a deduction for the taxable year in which it is paid or incurred. 
"(b) QUALIFIED ENVIRONMENTAL REMEDIATION EXPENDITURE.— 
For purposes of this section— 
"(1) IN GENERAL.—The term 'qualified 
environmental 
remediation expenditure' means any expenditure— 
"(A) which is otherwise chargeable to capital account, 
and 
"(B) which is paid or incurred in connection with the 
abatement or control of hazardous substances at a qualified 
contaminated site. 
"(2) SPECIAL RULE FOR EXPENDITURES FOR DEPRECIABLE 
PROPERTY.—Such term shall not include any expenditure for 
the acquisition of property of a character subject to the allow-
ance for depreciation which is used in connection with the 
abatement or control of hazardous substances at a qualified 
contaminated site; except that the portion of the allowance 
under section 167 for such property which is otherwise allocated 
to such site shall be treated as a qualified environmental 
remediation expenditure. 
"(c) QUALIFIED CONTAMINATED SITE.—For purposes of this sec-
tion— 
"(1) QUALIFIED CONTAMINATED SITE.— 
"(A) IN GENERAL.—The term 'qualified contaminated 
site' means any area— 
"(i) which is held by the taxpayer for use in a 
trade or business or for the production of income, or 
which is property described in section 1221(1) in the 
hands of the taxpayer, 
"(ii) which is within a targeted area, and 
"(iii) at or on which there has been a release (or 
threat of release) or disposal of any hazardous sub-
stance. 
"(B) TAXPAYER MUST RECEIVE STATEMENT FROM STATE 
ENVIRONMENTAL AGENCY.—^An area shall be treated as a 
qualified contaminated site with respect to expenditures 
paid or incurred during any taxable year only if the tax-
payer receives a statement from the appropriate agency 
of the State in which such area is located that such area 
meets the requirements of clauses (ii) and (iii) of subpara-
graph (A). 
"(C) APPROPRIATE STATE AGENCY.—For purposes of 
subparagraph (B), the chief executive officer of each State 
may, in consultation with the Administrator of the Environ-
mental Protection Agency, designate the appropriate State 
environmental agency within 60 days of the date of the 
enactment of this section. If the chief executive officer 
of a State has not designated an appropriate State environ-
mental agency within such 60-day period, the appropriate 
environmental agency for such State shall be designated 
by the Administrator of the Environmental Protection 
Agency. 
"(2) TARGETED AREA.— 
I l l STAT. 884 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(A) IN GENERAL.—The term 'targeted area' means— 
"(i) any population census tract with a poverty 
rate of not less than 20 percent, 
"(ii) a population census tract with a population 
of less than 2,000 i
f
— 
"(I) more than 75 percent of such tract is zoned 
for commercial or industrial use, and 
"(II) such tract is contiguous to 1 or more 
other population census tracts which meet the 
requirement of clause (i) without regard to this 
clause, 
"(iii) any empowerment zone or enterprise commu-
nity (and any supplemental zone designated on Decem-
ber 21,1994), and 
"(iv) any site announced before February 1, 1997, 
as being included as a brownfields pilot project of the 
Environmentfd Protection Agency. 
"(B) 
NATIONAL 
PRIORITIES 
LISTED 
SITES 
NOT 
INCLUDED.—Such term shall not include any site which 
is on, or proposed for, the national priorities list under 
section 105(a)(8XB) of the Comprehensive Environmental 
Response, Compensation, eind Liability Act of 1980 (as 
in effect on the date of the enactment of this section). 
"(C) CERTAIN RULES TO APPLY.—For purposes of this 
paragraph the rules of sections 1392(b)(4) and 1393(a)(9) 
shall apply. 
"(d) HAZARDOUS SUBSTANCE.—For purposes of this section— 
"(1) IN GENERAL.—^The term 'hazardous substance' means— 
"(A) any substance which is a hazardous substance 
as defined in section 101(14) of the Comprehensive Environ-
mental Response, Compensation, and LiabiUty Act of 1980, 
and 
"(B) any substeince which is designated as a hazardous 
substance imder section 102 of such Act. 
"(2) EXCEPTION.—Such term shall not include any sub-
stance with respect to which a removal or remedial action 
is not permitted under section 104 of such Act by reason of 
subsection (a)(3) thereof 
"(e) DEDUCTION RECAPTURED AS ORDINARY INCOME ON SALE, 
ETC.^Solely for purposes of section 1245, in the case of property 
to which a qualified environmental remediation expenditure would 
have been capitalized but for this section— 
"(1) the deduction allowed by this section for such expendi-
ture shall be treated as a deduction for depreciation, and 
"(2) such property (if not otherwise section 1245 property) 
shall be treated as section 1245 property solely for purposes 
of appl3dng section 1245 to such deduction. 
"(f) COORDINATION WITH OTHER PROVISIONS.—Sections 280B 
and 468 shall not apply to amounts which are treated as expenses 
under this section. 
"(g) REGULATIONS.—^The Secretary shall prescribe such regula-
tions as may be necessary or appropriate to carry out the purposes 
of this section. 
"(h) TERMINATION.—^This section shall not apply to expenditures 
paid or incurred after December 31, 2000.". 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 885 
(b) CLERICAL AMENDMENT.—The table of sections for part VI 
of subchapter B of chapter 1 is amended by adding at the end 
the following new item: 
"Sec. 198. Expensing of environmental remediation costs.". 
(c) EFFECTIVE DATE.—The amendments made by this section 26 use 198 note. 
shall apply to expenditures paid or incurred after the date of the 
enactment of this Act, in taxable years ending after such date. 
Subtitle F—Empowerment Zones, Enter-
prise 
Communities, 
Broivnfields, 
and 
Community Development Financial Insti-
tutions 
CHAPTER 1—ADDITIONAL EMPOWERMENT ZONES 
SEC. 951. ADDITIONAL EMPOWERMENT ZONES. 
(a) IN GENERAL.—Paragraph (2) of section 1391(b) (relating 
to designations of empowerment zones and enterprise communities) 
is amended— 
(1) by striking "9" and inserting "11", 
(2) by striking "6" and inserting "8", and 
(3) by striking "750,000" and inserting "1,000,000". 
(b) SPECLU. RULES FOR APPLICATION OF EMPLOYMENT CREDIT.— 
Subsection (b) of section 1396 (relating to empowerment zone 
employment credit) is amended— 
(1) by striking so much of the subsection as precedes the 
table and inserting the following: 
"(b) APPLICABLE PERCENTAGE.—For purposes of this section— 
"(1) IN GENERAL.—Except as provided in paragraph (2), 
the term 'applicable percentage' means the percentage deter-
mined in accordance with the following table:", and 
(2) by adding at the end the following new paragraph: 
"(2) SPECIAL RULE.—With respect to each empowerment 
zone designated pursuant to the amendments made by the 
Taxpayer Relief Act of 1997 to section 1391(b)(2), the following 
table shall apply in lieu of the table in paragraph (1): 
The 
applicable 
"In the case of wages paid or 
percentage 
incurred during calendar year— 
is— 
2000 through 2004 
20 
2005 
15 
2006 
10 
2007 
5.". 
(c) EFFECTIVE DATE.—^The amendments made by this section 26 use 1391 
shall take effect on the date of the enactment of this Act, except note, 
that designations of new empowerment zones made pursuant to 
such amendments shall be made during the 180-day period begin-
ning on the date of the enactment of this Act. No designation 
pursuant to such amendments shall take effect before January 
1,2000. 
Ill STAT. 886 
PUBLIC LAW 105-34—AUG. 5, 1997 
CHAPTER 2—>fEW EMPOWERMENT ZONES 
SEC. 952. DESIGNATION OF NEW EMPOWERMENT ZONES. 
(a) IN GENERAL,—Section 1391 (relating to designation proce-
dure for empowerment zones and enterprise communities) is amend-
ed by adding at the end the following new subsection: 
"(g) ADDITIONAL DESIGNATIONS PERMITTED.— 
"(1) IN GENERAL.—In addition to the areas designated under 
subsection (a), the appropriate Secretaries may designate in 
the 
aggregate 
an 
additional 
20 
nominated 
areas 
as 
empowerment zones under this section, subject to the availabil-
ity of eligible nominated areas. Of that number, not more 
than 15 may be designated in urban areas and not more than 
5 mav be designated in rural areas. 
(2) 
PERIOD 
DESIGNATIONS MAY BE MADE AND TAKE 
EFFECT.—A designation may be made under this subsection 
after the date of the enactment of this subsection and before 
January 1,1999. 
"(3) MODIFICATIONS TO ELIGIBILITY CRITERIA, ETC.— 
"(A) POVERTY RATE REQUIREMENT.— 
"(i) IN GENERAL.—A nominated area shall be 
eligible for designation imder this subsection only if 
the poverty rate for each population census tract within 
the nominated area is not less than 20 percent and 
the poverty rate for at least 90 percent of the popu-
lation census tracts within the nominated area is not 
less than 25 percent. 
"(ii) TREATMENT OF CENSUS TRACTS WITH SMALL 
POPULATIONS.—^A population census tract with a popu-
lation of less than 2,000 shall be treated as having 
a poverty rate of not less than 25 percent if— 
"(I) more than 75 percent of such tract is zoned 
for commercial or industrial use, and 
"(II) such tract is contiguous to 1 or more 
other population census tracts which have a pov-
erty rate of not less than 25 percent (determined 
without regard to this clause), 
"(iii) EXCEPTION FOR DEVELOPABLE SITES.—Clause 
(i) shall not apply to up to 3 noncontiguous parcels 
in a nominated area which may be developed for 
commercial or industrial purposes. The aggregate area 
of noncontiguous peircels to which the preceding sen-
tence applies with respect to any nominated area shall 
not exceed 2,000 acres. 
"(iv) CERTAIN PROVISIONS NOT TO APPLY.—Section 
1392(a)(4) (and so much of paragraphs (1) and (2) 
of section 1392(b) as relate to section 1392(a)(4)) shall 
not apply to an area nominated for designation under 
this subsection. 
"(v) 
SPECIAL RULE FOR RURAL EMPOWERMENT 
ZONE.—The Secretary of Agriculture may designate not 
more than 1 empowerment zone in a rural area without 
regard to clause (i) if such area satisfies emigration 
criteria specified by the Secretary of Agriculture. 
"(B) SIZE LIMITATION.— 
"(i) IN GENERAL.—The 
parcels 
described 
in 
subparagraph (A)(iii) shall not be taken into account 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 887 
in determining whether the requirement of subpara-
graph (A) or (B) of section 1392(a)(3) is met. 
"(ii) SPECIAL RULE FOR RURAL AREAS.—If a popu-
lation census tract (or equivalent division under section 
1392(b)(4)) in a rural area exceeds 1,000 square miles 
or includes a substantial amount of land owned by 
the Federal, State, or local government, the nominated 
area may exclude such excess square mileage or 
govemmentally owned land and the exclusion of that 
area will not be treated as violating the continuous 
boundary requirement of section 1392(a)(3)(B). 
"(C) AGGREGATE POPULATION LIMITATION.—The aggre-
gate population limitation under the last sentence of sub-
section (b)(2) shall not apply to a designation under para-
graph (1)(B). 
"(D) 
PREVIOUSLY DESIGNATED ENTERPRISE COMMU-
NITIES M
A
Y BE INCLUDED.—Subsection (e)(5) shall not apply 
to any enterprise community designated under subsection 
(a) that is also nominated for designation under this sub-
section. 
"(E) INDIAN RESERVATIONS MAY BE NOMINATED.— 
"(i) IN GENERAL.—Section 1393(a)(4) shall not 
apply to an area nominated for designation under this 
subsection. 
"(ii) SPECIAL RULE.—An area in an Indian reserva-
tion shall be treated as nominated by a State and 
a local government if it is nominated by the reservation 
governing body (as determined by the Secretary of 
Interior).". 
(b) EMPLOYMENT CREDIT NOT TO APPLY TO NEW EMPOWERMENT 
ZONES.—Section 1396 (relating to empowerment zone employment 
credit) is amended by adding at the end the following new sub-
section: 
"(e) 
CREDIT NOT TO APPLY TO EMPOWERMENT ZONES DES-
IGNATED UNDER SECTION 1391(g).—This section shall be applied 
without regard to any empowerment zone designated under section 
1391(g).". 
(c) INCREASED EXPENSING UNDER SECTION 179 NOT TO APPLY 
IN DEVELOPABLE SITES.—Section 1397A (relating to increase in 
expensing under section 179) is amended by adding at the end 
the following new subsection: 
"(c) LIMITATION.—For purposes of this section, qualified zone 
property shall not include any property substantially all of the 
use of which is in any parcel described in section 1391(g)(3)(A)(iii).". 
(d) CONFORMING AMENDMENTS.— 
(1) Subsections (e) and (f) of section 1391 are each amended 
by striking "subsection (a)" and inserting "this section". 
(2) Section 1391(c) is amended by striking "this section" 
and inserting "subsection (a)". 
SEC. 953. VOLUME CAP NOT TO APPLY TO ENTERPRISE ZONE FACILITY 
BONDS WITH RESPECT TO NEW EMPOWERMENT ZONES. 
(a) IN GENERAL.—Section 1394 (relating to tax-exempt enter-
prise zone facility bonds) is amended by adding at the end the 
following new subsection: 
"(f) BONDS FOR EMPOWERMENT ZONES DESIGNATED UNDER SEC-
TION 1391(g).— 
I l l STAT. 888 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(1) IN GENERAL.—In the case of a new empowerment zone 
facility bond— 
"(A) such bond shall not be treated as a private activity 
bond for purposes of section 146, and 
"(B) subsection (c) of this section shall not apply. 
"(2) LIMITATION ON AMOUNT OF BONDS.— 
"(A) IN GENERAL.—Paragraph (1) shall apply to a new 
empowerment zone facility bond only if such bond is des-
ignated for purposes of this subsection by the local govern-
ment which nominated the area to which such bond relates. 
"(B) 
LIMITATION ON BONDS DESIGNATED.—The aggre-
gate face amount of bonds which may be designated under 
subparagraph (A) with respect to any empowerment zone 
shall not exceed— 
"(i) $60,000,000 if such zone is in a rural area, 
"(ii) $130,000,000 if such zone is in an urban area 
and the zone has a population of less than 100,000, 
and 
"(iii) $230,000,000 if such zone is in an urban 
area and the zone has a population of at least 100,000. 
"(C) SPECIAL RULES.— 
"(i) COORDINATION WITH LIMITATION IN SUBSECTION 
(c).—Bonds to which paragraph (1) applies shall not 
be taken into account in applying the limitation of 
subsection (c) to other bonds. 
"(ii) 
CURRENT 
REFUNDING 
NOT 
TAKEN 
INTO 
ACCOUNT.—In the case of a refunding (or series of 
refundings) of a bond designated under this paragraph, 
the refunding obligation shall be treated as designated 
under this paragraph (and shall not be teiken into 
account in appl5dng subparagraph (B)) if— 
"(I) the amount of the refunding bond does 
not exceed the outstanding amount of the refunded 
bond, and 
"(II) the refunded bond is redeemed not later 
than 90 days after the date of issuance of the 
refunding bond. 
"(3) NEW EMPOWERMENT ZONE FACILITY BOND.—For pur-
poses of this subsection, the term 'new empowerment zone 
facility bond' means any bond which would be described in 
subsection (a) if only empowerment zones designated under 
section 1391(g) were taken into account under sections 1397B 
and 1397C.". 
26 use 1394 
(b) EFFECTIVE DATE.—^The amendment made by this section 
note. 
shall apply to obligations issued after the date of the enactment 
of this Act. 
SEC. 954. MODIFICATION TO ELIGIBILITY CRITERIA FOR DESIGNATION 
OF FUTURE ENTERPRISE ZONES IN ALASKA OR HAWAH. 
Section 1392 (relating to eligibility criteria) is amended by 
adding at the end the following new subsection: 
"(d) SPECIAL ELIGIBILITY FOR NOMINATED AREAS LOCATED IN 
ALASKA OR HAWAII.—A nominated area in Alaska or Hawaii shall 
be treated as meeting the requirements of paragraphs (2), (3), 
suid (4) of subsection (a) if for each census tract or block group 
within such area 20 percent or more of the families have income 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 889 
which is 50 percent or less of the statewide median family income 
(as determined under section 143).". 
CHAPTER 3—TREATMENT OF EMPOWERMENT ZONES 
AND ENTERPRISE COMMUNITIES 
SEC. 955. MODIFICATIONS TO ENTERPRISE ZONE FACILITY BOND 
RULES FOR ALL EMPOWERMENT ZONES AND ENTER-
PRISE COMMUNITIES. 
(a) MODIFICATIONS RELATING TO ENTERPRISE ZONE BUSINESS.— 
Paragraph (3) of section 1394(b) (defining enterprise zone business) 
is amended to read as follows: 
"(3) ENTERPRISE ZONE BUSINESS.— 
"(A) IN GENERAL.—Except as modified in this para-
graph, the term 'enterprise zone business' has the meaning 
given such term by section 1397B. 
"(B) MODIFICATIONS.—In applying section 1397B for 
purposes of this section— 
"(i) 
BUSINESSES 
IN 
ENTERPRISE 
COMMUNITIES 
ELIGIBLE.—References 
in 
section 
1397B 
to 
empowerment zones shall be treated as including ref-
erences to enterprise communities. 
"(ii) WAIVER OF REQUIREMENTS DURING STARTUP 
PERIOD.—^A business shall not fail to be treated as 
an enterprise zone business during the startup period 
if— 
"(I) as of the beginning of the startup period, 
it is reasonably expected that such business will 
be an enterprise zone business (as defined in sec-
tion 1397B as modified by this paragraph) at the 
end of such period, and 
"(II) such business makes bona fide efforts 
to be such a business. 
"(iii) 
REDUCED 
REQUIREMENTS AFTER 
TESTING 
PERIOD.—^A business shall not fail to be treated as 
an enterprise zone business for any taxable year begin-
ning after the testing period by reason of failing to 
meet any requirement of subsection (b) or (c) of section 
1397B if at least 35 percent of the employees of such 
business 
for 
such 
year 
are 
residents 
of an. 
empowerment zone or an enterprise community. The 
preceding sentence shall not apply to any business 
which is not a qualified business by reason of psira-
graph (1), (4), or (5) of section 1397B(d). 
"(C) 
DEFINITIONS RELATING TO SUBPARAGRAPH (B).— 
For purposes of subparagraph (B)— 
"(i) STARTUP PERIOD.—The term 'startup period' 
means, with respect to any property being provided 
for any business, the period before the first taxable 
year beginning more than 2 years after the later of— 
"(I) the date of issuance of the issue providing 
such property, or 
"(II) the date such property is first placed 
in service after such issuance (or, if earlier, the 
date which is 3 years after the date described 
in subclause (I)). 
I l l STAT. 890 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(ii) TESTING PERIOD.—The term 'testing period' 
means the first 3 taxable years beginning after the 
startup period. 
"(D) PORTIONS OF BUSINESS MAY BE ENTERPRISE ZONE 
BUSINESS.—The term 'enterprise zone business' includes 
any trades or businesses which would qualify as an enter-
prise zone business (determined after the modifications 
of subparagraph (B)) if such trades or businesses were 
separately incorporated.", 
(b) MODIFICATIONS RELATING TO QUALIFIED ZONE PROPERTY.— 
Paragraph (2) of section 1394(b) (defining qualified zone property) 
is amended to read as follows: 
"(2) QUALIFIED ZONE PROPERTY.—The term 'qualified zone 
property' has the meaning given such term by section 1397C; 
except that— 
"(A) the references to empowerment zones shall be 
treated as including references to enterprise communities, 
and 
"(B) section 1397C(a)(2) shall be applied by substituting 
'an amount equal to 15 percent of the adjusted basis' for 
'an amount equal to the adjusted basis'.". 
26 use 1394 
(c) EFFECTIVE DATE.—^The amendments made by this section 
note. 
shall apply to obligations issued after the date of the enactment 
of this Act. 
SEC. 956. MODIFICATIONS TO ENTERPRISE ZONE BUSINESS DEFINI-
TION FOR ALL EMPOWERMENT ZONES AND ENTERPRISE 
COMMUNITIES. 
(a) IN GENERAL.—Section 1397B (defining enterprise zone busi-
ness) is amended— 
(1) by striking "80 percent" in subsections (b)(2) and (c)(1) 
and inserting "50 percent", 
(2) by striking "substantially all" each place it appears 
in subsections (b) and (c) and inserting "a substsintial portion", 
(3) by striking ", and exclusively related to," in subsections 
(b)(4) and (c)(3), 
(4) by adding at the end of subsection (d)(2) the following 
new flush sentence: 
"For purposes of subparagraph (B), the lessor of the property 
may rely on a lessee's certification that such lessee is an enter-
prise zone business.", 
(5) by striking "substantially all" in subsection (d)(3) and 
inserting "at least 50 percent", and 
(6) by adding at the end the following new subsection: 
"(f) 
TREATMENT OF BUSINESSES STRADDLING CENSUS TRACT 
LINES.—For purposes of this section, if— 
"(1) a business entity or proprietorship uses real property 
located within an empowerment zone, 
"(2) the business entity or proprietorship also uses real 
property located outside the empowerment zone, 
"(3) the amount of real property described in paragraph 
(1) is substantial compared to the amount of real property 
described in paragraph (2), and 
"(4) the real property described in paragraph (2) is contig-
uous to part or all of the real property described in paragraph 
(1), 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 891 
then all the services performed by employees, all business activities, 
all tangible property, and all intangible property of the business 
entity or proprietorship that occur in or is located on the real 
property described in paragraphs (1) and (2) shall be treated as 
occurring or situated in an empowerment zone.". 
(b) EFFECTIVE DATES.— 
26 use 1397B 
(1) IN GENERAL.—The amendments made by this section note. 
shsdl apply to taxable years beginning on or after the date 
of the enactment of this Act. 
(2) SPECIAL RULE FOR ENTERPRISE ZONE FACILITY BONDS.— 
For purposes of section 1394(b) of the Internal Revenue Code 
of 1986, the amendments made by this section shall apply 
to obligations issued after the date of the enactment of this 
Act. 
Subtitle G—Other Provisions 
SEC. 961. USE OF ESTIMATES OF SHRINKAGE FOR INVENTORY 
ACCOUNTING. 
(a) IN GENERAL.—Section 471 (relating to general rule for inven-
tories) is amended by redesignating subsection (b) as subsection 
(c) and by inserting after subsection (a) the following new sub-
section: 
"(b) 
ESTIMATES OF INVENTORY 
SHRINKAGE 
PERMITTED.—A 
method of determining inventories shall not be treated as failing 
to clearly reflect income solely because it utilizes estimates of inven-
tory shrinkage that are confirmed by a physical count only after 
the last day of the taxable year if— 
"(1) the taxpayer normally does a physical count of inven-
tories at each location on a regular and consistent basis, and 
"(2) the taxpayer makes proper adjustments to such inven-
tories and to its estimating methods to the extent such esti-
mates are greater than or less than the actual shrinkage.". 
(b) EFFECTIVE DATE.— 
26 use 47i note. 
(1) IN GENERAL.—^The £imendment made by this section 
shall apply to taxable years ending after the date of the enact-
ment of this Act. 
(2) COORDINATION WITH SECTION 481.—In the case of any 
taxpayer permitted by this section to change its method of 
accounting to a permissible method for any taxable year— 
(A) such changes shall be treated as initiated by the 
taxpayer, 
(B) such changes shall be treated as made with the 
consent of the Secretary of the Treasury, and 
(C) the period for taking into account the adjustments 
under section 481 by reason of such change shall be 4 
years. 
SEC. 962. ASSIGNMENT OF WORKMEN'S COMPENSATION LIABILITY 
ELIGIBLE FOR EXCLUSION RELATING TO PERSONAL 
INJURY LIABILITY ASSIGNMENTS. 
(a) IN GENERAL.—Subsection (c) of section 130 (relating to 
certain personal injury liability assignments) is amended— 
(1) by inserting ", or as compensation under any workmen's 
compensation act," after "(whether by suit or agreement) in 
the material preceding paragraph (1), 
I l l STAT. 892 
PUBLIC LAW 105-34—AUG. 5, 1997 
(2) by inserting "or the workmen's compensation claim," 
after "agreement," in paragraph (1), and 
(3) by striking "section 104(a)(2)" in paragraph (2)(D) and 
inserting "paragraph (1) or (2) of section 104(a)". 
26 use 130 note. 
(b) EFFECTIVE DATE.—The amendments made by subsection 
(a) shall apply to claims under workmen's compensation acts filed 
after the date of the enactment of this Act. 
SEC. 963. TAX-EXEMPT STATUS FOR CERTAIN STATE WORKER'S COM-
PENSATION ACT COMPANIES. 
(a) IN GENERAL.—Section 501(c)(27) (relating to membership 
organizations under workmen's compensation acts) is amended by 
adding at the end the following: 
"(B) Any orgsinization (including a mutual insurance com-
pany) if— 
"(i) such organization is created by State law and is 
organized and operated under State law exclusively to— 
"(I) provide workmen's compensation insurance 
which is required by State law or with respect to 
which State law provides significant disincentives if 
such insurance is not purchased by an employer, and 
"(II) provide related coverage which is incidental 
to workmen's compensation insurance, 
"(ii) such organization must provide workmen's com-
pensation insurance to any employer in the State (for 
employees in the State or temporarily assigned out-of-
State) which seeks such insurance and meets other reason-
able requirements relating thereto, 
"(iii)(I) the State makes a financial commitment with 
respect to such organization either by extending the full 
faith and credit of the State to the initial debt of such 
organization or by providing the initial operating capital 
of such organization, and (II) in the case of periods after 
the date of enactment of this subparagraph, the assets 
of such organization revert to the State upon dissolution 
or State law does not permit the dissolution of such 
organization, and 
"(iv) the majority of the board of directors or oversight 
body of such organization are appointed by the chief execu-
tive officer or other executive branch official of the State, 
by the State legislature, or by both.". 
(b) CONFORMING AMENDMENTS.—Section 501(c)(27) is amended 
by inserting "(A)" after "(27)", by redesignating subparagraphs (A), 
(B), and (C) as clauses (i), (ii), and (iii), respectively, and by 
redesignating clauses (i) and (ii) of subparagraphs (B) and (Cf) 
(before redesignation) as subclauses (I) and (II), respectively. 
26 use 501 note. 
(c) EFFECTIVE DATE.—The amendments made by this section 
shall apply to tsixable years beginning after December 31, 1997. 
SEC. 964. ELECTION FOR 1987 PARTNERSHIPS TO CONTINUE EXCEP-
TION FROM TREATMENT OF PUBLICLY TRADED PART-
NERSmPS AS CORPORATIONS. 
(a) IN GENERAL.—Section 7704 is amended by adding at the 
end the following new subsection: 
"(g) EXCEPTION FOR ELECTING I987 PARTNERSHIPS.— 
"(1) IN GENERAL.—Subsection (a) shall not apply to an 
electing 1987 partnership. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 893 
"(2) ELECTING I987 PARTNERSHIP.—For purposes of this sub-
section, the term 'electing 1987 partnership meguis any pubUcly 
traded partnership if— 
"(A) such partnership is an existing partnership (as 
defined in section 10211(cX2) of the Revenue ReconciUation 
Act of 1987), 
"(B) subsection (a) has not applied (and without regard 
to subsection (c)(1) would not have applied) to such partaer-
ship for all prior taxable years beginning after December 
31,1987, and before January 1,1998, and 
"(C) such partnership elects the application of this 
subsection, and consents to the application of the tax 
imposed by paragraph (3), for its first taxable year begin-
ning afl;er December 31,1997. 
A pgirtnership which, but for this sentence, would be treated 
as an electing 1987 partnership shall cease to be so treated 
(and the election under subparagraph (C) shall cease to be 
in effect) as of the 1st day after December 31, 1997, on which 
there has been an addition of a substantial new line of business 
with respect to such partnership. 
"(3) ADDITIONAL TAX ON ELECTING PARTNERSHIPS.— 
"(A) IMPOSITION OF TAX.—There is hereby imposed for 
each taxable year on the income of each electmg 1987 
partnership a tax equal to 3.5 percent of such partnership's 
gross income for the taxable year from the active conduct 
of trades and businesses by the partnership. 
"(B) ADJUSTMENTS IN THE CASE OF TIERED PARTNER-
SHIPS.—For purposes of this paragraph, in the case of a 
partnership which is a partner in another partnership, 
the gross income referred to in subpeiragraph (A) shall 
include the partnership's distributive share of the gross 
income of such other partnership from the active conduct 
of trades and businesses of such other partnership. A simi-
lar rule shall apply in the case of lower-tiered partnerships. 
"(C) TREATMENT OF TAX.—For purposes of this title, 
the tax imposed by this paragraph shall be treated as 
imposed by chapter 1 other than for purposes of determin-
ing the amount of any credit allowable under chapter 1. 
"(4) ELECTION.—^An election and consent under this sub-
section shall apply to the taxable year for which made and 
all subsequent taxable years imless revoked by the partnership. 
Such revocation may be made without the consent of the Sec-
retary, but, once so revoked, may not be reinstated.". 
(b) EFFECTIVE DATE.—^The amendment made by this section 26 use 7704 
shall apply to taxable years beginning after December 31, 1997. note. 
SEC. 965. EXCLUSION FROM UNRELATED BUSINESS TAXABLE INCOME 
FOR CERTAIN SPONSORSHIP PAYMENTS. 
(a) IN GENERAL.—Section 513 (relating to unrelated trade or 
business income) is amended by adding at the end the following 
new subsection: 
"(i) TREATMENT OF CERTAIN SPONSORSHIP PAYMENTS.— 
"(1) IN GENERAL.—^The term 'unrelated trade or business' 
does not include the activity of soUciting and receiving qualified 
sponsorship payments. 
"(2) QUALIFIED SPONSORSHIP PAYMENTS.—For purposes of 
this subsection— 
I l l STAT. 894 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(A) IN GENERAL.—The term 'qualified sponsorship pay-
ment' means any pa3mient made by any person engaged 
in a trade or business with respect to which there is no 
arrangement or expectation that such person will receive 
any substantial return benefit other than the use or 
acknowledgement of the name or logo (or product lines) 
of such person's trade or business in connection with the 
activities of the organization that receives such payment. 
Such a use or acknowledgement does not include advertis-
ing such person's products or services (including messages 
containing qualitative or comparative language, price 
information, or other indications of savings or value, an 
endorsement, or an inducement to purchase, sell, or use 
such products or services). 
"(B) LIMITATIONS.— 
"(i) CONTINGENT PAYMENTS.—The term 'qualified 
sponsorship payment' does not include any payment 
if the amount of such payment is contingent upon 
the level of attendance at one or more events, broadcast 
ratings, or other factors indicating the degree of public 
exposure to one or more events. 
"(ii) SAFE HARBOR DOES NOT APPLY TO PERIODICALS 
AND QUALIFIED CONVENTION AND TRADE SHOW ACTIVI-
TIES.—^The term 'qualified sponsorship payment' does 
not include— 
"(I) any payment which entitles the payor to 
the use or acknowledgement of the name or logo 
(or product lines) of the payor's trade or business 
in regularly scheduled and printed material pub-
lished by or on behalf of the payee organization 
that is not related to and primarily distributed 
in connection with a specific event conducted by 
the payee organization, or 
"(II) any payment made in connection with 
any qualified convention or trade show activity 
(as defined in subsection (d)(3)(B)), 
"(3) ALLOCATION OF PORTIONS OF SINGLE PAYMENT.—For 
purposes of this subsection, to the extent that a portion of 
a payment would (if made as a separate payment) be a qualified 
sponsorship payment, such portion of such payment and the 
other portion of such payment shall be treated as separate 
pajnnents.". 
26 use 513 note. 
(b) EFFECTIVE DATE.—The amendment made by this section 
shall apply to payments solicited or received after December 31, 
1997. 
SEC. 966. ASSOCIATIONS OF HOLDERS OF TIMESHARE INTERESTS TO 
BE TAXED LIKE OTHER HOMEOWNERS ASSOCIATIONS. 
(a) 
TIMESHARE 
ASSOCUTIONS 
INCLUDED 
AS 
HOMEOWNER 
ASSOCIATIONS.— 
(1) IN GENERAL.—Paragraph (1) of section 528(c) (defining 
homeowners association) is amended— 
(A) by striking "or a residential real estate manage-
ment association" and inserting ", a residential real estate 
management association, or a timeshare association" in 
the material preceding subparagraph (A), 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 895 
(B) by striking "or" at the end of clause (i) of subpara-
graph (B), by striking the period at the end of clause 
(ii) of subparagraph (B) and inserting ", or", and by adding 
at the end of subparagraph (B) the following new clause: 
"(iii) owners of timeshare rights to use, or 
timeshare ownership interests in, association property 
in the case of a timeshare association,", and 
(C) by inserting "and, in the case of a timeshare 
association, for activities provided to or on behalf of mem-
bers of the association" before the comma at the end of 
subparagraph (C). 
(2) TIMESHARE ASSOCIATION DEFINED.—Subsection (c) of 
section 528 is amended by redesignating paragraph (4) as para-
graph (5) and by inserting after paragraph (3) the following 
new paragraph: 
"(4) 
TIMESHARE 
ASSOCIATION.—The 
term 
'timeshare 
association' means any organization (other than a condominium 
management association) meeting the requirement of subpara-
graph (A) of paragraph (1) if any member thereof holds a 
timeshare right to use, or a timeshare ownership interest in, 
real property constituting association property.". 
(b) EXEMPT FUNCTION INCOME.—Paragraph (3) of section 528(d) 
is amended by striking "or" at the end of subparagraph (A), by 
striking the period at the end of subparagraph (B) and inserting 
", or", and by adding at the end the following new subparagraph: 
"(C) owners of timeshare rights to use, or timeshare 
ownership interests in, real property in the case of a 
timeshare association.". 
(c) ASSOCIATION PROPERTY.—Paragraph (5) of section 528(c), 
as redesignated by subsection (a)(2), is amended by adding at the 
end the following new flush sentence: 
"In the case of a timeshare association, such term includes 
property in which the timeshare association, or members of 
the association, have rights arising out of recorded easements, 
covenants, or other recorded instruments to use property 
related to the timeshare project.". 
(d) RATE OF TAX.—Subsection (b) of section 528 (relating to 
certain homeowners associations) is amended by inserting before 
the period "(32 percent of such income in the case of a timeshare 
association)". 
(e) EFFECTIVE DATE.—The amendments made by this section 
26 use 528 note. 
shall apply to taxable years beginning after December 31, 1996. 
SEC. 967. ADDITIONAL ADVANCE REFUNDING OF CERTAIN VIRGIN 
ISLAND BONDS. 
Subclause (I) of section 149(d)(3)(A)(i) of the Internal Revenue 
Code of 1986 shall not apply to the second advance refunding 
of any issue of the Virgin Islands which was first advance refunded 
before June 9, 1997, if the debt provisions of the refunding bonds 
are changed to repeal the priority first lien requirement of the 
refunded bonds. 
SEC. 968. NONRECOGNITION OF GAIN ON SALE OF STOCK TO CERTAIN 
FARMERS' COOPERATIVES. 
(a) IN GENERAL.—Section 1042 (relating to sales of stock to 
employee stock ownership plans or certain cooperatives) is amended 
by adding at the end the following new subsection: 
I l l STAT. 896 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(g) APPLICATION OF SECTION TO SALES OF STOCK IN AGRICUL-
TURAL REFINERS AND PROCESSORS TO ELIGIBLE FARM COOPERA-
TIVES.— 
"(1) IN GENERAL.—This section shall apply to the sale of 
stock of a qualified refiner or processor to an eligible farmers' 
cooperative. 
"(2) QUALIFIED REFINER OR PROCESSOR.—For purposes of 
this subsection, the term 'qualified refiner or processor' means 
a domestic corporation— 
"(A) substantially all of the activities of which consist 
of the active conduct of the trade or business of refining 
or processing agricultural or horticultural products, and 
"(B) which, during the 1-year period ending on the 
date of the sale, purchases more than one-half of such 
products to be refined or processed from— 
"(i) farmers who make up the eligible farmers' 
cooperative which is purchasing stock in the corpora-
tion in a transaction to which this subsection is to 
apply, or 
"(ii) such cooperative. 
"(3) ELIGIBLE FARMERS' COOPERATIVE.—For purposes of this 
section, the term 'eligible farmers' cooperative' means an 
organization to which part I of subchapter T applies and which 
is engaged in the marketing of agricultural or horticultural 
products. 
"(4) SPECIAL RULES.—In appljdng this section to a sale 
to which paragraph (1) applies— 
"(A) the eligible farmers' cooperative shall be treated 
in the same manner as a cooperative described in sub-
section (b)(1)(B), 
"(B) subsection (b)(2) shall be applied by substituting 
*100 percent' for '30 percent' each place it appears, 
"(C) the determination as to whether any stock in 
the domestic corporation is a qualified security shall be 
made without regard to whether the stock is an employer 
security or to subsection (c)(1)(A), and 
"(D) paragraphs (2)(D) and (7) of subsection (c) shall 
not apply.". 
26USC1042 
(b) EFFECTIVE DATE.—The amendment made by this section 
note. 
shall apply to sales after December 31,1997. 
SEC. 969. INCREASED DEDUCTIBILITY OF BUSINESS MEAL EXPENSES 
FOR INDIVIDUALS SUBJECT TO FEDERAL HOURS OF 
SERVICE. 
(a) IN GENERAL.—Section 274(n) (relating to only 50 percent 
of meal and entertainment expenses allowed as deduction) is amend-
ed by adding at the end the following new paragraph: 
"(3) SPECIAL RULE FOR INDIVIDUALS SUBJECT TO FEDERAL 
HOURS OF SERVICE.— 
"(A) IN GENERAL.—In the case of any expenses for 
food or beverages consumed while away from home (within 
the meaning of section 162(a)(2)) by an individual during, 
or incident to, the period of duty subject to the hours 
of service limitations of the Department of Transportation, 
paragraph (1) shall be applied by substituting 'the 
applicable percentage' for '50 percent'. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 897 
"(B) APPLICABLE PERCENTAGE.—For purposes of this 
paragraph, the term 'apphcable percentage' means the 
percentage determined under the following table: 
The 
applicable 
T o r taxable years beginning 
percentage 
in calendar year— 
is— 
1998 or 1999 
55 
2000 or 2001 
60 
2002 or 2003 
65 
2004 or 2005 
70 
2006 or 2007 
75 
2008 or thereafter 
80.". 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
26 use 274 note, 
shall apply to taxable years beginning after December 31, 1997. 
SEC. 970. CLARIFICATION OF DE MINIMIS FRINGE BENEFIT RULES 
TO NO-CHARGE EMPLOYEE MEALS. 
(a) IN GENERAL.—Paragraph (2) of section 132(e) (defining de 
minimis fringe) is amended by adding at the end the following 
new sentence: "For purposes of subparagraph (B), an employee 
entitled under section 119 to exclude the value of a meal provided 
at such facility shall be treated as having paid an amount for 
such meal equal to the direct operating costs of the facility attrib-
utable to such meal.". 
(b) EFFECTIVE DATE.—The amendment made by this section 
26 use 132 note, 
shall apply to taxable years beginning after December 31, 1997. 
SEC. 971. EXEMPTION OF THE INCREMENTAL COST OF A CLEAN FUEL 
VEHICLE FROM THE LIMITS ON DEPRECIATION FOR 
VEHICLES. 
(a) IN GENERAL.—Section 280F(a)(l) (relating to limiting depre-
ciation on luxury automobiles) is amended by adding at the end 
the following new subparagraph: 
"(C) SPECIAL RULE FOR CERTAIN CLEAN-FUEL PASSENGER 
AUTOMOBILES.— 
"(i) MODIFIED AUTOMOBILES.—In the case of a pas-
senger automobile which is propelled by a fuel which 
is not a clean-burning fuel and to which is installed 
qualified clean-fuel vehicle property (as defined in sec-
tion 179A(c)(l)(A)) for purposes of permitting such 
vehicle to be propelled by a cleein burning fuel (as 
defined in section 179A(e)(l)), subparagraph (A) ahall 
not apply to the cost of the installed qualified clean 
burning vehicle property. 
"(ii) PURPOSE BUILT PASSENGER VEHICLES.—In the 
case of a purpose built passenger vehicle (as defined 
in section 4001(a)(2)(C)(ii)), each of the annual limita-
tions specified in subparagraph (A) shall be tripled.". 
(b) EFFECTIVE DATE.—The amendments made by this section 26USe280F 
shall apply to property placed in service after the date of enactment note. 
of this Act and before January 1, 2005. 
SEC. 972. TEMPORARY SUSPENSION OF TAXABLE INCOME LIMIT ON 
PERCENTAGE DEPLETION FOR MARGINAL PRODUCTION. 
(a) IN GENERAL.—Paragraph (6) of section 613A(c) is amended 
by adding at the end the following new subparagraph: 
I l l STAT. 898 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(H) TEMPORARY SUSPENSION OF TAXABLE INCOME LIMIT 
WITH RESPECT TO MARGINAL PRODUCTION.—The second sen-
tence of subsection (a) of section 613 shall not apply to 
so much of the allowance for depletion as is determined 
under subparagraph (A) for any taxable year beginning 
after December 31, 1997, and before January 1, 2000.". 
26 use 613A 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
note. 
shall apply to taxable years beginning after December 31, 1997. 
SEC. 973. INCREASE IN STANDARD MILEAGE RATE EXPENSE DEDUC-
TION FOR CHARITABLE USE OF PASSENGER AUTO-
MOBILE. 
(a) IN GENERAL.—Section 170(i) (relating to standard mileage 
rate for use of passenger automobile) is amended to read as follows: 
"(i) STANDARD MILEAGE RATE FOR USE OF PASSENGER AUTO-
MOBILE.—For purposes of computing the deduction under this sec-
tion for use of a passenger automobile, the standard mileage rate 
shall be 14 cents per mile.". 
26 use 170 note. 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31, 1997. 
SEC. 974. CLARIFICATION OF TREATMENT OF CERTAIN RECEIVABLES 
PURCHASED BY COOPERATIVE HOSPITAL SERVICE 
ORGANIZATIONS. 
(a) IN GENERAL.—Subparagraph (A) of section 501(e)(1) is 
amended by inserting "(including the purchase of patron accounts 
receivable on a recourse basis)" after "billing £ind collection". 
26 use 501 note. 
(b) EFFECTIVE DATE.—^The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31, 1996. 
SEC. 975. DEDUCTION IN COMPUTING ADJUSTED GROSS INCOME FOR 
EXPENSES IN CONNECTION WITH SERVICE PERFORMED 
BY CERTAIN OFFICIALS. 
(a) IN GENERAL.—Paragraph (2) of section 62(a) (defining 
adjusted gross income) is amended by adding at the end the follow-
ing new subparagraph: 
"(C) CERTAIN EXPENSES OF OFFICIALS.—The deductions 
allowed by section 162 which consist of expenses paid or 
incurred with respect to services performed by an official 
as an employee of a State or a political subdivision thereof 
in a position compensated in whole or in part on a fee 
basis. . 
26 use 62 note. 
(b) EFFECTIVE DATE.—The amendment made by this section 
shall apply to expenses paid or incurred in taxable years beginning 
after December 31,1986. 
SEC. 976. COMBINED EMPLOYMENT TAX REPORTING DEMONSTRATION 
PROJECT. 
26 use 6103 
(a) IN GENERAL.—The Secretary of the Treasury shall provide 
note. 
for a demonstration project to assess the feasibility and desirability 
of expanding combined Federal and State tax reporting. 
26 use 6103 
(b) DESCRIPTION OF DEMONSTRATION PROJECT.—The demonstra-
J^ote. 
tion project under subsection (a) shall be— 
Montana. 
(1) carried out between the Internal Revenue Service and 
the State of Montana for a period ending with the date which 
is 5 years after the date of the enactment of this Act, 
(2) limited to the reporting of emplo3rment taxes, and 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 899 
(3) limited to the disclosure of the taxpayer identity (as 
defined in section 6103(b)(6) of such Code) and the signature 
of the taxpayer. 
(c) CONFORMING AMENDMENT.—Section 6103(d) is amended by 
adding at the end the following new paragraph: 
"(5) 
DISCLOSURE 
FOR CERTAIN 
COMBINED 
REPORTING 
PROJECT.—The Secretary shall disclose taxpayer identities and 
signatures for purposes of the demonstration project described 
in section 967 of the Taxpayer Relief Act of 1997.". 
SEC. 977. ELECTIVE CARRYBACK OF EXISTING CARRYOVERS OF 26 USC172 note. 
NATIONAL RAILROAD PASSENGER CORPORATION. 
(a) ELECTIVE CARRYBACK.— 
(1) IN GENERAL.—If the National Railroad Passenger Cor-
poration (in this section referred to as the "Corporation")— 
(A) makes £in election under this section for its first 
taxable year ending after September 30,1997, and 
(B) agrees to the conditions specified in paragraph 
(2), 
then the Corporation shall be treated as having made a pay-
ment of the tax imposed by chapter 1 of the Internal Revenue 
Code of 1986 for such first taxable year and the succeeding 
taxable year in an amount (for each such taxable year) equal 
to 50 percent of the amount determined under paragraph (3). 
Each such pa5mient shall be treated as having been made 
by the Corporation on the last day prescribed by law (without 
regard to extensions) for filing its return of tax under chapter 
1 of such Code for the taxable year to which such payment 
relates. 
(2) CONDITIONS.— 
(A) IN GENERAL.—This section shall only apply to the 
Corporation if it agrees (in such manner as the Secretary 
of the Treasury or Ms delegate may prescribe) to— 
(i) except as provided in clause (ii), use any refund 
of the payment described in paragraph (1) (and any 
interest thereon) solely to finance qualified expenses 
of the Corporation, and 
(ii) make the payments to non-Amtrak States as 
described in subsection (c). 
(B) REPAYMENT.— 
(i) IN GENERAL.—The Corporation shall repay to 
the United States any amount not used in accordeince 
with this paragraph and any amount remaining unused 
as of January 1, 2010. 
(ii) SPECIAL RULES.—For purposes of clause (i)— 
(I) no amount shall be treated as remaining 
unused as of Jeinuary 1, 2010, if it is obligated 
as of such date for a qualified expense, and 
(II) the Corporation shall not be treated as 
failing to meet the requirements of clause (i) by 
reason of investing any amount for a temporary 
period. 
(3) AMOUNT.—For purposes of paragraph (1)— 
(A) IN GENERAL.—The amount determined under this 
paragraph shall be the lesser of— 
(i) 35 percent of the Corporation's existing qualified 
carryovers, or 
I l l STAT. 900 
PUBLIC LAW 105-34—AUG. 5, 1997 
(ii) the Corporation's net tax liability for the 
carryback period. 
(B) DOLLAR LIMIT.—Such amount shall not exceed 
$2,323,000,000. 
(b) EXISTING QUALIFIED CARRYOVERS; NET TAX LIABILITY.— 
For purposes of this section— 
(1) EXISTING QUALIFIED CARRYOVERS.—The term "existing 
qualified carryovers" means the aggregate of the amounts which 
are net operating loss carryovers under section 172(b) of the 
Internal Revenue Code of 1986 to the Corporation's first taxable 
year ending after September 30, 1997. 
(2) NET TAX LIABILITY FOR CARRYBACK PERIOD.— 
(A) IN GENERAL.—The Corporation's net tax liability 
for the carryback period is the aggregate of the net tax 
liability of the Corporation's railroad predecessors for tax-
able years in the carryback period. 
(B) NET TAX LIABILITY.—The term "net tax liabihty" 
means, with respect to any taxable year, the amount of 
the tax imposed by chapter 1 of the Internal Revenue 
Code of 1986 (or any corresponding provision of prior law) 
for such taxable year, reduced by the sum of the credits 
allowable against such tax under such Code (or any cor-
responding provision of prior law). 
(C) CARRYBACK PERIOD.—The term "carryback period" 
means the period— 
(i) which begins with the first taxable year of 
any railroad predecessor beginning before January 1, 
1971, for which there is a net tax liability, and 
(ii) which ends with the last taxable year of any 
railroad predecessor beginning before January 1, 1971. 
(3) RAILROAD PREDECESSOR.— 
(A) IN GENERAL.—The term "railroad predecessor" 
means— 
(i) any railroad which entered into a contract under 
section 401 or 404(a) of the Rail Passenger Service 
Act of 1970 relieving the railroad of its entire respon-
sibility for the provision of intercity rail passenger 
service, and 
(ii) any predecessor thereof. 
(B) CONSOLIDATED RETURNS.—If any railroad described 
in subparagraph (A) was a member of an affiliated group 
which filed a consolidated return for any taxable year in 
the carryback period, each member of such group shall 
be treated as a railroad predecessor for such year. 
(c) PAYMENTS TO NON-AMTRAK STATES.— 
(1) IN GENERAL.—^Within 30 days after receipt of any refund 
of any payment described in subsection (a)(1), the Corporation 
shall pay to each non-Amtrak State an amount equal to 1 
percent of the amount of such refund. 
(2) USE OF PAYMENT.—Each non-Amtrak State shall use 
the payment described in paragraph (1) (and any interest 
thereon) solely to finance qualified expenses of the State. 
(3) REPAYMENT.—A non-Amtrak State shall pay to the 
United States— 
(A) any portion of the payment received by the State 
under paragraph (1) (and any interest thereon) which is 
used for a purpose other than to finance qualified expenses 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 901 
of the State or which remains unused as of Jsinuary 1, 
2010, or 
(B) if such State ceases to be a non-Amtrak State, 
the portion of such payment (and any interest thereon) 
remaining as of the date of the cessation. 
Rules similar to the rules of subsection (a)(2)(B) shall apply 
for purposes of this paragraph. 
(d) TAX CONSEQUENCES.— 
(1) REDUCTION IN CARRYOVERS.—If the Corporation elects 
the application of this section, the Corporation's existing quali-
fied carryovers shall be reduced by an amount equal to the 
amount determined under subsection (a)(3) divided by 0.35. 
(2) REDUCTION IN TAX PAID BY RAILROAD PREDECESSORS.— 
(A) IN GENERAL.—The Secretary of the Treasury or 
his delegate shall appropriately adjust the tax account 
of each railroad predecessor to reduce the net tax liability 
of such predecessor for taxable years beginning in the 
carryback period which is offset by reason of the application 
of this section. 
(B) FIFO ORDERING RULE.—The Secretary shall make 
the adjustments under subparagraph (A) first for the earU-
est year in the carryback period and then for each subse-
quent year in such period. 
(C) No EFFECT ON OTHER TAXPAYERS.—In no event 
shall any taxpayer other than the Corporation be allowed 
a refund or credit by reason of this section. 
(D) WAIVER OF LIMITATIONS.—If the adjustment under 
subparagraph (A) is barred by the operation of any law 
or rule of law, such law or rule of law shall be waived 
solely for purposes of making such adjustment. 
(3) TAX TREATMENT OF EXPENDITURES.—With respect to 
any payment by the Corporation of qualified expenses described 
in subsection (e)(lXA) during any taxable year from the amount 
of any refund of the pajonent described in subsection (a)(1)— 
(A) no deduction shall be allowed to the Corporation 
with respect to any amoiuit paid or incurred which is 
attributable to such £imount, and 
(B) the basis of any property shall be reduced by the 
portion of the cost of such property which is attributable 
to such amount. 
(4) PAYMENTS TO A NON-AMTRAK STATE.—NO deduction shall 
be allowed to the Corporation under chapter 1 of the Internal 
Revenue Code of 1986 for any payment to a non-Amtrak State 
required under subsection (aX2)(A)(ii). 
(e) DEFINITIONS.—For purposes of this section— 
(1) QUALIFIED EXPENSES.—The term "qualified expenses" 
means expenses incurred for— 
(A) in the case of the Corporation— 
(i) the acquisition of equipment, rolling stock, and 
other capital improvements, the upgradiag of mainte-
nance facilities, and the maintenance of existing equip-
ment, in intercity passenger rail service, and 
(ii) the pajnoient of interest and principal on obliga-
tions incurred for such acquisition, upgrading, and 
maintenance, and 
(B) in the case of a non-Amtrak State— 
I l l STAT. 902 
PUBLIC LAW 105-34—AUG. 5, 1997 
(i) the acquisition of equipment, rolling stock, and 
other capital improvements, the upgrading of mainte-
nance facilities, and the maintenance of existing equip-
ment, in intercity passenger rail service, 
(ii) the acquisition of equipment, rolling stock, and 
other capital improvements, the upgrading of mainte-
nance facilities, and the maintenance of existing equip-
ment, in intercity bus service, 
(iii) the purchase of intercity passenger rail serv-
ices from the Corporation, and 
(iv) the pa)mient of interest and principal on 
obligations incurred for such acquisition, upgrading, 
maintenance, and purchase. 
In the case of a non-Amtrak State which provides its own 
intercity passenger rail service on the date of the enactment 
of this paragraph, subparagraph (B) shall be applied by only 
taking into account clauses (i) and (iv). 
(2) NON-AMTRAK STATE.—The term "non-Amtrak State" 
means, with respect to any payment, any State which does 
not receive intercity passenger rail service from the Corporation 
at any time during the period beginning on the date of the 
enactment of this Act and ending on the date of the payment, 
(f) AUTHORIZING REFORM REQUIRED.— 
(1) IN GENERAL.—The Secretary of the Treasury shall not 
make payment of any refund of any pa5mient described in 
subsection (a)(1) earlier than the date of the enactment of 
Federal legislation, other than legislation included in this sec-
tion, which is enacted after July 29, 1997, and which authorizes 
reforms of the National Railroad Passenger Corporation. 
(2) No INTEREST.—Notwithstanding any other provision of 
law, if the payment of any refund is delayed by reason of 
paragraph (1), no interest shall accrue with respect to such 
pa3mient prior to the 45th day following the date of the enact-
ment of Federal legislation described in paragraph (1). 
(3) ESTIMATE OF REVENUE.—For purposes of estimating 
revenues under budget reconciliation, the impact of this section 
on Federal revenues shall be determined without regard to 
this subsection. 
Subtitle H—Extension of Duty-Free Treat-
ment Under Generalized System of Pref-
erences 
SEC. 981. GENERALIZED SYSTEM OF PREFERENCES. 
(a) EXTENSION OF DUTY-FREE TREATMENT UNDER SYSTEM.— 
Section 505 of the Trade Act of 1974 (19 U.S.C. 2465) is amended 
by striking "May 31,1997" and inserting "June 30,1998". 
19 use 465 note. 
(b) RETROACTIVE APPLICATION FOR CERTAIN LIQUIDATIONS AND 
RELIQUIDATIONS .— 
(1) IN GENERAL.—Notwithstanding section 514 of the Tariff 
Act of 1930 or any other provision of law £ind subject to para-
graph (2), the entry— 
(A) of £iny article to which duty-free treatment under 
title V of the Trade Act of 1974 would have applied if 
the entry had been made on May 31, 1997, and 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 903 
(B) that was made after May 31, 1997, and before 
the date of the enactment of this Act, 
shall be liquidated or reliquidated as free of duty, and the 
Secretary of the Treasury shall refund any duty paid with 
respect to such entry. As used in this subsection, the term 
"entry" includes a withdrawal from warehouse for consumption. 
(2) REQUESTS.—Liquidation or reliquidation may be made 
under paragraph (1) with respect to an entry only if a request 
therefor is filed with the Customs Service, within 180 days 
after the date of the enactment of this Act, that contains 
sufficient information to enable the Customs Service— 
(A) to locate the entry; or 
(B) to reconstruct the entry if it cannot be located. 
TITLE X—REVENUES 
Subtitle A—Financial Products 
SEC. 1001. CONSTRUCTIVE SALES TREATMENT FOR APPRECIATED 
FINANCIAL POSITIONS. 
(a) IN GENERAL.—Part IV of subchapter P of chapter 1 is 
amended by adding at the end the following new section: 
"SEC. 1259. CONSTRUCTIVE SALES TREATMENT FOR APPRECIATED 
FINANCIAL POSITIONS. 
"(a) IN GENERAL.—If there is a constructive sale of an appre-
ciated financial position— 
"(1) the taxpayer shall recognize gain as if such position 
were sold, assigned, or otherwise terminated at its fair market 
value on the date of such constructive sale (and any gain 
shall be taken into account for the taxable year which includes 
such date), and 
"(2) for purposes of applying this title for periods after 
the constructive sale— 
"(A) proper adjustment shall be made in the amount 
of any gain or loss subsequently realized with respect to 
such position for any gain taken into account by reason 
of paragraph (1), and 
"(B) the holding period of such position shall be deter-
mined as if such position were originally acquired on the 
date of such constructive sale. 
"(b) APPRECIATED FINANCIAL POSITION.—For purposes of this 
section— 
"(1) IN GENERAL.—Except as provided in paragraph (2), 
the term 'appreciated financial position' meeuis any position 
vidth respect to any stock, debt instrument, or partnership 
interest if there would be gain were such position sold, assigned, 
or otherwise terminated at its fair market value. 
"(2) EXCEPTIONS.—The term 'appreciated financial position' 
shall not include— 
"(A) any position with respect to debt if— 
"(i) the debt unconditionally entitles the holder 
to receive a specified principal amount, 
"(ii) the interest payments (or other 
similar 
amounts) with respect to such debt meet the require-
ments of clause (i) of section 860G(a)(l)(B), and 
I l l STAT. 904 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(iii) such debt is not convertible (directly or 
indirectly) into stock of the issuer or any related per-
son, and 
"(B) any position which is marked to market under 
any provision of this title or the regulations thereunder. 
"(3) POSITION.—The term 'position' means an interest, 
including a futures or forward contract, short sale, or option. 
"(c) CONSTRUCTIVE SALE.—For purposes of this section— 
"(1) IN GENERAL.—A taxpayer shall be treated as having 
made a constructive sale of an appreciated financial position 
if the taxpayer (or a related person)— 
"(A) enters into a short sale of the same or substan-
tially identical property, 
"(B) enters into an offsetting notional principal contract 
with respect to the same or substantially identical property, 
"(C) enters into a futures or forward contract to deliver 
the same or substantially identical property, 
"(D) in the case of an appreciated financial position 
that is a short sale or a contract described in subparagraph 
(B) or (C) with respect to any property, acquires the same 
or substantially identical property, or 
"(E) to the extent prescribed by the Secretary in regula-
tions, enters into 1 or more other transactions (or acquires 
1 or more positions) that have substantially the same effect 
as a transaction described in any of the preceding subpara-
graphs. 
"(2) EXCEPTION FOR SALES OF NONPUBLICLY TRADED PROP-
ERTY.—The term 'constructive sale' shall not include any con-
tract for sale of any stock, debt instrument, or partnership 
interest which is not a marketable security (as defined in 
section 453(f)) if the contract settles within 1 year after the 
date such contract is entered into. 
"(3) EXCEPTION FOR CERTAIN CLOSED TRANSACTIONS.— 
"(A) IN GENERAL.—In applying this section, there shall 
be disregarded any transaction (which would otherwise 
be treated as a constructive sale) during the taxable year 
if— 
"(i) such transaction is closed before the end of 
the 30th day after the close of such taxable year, 
"(ii) the tsixpayer holds the appreciated financial 
position throughout the 60-day period beginning on 
the date such transaction is closed, and 
"(iii) at no time during such 60-day period is the 
taxpayer's risk of loss with respect to such position 
reduced by reason of a circumstance which would be 
described in section 246(c)(4) if references to stock 
included references to such position. 
"(B) 
TREATMENT OF POSITIONS WHICH ARE REESTAB-
LISHED.—If— 
"(i) a transaction, which would otherwise be treat-
ed as a constructive sale of an appreciated financial 
position, is closed during the taxable year or during 
the 30 days thereafter, and 
"(ii) another substantially similar transaction is 
entered into during the 60-day period beginning on 
the date the trsmsaction referred to in clause (i) is 
closed— 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 905 
"(I) which also would otherwise be treated as 
a constructive sale of such position, 
"(11) which is closed before the 30th day after 
the close of the taxable year in which the trans-
action referred to in clause (i) occurs, and 
"(III) which meets the requirements of clauses 
(ii) and (iii) of subparagraph (A), 
the transaction referred to in clause (ii) shall be disregarded 
for purposes of determining whether the requirements of 
subparagraph (A)(iii) are met with respect to the trans-
action described in clause (i). 
"(4) RELATED PERSON.—A person is related to another per-
son with respect to a transaction if— 
"(A) the relationship is described in section 267(b) or 
707(b), and 
"(B) such transaction is entered into with a view toward 
avoiding the purposes of this section. 
"(d) OTHER DEFINITIONS.—For purposes of this section— 
"(1) FORWARD CONTRACT.—The term 'forward contract' 
means a contract to deliver a substsmtially fixed amount of 
property for a substantially fixed price. 
"(2) OFFSETTING NOTIONAL PRINCIPAL CONTRACT.—The term 
'offsetting notional principal contract' mesins, with respect to 
any property, an agreement which includes— 
"(A) a requirement to pay (or provide credit for) all 
or substantially all of the investment yield (including 
appreciation) on such property for a specified period, and 
"(B) a right to be reimbursed for (or receive credit 
for) all or substantially all of any decline in the value 
of such property. 
"(e) SPECIAL RULES.— 
"(1) TREATMENT OF SUBSEQUENT SALE OF POSITION WHICH 
WAS DEEMED SOLD.—If— 
"(A) there is a constructive sale of any appreciated 
financial position, 
"(B) such position is subsequently disposed of, and 
"(C) at the time of such disposition, the transaction 
resulting in the constructive sale of such position is open 
with respect to the taxpayer or any related person, 
solely for purposes of determining whether the taxpayer has 
entered into a constructive sale of any other appreciated finan-
cial position held by the taxpayer, the taxpayer shall be treated 
as entering into such transaction immediately after such dis-
position. For purposes of the preceding sentence, an assignment 
or other termination shall be treated as a disposition. 
"(2) 
CERTAIN TRUST INSTRUMENTS TREATED AS STOCK.— 
For purposes of this section, an interest in a trust which is 
actively traded (within the meaning of section 1092(d)(1)) shall 
be treated as stock unless substantially all (by value) of the 
property held by the trust is debt described in sulbsection 
(b)(2)(A). 
"(3) MULTIPLE POSITIONS IN PROPERTY.—If a taxpayer holds 
multiple positions in property, the determination of whether 
a specific transaction is a constructive sale and, if so, which 
appreciated financial position is deemed sold shall be made 
in the same manner as actual sales. 
39-194 O - 97 - 30 : QL 3 Part 1 
I l l STAT. 906 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(f) REGULATIONS.—The Secretary shall prescribe such regula-
tions as may be necessary or appropriate to carry out the purposes 
of this section.", 
(b) ELECTION OF MARK TO MARKET FOR DEALERS IN COMMOD-
ITIES AND FOR TRADERS IN SECURITIES OR COMMODITIES.—Section 
475 (relating to mark to market accounting method for dealers 
in securities) is amended by redesignating subsection (e) as sub-
section (g) and by inserting after subsection (d) the following new 
subsections: 
"(e) ELECTION OF MARK TO MARKET FOR DEALERS IN COMMOD-
ITIES.— 
"(1) IN GENERAL.—In the case of a dealer in commodities 
who elects the application of this subsection, this section shall 
apply to commodities held by such dealer in the same manner 
as this section applies to securities held by a dealer in securi-
ties. 
"(2) COMMODITY,—For purposes of this subsection and sub-
section if), the term 'commodity' means— 
"(A) any commodity which is actively traded (within 
the meaning of section 1092(d)(1)); 
"(B) any notional principal contract with respect to 
any commodity described in subparagraph (A); 
"(C) any evidence of an interest in, or a derivative 
instrument in, any commodity described in subparagraph 
(A) or (B), including any option, forward contract, futures 
contract, short position, and any similar instrument in 
such a commodity; and 
"(D) any position which— 
"(i) is not a commodity described in subparagraph 
(A),(B),or(C), 
"(ii) is a hedge with respect to such a commodity, 
and 
"(iii) is clearly identified in the taxpayer's records 
as being described in this subparagraph before the 
close of the day on which it was acquired or entered 
into (or such other time as the Secretary may by regu-
lations prescribe). 
"(3) ELECTION.—^An election under this subsection may be 
made without the consent of the Secretary. Such an election, 
once made, shall apply to the taxable year for which made 
and all subsequent taxable years unless revoked with the con-
sent of the Secretary. 
"(f) ELECTION OF MARK TO MARKET FOR TRADERS IN SECURITIES 
OR COMMODITIES.— 
"(1) TRADERS IN SECURITIES.— 
"(A) IN GENERAL.—In the case of a person who is 
engaged in a trade or business as a trader in securities 
and who elects to have this paragraph apply to such trade 
or business— 
"(i) such person shall recognize gain or loss on 
any security held in connection with such trade or 
business at the close of any taxable year as if such 
security were sold for its fair market value on the 
last business day of such taxable year, and 
"(ii) any gain or loss shall be taken into account 
for such taxable year. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 907 
Proper adjustment shall be made in the amount of any 
gain or loss subsequently realized for gain or loss taken 
into account under the preceding sentence. The Secretary 
may provide by regulations for the application of this 
subparagraph at times other than the times provided in 
this subparagraph. 
"(B) EXCEPTION.—Subparagraph (A) shall not apply 
to any security— 
"(i) which is established to the satisfaction of the 
Secretary as having no connection to the activities 
of such person as a trader, and 
"(ii) which is clearly identified in such person's 
records as being described in clause (i) before the close 
of the day on which it was acquired, originated, or 
entered into (or such other time as the Secretary may 
by regulations prescribe). 
If a security ceases to be described in clause (i) at gmy 
time after it was identified as such under clause (ii), 
subparagraph (A) shall apply to any changes in value of 
the security occurring after the cessation. 
"(C) COORDINATION WITH SECTION 1259.—Any security 
to which subparagraph (A) applies and which was acquired 
in the normal course of the taxpayer's activities as a trader 
in securities shall not be taken into account in applying 
section 1259 to any position to which subparagraph (A) 
does not apply. 
"(D) OTHER RULES TO APPLY.—Rules similar to 
the 
rules of subsections (b)(4) and (d) shall apply to securities 
held by a person in any trade or business with respect 
to which an election under this paragraph is in effect. 
"(2) TRADERS IN COMMODITIES.—In the case of a person 
who is engaged in a trade or business as a trader in commod-
ities and who elects to have this paragraph apply to such 
trade or business, paragraph (1) shall apply to commodities 
held by such trader in connection with such trade or business 
in the same manner as paragraph (1) applies to securities 
held by a trader in securities. 
"(3) ELECTION.—The elections under paragraphs (1) and 
(2) may be made separately for each trade or business and 
without the consent of the Secretary. Such an election, once 
made, shall apply to the teixable year for which made and 
all subsequent taxable years unless revoked with the consent 
of the Secretary.". 
(c) CLERICAL AMENDMENT.—The table of sections for part IV 
of subchapter P of chapter 1 is amended by adding at the end 
the following new item: 
"Sec. 1259. Constructive sales treatment for appreciated financial posi-
tions.". 
(d) EFFECTIVE DATES.— 
26 use 475 note. 
(1) IN GENERAL.—Except as otherwise provided in this sub-
section, the amendments made by this section shall apply to 
any constructive sale after June 8,1997. 
(2) EXCEPTION FOR SALES OF POSITIONS, ETC. HELD BEFORE 
JUNE 9, 1997.—If— 
(A) before June 9, 1997, the taxpayer entered into 
any transaction which is a constructive sale of any appre-
ciated financial position, and 
I l l STAT. 908 
PUBLIC LAW 105-34—AUG. 5, 1997 
(B) before the close of the 30-day period beginning 
on the date of the enactment of this Act or before such 
later date as may be specified by the Secretary of the 
Treasury, such transaction £ind position are clearly identi-
fied in the taxpayer's records as offsetting, 
such transaction and position shall not be taken into account 
in determining whether any other constructive sale after June 
8, 1997, has occurred. The preceding sentence shall cease to 
apply as of the date such transaction is closed or the taxpayer 
ceases to hold such position. 
(3) SPECIAL RULE.—In the case of a decedent dying after 
June 8,1997, if— 
(A) there was a constructive sale on or before such 
date of £iny appreciated financial position, 
(B) the transaction resulting in such constructive sale 
of such position remains open (with respect to the decedent 
or any related person)— 
(i) for not less than 2 years after the date of 
such transaction (whether such period is before or after 
June 8, 1997), and 
(ii) at any time during the 3-year period ending 
on the date of the decedent's death, and 
(C) such transaction is not closed within the 30-day 
period beginning on the date of the enactment of this 
Act, 
then, for purposes of such Code, such position (and the trems-
action resulting in such constructive sale) shall be treated 
as property constituting rights to receive £in item of income 
in respect of a decedent under section 691 of such Code. Section 
1014(c) of such Code shall not apply to so much of such posi-
tion's or properties value (as included in the decedent's estate 
for purposes of chapter 11 of such Code) as exceeds its fair 
market value as of the date such transaction is closed. 
(4) ELECTION OF MARK TO MARKET BY SECURITIES TRADERS 
AND TRADERS AND DEALERS IN COMMODITIES.— 
(A) IN GENERAL.—The amendments made by subsection 
(b) shall apply to taxable years ending after the date of 
the enactment of this Act. 
(B) 4-YEAR SPREAD OF ADJUSTMENTS.—In t h e Case of 
a taxpayer who elects under subsection (e) or (f) of section 
475 of the Internal Revenue Code of 1986 (as added by 
this section) to change its method of accounting for the 
taxable year which includes the date of the enactment 
of this Act— 
(i) any identification required under such sub-
section with respect to securities and commodities held 
on the date of the enactment of this Act shall be 
treated as timely made if made on or before the 30th 
day after such date of enactment, and 
(ii) the net amount of the adjustments required 
to be taken into account by the taxpayer under section 
481 of such Code shall be taken into account ratably 
over the 4-taxable year period beginning with such 
first taxable year. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 909 
SEC. 1002. LIMITATION ON EXCEPTION FOR INVESTMENT COMPANIES 
UNDER SECTION 351. 
(a) IN GENERAL.—Paragraph (1) of section 351(e) (relating to 
exceptions) is amended by adding at the end the following: "For 
purposes of the preceding sentence, the determination of whether 
a company is an investment company shall be made— 
"(A) by taking into account all stock and securities 
held by the company, and 
"(B) by treating as stock and securities— 
"(i) money, 
"(ii) stocks and other equity interests in a corpora-
tion, evidences of indebtedness, options, forward or 
futures contracts, notional principal contracts and 
derivatives, 
"(iii) any foreign currency, 
"(iv) any interest in a real estate investment trust, 
a common trust fund, a regulated investment company, 
a publicly-traded partnership (as defined in section 
7704(b)) or any other equity interest (other than in 
a corporation) which pursuant to its terms or any 
other arrangement is readily convertible into, or 
exchangeable for, any asset described in any preceding 
clause, this clause or clause (v) or (viii), 
"(v) except to the extent provided in regulations 
prescribed by the Secretary, any interest in a precious 
metal, unless such metal is used or held in the active 
conduct of a trade or business after the contribution, 
"(vi) except as otherwise provided in regulations 
prescribed by the Secretary, interests in any entity 
if substantially all of the assets of such entity consist 
(directly or indirectly) of any assets described in any 
preceding clause or clause (viii), 
"(vii) to the extent provided in regulations pre-
scribed by the Secretary, any interest in siny entity 
not described in clause (vi), but only to the extent 
of the value of such interest that is attributable to 
assets listed in clauses (i) through (v) or clause (viii), 
or 
"(viii) any other asset specified in regulations pre-
scribed by the Secretary. 
The Secretary may prescribe regulations that, under appro-
priate circumstances, treat any asset described in clauses (i) 
through (v) as not so listed.". 
(b) EFFECTIVE DATE.— 
26 use 351 note. 
(1) IN GENERAL.—The amendment made by subsection (a) 
shall apply to transfers after June 8, 1997, in taxable years 
ending after such date. 
(2) BINDING CONTRACTS.—The amendment made by sub-
section (a) shall not apply to any transfer pursuant to a written 
binding contract in effect on June 8, 1997, and at all times 
thereafter before such transfer if such contract provides for 
the transfer of a fixed amount of property. 
SEC. 1003. GAINS AND LOSSES FROM CERTAIN TERMINATIONS WITH 
RESPECT TO PROPERTY. 
(
a
) 
APPLICATION 
OF 
CAPITAL 
TREATMENT 
TO 
PROPERTY OTHER 
THAN 
PERSONAL 
PROPERTY.— 
Ill STAT. 910 
PUBLIC LAW 105-34—AUG. 5, 1997 
(1) IN GENERAL,—Paragraph (1) of section 1234A (relating 
to gains and losses from certain terminations) is amended 
by striking "personal property (as defined in section 1092(d)(1))" 
and inserting "property". 
26 use 1234A 
(2) EFFECTIVE DATE.—The amendment made by paragraph 
i^ote. 
(1) shall apply to terminations more than 30 days after the 
date of the enactment of this Act. 
(b) TREATMENT OF SHORT SALES OF PROPERTY WHICH BECOMES 
SUBSTANTIALLY WORTHLESS.— 
(1) IN GENERAL.—Section 1233 is amended by adding at 
the end the following new subsection: 
"(h) SHORT SALES OF PROPERTY WHICH BECOMES SUBSTAN-
TIALLY WORTHLESS.— 
"(1) IN GENERAL.—If— 
"(A) the taxpayer enters into a short sale of property, 
and 
"(B) such property becomes substantially worthless, 
the taxpayer shall recognize gain in the same manner as if 
the short sale were closed when the property becomes substan-
tially worthless. To the extent provided in regulations pre-
scribed by the Secretary, the preceding sentence also shall 
apply with respect to any option with respect to property, 
any offsetting notional principal contract with respect to prop-
erty, any futures or forward contract to deliver any property, 
and any other similar transaction. 
"(2) 
STATUTE 
OF LIMITATIONS.—If 
property 
becomes 
substantially worthless during a taxable year and any short 
sale of such property remains open at the time such property 
becomes substantially worthless, then— 
"(A) the statutory period for the assessment of any 
deficiency attributable to any part of the gain on such 
transaction shall not expire before the earlier of— 
"(i) the date which is 3 years after the date the 
Secretary is notified by the taxpayer (in such manner 
as the Secretary may by regulations prescribe) of the 
substantial worthlessness of such property, or 
"(ii) the date which is 6 years after the date the 
return for such taxable year is filed, and 
"(B) such deficiency may be assessed before the date 
applicable under subparagraph (A) notwithstanding the 
provisions of any other law or rule of law which would 
otherwise prevent such assessment.". 
26 use 1233 
(2) EFFECTIVE DATE.—The amendment made by paragraph 
"lote. 
(1) shall apply to property which becomes substantially worth-
less after the date of the enactment of this Act. 
(c) APPLICATION OF CAPITAL TREATMENT, ETC. TO OBLIGATIONS 
ISSUED BY NATURAL PERSONS.— 
(1) IN GENERAL.—Section 1271(b) is amended to read as 
follows: 
"(b) EXCEPTION FOR CERTAIN OBLIGATIONS.— 
"(1) IN GENERAL.—This section shall not apply to— 
"(A) any obligation issued by a natural person before 
June 9,1997, and 
"(B) any obligation issued before July 2, 1982, by an 
issuer which is not a corporation and is not a government 
or political subdivision thereof. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 911 
"(2) TERMINATION.—Paragraph (1) shall not apply to any 
obligation purchased (within the meaning of section 1272(d)(1)) 
after June 8,1997.". 
(2) EFFECTIVE DATE.—The amendment made by paragraph 
26 use 1271 
(1) shall apply to sales, exchanges, and retirements after the note. 
date of enactment of this Act. 
SEC. 1004. DETERMINATION OF ORIGINAL ISSUE DISCOUNT WHERE 
POOLED DEBT OBLIGATIONS SUBJECT TO ACCELERA-
TION. 
(a) IN GENERAL.—Subparagraph (C) of section 1272(a)(6) (relat-
ing to debt instruments to which the paragraph applies) is amended 
by striking "or" at the end of clause (i), by striking the period 
at the end of clause (ii) and inserting ", or", and by inserting 
after clause (ii) the following: 
"(iii) anv pool of debt instruments the yield on 
which may be affected by reason of prepa3mients (or 
to the extent provided in regulations, by reason of 
other events). 
To the extent provided in regulations prescribed by the 
Secretary, in the case of a small business engaged in the 
trade or business of selling tangible personal property at 
retail, clause (iii) shall not apply to debt instruments 
incurred in the ordinary course of such trade or business 
while held by such business.". 
(b) EFFECTIVE DATES.— 
26 use 1272 
(1) IN GENERAL.—The amendment made by this section note, 
shall apply to taxable years beginning after the date of the 
enactment of this Act. 
(2) CHANGE IN METHOD OF ACCOUNTING.—In the case of 
any taxpayer required by this section to change its method 
of accounting for its first taxable year beginning after the 
date of the enactment of this Act— 
(A) such change shall be treated as initiated by the 
taxpayer, 
(B) such cheinge shall be treated as made with the 
consent of the Secretary of the Treasury, and 
(C) the net amount of the adjustments required to 
be taken into account by the taxpayer under section 481 
of the Internal Revenue Code of 1986 shall be taken into 
account ratably over the 4-taxable year period beginning 
with such first taxable year. 
SEC. 1005. DENIAL OF INTEREST DEDUCTIONS ON CERTAIN DEBT 
INSTRUMENTS. 
(a) IN GENERAL.—Section 163 (relating to deduction for 
interest), as amended by title V, is amended by redesignating 
subsection (1) as subsection (m) and by inserting after subsection 
(k) the following new subsection: 
"(1) 
DISALLOWANCE 
OF 
DEDUCTION 
ON 
CERTAIN 
DEBT 
INSTRUMENTS OF CORPORATIONS.— 
"(1) IN GENERAL.—No deduction shall be allowed under 
this chapter for any interest paid or accrued on a disqualified 
debt instrument. 
"(2) DISQUALIFIED DEBT INSTRUMENT.—For purposes of this 
subsection, the term 'disqualified debt instrument' means any 
indebtedness of a corporation which is payable in equity of 
the issuer or a related party. 
I l l STAT. 912 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(3) SPECIAL RULES FOR AMOUNTS PAYABLE IN EQUITY.— 
For purposes of paragraph (2), indebtedness shall be treated 
as payable in equity of the issuer or a related party only 
if— 
"(A) a substantial amount of the principal or interest 
is required to be paid or converted, or at the option of 
the issuer or a related party is payable in, or convertible 
into, such equity, 
"(B) a substantial amount of the principal or interest 
is required to be determined, or at the option of the issuer 
or a related party is determined, by reference to the value 
of such equity, or 
"(C) the indebtedness is part of an arrangement which 
is reasonably expected to result in a transaction described 
in subparagraph (A) or (B). 
For purposes of this paragraph, principal or interest shall be 
treated as required to be so paid, converted, or determined 
if it may be required at the option of the holder or a related 
party and there is a substantial certainty the option will be 
exercised. 
"(4) RELATED PARTY.—For purposes of this subsection, a 
person is a related party with respect to another person if 
such person bears a relationship to such other person described 
in section 267(b) or 707(b). 
"(5) REGULATIONS.—The Secretary shall prescribe such 
regulations as may be necessary or appropriate to carry out 
the purposes of this subsection, including regulations prevent-
ing avoidance of this subsection through the use of an issuer 
other than a corporation.". 
26 use 163 note. 
(b) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendment made by this section 
shall apply to disqualified debt instruments issued after June 
8,1997. 
(2) TRANSITION RULE.—The amendment made by this sec-
tion shall not apply to any instrument issued after June 8, 
1997, if such instrument is— 
(A) issued pursuant to a written agreement which was 
binding on such date and at all times thereafter, 
(B) described in a ruling request submitted to the 
Internal Revenue Service on or before such date, or 
(C) described on or before such date in a public 
announcement or in a filing with the Securities and 
Exchange Commission required solely by reason of the 
issuance. 
Subtitle B—Corporate Organizations and 
Reorganizations 
SEC. 1011. TAX TREATMENT OF CERTAIN EXTRAORDINARY DIVIDENDS. 
(a) TREATMENT OF EXTRAORDINARY DIVIDENDS IN EXCESS OF 
BASIS.—Paragraph (2) of section 1059(a) (relating to corporate 
shareholder's recognition of gain attributable to nontaxed portion 
of extraordinary dividends) is amended to read as follows: 
"(2) AMOUNTS IN EXCESS OF BASIS.—If the nontaxed portion 
of such dividends exceeds such basis, such excess shall be 
treated as gain from the sale or exchange of such stock for 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 913 
the taxable year in which the extraordinary dividend is 
received.". 
(b) TREATMENT OF REDEMPTIONS WHERE OPTIONS INVOLVED.— 
Paragraph (1) of section 1059(e) (relating to treatment of partial 
liquidations Eind non-pro rata redemptions) is amended to read 
as follows: 
"(1) TREATMENT OF PARTIAL LIQUIDATIONS AND CERTAIN 
REDEMPTIONS.—Except as otherwise provided in regulations— 
"(A) REDEMPTIONS.—In the case of any redemption of 
stock— 
"(i) which is part of a partial liquidation (within 
the meaning of section 302(e)) of the redeeming cor-
poration, 
"(ii) which is not pro rata as to all shareholders, 
or 
"(iii) which would not have been treated (in whole 
or in part) as a dividend if any options had not been 
taken into account under section 318(a)(4), 
any amount treated as a dividend with respect to such 
redemption shall be treated as an extraordinary dividend 
to which paragraphs (1) and (2) of subsection (a) apply 
without regard to the period the taxpayer held such stock. 
In the case of a redemption described in clause (iii), only 
the basis in the stock redeemed shall be taken into account 
under subsection (a). 
"(B) REORGANIZATIONS, ETC.—An exchange described 
in section 356 which is treated as a dividend shall be 
treated as a redemption of stock for purposes of applying 
subparagraph (A).". 
(c) TIME FOR REDUCTION.—Paragraph (1) of section 1059(d) 
is amended to read as follows: 
"(1) TIME FOR REDUCTION.—Any reduction in basis under 
subsection (a)(1) shall be treated as occurring at the beginning 
of the ex-dividend date of the extraordinary dividend to which 
the reduction relates.". 
(d) EFFECTIVE DATES.— 
26 use 1059 
(1) IN GENERAL,—The amendments made by this section note. 
shall apply to distributions after May 3, 1995. 
(2) TRANSITION RULE.—The amendments made by this sec-
tion shall not apply to any distribution made pursuant to 
the terms of— 
(A) a written binding contract in effect on May 3, 
1995, and at all times thereafter before such distribution, 
or 
(B) a tender offer outstanding on May 3, 1995. 
(3) CERTAIN DIVIDENDS NOT PURSUANT TO CERTAIN REDEMP-
TIONS.—In determining whether the amendment made by sub-
section (a) applies to any extraordinary dividend other than 
a dividend treated as an extraordinary dividend under section 
1059(e)(1) of the Internal Revenue Code of 1986 (as amended 
by this Act), paragraphs (1) and (2) shall be applied by 
substituting "September 13, 1995" for "May 3, 1995". 
I l l STAT. 914 
PUBLIC LAW 105-34—AUG. 5, 1997 
SEC. 1012. APPLICATION OF SECTION 355 TO DISTRIBUTIONS IN 
CONNECTION WITH ACQUISITIONS AND TO INTRAGROUP 
TRANSACTIONS. 
(a) DISTRIBUTIONS IN CONNECTION WITH ACQUISITIONS.—Sec-
tion 355 (relating to distributions of stock and securities of a con-
trolled corporation) is amended by adding at the end the following 
new subsection: 
"(e) RECOGNITION OF GAIN ON CERTAIN DISTRIBUTIONS OF STOCK 
OR SECURITIES IN CONNECTION WITH ACQUISITIONS.— 
"(1) GENERAL RULE.—If there is a distribution to which 
this subsection applies, any stock or securities in the controlled 
corporation shall not be treated as qualified property for pur-
poses of subsection (c)(2) of this section or section 361(c)(2). 
"(2) DISTRIBUTIONS TO WHICH SUBSECTION APPLIES.— 
"(A) IN GENERAL.—This subsection shall apply to any 
distribution— 
"(i) to which this section (or so much of section 
356 as relates to this section) applies, and 
"(ii) which is part of a plan (or series of related 
transactions) pursuant to which 1 or more persons 
acquire directly or indirectly stock representing a 50-
percent or greater interest in the distributing corpora-
tion or any controlled corporation. 
"(B) 
PLAN PRESUMED TO EXIST IN CERTAIN CASES.— 
If 1 or more persons acquire directly or indirectly stock 
representing a 50-percent or greater interest in the distrib-
uting corporation or any controlled corporation during the 
4-year period beginning on the date which is 2 years before 
the date of the distribution, such acquisition shall be treat-
ed as pursuant to a plan described in subparagraph (A)(ii) 
unless it is established that the distribution and the 
acquisition are not pursuant to a plan or series of related 
transactions. 
"(C) CERTAIN PLANS DISREGARDED.—A plan (or series 
of related transactions) shall not be treated as described 
in subparagraph (A)(ii) if, immediately after the completion 
of such plan or transactions, the distributing corporation 
and all controlled corporations are members of a single 
affiliated group (as defined in section 1504 without regard 
to subsection (b) thereof). 
"(D) COORDINATION WITH SUBSECTION (d).—This sub-
section shall not apply to £iny distribution to which sub-
section (d) applies. 
"(3) SPECIAL RULES RELATING TO ACQUISITIONS.— 
"(A) 
CERTAIN 
ACQUISITIONS 
NOT 
TAKEN 
INTO 
ACCOUNT.—Except as provided in regulations, the following 
acquisitions shall not be treated as described in paragraph 
(2)(A)(ii): 
"(i) The acquisition of stock in any controlled cor-
poration by the distributing corporation. 
"(ii) Tlie acquisition by a person of stock in any 
controlled corporation by reason of holding stock or 
securities in the distributing corporation. 
"(iii) The acquisition by a person of stock in any 
successor corporation of the distributing corporation 
or any controlled corporation by reason of holding stock 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 915 
or securities in such distributing or controlled corpora-
tion. 
"(iv) The acquisition of stock in a corporation if 
shareholders 
owning 
directly or indirectly 
stock 
possessing— 
"(I) more than 50 percent of the total combined 
voting power of all classes of stock entitled to 
vote, and 
"(11) more than 50 percent of the total value 
of shares of all classes of stock, 
in the distributing corporation or any controlled cor-
poration before such acquisition own directly or 
indirectly stock possessing such vote and value in such 
distributing or controlled 
corporation 
after 
such 
acquisition. 
This subparagraph shall not apply to any acquisition if 
the stock held before the acquisition was acquired pursuant 
to a plan (or series of related transactions) described in 
paragraph (2)(A)(ii). 
"(B) ASSET ACQUISITIONS.—Except as provided in regu-
lations, for purposes of this subsection, if the assets of 
the distributing corporation or any controlled corporation 
are acquired by a successor corporation in a transaction 
described in subparagraph (A), (C), or (D) of section 
368(a)(1) or any other transaction specified in regulations 
by the Secretary, the shareholders (immediately before the 
acquisition) of the corporation acquiring such assets shall 
be treated as acquiring stock in the corporation from which 
the assets were acquired. 
"(4) DEFINITION AND SPECIAL RULES.—For purposes of this 
subsection— 
"(A) 50-PERCENT OR GREATER INTEREST.—The term '50-
percent or greater interest' has the meaning given such 
term by subsection (d)(4). 
"(B) DISTRIBUTIONS IN TITLE ii OR SIMILAR CASE.— 
Paragraph (1) shall not apply to any distribution made 
in a title 11 or similar case (as defined in section 368(a)(3)). 
"(C) AGGREGATION AND ATTRIBUTION RULES.— 
"(i) AGGREGATION.—The rules of paragraph (7)(A) 
of subsection (d) shall apply. 
"(ii) ATTRIBUTION.—Section 318(a)(2) shall apply 
in determining whether a person holds stock or securi-
ties in any corporation. Except as provided in regula-
tions, section 318(a)(2)(C) shall be applied without 
regard to the phrase '50 percent or more in value' 
for purposes of the preceding sentence. 
"(D) SUCCESSORS AND PREDECESSORS.—For purposes 
of this subsection, any reference to a controlled corporation 
or a distributing corporation shall include a reference to 
any predecessor or successor of such corporation. 
"(E) STATUTE OF LIMITATIONS.—If there is a distribu-
tion to which paragraph (1) applies— 
"(i) the statutory period for the assessment of any 
deficiency attributable to any part of the gain recog-
nized luider this subsection by reason of such distribu-
tion shall not expire before the expiration of 3 years 
from the date the Secretary is notified by the taxpayer 
I l l STAT. 916 
PUBLIC LAW 105-34—AUG. 5, 1997 
(in such m£inner as the Secretary may by regulations 
prescribe) that such distribution occurred, and 
"(ii) such deficiency may be assessed before the 
expiration of such 3-year period notwithstanding the 
provisions of any other law or rule of law which would 
otherwise prevent such assessment. 
"(5) REGULATIONS.—The Secretary shall prescribe such 
regulations as may be necessary to carry out the purposes 
of this subsection, including regulations— 
"(A) providing for the application of this subsection 
where there is more than 1 controlled corporation, 
"(B) treating 2 or more distributions as 1 distribution 
where necessary to prevent the avoidance of such purposes, 
and 
"(C) providing for the application of rules similar to 
the rules of subsection (d)(6) where appropriate for pur-
poses of paragraph (2)(B).". 
(b) SPECIAL RULES FOR CERTAIN INTRAGROUP TRANSACTIONS.— 
(1) SECTION 355 NOT TO APPLY.—Section 355, as amended 
by subsection (a), is amended by adding at the end the following 
new subsection: 
"(f) SECTION NOT TO APPLY TO CERTAIN INTRAGROUP DISTRIBU-
TIO^fS.—Except as provided in regulations, this section (or so much 
of section 356 as relates to this section) shall not apply to the 
distribution of stock from 1 member of an affiliated group (as 
defined in section 1504(a)) to another member of such group if 
such distribution is part of a plan (or series of related transactions) 
described in subsection (e)(2)(A)(ii) (determined after the application 
of subsection (e)).". 
(2) ADJUSTMENTS TO BASIS.—Section 358 (relating to basis 
to distributees) is amended by adding at the end the following 
new subsection: 
"(g) ADJUSTMENTS IN INTRAGROUP TRANSACTIONS INVOLVING 
SECTION 355.—In the case of a distribution to which section 355 
(or so much of section 356 as relates to section 355) applies and 
which involves the distribution of stock from 1 member of an 
affiliated group (as defined in section 1504(a) without regard to 
subsection (b) thereof) to another member of such group, the Sec-
retary may, notwithstanding any other provision of this section, 
provide adjustments to the adjusted basis of any stock which— 
"(1) is in a corporation which is a member of such group, 
and 
"(2) is held by Einother member of such group, 
to appropriately reflect the proper treatment of such distribution.". 
(c) DETERMINATION OF CONTROL IN CERTAIN DIVISIVE TRANS-
ACTIONS.— 
(1) SECTION 351 TRANSACTIONS.—Section 351(c) (relating 
to special rule) is amended to read as follows: 
"(c) SPECIAL RULES WHERE DISTRIBUTION TO SHAREHOLDERS.— 
In determining control for purposes of this section— 
"(1) the fact that any corporate transferor distributes part 
or all of the stock in the corporation which it receives in 
the exchange to its shareholders shall not be taken into account, 
and 
"(2) if the requirements of section 355 are met with respect 
to such distribution, the shareholders shall be treated as in 
control of such corporation immediately after the exchange 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 917 
if the shareholders own (immediately after the distribution) 
stock possessing— 
"(A) more than 50 percent of the total combined voting 
power of all classes of stock of such corporation entitled 
to vote, and 
"(B) more than 50 percent of the total value of shares 
of all classes of stock of such corporation.". 
(2) D REORGANIZATIONS.—Section 368(a)(2)(H) (relating to 
special rule for determining whether certain transactions are 
qualified under paragraph (1)(D)) is amended to read as follows: 
"(H) SPECIAL RULES FOR DETERMINING WHETHER CER-
TAIN TRANSACTIONS ARE QUALIFIED UNDER PARAGRAPH 
(i)(D).—For purposes of determining whether a transaction 
qualifies under paragraph (1)(D)— 
"(i) in the case of a transaction with respect to 
which the requirements of subparagraphs (A) and (B) 
of section 354(b)(1) are met, the term 'control' has 
the meaning given such term by section 304(c), and 
"(ii) in the case of a transaction with respect to 
which the requirements of section 355 are met, the 
shareholders described in paragraph (1)(D) shall be 
treated as having control of the corporation to which 
the assets are transferred if such shareholders own 
(immediately after the distribution) stock possessing— 
"(I) more than 50 percent of the total combined 
voting power of all classes of stock of such corpora-
tion entitled to vote, and 
"(II) more than 50 percent of the total value 
of shares of all classes of stock of such corpora-
tion.", 
(d) EFFECTIVE DATES.— 
26 use 351 note. 
(1) SECTION 355 RULES.—The amendments made by sub-
sections (a) and (b) shall apply to distributions after April 
16, 1997, pursuant to a plan (or series of related transactions) 
which 
involves 
an 
acquisition 
described 
in 
section 
355(e)(2)(A)(ii) of the Internal Revenue Code of 1986 occurring 
after such date. 
(2) DIVISIVE TRANSACTIONS.—The amendments made by 
subsection (c) shall apply to transfers after the date of the 
enactment of this Act. 
(3) TRANSITION RULE.—The amendments made by this sec-
tion shall not apply to any distribution pursuant to a plan 
(or series of related tr£insactions) which involves an acquisition 
described in section 355(e)(2)(A)(ii) of the Internal Revenue 
Code of 1986 (or, in the case of the amendments made by 
subsection (c), any transfer) occurring after April 16, 1997, 
if such acquisition or, transfer is— 
(A) made pursuant to an agreement which was binding 
on such date and at all times thereafter, 
(B) described in a ruling request submitted to the 
Internal Revenue Service on or before such date, or 
(C) described on or before such date in a public 
announcement or in a filing with the Securities and 
Exchange Commission required solely by reason of the 
acquisition or transfer. 
This paragraph shall not apply to any agreement, ruling 
request, or public announcement or filing unless it identifies 
I l l STAT. 918 
PUBLIC LAW 105-34—AUG. 5, 1997 
the acquirer of the distributing corporation or any controlled 
corporation, or the transferee, whichever is applicable. 
SEC. 1013. TAX TREATMENT OF REDEMPTIONS INVOLVING RELATED 
CORPORATIONS. 
(a) STOCK PURCHASES BY RELATED CORPORATIONS.—The last 
sentence of section 304(a)(1) (relating to acquisition by related cor-
poration other than subsidiary) is amended to read as follows: 
"To the extent that such distribution is treated as a distribution 
to which section 301 applies, the transferor and the acquiring 
corporation shall be treated in the same manner as if the transferor 
had transferred the stock so acquired to the acquiring corporation 
in exchange for stock of the acquiring corporation in a transaction 
to which section 351(a) applies, and then the acquiring corporation 
had redeemed the stock it was treated as issuing in such trans-
action.". 
(b) COORDINATION WITH SECTION 1059.—Clause (iii) of section 
1059(e)(1)(A), as amended by this title, is amended to read as 
follows: 
"(iii) which would not have been treated (in whole 
or in part) as a dividend if— 
"(I) any options had not been taken into 
account under section 318(a)(4), or 
"(II) section 304(a) had not apphed,". 
(c) SPECIAL RULE FOR ACQUISITIONS BY FOREIGN CORPORA-
TIONS.—Section 304(b) (relating to special rules for application of 
subsection (a)) is amended by adding at the end the following 
new paragraph: 
"(5) ACQUISITIONS BY FOREIGN CORPORATIONS.— 
"(A) IN GENERAL.—In the case of any acquisition to 
which subsection (a) applies in which the acquiring corpora-
! 
tion is a foreign corporation, the only earnings and profits 
taken into account under paragraph (2)(A) shall be those 
earnings Eind profits— 
"(i) which are attributable (under regulations pre-
scribed by the Secretary) to stock of the acquiring 
corporation owned (within the meaning of section 
958(a)) by a corporation or individual which is— 
"(I) a United States shareholder (within the 
meaning of section 951(b)) of the acquiring corpora-
tion, £ind 
"(II) the transferor or a person who bears a 
relationship to the transferor described in section 
267(b) or 707(b), and 
"(ii) which were accumulated during the period 
or periods such stock was owned by such person while 
the acquiring corporation was a controlled foreign cor-
poration. 
"(B) APPLICATION OF SECTION 1248.—For purposes of 
subparagraph (A), the rules of section 1248(d) shall apply 
except to the extent otherwise provided by the Secretary. 
"(C) REGULATIONS.—The Secretary shall prescribe such 
regulations as are appropriate to carry out the purposes 
of this paragraph.". 
26 use 304 note. 
(d) EFFECTIVE DATE.— 
(1) IN GENERAL,—The amendments made by this section 
shall apply to distributions and acquisitions after June 8, 1997. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 919 
(2) TRANSITION RULE.—The amendments made by this sec-
tion shall not apply to any distribution or acquisition after 
June 8, 1997, if such distribution or acquisition is— 
(A) made pursusuit to a written agreement which was 
binding on such date and at all times thereafter, 
(B) described in a ruling request submitted to the 
Internal Revenue Service on or before such date, or 
(C) described in a public Einnouncement or filing with 
the Securities and Exchange Commission on or before such 
date. 
SEC. 1014. CERTAIN PREFERRED STOCK TREATED AS BOOT. 
(a) SECTION 351.—Section 351 (relating to transfer to corpora-
tion controlled by transferor) is amended by redesignating sub-
section (g) as subsection (h) and by inserting after subsection (f) 
the following new subsection: 
"(g) 
NONQUALIFIED 
PREFERRED 
STOCK 
NOT TREATED 
AS 
STOCK.— 
"(1) IN GENERAL.—In the case of a person who transfers 
property to a corporation and receives nonqualified preferred 
stock— 
"(A) subsection (a) shall not apply to such transferor, 
"(B) subsection (b) shall apply to such transferor, and 
"(C) such nonqualified preferred stock shall be treated 
as other property for purposes of appl3dng subsection (b). 
"(2) NONQUALIFIED PREFERRED STOCK.—For purposes of 
paragraph (1)— 
"(A) IN GENERAL.—The term 'nonqualified preferred 
stock' means preferred stock if— 
"(i) the holder of such stock has the right to require 
the issuer or a related person to redeem or purchase 
the stock, 
"(ii) the issuer or a related person is required 
to redeem or purchase such stock, 
"(iii) the issuer or a related person has the right 
to redeem or purchase the stock and, as of the issue 
date, it is more likely than not that such right will 
be exercised, or 
"(iv) the dividend rate on such stock varies in 
whole or in part (directly or indirectly) with reference 
to interest rates, commodity prices, or other similar 
indices. 
"(B) LIMITATIONS.—Clauses (i), (ii), and (iii) of subpara-
graph (A) shall apply only if the right or obligation referred 
to therein may be exercised within the 20-year period begin-
ning on the issue date of such stock and such right or 
obligation is not subject to a contingency which, as of 
the issue date, makes remote the likelihood of the redemp-
tion or purchase. 
"(C) 
EXCEPTIONS FOR CERTAIN RIGHTS OR OBLIGA-
TIONS.— 
"(i) IN GENERAL.—^A right or obligation shall not 
be treated as described in clause (i), (ii), or (iii) of 
subparagraph (A) if— 
"(I) it may be exercised only upon the death, 
disability, or mental incompetency of the holder, 
or 
I l l STAT. 920 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(II) in the case of a right or obhgation to 
redeem or purchase stock transferred in connection 
with the performance of services for the issuer 
or a related person (and which represents reason-
able compensation), it may be exercised only upon 
the holder's separation from service from the issuer 
or a related person. 
"(ii) EXCEPTION.—Clause (i)(I) shall not apply if 
the stock relinquished in the exchange, or the stock 
acquired in the exchange is in— 
"(I) a corporation if any class of stock in such 
corporation or a related party is readily tradable 
on an established securities market or otherwise, 
or 
"(II) any other corporation if such exchange 
is part of a transaction or series of transactions 
in which such corporation is to become a corpora-
tion described in subclause (I). 
"(3) DEFINITIONS.—For purposes of this subsection— 
"(A) PREFERRED STOCK.—The term 'preferred stock' 
means stock which is limited and preferred as to dividends 
and does not participate in corporate growth to any signifi-
cant extent. 
"(B) RELATED PERSON.—^A person shall be treated as 
related to another person if they bear a relationship to 
such other person described in section 267(b) or 707(b). 
"(4) REGULATIONS.—The Secretary may prescribe such 
regulations as may be necessary or appropriate to carry out 
the purposes of this subsection and sections 354(a)(2)(C), 
355(a)(3)(D), and 356(e). The Secretary may also prescribe regu-
lations, consistent with the treatment under this subsection 
and such sections, for the treatment of nonqualified preferred 
stock under other provisions of this title.". 
(b) SECTION 354.—Paragraph (2) of section 354(a) (relating 
to exchanges of stock and securities in certain reorganizations) 
is amended by adding at the end the following new subparagraph: 
"(C) NONQUALIFIED PREFERRED STOCK.— 
"(i) IN GENERAL.—Nonqualified preferred stock (as 
defined in section 351(g)(2)) received in exchange for 
stock other than nonqualified preferred stock (as so 
defined) shall not be treated as stock or securities, 
"(ii) 
RECAPITALIZATIONS OF FAMILY-OWNED COR-
PORATIONS.— 
"(I) IN GENERAL.—Clause (i) shall not apply 
in the case of a recapitalization under section 
368(a)(1)(E) of a family-owned corporation. 
"(II) FAMILY-OWNED CORPORATION.—For pur-
poses of this clause, except as provided in regula-
tions, the term 'family-owned corporation' means 
any corporation which is described in clause (i) 
of section 447(d)(2)(C) throughout the 8-year period 
beginning on the date which is 5 years before 
the date of the recapitalization. For purposes of 
the preceding sentence, stock shall not be treated 
as owned by a family member during any period 
described in section 355(d)(6)(B).". 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 921 
(c) SECTION 355.—Paragraph (3) of section 355(a) is amended 
by adding at the end the following new subparagraph: 
"(D) NONQUALIFIED PREFERRED STOCK.—Nonqualified 
preferred stock (as defined in section 351(g)(2)) received 
in a distribution with respect to stock other thsm non-
qualified preferred stock (as so defined) shall not be treated 
as stock or securities.". 
(d) SECTION 356.—Section 356 is amended by redesignating 
subsections (e) and (f) as subsections (f) and (g), respectively, and 
by inserting after subsection (d) the following new subsection: 
"(e) NONQUALIFIED PREFERRED STOCK TREATED AS OTHER PROP-
ERTY.—For purposes of this section— 
"(1) IN GENERAL.—Except as provided in paragraph (2), 
the term 'other property' includes nonqualified preferred stock 
(as defined in section 351(g)(2)). 
"(2) EXCEPTION.—The term 'other property does not include 
nonqualified preferred stock (as so defined) to the extent that, 
under section 354 or 355, such preferred stock would be per-
mitted to be received without the recognition of gain.". 
(e) CONFORMING AMENDMENTS.— 
(1) Subparagraph (B) of section 354(a)(2) and subparagraph 
(C) of section 355(a)(3)(C) are each amended by inserting 
"(including nonqualified preferred stock, as defined in section 
351(g)(2))'^after "stock". 
(2) Subparagraph (A) of section 354(a)(3) and subparagraph 
(A) of section 355(a)(4) are each amended by inserting "non-
qualified preferred stock and" after "including". 
(3) Section 1036 is amended by redesignating subsection 
(b) as subsection (c) and by inserting after subsection (a) the 
following new subsection: 
"(b) 
NONQUALIFIED 
PREFERRED 
STOCK 
NOT TREATED 
AS 
STOCK.—For purposes of this section, nonqualified preferred stock 
(as defined in section 351(g)(2)) shall be treated as property other 
than stock.". 
(f) EFFECTIVE DATE.— 
26 use 351 note. 
(1) IN GENERAL.—The amendments made by this section 
shall apply to transactions after June 8, 1997. 
(2) TRANSITION RITT.E.—The amendments made by this sec-
tion shall not apply to any transaction after June 8, 1997, 
if such transaction is— 
(A) made pursuant to a written agreement which was 
binding on such date and at all times thereafter, 
(B) described in a ruling request submitted to the 
Internal Revenue Service on or before such date, or 
(C) described on or before such date in a public 
announcement or in a filing with the Securities and 
Exchsmge Commission required solely by reason of the 
transaction. 
SEC. 1015. MODIFICATION OF HOLDING PERIOD APPLICABLE TO DIVI-
DENDS RECEIVED DEDUCTION. 
(a) IN GENERAL.—Subparagraph (A) of section 246(c)(1) is 
amended to read as follows: 
"(A) which is held by the taxpayer for 45 days or 
less during the 90-day period beginning on the date which 
is 45 days before the date on which such share becomes 
ex-dividend with respect to such dividend, or". 
I l l STAT. 922 
PUBLIC LAW 105-34—AUG. 5, 1997 
(b) CONFORMING AMENDMENTS.— 
(1) Paragraph (2) of section 246(c) is amended to read 
as follows: 
"(2) 90-DAY RULE IN THE CASE OF CERTAIN PREFERENCE 
DIVIDENDS.—In the case of stock having preference in dividends, 
if the taxpayer receives dividends with respect to such stock 
which are attributable to a period or periods aggregating in 
excess of 366 days, paragraph (1)(A) shall be applied— 
"(A) by substituting '90 days' for '45 days' each place 
it appears, and 
"(B) by substituting '180-day period' for 
'90-day 
period'.". 
(2) Paragraph (3) of section 246(c) is amended by adding 
"and" at the end of subparagraph (A), by striking subparagraph 
(B), and by redesignating subparagraph (C) as subparagraph 
(B). 
26 use 246 note. 
(c) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendments made by this section 
shall apply to dividends received or accrued after the 30th 
day after the date of the enactment of this Act. 
(2) TRANSITIONAL RULE.—The amendments made by this 
section shall not apply to dividends received or accrued during 
the 2-year period beginning on the date of the enactment of 
this Act if— 
(A) the dividend is paid with respect to stock held 
by the taxpayer on June 8, 1997, and all times thereafter 
until the dividend is received, 
(B) such stock is continuously subject to a position 
described in section 246(c)(4) of the Internal Revenue Code 
of 1986 on June 8, 1997, and all times thereafter until 
the dividend is received, and 
(C) such stock and position are clearly identified in 
the taxpayer's records within 30 days after the date of 
the enactment of this Act. 
Stock shall not be treated as meeting the requirement of 
subparagraph (B) if the position is sold, closed, or otherwise 
terminated and reestablished. 
Subtitle C—^Administrative Provisions 
SEC. 1021. REPORTING OF CERTAIN PAYMENTS MADE TO ATTORNEYS. 
(a) IN GENERAL.—Section 6045 (relating to returns of brokers) 
is amended by adding at the end the following new subsection: 
"(f) RETURN REQUIRED IN THE CASE OF PAYMENTS TO ATTOR-
NEYS.— 
"(1) IN GENERAL.—Any person engaged in a trade or busi-
ness and making a payment (in the course of such trade or 
business) to which this subsection applies shall file a return 
under subsection (a) and a statement under subsection (b) 
with respect to such payment. 
"(2) APPLICATION OF SUBSECTION.— 
"(A) IN GENERAL.—This subsection shall apply to any 
payment to an attorney in connection with legal services 
(whether or not such services are performed for the payor). 
"(B) EXCEPTION.—This subsection shall not apply to 
the portion of any pa3nnent which is required to be reported 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 923 
under section 6041(a) (or would be so required but for 
the dollar limitation contained therein) or section 6051.". 
(b) 
REPORTING OF ATTORNEYS' FEES PAYABLE TO CORPORA-
TIONS.—The regulations providing an exception under section 6041 
of the Internal Revenue Code of 1986 for payments made to corpora-
tions shall not apply to payments of attorneys' fees. 
(c) EFFECTIVE DATE.—The amendment made by this section 
26 use 6045 
shall apply to payments made after December 31, 1997. 
note. 
SEC. 1022. DECREASE OF THRESHOLD FOR REPORTING PAYMENTS 
TO CORPORATIONS PERFORMING SERVICES FOR FED-
ERAL AGENCIES. 
(a) IN GENERAL.—Subsection (d) of section 6041A (relating to 
returns regarding payments of remuneration for services and direct 
sales) is amended by adding at the end the following new paragraph: 
"(3) 
PAYMENTS TO CORPORATIONS BY FEDERAL EXECUTIVE 
AGENCIES.— 
"(A) IN GENERAL.—Notwithstanding any regulation 
prescribed by the Secretary before the date of the enact-
ment of this paragraph, subsection (a) shall apply to remu-
neration paid to a corporation by any Federal executive 
agency (as defined in section 6050M(b)). 
"(B) EXCEPTION.—Subparagraph (A) shall not apply 
to— 
"(i) services under contracts described in section 
6050M(e)(3) with respect to which the requirements 
of section 6050M(e)(2) are met, and 
"(ii) such other services as the Secretary may 
specify in regulations prescribed after the date of the 
enactment of this paragraph.". 
(b) EFFECTIVE DATE.—The amendment made by this section 26USC6041A 
shall apply to returns the due date for which (determined without note. 
regard to any extension) is more than 90 days after the date 
of the enactment of this Act. 
SEC. 1023. DISCLOSURE OF RETURN INFORMATION FOR ADMINISTRA-
TION OF CERTAIN VETERANS PROGRAMS. 
(a) GENERAL RULE.—Clause (viii) of section 6103(1)(7)(D) (relat-
ing to disclosure of return information to Federal, State, and local 
agencies administering certain programs) is amended by striking 
"1998" and inserting "2003". 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 26 use 6103 
shall take effect on the date of the enactment of this Act. 
note. 
SEC. 1024. CONTINUOUS LEVY ON CERTAIN PAYMENTS. 
(a) IN GENERAL.—Section 6331 (relating to levy and distraint) 
is amended— 
(1) by redesignating subsection (h) as subsection (i), and 
(2) by inserting after subsection (g) the following new sub-
section: 
"(h) CONTINUING LEVY ON CERTAIN PAYMENTS.— 
"(1) IN GENERAL.—The effect of a levy on specified pa5anents 
to or received by a taxpayer shall be continuous from the 
date such levy is first made until such levy is released. Notwith-
standing section 6334, such continuous levy shall attach to 
up to 15 percent of any specified payment due to the taxpayer. 
"(2) SPECIFIED PAYMENT.—For the purposes of paragraph 
(1), the term 'specified pa3anent' means— 
Ill STAT. 924 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(A) any Federal payment other than a payment for 
which ehgibihty is based on the income or assets (or both) 
of a payee, 
"(B) any payment described in paragraph (4), (7), (9), 
or (11) of section 6334(a), and 
"(C) any annuity or pension pa3anent imder the Rail-
road Retirement Act or benefit under the 
Railroad 
Unemployment Insurance Act.". 
26 use 6331 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
note. 
shall apply to levies issued after the date of the enactment of 
this Act. 
SEC. 1025. MODIFICATION OF LEVY EXEMPTION. 
(a) IN GENERAL.—Section 6334 (relating to property exempt 
from levy) is amended by redesignating subsection (f) as subsection 
(g) and by inserting after subsection (e) the following new sub-
section: 
"(f) LEVY ALLOWED ON CERTAIN SPECIFIED PAYMENTS.—Any 
pa3nnent described in subparagraph (B) or (C) of section 6331(h)(2) 
shall not be exempt fi*om levy if the Secretary approves the levy 
thereon under section 6331(h).". 
26 use 6334 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
note. 
shall apply to levies issued after the date of the enactment of 
this Act. 
SEC. 1026. CONFIDENTIALITY AND DISCLOSURE OF RETURNS AND 
RETURN INFORMATION. 
(a) IN GENERAL.—Subsection (k) of section 6103 is amended 
by adding at the end the following new paragraph: 
"(8) LEVIES ON CERTAIN GOVERNMENT PAYMENTS.— 
"(A) DISCLOSURE OF RETURN INFORMATION IN LEVIES 
ON FINANCIAL MANAGEMENT SERVICE.—In serving a notice 
of levy, or release of such levy, with respect to any 
applicable government payment, the Secretary may disclose 
to officers and employees of the Financial Management 
Service— 
"(i) return information, including taxpayer identity 
information, 
"(ii) the amount of any unpaid liability under this 
title (including penalties and interest), and 
"(iii) the type of tax and tax period to which such 
unpaid liability relates. 
"(B) 
RESTRICTION ON USE OF DISCLOSED INFORMA-
TION.—Return information disclosed under subparagraph 
(A) may be used by officers and employees of the Financial 
Msmagement Service only for the purpose of, and to the 
extent necessary in, transferring levied funds in satisfac-
tion of the levy, maintaining appropriate agency records 
in regard to such levy or the release thereof, notifying 
the taxpayer and the agency certifying such payment that 
the levy has been honored, or in the defense of any litiga-
tion ensuing from the honor of such levy. 
"(C) APPLICABLE GOVERNMENT PAYMENT.—For purposes 
of this paragraph, the term 'applicable government pay-
ment' means— 
"(i) any Federal pa3anent (other than a payment 
for which eligibility is based on the income or assets 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 925 
(or both) of a payee) certified to the Financial Manage-
ment Service for disbursement, and 
"(ii) any other payment which is certified to the 
Financial Management Service for disbursement and 
which the Secretary designates by published notice.". 
(b) CONFORMING AMENDMENTS.— 
(1) Section 6103(p) is amended— 
(A) in paragraph (3)(A), by striking "(2), or (6)" and 
inserting "(2), (6), or (8)", and 
(B) in paragraph (4), by inserting "(k)(8)," after "(j) 
(1) or (2)," each place it appears. 
(2) Section 552a(a)(8)(B) of title 5, United States Code, 
is amended by striking "or" at the end of clause (v), by adding 
"or" at the end of clause (vi), and by adding at the end the 
following new clause: 
"(vii) matches performed 
incident to a levy 
described in section 6103(k)(8) of the Internal Revenue 
Code of 1986;". 
(c) EFFECTIVE DATE.—The amendments made by this section 26 use 6103 
shall apply to levies issued after the date of the enactment of note. 
this Act. 
SEC. 1027. RETURNS OF BENEFICIARIES OF ESTATES AND TRUSTS 
REQUIRED TO FILE RETURNS CONSISTENT WITH ESTATE 
OR TRUST RETURN OR TO NOTIFY SECRETARY OF 
INCONSISTENCY. 
(a) DOMESTIC ESTATES AND TRUSTS.—Section 6034A (relating 
to information to beneficiaries of estates and trusts) is amended 
by adding at the end the following new subsection: 
"(c) BENEFICIARY'S RETURN MUST BE CONSISTENT WITH ESTATE 
OR TRUST RETURN OR SECRETARY NOTIFIED OF INCONSISTENCY.— 
"(1) IN GENERAL.—A beneficiary of any estate or trust to 
which subsection (a) applies shall, on such beneficiary's return, 
treat any reported item in a manner which is consistent with 
the treatment of such item on the applicable entity's return. 
"(2) NOTIFICATION OF INCONSISTENT TREATMENT.— 
"(A) IN GENERAL.—In the case of any reported item, 
if— 
"(i)(I) the applicable entity has filed a return but 
the beneficiary's treatment on such beneficiary's return 
is (or may be) inconsistent with the treatment of the 
item on the applicable entity's return, or 
"(II) the applicable entity has not filed a return, 
and 
"(ii) the beneficiary files with the Secretary a state-
ment identifying the inconsistency, 
paragraph (1) shall not apply to such item. 
"(B) 
BENEFICIARY RECEIVING 
INCORRECT 
INFORMA-
TION.—A beneficiary shall be treated as having complied 
with clause (ii) of subparagraph (A) with respect to a 
reported item if the beneficiary— 
"(i) demonstrates to the satisfaction of the Sec-
retary that the treatment of the reported item on the 
beneficiary's return is consistent with the treatment 
of the item on the statement furnished under sub-
section (a) to the beneficiary by the applicable entity, 
and 
I l l STAT. 926 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(ii) elects to have this paragraph apply with 
respect to that item. 
"(3) EFFECT OF FAILURE TO NOTIFY.—In any case— 
"(A) described in subparagraph (A)(i)(I) of paragraph 
(2), and 
"(B) in which the beneficiary does not comply with 
subparagraph (A)(ii) of paragraph (2), 
any adjustment required to m ^ e the treatment of the items 
by such beneficiary consistent with the treatment of the items 
on the applicable entity's return shall be treated as arising 
out of mathematical or clerical errors and assessed according 
to section 6213(b)(1). Paragraph (2) of section 6213(b) shall 
not apply to any assessment referred to in the preceding sen-
tence. 
"(4) DEFINITIONS.—For purposes of this subsection— 
"(A) REPORTED ITEM.—The term 'reported item' means 
any item for which information is required to be furnished 
under subsection (a). 
"(B) APPLICABLE ENTITY.—The term 'applicable entity* 
means the estate or trust of which the taxpayer is the 
beneficiary. 
"(5) ADDITION TO TAX FOR FAILURE TO COMPLY WITH SEC-
TION.—For addition to tax in the case of a beneficiary's neg-
ligence in connection with, or disregard of, the requirements 
of this section, see part II of subchapter A of chapter 68.". 
(b) FOREIGN TRUSTS.—Subsection (d) of section 6048 (relating 
to information with respect to certain foreign trusts) is amended 
by adding at the end the following new paragraph: 
"(5) UNITED STATES PERSON'S RETURN MUST BE CONSISTENT 
WITH TRUST RETURN O
R SECRETARY NOTIFIED OF INCONSIST-
ENCY.—Rules similar to the rules of section 6034A(c) shall 
apply to items reported by a trust under subsection (b)(1)(B) 
and to United States persons referred to in such subsection.". 
26USC6034A 
(c) EFFECTIVE DATE.—The amendments made by this section 
note. 
shall apply to returns of beneficiaries and owners filed after the 
date of the enactment of this Act. 
SEC. 1028. REGISTRATION AND OTHER PROVISIONS RELATING TO CON-
FIDENTIAL CORPORATE TAX SHELTERS. 
(a) IN GENERAL.—Section 6111 (relating to registration of tax 
shelters) is amended by redesignating subsections (d) and (e) as 
subsections (e) and (f), respectively, and by inserting after sub-
section (c) the following new subsection: 
"(d) CERTAIN CONFIDENTIAL ARRANGEMENTS TREATED AS TAX 
SHELTERS.— 
"(1) IN GENERAL.—For purposes of this section, the term 
'tax shelter' includes any entity, plan, arrangement, or trans-
action— 
"(A) a significant purpose of the structure of which 
is the avoidance or evasion of Federal income tax for a 
direct or indirect participant which is a corporation, 
"(B) which is offered to any potential participant under 
conditions of confidentiality, and 
"(C) for which the t£ix shelter promoters may receive 
fees in excess of $100,000 in the aggregate. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 927 
"(2) CONDITIONS OF CONFIDENTIALITY.—For purposes of 
paragraph (1)(B), an offer is under conditions of confidentiality 
if— 
"(A) the potential participant to whom the offer is 
made (or any other person acting on behalf of such partici-
pant) has an understanding or agreement with or for the 
benefit of any promoter of the tax shelter that such partici-
pant (or such other person) will limit disclosure of the 
tax shelter or any significant tax features of the tax shelter, 
or 
"(B) any promoter of the tax shelter— 
"(i) claims, knows, or has reason to know, 
"(ii) knows or has reason to know that any other 
person (other than the potential participant) claims, 
or 
"(iii) causes another person to claim, 
that the tax shelter (or any aspect thereof) is proprietary 
to any person other than the potential participant or is 
otherwise protected from disclosure to or use by others. 
For purposes of this subsection, the term 'promoter' means 
any person or any related person (within the meaning of section 
267 or 707) who participates in the organization, management, 
or sale of the tax shelter. 
"(3) PERSONS OTHER THAN PROMOTER REQUIRED TO REG-
ISTER IN CERTAIN CASES.— 
"(A) IN GENERAL.—If— 
"(i) the requirements of subsection (a) are not met 
with respect to any tax shelter (as defined in paragraph 
(1)) by any tax shelter promoter, and 
"(ii) no tax shelter promoter is a United States 
person, 
then each United States person who discussed participation 
in such shelter shall register such shelter under subsection 
(a). 
"(B) EXCEPTION.—Subparagraph (A) shall not apply 
to a United States person who discussed participation in 
a tax shelter i
f
—
-
"(i) such person notified the promoter in writing 
(not later than the close of the 90th day after the 
day on which such discussions began) that such person 
would not participate in such shelter, and 
"(ii) such person does not participate in such shel-
ter. 
"(4) OFFER TO PARTICIPATE TREATED AS OFFER FOR SALE.— 
For purposes of subsections (a) and (b), an offer to participate 
in a tax shelter (as defined in paragraph (1)) shall be treated 
as an offer for sale.". 
(b) PENALTY.—Subsection (a) of section 6707 (relating to failure 
to furnish information regarding tax shelters) is amended by adding 
at the end the following new paragraph: 
"(3) CONFIDENTIAL ARRANGEMENTS.— 
"(A) IN GENERAL.—In the case of a tax shelter (as 
defined in section 6111(d)), the penalty imposed under 
paragraph (1) shall be an amount equal to the greater 
of— 
"(i) 50 percent of the fees paid to all promoters 
of the tax shelter with respect to offerings made before 
I l l STAT. 928 
PUBLIC LAW 105-34—AUG. 5, 1997 
the date such shelter is registered under section 6111, 
or 
"(ii) $10,000. 
Clause (i) shall be applied by substituting 75 percent' 
for *50 percent' in the case of an intentional failure or 
act described in paragraph (1). 
"(B) SPECIAL RULE FOR PARTICIPANTS REQUIRED TO REG-
ISTER SHELTER.—In the case of a person required to register 
such a t£ix shelter by reason of section 6111(d)(3)— 
"(i) such person shall be required to pay the pen-
alty under paragraph (1) only if such person actually 
participated in such shelter, 
"(ii) the amount of such penalty shall be deter-
mined by taking into account under subparagraph 
(A)(i) only the fees paid by such person, and 
"(iii) such penalty shall be in addition to the pen-
alty imposed on any other person for failing to register 
such shelter.". 
(c) MODIFICATIONS TO SUBSTANTIAL UNDERSTATEMENT PEN-
ALTY.— 
(1) RESTRICTION ON REASONABLE BASIS FOR CORPORATE 
UNDERSTATEMENT OF INCOME TAX.—Subparagraph (B) of section 
6662(d)(2) is amended by adding at the end the following new 
flush sentence: 
"For purposes of clause (ii)(II), in no event shall a corpora-
tion be treated as having a reasonable basis for its tax 
treatment of an item attributable to a multiple-party 
financing transaction if such treatment does not clearly 
reflect the income of the corporation.". 
(2) MODIFICATION TO DEFINITION OF TAX SHELTER.—Clause 
(iii) of section 6662(d)(2)(C) is amended by striking "the prin-
cipal purpose" and inserting "a significant purpose". 
(d) CONFORMING AMENDMENTS.— 
(1) Paragraph (2) of section 6707(a) is amended by striking 
"The penalty^' and inserting "Except as provided in paragraph 
(3), the penalty". 
(2) Subparagraph (A) of section 6707(a)(1) is amended by 
striking "paragraph (2)" and inserting "paragraph (2) or (3), 
as the case may be". 
26 use 6111 
(e) EFFECTIVE DATE.— 
note. 
(1) IN GENERAL.—Except as provided in paragraph (2), the 
amendments made by this section shall apply to any tax shelter 
(as defined in section 6111(d) of the Internal Revenue Code 
of 1986, as amended by this section) interests in which are 
offered to potential participants after the Secretary of the Treas-
ury prescribes guidance with respect to meeting requirements 
added by such amendments. 
(2) MODIFICATIONS TO SUBSTANTIAL UNDERSTATEMENT PEN-
ALTY.—The amendments made by subsection (c) shall apply 
to items with respect to transactions entered into after the 
date of the enactment of this Act. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 929 
Subtitle D—Excise and Employment Tax 
Provisions 
SEC. 1031. EXTENSION AND MODIFICATION OF TAXES FUNDING AIR-
PORT AND AIRWAY TRUST FUND; INCREASED DEPOSITS 
INTO SUCH FUND. 
(a) FUEL TAXES.— 
(1) AVIATION FUEL.—Clause (ii) of section 4091(b)(3)(A) is 
amended by striking "September 30, 1997" and inserting 
"September 30, 2007". 
(2) AVIATION GASOLINE.—Subparagraph (B) of section 
4081(d)(2) is amended by striking "September 30, 1997" and 
inserting "September 30, 2007". 
(3) NONCOMMERCIAL AVIATION.—Subparagraph (B) of sec-
tion 4041(c)(3) is amended by striking "September 30, 1997" 
and inserting "September 30, 2007". 
(b) TICKET TAXES.— 
(1) PERSONS.—Clause (ii) of section 4261(g)(1)(A) is amend-
ed by striking "September 30, 1997" and inserting "September 
30, 2007". 
(2) PROPERTY.—Clause (ii) of section 4271(d)(1)(A) is 
amended by striking "September 30, 1997" and inserting 
"September 30, 2007". 
(c) MODIFICATIONS TO TAX ON TRANSPORTATION OF PERSONS 
BY AIR.— 
(1) IN GENERAL.—Section 4261 (relating to imposition of 
tax) is amended by striking subsections (a), (b), and (c) £ind 
inserting the following new subsections: 
"(a) IN GENERAL.—There is hereby imposed on the amount 
paid for taxable transportation of any person a t£ix equal to 7.5 
percent of the amount so paid. 
"(b) DOMESTIC SEGMENTS OF TAXABLE TRANSPORTATION.— 
"(1) IN GENERAL.—There is hereby imposed on the amount 
paid for each domestic segment of taxable transportation by 
air a tax in the amount determined in accordance with the 
following table for the period in which the segment begins: 
In the case of segments 
beginning: 
The tax is: 
After September 30, 1997, and before October 1, 1998 
$1.00 
After September 30, 1998, and before October 1, 1999 
$2.00 
After September 30, 1999, and before January 1, 2000 
$2.25 
During 2000 
$2.50 
During 2001 
$2.75 
During 2002 or thereafter 
$3.00. 
"(2) DOMESTIC SEGMENT.—For purposes of this section, the 
term 'domestic segment' means any segment consisting of 1 
takeoff and 1 landing and which is taxable transportation 
described in section 4262(a)(1). 
"(3) CHANGES IN SEGMENTS BY REASON OF REROUTING.— 
If— 
"(A) transportation is purchased between 2 locations 
on specified flights, and 
"(B) there is a change in the route taken between 
such 2 locations which changes the number of domestic 
segments, but there is no change in the amount charged 
for such transportation, 
I l l STAT. 930 
PUBLIC LAW 105-34—AUG. 5, 1997 
the tax imposed by paragraph (1) shall be determined without 
regard to such change in route. 
"(c) USE OF INTERNATIONAL TRAVEL FACILITIES.— 
"(1) IN GENERAL.—There is hereby imposed a tax of $12.00 
on any amount paid (whether within or without the United 
States) for any transportation of any person by air, if such 
transportation begins or ends in the United States. 
"(2) 
EXCEPTION FOR TRANSPORTATION ENTIRELY TAXABLE 
UNDER SUBSECTION (a).—This subsection shall not apply to any 
transportation all of which is taxable under subsection (a) 
(determined without regard to sections 4281 and 4282). 
"(3) SPECIAL RULE FOR ALASKA AND HAWAII.—In any case 
in which the tax imposed by paragraph (1) applies to a domestic 
segment beginning or ending in Alaska or Hawaii, such t£ix 
shall apply only to departures and shall be at the rate of 
$6.". 
(2) 
SPECIAL 
RULES.—Section 
4261 
is 
amended 
by 
redesignating subsections (e), (f), and (g) as subsections (f), 
(g), and (h), respectively, and by inserting after subsection 
(d) the following new subsection: 
"(e) SPECIAL RULES.— 
"(1) SEGMENTS TO AND FROM RURAL AIRPORTS.— 
"(A) EXCEPTION FROM SEGMENT TAX.—The tax imposed 
by subsection (b)(1) shall not apply to any domestic segment 
beginning or ending at an airport which is a rural airport 
for the calendar year in which such segment begins or 
ends (as the case may be). 
"(B) RURAL AIRPORT.—For purposes of this paragraph, 
the term 'rural airport' means, with respect to any calendar 
year, any airport if— 
"(i) there were fewer than 100,000 commercial pas-
sengers departing by air during the second preceding 
calendar year from such airport, and 
"(ii) such airport— 
"(I) is not located within 75 miles of another 
airport which is not described in clause (i), or 
"(II) is receiving essential air service subsidies 
as of the date of the enactment of this paragraph. 
"(C) No PHASEIN OF REDUCED TICKET TAX.—In the case 
of transportation beginning before October 1, 1999— 
"(i) IN GENERAL.—Paragraph (5) shall not apply 
to any domestic segment beginning or ending at an 
airport which is a rural airport for the calendar year 
in which such segment begins or ends (as the case 
may be). 
"(ii) 
TRANSPORTATION INVOLVING MULTIPLE SEG-
MENTS.—In the case of transportation involving more 
than 1 domestic segment at least 1 of which does 
not begin or end at a rural airport, the 7.5 percent 
rate applicable by reason of clause (i) shall be applied 
by taking into account only an amoimt which bears 
the same ratio to the amount paid for such transpor-
tation as the number of specified miles in domestic 
segments which begin or end at a rural airport bears 
to the total number of specified miles in such transpor-
tation. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 931 
"(2) AMOUNTS PAID OUTSIDE THE UNITED STATES.—In the 
case of amounts paid outside the United States for taxable 
transportation, the taxes imposed by subsections (a) and (b) 
shall apply only if such transportation begins and ends in 
the United States. 
"(3) AMOUNTS PAID FOR RIGHT TO AWARD FREE OR REDUCED 
RATE AIR TRANSPORTATION.— 
"(A) IN GENERAL.—Any amount paid (and the value 
of any other benefit provided) to an air carrier (or any 
related person) for the right to provide mileage awards 
for (or other reductions in the cost of) any transportation 
of persons by air shall be treated for purposes of subsection 
(a) as an amount paid for taxable transportation, and such 
amount shall be taxable under subsection (a) without 
regard to any other provision of this subchapter. 
"(B) CONTROLLED GROUP.—For purposes of subpara-
graph (A), a corporation and all wholly owned subsidiaries 
of such corporation shall be treated as 1 corporation. 
"(C) REGULATIONS.—The Secretary shall prescribe 
rules which reallocate items of income, deduction, credit, 
exclusion, or other allowance to the extent necessary to 
prevent the avoidance of tax imposed by reason of this 
paragraph. The Secretary may prescribe rules which 
exclude from the tax imposed by subsection (a) amounts 
attributable to mileage awards which are used other than 
for transportation of persons by air. 
"(4) INFLATION ADJUSTMENT OF DOLLAR RATES OF TAX.— 
"(A) IN GENERAL.—In the case of taxable events in 
a calendar year after the last nonindexed year, the $3.00 
amount contained in subsection (b) and each dollar amoiint 
contained in subsection (c) shall be increased by an amount 
equal to— 
"(i) such dollar amount, multiplied by 
"(ii) the cost-of-living 
adjustment 
determined 
under section 1(f)(3) for such calendar year by 
substituting the year before the last nonindexed year 
for 'calendar year 1992' in subparagraph (B) thereof. 
If any increase determined under the preceding sentence 
is not a multiple of 10 cents, such increase shall be rounded 
to the nearest multiple of 10 cents. 
"(B) 
LAST 
NONINDEXED 
YEAR.—For 
purposes 
of 
subparagraph (A), the last nonindexed year is— 
"(i) 2002 in the case of the $3.00 amount contained 
in subsection (b), and 
"(ii) 1998 in the case of the dollar amounts con-
tained in subsection (c). 
"(C) TAXABLE EVENT.—For purposes of subparagraph 
(A), in the case of the tax imposed subsection (b), the 
beginning of the domestic segment shall be treated as 
the taxable event. 
"(5) RATES OF TICKET TAX FOR TRANSPORTATION BEGINNING 
BEFORE OCTOBER 1, 1999.—Subsection (a) shall be applied by 
substituting for 7.5 percent'— 
"(A) *9 percent' in the case of transportation beginning 
after September 30, 1997, and before October 1, 1998, 
and 
I l l STAT. 932 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(B) '8 percent' in the case of transportation beginning 
after September 30, 1998, and before October 1, 1999.". 
(3) SECONDARY LIABILITY OF CARRIER FOR UNPAID TAX.— 
Subsection (c) of section 4263 is amended by striking "sub-
chapter—" and all that follows and inserting "subchapter, such 
tax shall be paid by the carrier providing the initial segment 
of such transportation which begins or ends in the United 
States.". 
(d) INCREASED AIRPORT AND AIRWAY TRUST FUND DEPOSITS.— 
(1) Paragraph (1) of section 9502(b) is amended— 
(A) by striking "(to the extent that the rate of the 
tax on such gasoline exceeds 4.3 cents per gallon)" in 
subparagraph (C), 
(B) by striking "to the extent attributable to the Airport 
and Airway Trust Fund financing rate" in subparagraph 
(D), and 
(C) by adding at the end the following flush sentence: 
"There shall not be taken into account under paragraph (1) so 
much of the taxes imposed by sections 4081 and 4091 as are 
determined at the rates specified in section 4081(a)(2)(B) or 
4091(b)(2).". 
(2) Section 9502 is amended by striking subsection (f). 
(e) EFFECTIVE DATES.— 
26 use 4041 
(1) FUEL TAXES.—The amendments made by subsection 
note. 
(a) shall apply take effect on October 1, 1997. 
26 use 4261 
(2) TICKET TAXES.— 
note. 
(A) IN GENERAL.—Except as otherwise provided in this 
paragraph, the amendments made by subsections (b) and 
(c) shall apply to transportation beginning on or after Octo-
ber 1, 1997. 
(B) TREATMENT OF AMOUNTS PAID FOR TICKETS PUR-
CHASED BEFORE OCTOBER 1, 1997.—The amendments made 
by subsection (c) shall not apply to amounts paid before 
October 1, 1997; except that— 
(i) the amendment made to section 4261(c) of the 
Internal Revenue Code of 1986 shall apply to amounts 
paid more than 7 days after the date of the enactment 
of this Act for transportation beginning on or after 
October 1, 1997, and 
(ii) the amendment made to section 4263(c) of such 
Code shall apply to the extent related to taxes imposed 
under the amendment made to such section 4261(c) 
on the amounts described in clause (i). 
(C) 
AMOUNTS PAID FOR RIGHT TO AWARD MILEAGE 
AWARDS.— 
(i) IN GENERAL.—Paragraph (3) of section 4261(e) 
of the Internal Revenue Code of 1986 (as added by 
the amendment made by subsection (c)) shall apply 
to amounts paid (and other benefits provided) after 
September 30, 1997. 
(ii) 
PAYMENTS WITHIN CONTROLLED GROUP.—For 
purposes of clause (i), any amount paid after June 
11, 1997, and before October 1, 1997, by 1 member 
of a controlled group for a right which is described 
in such section 4261(e)(3) and is furnished by another 
member of such group after September 30, 1997, shall 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 933 
be treated as paid after September 30, 1997. For pur-
poses of the preceding sentence, all persons treated 
as a single employer under subsection (a) or (b) of 
section 52 of such Code shall be treated as members 
of a controlled group. 
(3) INCREASED DEPOSITS INTO AIRPORT AND AIRWAY TRUST 26 use 9502 
FUND.—The amendments made by subsection (d) shall apply note. 
with respect to teixes received in the Treasury on and after 
October 1, 1997. 
(g) DELAYED DEPOSITS OF AIRPORT TRUST FUND TAX REVE- 
26USC6302 
NUES.—Notwithstanding section 6302 of the Internal Revenue Code note. 
of 1986— 
(1) in the case of deposits of taxes imposed by section 
4261 of such Code, the due date for any such deposit which 
would (but for this subsection) be required to be made after 
August 14, 1997, and before October 1, 1997, shall be October 
10, 1997, 
(2) in the case of deposits of taxes imposed by section 
4261 of such Code, the due date for any such deposit which 
would (but for this subsection) be required to be made after 
August 14, 1998, and before October 1, 1998, shall be October 
5, 1998, and 
(3) in the case of deposits of taxes imposed by sections 
4081(a)(2)(A)(ii), 4091, and 4271 of such Code, the due date 
for any such deposit which would (but for this subsection) 
be required to be made after July 31, 1998, and before October 
1, 1998, shall be October 5, 1998. 
SEC. 1032. KEROSENE TAXED AS DIESEL FUEL. 
(a) IN GENERAL.—Subsection (a) of section 4083 (defining tax-
able fuel) is amended by striking "and" at the end of subparagraph 
(A), by striking the period at the end of subparagraph (B) and 
inserting ", and", and by adding at the end the following new 
subparagraph: 
"(C) kerosene.". 
(b) RATE OF TAX.—Clause (iii) of section 4081(a)(2)(A) is amend-
ed by inserting "or kerosene" after "diesel fuel". 
(c) EXEMPTIONS FROM TAX; REFUNDS TO VENDORS.— 
(1) IN GENERAL.—Section 4082 (relating to exemptions for 
diesel fuel) is amended by striking "diesel fuel" each place 
it appears in subsections (a), (c), and (d) and inserting "diesel 
fuel and kerosene". 
(2) CERTAIN KEROSENE EXEMPT FROM DYEING REQUIRE-
MENT.—Section 4082 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) ADDITIONAL EXCEPTIONS TO DYEING REQUIREMENTS FOR 
KEROSENE.— 
"(1) AVIATION-GRADE KEROSENE.—Subsection (a)(2) shall Regulations, 
not apply to a removal, entry, or sale of aviation-grade kerosene 
(as determined under regulations prescribed by the Secretary) 
if the person receiving the kerosene is registered under section 
4101 with respect to the tax imposed by section 4091. 
"(2) USE FOR NON-FUEL FEEDSTOCK PURPOSES.—Subsection 
(a)(2) shall not apply to kerosene— 
"(A) received by pipeline or vessel for use by the person 
receiving the kerosene in the manufacture or production 
I l l STAT. 934 
PUBLIC LAW 105-34—AUG. 5, 1997 
of any substance (other than gasoHne, diesel fuel, or special 
fuels referred to in section 4041), or 
"(B) to the extent provided in regulations, removed 
or entered— 
"(i) for such a use by the person removing or 
entering the kerosene, or 
"(ii) for resale by such person for such a use by 
the purchaser, 
but only if the person receiving, removing, or entering the 
kerosene and such purchaser (if any) are registered under 
section 4101 with respect to the tax imposed by section 4081. 
"(3) WHOLESALE DISTRIBUTORS.—TO the extent provided in 
regulations, subsection (a)(2) shall not apply to a removal, 
entry, or sale of kerosene to a wholesale distributor of kerosene 
if such distributor— 
"(A) is registered under section 4101 with respect to 
the tax imposed by section 4081 on kerosene, and 
"(B) sells kerosene exclusively to ultimate vendors 
described in section 6427(1)(5)(B) with respect to kerosene.". 
(3) REFUNDS.— 
(A) Subsection (1) of section 6427 is amended by insert-
ing "or kerosene" after "diesel fuel" each place it appears 
in paragraphs (1), (2), and (5) (including the heading for 
paragraph (5)). 
(B) Paragraph (5) of section 6427(1) is amended by 
redesignating subparagraph (B) as subparagraph (C) and 
by inserting after subparagraph (A) the following new 
subparagraph: 
"(B) 
SALES OF KEROSENE NOT FOR USE IN MOTOR 
FUEL.—Paragraph (1)(A) shall not apply to kerosene sold 
by a vendor— 
"(i) for any use if such sale is from a pump which 
(as determined under regulations prescribed by the 
Secretary) is not suitable for use in fueling any diesel-
powered highway vehicle or train, or 
"(ii) to the extent provided by the Secretary, for 
blending with heating oil to be used during periods 
of extreme or unseasonable cold.". 
(C) Subparagraph (C) of section 6427(1)(5), as redesig-
nated by subparagraph (B) of this paragraph, is amended 
by striking "subparagraph (A)" and inserting "subpara-
graph (A) or (B)". 
(D) The heading for subsection (1) of section 6427 is 
amended by inserting ", KEROSENE," after "DiESEL FUEL". 
(E) Clause (i) of section 6427(i)(5)(A) is amended by 
inserting "($100 or more in the case of kerosene)" after 
"$200 or more". 
(d) CERTAIN APPROVED TERMINALS OF REGISTERED PERSONS 
REQUIRED TO OFFER DYED DIESEL FUEL AND KEROSENE FOR NON-
TAXABLE PURPOSES.—Section 4101 is amended by adding at the 
end the following new subsection: 
"(e) CERTAIN APPROVED TERMINALS OF REGISTERED PERSONS 
REQUIRED TO OFFER DYED DIESEL FUEL AND KEROSENE FOR NON-
TAXABLE PURPOSES.— 
"(1) IN GENERAL.—A terminal for kerosene or diesel fuel 
may not be an approved facility for storage of non-teix-paid 
diesel fuel or kerosene under this section unless the operator 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 935 
of such terminal offers dyed diesel fuel and kerosene for removal 
for nontaxable use in accordance with section 4082(a). 
"(2) EXCEPTION.—Paragraph (1) shall not apply to any 
terminal exclusively providing aviation-grade kerosene by pipe-
line to an airport.". 
(e) CONFORMING AMENDMENTS.— 
(1) Paragraph (2) of section 4041(a), as amended by title 
IX, is amended by striking "kerosene,". 
(2) Paragraph (1) of section 4041(c) is amended by striking 
"any liquid" and inserting "kerosene and any other liquid". 
(3)(A) The heading for section 4082 is amended by inserting 
"AND KEROSENE" after "DIESEL FUEL". 
(B) The table of sections for subpart A of part III of sub-
chapter A of chapter 32 is amended by inserting "and kerosene" 
after "diesel fuel" in the item relating to section 4082. 
(4) Subsection (b) of section 4083 is amended by striking 
"gasoline, diesel fuel," and inserting "taxable fuels". 
(5) Subsection (a) of section 4093 is amended by striking 
"any liquid" and inserting "kerosene and any other liquid". 
(6) The material following subparagraph (F) of section 
6416(b)(2) is amended by inserting "or kerosene" after "diesel 
fuel". 
(7) Paragraphs (1) and (3) of section 6427(f), and the head-
ing for section 6427(f), are each amended by inserting "ker-
osene," after "diesel fuel,". 
(8) Paragraph (2) of section 6427(f) is amended by striking 
"or diesel fuel" each place it appears and inserting ", diesel 
fuel, or kerosene". 
(9) Subparagraph (A) of section 6427(i)(3) is amended by 
striking "or diesel fuel" and inserting ", diesel fuel, or kerosene". 
(10) The heading for paragraph (4) of section 6427(i) is 
amended to read as follows: 
"(4) 
SPECIAL 
RULE 
FOR REFUNDS 
UNDER 
SUBSECTION 
(1).-". 
(11) Paragraph (1) of section 6715(c) is amended by insert-
ing "or kerosene" after "diesel fuel". 
(12)(A) The text of section 7232 is amended by striking 
"gasoline, lubricating oil, diesel fuel" and inserting "any taxable 
fuel (as defined in section 4083)". 
(B) The section heading for section 7232 is amended to 
read as follows: 
"SEC. 7232. FAILURE TO REGISTER UNDER SECTION 4101, FALSE REP-
RESENTATIONS OF REGISTRATION STATUS, ETC.". 
(C) The table of sections for part II of subchapter A of 
chapter 75 is amended by striking the item relating to section 
7232 and inserting the following: 
"Sec. 7232. Failure to register under section 4101, false representations of 
registration status, etc.". 
(13) Sections 9503(b)(1)(E) and 9508(b)(2) are each amend-
ed by striking "and diesel fuel" and inserting ", diesel fuel, 
and kerosene". 
(14) Subparagraph (B) of section 9503(b)(5) is amended 
by striking "or diesel fuel" and inserting ", diesel fuel, or ker-
osene". 
(f) EFFECTIVE DATE.—The amendments made by this section 26USC404i 
shall take effect on July 1, 1998. 
note. 
I l l STAT. 936 
PUBLIC LAW 105-34—AUG. 5, 1997 
26 use 4081 
(g) FLOOR STOCK TAXES.— 
note. 
(1) IMPOSITION OF TAX.—In the case of kerosene which 
is held on July 1, 1998, by any person, there is hereby imposed 
a floor stocks tax of 24.4 cents per gallon. 
(2) LIABILITY FOR TAX AND METHOD OF PAYMENT.— 
(A) LIABILITY FOR TAX.—A person holding kerosene 
on July 1, 1998, to which the tax imposed by paragraph 
(1) applies shall be liable for such tax. 
(B) METHOD OF PAYMENT.—The tax imposed by para-
graph (1) shall be paid in such manner as the Secretary 
shall prescribe. 
(C) TIME FOR PAYMENT.—The tax imposed by para-
graph (1) shall be paid on or before August 31, 1998. 
(3) DEFINITIONS.—For purposes of this subsection— 
(A) HELD BY A PERSON.—Kerosene shall be considered 
as "held by a person" if title thereto has passed to such 
person (whether or not delivery to the person has been 
made). 
(B) SECRETARY.—The term "Secretary" means the Sec-
retary of the Treasury or his delegate. 
(4) EXCEPTION FOR EXEMPT USES.—The tax imposed by 
paragraph (1) shall not apply to kerosene held by any person 
exclusively for any use to the extent a credit or refund of 
the tax imposed by section 4081 of the Internal Revenue Code 
of 1986 is allowable for such use. 
(5) EXCEPTION FOR FUEL HELD IN VEHICLE TANK.—NO tax 
shall be imposed by paragraph (1) on kerosene held in the 
tank of a motor vehicle or motorboat. 
(6) EXCEPTION FOR CERTAIN AMOUNTS OF FUEL.— 
(A) IN GENERAL.—No tax shall be imposed by para-
graph (1) on kerosene held on July 1, 1998, by any person 
if the aggregate amount of kerosene held by such person 
on such date does not exceed 2,000 gallons. The preceding 
sentence shall apply only if such person submits to the 
Secretary (at the time and in the manner required by 
the Secretary) such information as the Secretary shall 
require for purposes of this paragraph. 
(B) EXEMPT FUEL.—For purposes of subparagraph (A), 
there shall not be taken into account fuel held by any 
person which is exempt from the tax imposed by paragraph 
(1) by reason of paragraph (4) or (5). 
(C) CONTROLLED GROUPS.—For purposes of this para-
graph— 
(i) CORPORATIONS.— 
(I) IN GENERAL.—All persons treated as a con-
trolled group shall be treated as 1 person. 
(II) 
CONTROLLED GROUP.—The term "con-
trolled group" has the meaning given to such term 
by subsection (a) of section 1563 of such Code; 
except that for such purposes the phrase "more 
than 50 percent" shall be substituted for the 
phrase "at least 80 percent" each place it appears 
in such subsection. 
(ii) NONINCORPORATED PERSONS UNDER COMMON 
CONTROL.—Under regulations prescribed by the Sec-
retary, principles similar to the principles of clause 
(i) shall apply to a group of persons under common 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 937 
control where 1 or more of such persons is not a 
corporation. 
(7) COORDINATION WITH SECTION 4081.—No tax shall be 
imposed by paragraph (1) on kerosene to the extent that tax 
has been (or will be) imposed on such kerosene under section 
4081 or 4091 of such Code. 
(8) OTHER LAWS APPLICABLE.—All provisions of law, includ-
ing penalties, applicable with respect to the taxes imposed 
by section 4081 of such Code shall, insofar as applicable and 
not inconsistent with the provisions of this subsection, apply 
with respect to the floor stock taxes imposed by paragraph 
(1) to the same extent as if such taxes were imposed by such 
section 4081. 
SEC. 1033. RESTORATION OF LEAKING UNDERGROUND STORAGE TANK 
TRUST FUND TAXES. 
Paragraph (3) of section 4081(d) is amended by striking "shall 
not apply after December 31, 1995" and inserting "shall apply 
after September 30, 1997, and before April 1, 2005". 
SEC. 1034. APPLICATION OF COMMUNICATIONS TAX TO PREPAID TELE-
PHONE CARDS. 
(a) IN GENERAL.—Section 4251 is amended by adding at the 
end the following new subsection: 
"(d) TREATMENT OF PREPAID TELEPHONE CARDS.— 
"(1) IN GENERAL.—For purposes of this subchapter, in the 
case of communications services acquired by means of a prepaid 
telephone card— 
"(A) the face amount of such card shall be treated 
as the amount paid for such communications services, and 
"(B) that amount shall be treated as paid when the 
card is transferred by any telecommunications carrier to 
any person who is not such a carrier. 
"(2) DETERMINATION OF FACE AMOUNT IN ABSENCE OF SPECI-
FIED DOLLAR AMOUNT.—In the case of any prepaid telephone 
card which entitles the user other than to a specified dollar 
amount of use, the face amount shall be determined under 
regulations prescribed by the Secretary. 
"(3) PREPAID TELEPHONE CARD.—For purposes of this sub-
section, the term 'prepaid telephone card' means any card or 
other similar arrangement which permits its holder to obtain 
communications services and pay for such services in advance.". 
(b) EFFECTIVE DATE.—The amendments made by this section 26 use 4251 
shall apply to amounts paid in calendar months beginning more note. 
than 60 days after the date of the enactment of this Act. 
SEC. 1035. EXTENSION OF TEMPORARY UNEMPLOYMENT TAX. 
Section 3301 (relating to rate of unemplojnnent tax) is amend-
ed— 
(1) by striking "1998" in paragraph (1) and inserting "2007", 
and 
(2) by striking "1999" in paragraph (2) and inserting "2008". 
39-194 O - 97 - 31 : QL 3 Part 1 
I l l STAT. 938 
PUBLIC LAW 105-34—AUG. 5, 1997 
Subtitle E—Provisions Relating to Tax-
Exempt Entities 
SEC. 1041. EXPANSION OF LOOK-THRU RULE FOR INTEREST, ANNU-
ITIES, ROYALTIES, AND RENTS DERIVED BY SUBSIDI-
ARIES OF TAX-EXEMPT ORGANIZATIONS. 
(a) IN GENERAL.—Paragraph (13) of section 512(b) is amended 
to read as follows: 
"(13) SPECIAL RULES FOR CERTAIN AMOUNTS RECEIVED FROM 
CONTROLLED ENTITIES.— 
"(A) IN GENERAL.—If an organization (in this paragraph 
referred to as the 'controlling organization') receives 
(directly or indirectly) a specified payment from another 
entity which it controls (in this paragraph referred to as 
the 'controlled entity), notwithstanding paragraphs (1), (2), 
and (3), the controlling organization shall include such 
pa3mient as an item of gross income derived from an unre-
lated trade or business to the extent such payment reduces 
the net unrelated income of the controlled entity (or 
increases £my net unrelated loss of the controlled entity). 
There shall be allowed all deductions of the controlling 
organization directly connected with amounts treated as 
derived from an unrelated trade or business under the 
preceding sentence. 
"(B) NET UNRELATED INCOME OR LOSS.—For purposes 
of this paragraph— 
"(i) NET UNRELATED INCOME.—The term 'net unre-
lated income' means— 
"(I) in the case of a controlled entity which 
is not exempt from tax under section 501(a), the 
portion of such entity's taxable income which 
would be unrelated business taxable income if such 
entity were exempt from t£ix under section 501(a) 
and had the same exempt purposes (as defined 
in 
section 
513A(a)(5)(A)) 
as 
the 
controlling 
organization, or 
"(II) in the case of a controlled entity which 
is exempt from tax under section 501(a), the 
amount of the unrelated business taxable income 
of the controlled entity. 
"(ii) NET UNRELATED LOSS.—The term 'net unre-
lated loss' means the net operating loss adjusted under 
rules similar to the rules of clause (i). 
"(C) SPECIFIED PAYMENT.—For purposes of this para-
graph, the term 'specified payment' means any interest, 
annuity, royalty, or rent. 
"(D) DEFINITION OF CONTROL.—For purposes of this 
paragraph— 
"(i) CONTROL.—The term 'control' means— 
"(I) in the case of a corporation, ownership 
(by vote or value) of more than 50 percent of 
the stock in such corporation, 
"(II) in the case of a partnership, ownership 
of more than 50 percent of the profits interests 
or capital interests in such partnership, or 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 939 
"(III) in any other case, ownership of more 
than 50 percent of the beneficial interests in the 
entity. 
"(ii) 
CONSTRUCTIVE 
OWNERSHIP.—Section 
318 Applicability. 
(relating to constructive ownership of stock) shall apply 
for purposes of determining ownership of stock in a 
corporation. Similar principles shall apply for purposes 
of determining ownership of interests in any other 
entity. 
"(E) RELATED PERSONS.—The Secretary shall prescribe 
such rules as may be necessary or appropriate to prevent 
avoidance of the purposes of this paragraph through the 
use of related persons.", 
(b) EFFECTIVE DATE.— 
26 use 512 note. 
(1) IN GENERAL.—Except as provided in paragraph (2), the 
amendments made by this section shall apply to taxable years 
beginning after the date of the enactment of this Act. 
(2) BINDING CONTRACTS.—The amendments made by this 
section shall not apply to any payment made during the first 
2 taxable years beginning on or after the date of the enactment 
of this Act if such payment is made pursuant to a written 
binding contract in effect on June 8, 1997, and at all times 
thereafter before such payment. 
SEC. 1042. TERMINATION OF CERTAIN EXCEPTIONS FROM RULES 26 USC 833 note. 
RELATING TO EXEMPT ORGANIZATIONS WHICH PROVIDE 
COMMERCIAL-TYPE INSURANCE. 
(a) IN GENERAL.^Subparagraphs (A) and (B) of section 
1012(c)(4) of the Tax Reform Act of 1986 shall not apply to any 
taxable year beginning after December 31, 1997. 
(b) SPECIAL RULES.—In the case of an organization to which 
section 501(m) of the Internal Revenue Code of 1986 applies solely 
by reason of the amendment made by subsection (a)— 
(1) no adjustment shall be made under section 481 (or 
any other provision) of such Code on account of a change 
in its method of accounting for its first taxable year beginning 
after December 31,1997, and 
(2) for purposes of determining gain or loss, the adjusted 
basis of any asset held on the 1st day of such taxable year 
shall be treated as equal to its fair market value as of such 
day. 
(c) RESERVE WEAKENING AFTER JUNE 8, 1997.—Any reserve 
weakening after Jime 8, 1997, by an organization described in 
subsection (b) shall be treated as occurring in such organization's 
1st taxable year beginning after December 31, 1997. 
(d) REGULATIONS.—The Secretary of the Treasury or his dele-
gate may prescribe rules for providing proper adjustments for 
organizations described in subsection (b) with respect to short tax-
able years which begin during 1998 by reason of section 843 of 
the Internal Revenue Code of 1986. 
I l l STAT. 940 
PUBLIC LAW 105-34—AUG. 5, 1997 
Subtitle F—Foreign Provisions 
SEC. 1051. DEFINITION OF FOREIGN PERSONAL HOLDING COMPANY 
INCOME. 
(a) INCOME FROM NOTIONAL PRINCIPAL CONTRACTS AND PAY-
MENTS IN LIEU OF DIVIDENDS.— 
(1) IN GENERAL.—Paragraph (1) of section 954(c) (defining 
foreign personal holding company income) is amended by adding 
at the end the following new subparagraphs: 
"(F) INCOME FROM NOTIONAL PRINCIPAL CONTRACTS.— 
Net income from notional principal contracts. Any item 
of income, gain, deduction, or loss from a notional principal 
contract entered into for purposes of hedging any item 
described in £iny preceding subparagraph shall not be taken 
into account for purposes of this subparagraph but shall 
be taken into account under such other subparagraph. 
"(G) PAYMENTS IN LIEU OF DIVIDENDS.—Payments in 
lieu of dividends which are made pursuant to an agreement 
to which section 1058 applies.". 
(2) CONFORMING AMENDMENT.—Subparagraph (B) of section 
954(c)(1) is amended— 
(A) by striking the second sentence, and 
(B) by striking "also" in the last sentence. 
(b) EXCEPTION FOR DEALERS.—Paragraph (2) of section 954(c) 
is amended by adding at the end the following new subparagraph: 
"(C) EXCEPTION FOR DEALERS.—Except as provided in 
subparagraph (A), (E), or (G) of paragraph (1) or by regula-
tions, in the case of a regular dealer in property (within 
the meaning of paragraph (1)(B)), forward contracts, option 
contracts, or similar financial 
instruments 
(including 
notional principal contracts and all instruments referenced 
to commodities), there shall not be taken into account 
in computing foreign personal holding income any item 
of income, gain, deduction, or loss from any transaction 
(including hedging transactions) entered into in the ordi-
nary course of such dealer's trade or business as such 
a dealer.". 
26 use 954 note. 
(c) EFFECTIVE DATE.—The amendments made by this section 
shall apply to taxable years beginning after the date of the enact-
ment of this Act. 
SEC. 1052. PERSONAL PROPERTY USED PREDOMINANTLY IN THE 
UNITED STATES TREATED AS NOT PROPERTY OF A LIKE 
KIND WITH RESPECT TO PROPERTY USED PREDOMI-
NANTLY OUTSIDE THE UNITED STATES. 
(a) IN GENERAL.—Subsection (h) of section 1031 (relating to 
exchange of property held for productive use or investment) is 
amended to read as follows: 
"(h) SPECIAL RULES FOR FOREIGN REAL AND PERSONAL PROP-
ERTY.—For purposes of this section— 
"(1) REAL PROPERTY.—Real property located in the United 
States and real property located outside the United States 
are not property of a like kind. 
"(2) PERSONAL PROPERTY.— 
"(A) IN GENERAL.—Personal property used predomi-
nantly within the United States and personal property 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 941 
used predominantly outside the United States are not prop-
erty of a like kind. 
"(B) 
PREDOMINANT 
USE.—Except 
as 
provided 
in 
subparagraph (C) £ind (D), the predominant use of any 
property shall be determined based on— 
"(i) in the case of the property relinquished in 
the exchange, the 2-year period ending on the date 
of such relinquishment, and 
"(ii) in the case of the property acquired in the 
exchange, the 2-year period beginning on the date of 
such acquisition. 
"(C) PROPERTY HELD FOR LESS THAN 2 YEARS.—Except 
in the case of an exchange which is part of a transaction 
(or series of transactions) structured to avoid the purposes 
of this subsection— 
"(i) only the periods the property was held by 
the person relinquishing the property (or any related 
person) shall be taken into account under subpara-
graph (B)(i), and 
"(ii) only the periods the property was held by 
the person acquiring the property (or £iny related per-
son) shall be taken into account under subparagraph 
(B)(ii). 
"(D) SPECIAL RULE FOR CERTAIN PROPERTY.—Property 
described in any subparagraph of section 168(g)(4) shall 
be treated as used predominantly in the United States.", 
(b) EFFECTIVE DATE.— 
26 use 1031 
(1) IN GENERAL.—The amendment made by this section note. 
shall apply to transfers after June 8, 1997, in taxable years 
ending after such date. 
(2) BINDING CONTRACTS.—The amendment made by this 
section shall not apply to any transfer pursuant to a written 
binding contract in effect on June 8, 1997, and at all times 
thereafter before the disposition of property. A contract shall 
not fail to meet the requirements of the preceding sentence 
solely because— 
(A) it provides for a sale in lieu of an exchange, or 
(B) the property to be acquired as replacement property 
was not identified under such contract before June 9, 1997. 
SEC. 1053. HOLDING PERIOD REQUIREMENT FOR CERTAIN FOREIGN 
TAXES. 
(a) IN GENERAL.—Section 901 is amended by redesignating 
subsection (k) as subsection (1) and by inserting after subsection 
(j) the following new subsection: 
"(k) MINIMUM HOLDING PERIOD FOR CERTAIN TAXES.— 
"(1) WITHHOLDING TAXES.— 
"(A) IN GENERAL.—In no event shall a credit be allowed 
under subsection (a) for any withholding tsix on a dividend 
with respect to stock in a corporation if— 
"(i) such stock is held by the recipient of the divi-
dend for 15 days or less during the 30-day period 
beginning on the date which is 15 days before the 
date on which such share becomes ex-dividend with 
respect to such dividend, or 
"(ii) to the extent that the recipient of the dividend 
is under an obligation (whether pursuant to a short 
Ill STAT. 942 
PUBLIC LAW 105-34—AUG. 5, 1997 
sale or otherwise) to make related pa5niients with 
respect to positions in substantially similar or related 
property. 
"(B) WITHHOLDING TAX.—For purposes of this para-
graph, the term 'withholding tax' includes any tax deter-
mined on a gross basis; but does not include any tax 
which is in the nature of a prepayment of a tax imposed 
on a net basis. 
"(2) DEEMED PAID TAXES.—In the case of income, war prof-
its, or excess profits taxes deemed paid under section 853, 
902, or 960 through a chain of ownership of stock in 1 or 
more corporations, no credit shall be allowed under subsection 
(a) for such taxes if— 
"(A) any stock of any corporation in such chain (the 
ownership of which is required to obtain credit under sub-
section (a) for such taxes) is held for less than the period 
described in paragraph (l)(A)(i), or 
"(B) the corporation holding the stock is under an 
obligation referred to in paragraph (l)(A)(ii). 
"(3) 45-DAY RULE IN THE CASE OF CERTAIN PREFERENCE 
DIVIDENDS.—In the case of stock having preference in dividends 
and dividends with respect to such stock which are attributable 
to a period or periods aggregating in excess of 366 days, para-
graph (l)(A)(i) shall be applied— 
"(A) by substituting '45 days' for '15 days' each place 
it appears, and 
"(B) by substituting '90-day period' for '30-day period'. 
"(4) 
EXCEPTION FOR CERTAIN TAXES PAID BY SECURITIES 
DEALERS.— 
"(A) IN GENERAL.—Paragraphs (1) and (2) shall not 
apply to any qualified tax with respect to any security 
held in the active conduct in a foreign country of a securi-
ties business of any person— 
"(i) who is registered as a securities broker or 
dealer under section 15(a) of the Securities Exchange 
Act of 1934, 
"(ii) who is registered as a Government securities 
broker or dealer under section 15C(a) of such Act, 
or 
"(iii) who is licensed or authorized in such foreign 
country to conduct securities activities in such country 
and is subject to bona fide regulation by a securities 
regulating authority of such country. 
"(B) QUALIFIED TAX.—For purposes of subparagraph 
(A), the term 'qualified tax' means a tax paid to a foreign 
country (other than the foreign country referred to in 
subparagraph (A)) if— 
"(i) the dividend to which such tax is attributable 
is subject to taxation on a net basis by the country 
referred to in subparagraph (A), and 
"(ii) such country allows a credit against its net 
basis tax for the full amount of the tax paid to such 
other foreign country. 
"(C) REGULATIONS.—The Secretary may prescribe such 
regulations as may be appropriate to carry out this para-
graph, including regulations to prevent the abuse of the 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 943 
exception provided by this paragraph and to treat other 
taxes as qualified taxes. 
"(5) CERTAIN RULES TO APPLY.—For purposes of this sub-
section, the rules of paragraphs (3) and (4) of section 246(c) 
shall apply. 
"(6) TREATMENT OF BONA FIDE SALES.—If a person's holding 
period is reduced by reason of the application of the rules 
of section 246(c)(4) to any contract for the bona fide sale of 
stock, the determination of whether such person's holding 
period meets the requirements of paragraph (2) with respect 
to taxes deemed paid under section 902 or 960 shall be made 
as of the date such contract is entered into. 
"(7) TAXES ALLOWED AS DEDUCTION, ETC.—Sections 275 and 
78 shall not apply to any tax which is not allowable as a 
credit under subsection (a) by reason of this subsection.". 
(b) NOTICE OF WITHHOLDING TAXES PAID BY REGULATED INVEST-
MENT COMPANY.—Subsection (c) of section 853 (relating to foreign 
tax credit allowed to shareholders) is amended by adding at the 
end the following new sentence: "Such notice shall also include 
the amount of such taxes which (without regard to the election 
under this section) would not be allowable as a credit under section 
901(a) to the regulated investment company by reason of section 
901(k).". 
(c) EFFECTIVE DATE.—The amendments made by this section 
26 use 853 note, 
shall apply to dividends paid or accrued more than 30 days after 
the date of the enactment of this Act. 
SEC. 1054. DENIAL OF TREATY BENEFITS FOR CERTAIN PAYMENTS 
THROUGH HYBRID ENTITIES. 
« 
(a) IN GENERAL.—Section 894 (relating to income affected by 
treaty) is amended by inserting after subsection (b) the following 
new subsection: 
"(c) DENL\L OF TREATY BENEFITS FOR CERTAIN PAYMENTS 
THROUGH HYBRID ENTITIES.— 
"(1) APPLICATION TO CERTAIN PAYMENTS.—A foreign person 
shall not be entitled under any income tax treaty of the United 
States with a foreign country to any reduced rate of any 
withholding tax imposed by this title on an item of income 
derived through an entity which is treated as a partnership 
(or is otherwise treated as fiscally transparent) for purposes 
of this title if— 
"(A) such item is not treated for purposes of the tax-
ation laws of such foreign country as an item of income 
of such person, 
"(B) the treaty does not contain a provision addressing 
the applicability of the treaty in the case of an item of 
income derived through a partnership, and 
"(C) the foreign country does not impose tax on a 
distribution of such item of income from such entity to 
such person. 
"(2) REGULATIONS.—The Secretary shall prescribe such 
regulations as may be necessary or appropriate to determine 
the extent to which a taxpayer to which paragraph (1) does 
not apply shall not be entitled to benefits under any income 
tax treaty of the United States with respect to any pajmaent 
received by, or income attributable to any activities of, an 
entity organized in any jurisdiction (including the United 
I l l STAT. 944 
PUBLIC LAW 105-34—AUG. 5, 1997 
States) that is treated as a partnership or is otherwise treated 
as fiscally transparent for purposes of this title (including a 
common investment trust under section 584, a grantor trust, 
or an entity that is disregarded for purposes of this title) 
and is treated as fiscally nontransparent for purposes of the 
tax laws of the jurisdiction of residence of the taxpayer.". 
26 use 894 note. 
(b) EFFECTIVE DATE.—The amendments made by this section 
shall apply upon the date of enactment of this Act. 
SEC. 1055. INTEREST ON UNDERPAYMENTS NOT REDUCED BY FOREIGN 
TAX CREDIT CARRYBACKS. 
(a) IN GENERAL.—Subsection (d) of section 6601 is amended 
by redesignating paragraphs (2) and (3) as paragraphs (3) and 
(4), respectively, and by inserting after paragraph (1) the following 
new paragraph: 
"(2) FOREIGN 
TAX CREDIT CARRYBACKS.—If any credit 
allowed for any taxable year is increased by reason of a 
carryback of tax paid or accrued to foreign countries or posses-
sions of the United States, such increase shall not affect the 
computation of interest under this section for the period ending 
with the filing date for the taxable year in which such taxes 
were in fact paid or accrued, or, with respect to any portion 
of such credit carryback from a taxable year attributable to 
a net operating loss carryback or a capital loss carryback from 
a subsequent taxable year, such increase shall not affect the 
computation of interest under this section for the period ending 
with the filing date for such subsequent taxable year.". 
^ 
(b) CONFORMING AMENDMENT TO REFUNDS ATTRIBUTABLE TO 
FOREIGN TAX CREDIT CARRYBACKS.— 
(1) IN GENERAL.—Subsection (f) of section 6611 is amended 
by redesignating paragraphs (2) and (3) as paragraphs (3) and 
(4), respectively, and by inserting after paragraph (1) the follow-
ing new paragraph: 
"(2) FOREIGN TAX CREDIT CARRYBACKS.—For purposes of 
subsection (a), if any overpayment of tax imposed by subtitle 
A results from a carryback of tax paid or accrued to foreign 
countries or possessions of the United States, such overpayment 
shall be deemed not to have been made before the filing date 
for the taxable year in which such taxes were in fact paid 
or accrued, or, with respect to any portion of such credit 
carryback from a taxable year attributable to a net operating 
loss carryback or a capital loss carryback from a subsequent 
taxable year, such overpayment shall be deemed not to have 
been made before the filing date for such subsequent taxable 
year.". 
(2) CONFORMING AMENDMENTS.— 
(A) Paragraph (4) of section 6611(f) (as so redesignated) 
is amended— 
(i) by striking "PARAGRAPHS (i) AND (2)" and insert-
ing "PARAGRAPHS (1), (2), AND (3)", and 
(ii) by striking "paragraph (1) or (2)" each place 
it appears and inserting "paragraph (1), (2), or (3)". 
(B) Clause (ii) of section 6611(f)(4)(B) (as so redesig-
nated) is amended by striking "and" at the end of subclause 
(I), by redesignating subclause (II) as subclause (III), and 
by inserting after subclause (I) the following new subclause: 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 945 
"(II) in the case of a carryback of taxes paid 
or accrued to foreign countries or possessions of 
the United States, the taxable year in which such 
taxes were in fact paid or accrued (or, with respect 
to any portion of such carryback from a taxable 
year attributable to a net operating loss carryback 
or a capital loss carryback from a subsequent tax-
able year, such subsequent taxable year), and". 
(C) Subclause (III) of section 6611(f)(4)(B)(ii) (as so 
redesignated) is amended by inserting "(as defined in para-
graph (3)(B))" after "credit carryback" the first place it 
. appears. 
(D) Section 6611 is amended by striking subsection 
(g) and by redesignating subsections (h) and (i) as sub-
sections (g) and (h), respectively. 
(c) EFFECTIVE DATE.—The amendments made by this section 26USC660i 
shall apply to foreign tax credit carrybacks arising in taxable years note, 
beginning after the date of the enactment of this Act. 
SEC. 1056. CLARIFICATION OF PERIOD OF LIMITATIONS ON CLAIM 
FOR CREDIT OR REFUND ATTRIBUTABLE TO FOREIGN 
TAX CREDIT CARRYFORWARD. 
(a) IN GENERAL.—Subparagraph (A) of section 6511(d)(3) is 
amended by striking "for the year with respect to which the claim 
is made" and inserting "for the year in which such taxes were 
actually paid or accrued". 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
26 use 65ii 
shall apply to tsixes paid or accrued in taxable years beginning note. 
after the date of the enactment of this Act. 
SEC. 1057. REPEAL OF EXCEPTION TO ALTERNATIVE MINIMUM FOR-
EIGN TAX CREDIT LIMIT. 
(a) IN GENERAL.—Section 59(a)(2) (relating to limitation to 90 
percent of tax) is amended by striking subparagraph (C). 
(b) EFFECTIVE DATE.—The amendment made by this section 26 use 59 note, 
shall apply to taxable years beginning after the date of the enact-
ment of this Act. 
Subtitle G—Partnership Provisions 
SEC. 1061. ALLOCATION OF BASIS AMONG PROPERTIES DISTRIBUTED 
BY PARTNERSHIP. 
(a) IN GENERAL.—Subsection (c) of section 732 is amended 
to read as follows: 
"(c) ALLOCATION OF BASIS.— 
"(1) IN GENERAL.—The basis of distributed properties to 
which subsection (a)(2) or (b) is applicable shall be allocated— 
"(A)(i) first to any unrealized receivables (as defined 
in section 751(c)) and inventory items (as defined in section 
751(d)(2)) in an amount equal to the adjusted basis of 
each such property to the partnership, and 
"(ii) if the basis to be allocated is less than the sum 
of the adjusted bases of such properties to the partnership, 
then, to the extent any decrease is required in order to 
have the adjusted bases of such properties equal the basis 
to be allocated, in the manner provided in paragraph (3), 
and 
I l l STAT. 946 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(B) to the extent of any basis remaining after the 
allocation under subparagraph (A), to other distributed 
properties— 
"(i) first by assigning to each such other property 
such other property's adjusted basis to the partnership, 
and 
"(ii) then, to the extent any increase or decrease 
in basis is required in order to have the adjusted 
bases of such other distributed properties equal such 
remaining basis, in the manner provided in paragraph 
(2) or (3), whichever is appropriate. 
"(2) METHOD OF ALLOCATING INCREASE.—Any increase 
required under paragraph (1)(B) shall be allocated among the 
properties— 
"(A) first to properties with unrealized appreciation 
in proportion to their respective amounts of unrealized 
appreciation before such increase (but only to the extent 
of each property's unrealized appreciation), and 
"(B) then, to the extent such increase is not allocated 
under subparagraph (A), in proportion to their respective 
fair market values. 
"(3) METHOD OF ALLOCATING DECREASE.—Any decrease 
required under paragraph (1)(A) or (1)(B) shall be allocated— 
"(A) first to properties with unrealized depreciation 
in proportion to their respective amounts of unrealized 
depreciation before such decrease (but only to the extent 
of each property's unrealized depreciation), and 
"(B) then, to the extent such decrease is not allocated 
under subparagraph (A), in proportion to their respective 
adjusted bases (as adjusted under subparagraph (A)).". 
26 use 732 note. 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to distributions after the date of the enactment of 
this Act. 
SEC. 1062. REPEAL OF REQUIREMENT THAT INVENTORY BE SUBSTAN-
TIALLY APPRECIATED WITH RESPECT TO SALE OR 
EXCHANGE OF PARTNERSHIP INTEREST. 
(a) IN GENERAL.—Paragraph (2) of section 751(a) is amended 
to read as follows: 
"(2) inventory items of the partnership,". 
(b) CONFORMING AMENDMENTS.— 
(1)(A) Paragraph (1) of section 751(b) is amended by strik-
ing subparagraphs (A) and (B) and inserting the following 
new subparagraphs: 
"(A) partnership property which is— 
"(i) unrealized receivables, or 
"(ii) inventory items which have 
appreciated 
substantially in value, 
in exchange for all or a part of his interest in other partner-
ship property (including money), or 
"(B) partnership property (including money) other than 
property described in subparagraph (A)(i) or (ii) in exchange 
for all or a part of his interest in partnership property 
described in subparagraph (A)(i) or (ii),". 
(B) Subsection (b) of section 751 is amended by adding 
at the end the following new paragraph: 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 947 
"(3) SUBSTANTIAL APPRECIATION.—For purposes of para-
graph (1)— 
"(A) IN GENERAL.—Inventory items of the partnership 
shall be considered to have appreciated substantially in 
value if their fair market value exceeds 120 percent of 
the adjusted basis to the partnership of such property. 
"(B) CERTAIN PROPERTY EXCLUDED.—For purposes of 
subparagraph (A), there shall be excluded any inventory 
property if a principal purpose for acquiring such property 
was to avoid the provisions of this subsection relating to 
inventory items.". 
(2) Subsection (d) of section 751 is amended to read as 
follows: 
"(d) INVENTORY ITEMS.—For purposes of this subchapter, the 
term 'inventory items' means— 
"(1) property of the partnership of the kind described in 
section 1221(1), 
"(2) any other property of the partnership which, on sale 
or exchange by the partnership, would be considered property 
other than a capital asset and other than property described 
in section 1231, 
"(3) any other property of the partnership which, if sold 
or exchanged by the partnership, would result in a gain taxable 
under subsection (a) of section 1246 (relating to gain on foreign 
investment company stock), and 
"(4) any other property held by the partnership which, 
if held by the selling or distributee partner, would be considered 
property of the t3T)e described in paragraph (1), (2), or (3).". 
(3) Sections 724(d)(2), 731(a)(2)(B), 731(c)(6), 732(c)(1)(A) 
(as amended by the preceding section), 735(a)(2), and 735(c)(1) 
are each amended by striking "section 751(d)(2)" and inserting 
"section 751(d)". 
(c) EFFECTIVE DATE.— 
26 use 724 note. 
(1) IN GENERAL.—The amendments made by this section 
shall apply to sales, exchanges, and distributions after the 
date of the enactment of this Act. 
(2) BINDING CONTRACTS.—The amendments made by this 
section shall not apply to any sale or exchange pursuant to 
a written binding contract in effect on June 8, 1997, and at 
all times thereafter before such sale or exchange. 
SEC. 1063. EXTENSION OF TIME FOR TAXING PRECONTRIBUTION GAIN. 
(a) IN GENERAL.—Sections 704(c)(1)(B) and 737(b)(1) are each 
amended by striking "5 years" and inserting "7 years". 
(b) EFFECTIVE DATE.— 
26 use 704 note. 
(1) IN GENERAL.—The amendment made by subsection (a) 
shall apply to property contributed to a partnership after June 
8, 1997. 
(2) BINDING CONTRACTS.—The amendment made by sub-
section (a) shall not apply to any property contributed pursuant 
to a written binding contract in effect on June 8, 1997, and 
at all times thereafter before such contribution if such contract 
provides for the contribution of a fixed amount of property. 
I l l STAT. 948 
PUBLIC LAW 105-34—AUG. 5, 1997 
Subtitle H—Pension Provisions 
SEC. 1071. PENSION ACCRUED BENEFIT DISTRIBUTABLE WITHOUT 
CONSENT INCREASED TO $5,000. 
(a) AMENDMENT TO 1986 C O D E . — 
(1) I N GENERAL.—Subparagraph (A) of section 411(a)(ll) 
(relating to restrictions on certain mandatory 
distributions) 
is amended by striking "$3,500" and inserting "$5,000". 
(2) CONFORMING AMENDMENTS.— 
(A) Section 411(a)(7)(B), paragraphs (1) and (2) of sec-
tion 417(e), and section 457(e)(9) are each amended by 
striking "$3,500" each place it appears (other than the 
headings) and inserting "the dollar limit under section 
411(a)(ll)(A)". 
(B) The headings for paragraphs (1) and (2) of section 
417(e) and subparagraph (A) of section 457(e)(9) are each 
amended by striking "$3,500" and inserting "DOLLAR LIMIT". 
(b) AMENDMENTS TO ERISA.— 
(1) I N GENERAL.—Section 203(e)(1) of the Employee Retire-
ment Income Security Act of 1974 (29 U.S.C. 1053(e)(1)) is 
amended by striking "$3,500" and inserting "$5,000". 
(2) 
CONFORMING 
AMENDMENTS.—Sections 
204(d)(1) 
and 
205(g) (1) and (2) (29 U.S.C. 1054(d)(1) and 1055(g) (1) and 
(2)) are each amended by striking "$3,500" and inserting "the 
dollar limit under section 203(e)(1)". 
26 use 411 note. 
(c) EFFECTIVE DATE.—The amendments made by this section 
shall apply to plan years beginning after the date of the enactment 
of this Act. 
SEC. 1072. ELECTION TO RECEIVE TAXABLE CASH COMPENSATION IN 
LIEU OF NONTAXABLE PARKING BENEFITS. 
(a) I N GENERAL.—Section 132(f)(4) (relating to benefits not in 
lieu of compensation) is amended by adding at the end the following 
new sentence: "This paragraph shall not apply to any qualified 
parking provided in lieu of compensation which otherwise would 
have been includible in gross income of the employee, and no 
amount shall be included in the gross income of the employee 
solely because the employee may choose between the qualified park-
ing and compensation.". 
26 use 132 note. 
(b) EFFECTIVE DATE.—The amendment made by this section 
shall apply to taxable years beginning after December 31, 1997. 
SEC. 1073. REPEAL OF EXCESS DISTRIBUTION AND EXCESS RETIRE-
MENT ACCUMULATION TAX. 
(a) REPEAL O F EXCESS DISTRIBUTION AND EXCESS RETIREMENT 
ACCUMULATION TAX.—Section 4980A (relating to excess distribu-
tions fi'om qualified retirement plans) is repealed. 
(b) CONFORMING AMENDMENTS.— 
(1) Section 691(c)(1) is amended by striking subparagraph 
(C). 
(2) Section 2013 is amended by striking subsection (g). 
(3) Section 2053(c)(1)(B) is amended by striking the last 
sentence. 
(4) Section 6018(a) is amended by striking paragraph (4). 
42 use 4980A 
(c) EFFECTIVE DATES.— 
note. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 949 
(1) EXCESS DISTRIBUTION TAX REPEAL.—Except as provided 
Applicability. 
in paragraph (2), the repeal made by subsection (a) shall apply 
to excess distributions received after December 31, 1996. 
(2) EXCESS RETIREMENT ACCUMULATION TAX REPEAL.—The 
repeal made by subsection (a) with respect to section 4980A(d) 
of the Internal Revenue Code of 1986 and the amendments 
made by subsection (b) shall apply to estates of decedents 
d3dng after December 31,1996. 
SEC. 1074. INCREASE IN TAX ON PROHIBITED TRANSACTIONS. 
(a) IN GENERAL.—Section 4975(a) is amended by striking "10 
percent" and inserting "15 percent". 
(b) EFFECTIVE DATE.—The amendment made by this section 
26 use 4975 
shall apply to prohibited transactions occurring after the date of note. 
the enactment of this Act. 
SEC. 1075. BASIS RECOVERY RULES FOR ANNUITIES OVER MORE THAN 
ONE LIFE. 
(a) IN GENERAL.—Section 72(d)(1)(B) is amended by adding 
at the end the following new clause: 
"(iv) NUMBER OF ANTICIPATED PAYMENTS WHERE 
MORE THAN ONE LIFE.—If the annuity is payable over 
the lives of more than 1 individual, the number of 
anticipated payments shall be determined as follows: 
"If the combined ages of annu-
itants are: 
The number is: 
Not more than 110 
410 
More than 110 but not more than 120 
360 
More than 120 but not more than 130 
310 
More than 130 but not more than 140 
260 
More than 140 
210.". 
(b) 
CONFORMING 
AMENDMENT.—Section 
72(d)(l)(B)(iii) 
is 
amended— 
(1) by inserting "If the annuity is payable over the life 
of a single individual, the number of anticipated payments 
shall be determined as follows:" after i;he heading and before 
the table, and 
(2) by striking "primary" in the table. 
(c) EFFECTIVE DATE.—The amendments made by this section 26USC72note. 
shall apply with respect to annuity starting dates beginning after 
December 31, 1997. 
Subtitle I—Other Revenue Provisions 
SEC 1081. TERMINATION OF SUSPENSE ACCOUNTS FOR FAMILY COR-
PORATIONS REQUIRED TO USE ACCRUAL METHOD OF 
ACCOUNTING. 
(a) IN GENERAL.—Subsection (i) of section 447 (relating to 
method of accounting for corporations engaged in farming) is amend-
ed by striking paragraphs (3) and (4), by redesignating paragraphs 
(5) and (6) as paragraphs (3) and (4), respectively, and by adding 
at the end the following new paragraph: 
"(5) TERMINATION.— 
"(A) IN GENERAL.—No suspense account may be estab-
lished under this subsection by any corporation required 
by this section to change its method of accounting for 
any taxable year ending after June 8, 1997. 
Ill STAT. 950 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(B) PHASEOUT OF EXISTING SUSPENSE ACCOUNTS.— 
"(i) IN GENERAL.—Each suspense account under 
this subsection shall be reduced (but not below zero) 
for each taxable year beginning after June 8, 1997, 
by an amount equal to the lesser of— 
"(I) the applicable portion of such account, or 
"(II) 50 percent of the taxable income of the 
corporation for the taxable year, or, if the corpora-
tion has no taxable income for such year, the 
amount of any net operating loss (as defined in 
section 172(c)) for such taxable year. 
For purposes of the preceding sentence, the amoiint 
of taxable income and net operating loss shall be deter-
mined without regard to this paragraph. 
"(ii) COORDINATION WITH OTHER REDUCTIONS.—The 
amount of the applicable portion for any taxable year 
shall be reduced (but not below zero) by the amount 
of any reduction required for such taxable year under 
any other provision of this subsection. 
"(iv) 
INCLUSION IN INCOME.—^Any reduction in 
a 
suspense account under this paragraph shall be 
included in gross income for the taxable year of the 
reduction. 
"(C) APPLICABLE PORTION.—For purposes of subpara-
graph (B), the term 'applicable portion' means, for any 
taxable year, the amount which would ratably reduce the 
amount in the account (after taking into account prior 
reductions) to zero over the period consisting of such tax-
able year and the remaining teixable years in such first 
20 taxable years. 
"(D) AMOUNTS AFTER 20TH YEAR.—Any amount in the 
account as of the close of the 20th year referred to in 
subparagraph (C) shall be treated as the applicable portion 
for each succeeding year thereafter to the extent not 
reduced under this paragraph for any prior taxable year 
after such 20th year.". 
26 use 447 note. 
(b) EFFECTIVE DATE.—The amendments made by this section 
shall apply to tsixable years ending after June 8,1997. 
SEC. 1082. MODIFICATION OF TAXABLE YEARS TO WfflCH NET OPERAT-
ING LOSSES MAY BE CARRIED. 
(a) IN GENERAL.—Subparagraph (A) of section 172(b)(1) (relat-
ing to years to which loss may be carried) is amended— 
(1) by striking "3" in clause (i) £ind inserting "2", and 
(2) by striking "15" in clause (ii) and inserting "20". 
(b) RETENTION OF 3-YEAR CARRYBACK FOR CERTAIN LOSSES.— 
Paragraph (1) of section 172(b) is amended by adding at the end 
the following new subparagraph: 
"(F) 
RETENTION OF 3-YEAR CARRYBACK IN CERTAIN 
CASES.— 
"(i) IN GENERAL.—Subparagraph (A)(i) shall be 
applied by substituting '3 years' for '2 years' with 
respect to the portion of the net operating loss for 
the taxable year which is an eligible loss with respect 
to the taxpayer. 
"(ii) ELIGIBLE LOSS.—For purposes of clause (i), 
the term 'eligible loss' means— 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 951 
"(I) in the case of an individual, losses of prop-
erty arising from fire, storm, shipwreck, or other 
casualty, or from theft, 
"(II) in the case of a taxpayer which is a small 
business, net operating losses attributable to Presi-
dentially declared disasters (as defined in section 
1033(h)(3)), and 
"(III) in the case of a taxpayer engaged in 
the trade or business of farming (as defined in 
section 263A(e)(4)), net operating losses attrib-
utable to such Presidentially declared disasters, 
"(iii) 
SMALL 
BUSINESS.—For purposes 
of this 
subparagraph, the term 'small business' means a cor-
poration or partnership which meets the gross receipts 
test of section 448(c) for the taxable year in which 
the loss arose (or, in the case of a sole proprietorship, 
which would meet such test if such proprietorship were 
a corporation).", 
(c) EFFECTIVE DATE.—The amendments made by this section 
26 use 172 note. 
shall apply to net operating losses for taxable years beginning 
after the date of the enactment of this Act. 
SEC. 1083. MODIFICATIONS TO TAXABLE YEARS TO WHICH UNUSED 
CREDITS MAY BE CARRIED. 
(a) IN GENERAL.—Section 39(a) (relating to unused credits) 
is amended— 
(1) in paragraph (1), by striking "3" each place it appears 
and inserting "1" and by striking "15" each place it appears 
and inserting "20"; and 
(2) in paragraph (2), by striking "18" each place it appears 
and inserting "22" and by striking "17" each place it appears 
and inserting "21". 
(b) EFFECTIVE DATE.—The amendments made by this section 26 use 39 note. 
shall apply to credits arising in taxable years beginning after 
December 31,1997. 
SEC. 1084. EXPANSION OF DENIAL OF DEDUCTION FOR CERTAIN 
AMOUNTS PAID IN CONNECTION WITH INSURANCE. 
(a) DENIAL OF DEDUCTION FOR PREMIUMS.— 
(1) IN GENERAL.—Paragraph (1) of section 264(a) is amend-
ed to read as follows: 
"(1) Premiums on emy life insurance policy, or endowment 
or annuity contract, if the taxpayer is directly or indirectly 
a beneficiary under the policy or contract.". 
(2) EXCEPTIONS.—Section 264 is amended by redesignating 
subsections (b), (c), £ind (d) as subsections (c), (d), and (e), 
respectively, and by inserting after subsection (a) the following 
new subsection: 
"(b) EXCEPTIONS TO SUBSECTION (a)(1).—Subsection (a)(1) shall 
not apply to— 
"(1) any annuity contract described in section 72(s)(5), and 
"(2) any annuity contract to which section 72(u) applies.". 
(b) INTEREST ON POLICY LOANS.— 
(1) IN GENERAL.—Paragraph (4) of section 264(a) is amend-
ed by striking "individual, who" and all that follows and insert-
ing "individual.". 
I l l STAT. 952 
PUBLIC LAW 105-34—AUG. 5, 1997 
(2) COORDINATION WITH TRANSFERS FOR VALUE.—Paragraph 
(2) of section 101(a) is amended by adding at the end the 
following new flush sentence: 
"The term 'other amounts' in the first sentence of this para-
graph includes interest paid or accrued by the transferee on 
indebtedness with respect to such contract or any interest 
therein if such interest paid or accrued is not allowable as 
a deduction by reason of section 264(a)(4).". 
(c) PRO RATA ALLOCATION OF INTEREST EXPENSE TO POLICY 
CASH VALUES.—Section 264 is amended by adding at the end the 
following new subsection: 
"(f) PRO RATA ALLOCATION OF INTEREST EXPENSE TO POLICY 
CASH VALUES.— 
"(1) IN GENERAL.—No deduction shall be allowed for that 
portion of the taxpayer's interest expense which is allocable 
to unborrowed policy cash values. 
"(2) ALLOCATION.—For purposes of paragraph (1), the por-
tion of the taxpayer's interest expense which is allocable to 
unborrowed policy cash values is an amount which bears the 
same ratio to such interest expense as— 
"(A) the taxpayer's average unborrowed policy cash 
values of life insurance policies, and annuity and endow-
ment contracts, issued after June 8, 1997, bears to 
"(B) the sum of— 
"(i) in the case of assets of the taxpayer which 
are life insurance policies or annuity or endowment 
contracts, the average unborrowed policy cash values 
of such policies and contracts, and 
"(ii) in the case of assets of the taxpayer not 
described in clause (i), the average adjusted bases 
(within the meaning of section 1016) of such assets. 
"(3) 
UNBORROWED POLICY CASH VALUE.—For purposes of 
this subsection, the term 'unborrowed policy cash value means, 
with respect to any life insurance policy or annuity or endow-
ment contract, the excess of— 
"(A) the cash surrender value of such policy or contract 
determined without regard to any surrender charge, over 
"(B) the amount of any loan with respect to such policy 
or contract. 
"(4) EXCEPTION FOR CERTAIN POLICIES AND CONTRACTS.— 
"(A) 
POLICIES AND CONTRACTS COVERING 2O-PERCENT 
OWNERS, OFFICERS, DIRECTORS, AND EMPLOYEES.—Para-
graph (1) shall not apply to any policy or contract owned 
by an entity engaged in a trade or business if such policy 
or contract covers only 1 individual and if such individual 
is (at the time first covered by the policy or contract)— 
"(i) a 20-percent owner of such entity, or 
"(ii) an individual (not described in clause (i)) who 
is an officer, director, or employee of such trade or 
business. 
A policy or contract covering a 20-percent owner of such 
entity shall not be treated as failing to meet the require-
ments of the preceding sentence by reason of covering 
the joint lives of such owner and such owner's spouse. 
"(B) CONTRACTS SUBJECT TO CURRENT INCOME INCLU-
SION.—Paragraph (1) shall not apply to any annuity con-
tract to which section 72(u) applies. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 953 
"(C) COORDINATION WITH PARAGRAPH (2).—Any policy 
or contract to which paragraph (1) does not apply by reason 
of this paragraph shall not be taken into account under 
paragraph (2). 
"(D) 20-PERCENT OWNER.—For purposes of subpara-
graph (A), the term '20-percent owner' has the meaning 
given such term by subsection (e)(4). 
"(5) EXCEPTION FOR POLICIES AND CONTRACTS HELD BY 
NATURAL PERSONS; TREATMENT OF PARTNERSHIPS AND S COR-
PORATIONS.— 
"(A) POLICIES AND CONTRACTS HELD BY NATURAL PER-
SONS.— 
"(i) IN GENERAL.—This subsection shall not apply 
to any policy or contract held by a natural person, 
"(ii) EXCEPTION WHERE BUSINESS IS BENEFICIARY.— 
If a trade or business is directly or indirectly the 
beneficiary under any policy or contract, such policy 
or contract shall be treated as held by such trade 
or business and not by a natural person, 
"(iii) SPECIAL RULES.— 
"(I) 
CERTAIN TRADES OR BUSINESSES NOT 
TAKEN INTO ACCOUNT.—Clause (ii) shall not apply 
to any trade or business carried on as a sole 
proprietorship and to any trade or business 
performing services as an employee. 
"(II) 
LIMITATION 
ON 
UNBORROWED 
CASH 
VALUE.—The amount of the unborrowed cash value 
of any policy or contract which is taken into 
account by reason of clause (ii) shall not exceed 
the benefit to which the trade or business is 
directly or indirectly entitled under the policy or 
contract. 
"(iv) REPORTING.—The Secretary shall require such 
reporting from policyholders and issuers as is nec-
essary to carry out clause (ii). Any report required 
under the preceding sentence shall be treated as a 
statement referred to in section 6724(d)(1). 
"(B) TREATMENT OF PARTNERSHIPS AND S CORPORA-
TIONS.—In the case of a partnership or S corporation, this 
subsection shall be applied at the partnership and corporate 
levels. 
"(6) SPECIAL RULES.— 
"(A) COORDINATION WITH SUBSECTION (a) AND SECTION 
265.—If interest on £iny indebtedness is disallowed under 
subsection (a) or section 265— 
"(i) such disallowed interest shall not be taken 
into account for purposes of applying this subsection, 
and 
"(ii) the amount otherwise taken into account 
under paragraph (2)(B) shall be reduced (but not below 
zero) by the amount of such indebtedness. 
"(B) COORDINATION WITH SECTION 263A.—This sub-
section shall be applied before the application of section 
263A (relating to capitalization of certain expenses where 
taxpayer produces property). 
"(7) INTEREST EXPENSE.—The term 'interest expense' means 
the aggregate amount allowable to the taxpayer as a deduction 
I l l STAT. 954 
PUBLIC LAW 105-34—AUG. 5, 1997 
for interest (within the meaning of section 265(b)(4)) for the 
taxable year (determined without regard to this subsection, 
section 265(b), and section 291). 
"(8) AGGREGATION RULES.— 
"(A) IN GENERAL.—All members of a controlled group 
(within the meaning of subsection (d)(5)(B)) shall be treated 
as 1 taxpayer for purposes of this subsection. 
"(B) TREATMENT OF INSURANCE COMPANIES.—This sub-
section shall not apply to an insurance company subject 
to tax under subchapter L, and subparagraph (A) shall 
be applied without regard to any member of an affiliated 
group which is an insurance company.", 
(b) TREATMENT OF INSURANCE COMPANIES.— 
(1)(A) Clause (ii) of section 805(a)(4)(C) is amended by 
inserting ", or out of the increase for the taxable year in 
policy cash values (within the meaning of subparagraph (F)) 
of life insurance policies and annuity and endowment contracts 
to which section 264(f) applies," after "tax-exemjjt interest". 
(B) Clause (iii) of section 805(a)(4)(D) is amended by strik-
ing "and" and inserting ", the increase for the taxable year 
in policy cash values (within the meaning of subparagraph 
(F)) of life insurance policies and annuity and endowment con-
tracts to which section 264(f) applies, and". 
(C) Paragraph (4) of section 805(a) is amended by adding 
at the end the following new subparagraph: 
"(F) INCREASE IN POLICY CASH VALUES.—For purposes 
of subparagraphs (C) and (D)— 
"(i) IN GENERAL.—The increase in the policy cash 
value for any taxable year with respect to policy or 
contract is the amount of the increase in the adjusted 
cash value during such taxable year determined with-
out regard to— 
"(I) gross premiums paid during such taxable 
year, and 
"(II) distributions (other than amounts includ-
ible in the policyholder's gross income) during such 
taxable year to which section 72(e) applies, 
"(ii) 
ADJUSTED 
CASH VALUE.—For purposes 
of 
clause (i), the term 'adjusted cash value' means the 
cash surrender value of the policy or contract increased 
by the sum of— 
"(I) commissions payable with respect to such 
policy or contract for the taxable year, and 
"(II) 
asset 
management 
fees, 
surrender 
charges, mortality and expense charges, and any 
other fees or charges specified in regulations pre-
scribed by the Secretary which are imposed (or 
which would be imposed were the policy or contract 
canceled) with respect to such policy or contract 
for the taxable year.". 
(2)(A) Subparagraph (B) of section 807(a)(2) is amended 
by striking "interest," and inserting "interest and the amount 
of the policyholder's share of the increase for the taxable year 
in 
policy 
cash 
values 
(within 
the 
meaning 
of section 
805(a)(4)(F)) of life insurance policies and einnuity and endow-
ment contracts to which section 264(f) applies,". 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 955 
(B) Subparagraph (B) of section 807(b)(1) is amended by 
striking "interest," and inserting "interest £ind the amount of 
the policyholder's share of the increase for the tsixable year 
in policy cash values 
(within 
the 
meaning 
of section 
805(a)(4)(F)) of life insurance policies and annuity and endow-
ment contracts to which section 264(f) applies,". 
(3) Paragraph (1) of section 812(d) is amended by striking 
"and" at the end of subparagraph (B), by striking the period 
at the end of subparagraph (C) and inserting ", and", and 
by adding at the end the following new subparagraph: 
"(D) the increase for any taxable year in the policy 
cash values (within the meaning of section 805(a)(4)(F)) 
of life insurance policies and annuity and endowment con-
tracts to which section 264(f) applies.". 
(4) Subparagraph (B) of section 832(b)(5) is amended by 
striking "and" at the end of clause (i), by striking the period 
at the end of clause (ii) and inserting ", and", and by adding 
at the end the following new clause: 
"(iii) the increase for the taxable year in policy 
cash values (within the meaning of section 805(a)(4)(F)) 
of life insur£ince policies and annuity £ind endowment 
contracts to which section 264(f) applies.". 
(c) CONFORMING AMENDMENT.—Subparagraph (A) of section 
265(b)(4) is amended by inserting ", section 264," before "and section 
291". 
(d) EFFECTIVE DATE.—The amendments made by this section 
26 use loi note, 
shall apply to contracts issued after June 8, 1997, in taxable years 
ending after such date. For purposes of the preceding sentence, 
any material increase in the death benefit or other material change 
in the contract shall be treated as a new contract but the addition 
of covered lives shall be treated as a new contract only with respect 
to such additional covered lives. For purposes of this subsection, 
an increase in the death benefit under a policy or contract issued 
in connection with a lapse described in section 501(d)(2) of the 
Health Insurance Portability and Accountability Act of 1996 shall 
not be treated as a new contract. 
SEC. 1085. IMPROVED ENFORCEMENT OF THE APPLICATION OF THE 
EARNED INCOME CREDIT. 
(a) RESTRICTIONS ON AVAILABILITY OF EARNED INCOME CREDIT 
FOR TAXPAYERS WHO IMPROPERLY CLAIMED CREDIT IN PRIOR YEAR.— 
(1) IN GENERAL.—Section 32 is amended by redesignating 
subsections (k) and (1) as subsections (1) and (m), respectively, 
and by inserting after subsection (j) the following new sub-
section: 
"(k) RESTRICTIONS ON TAXPAYERS WHO IMPROPERLY CLAIMED 
CREDIT IN PRIOR YEAR.— 
"(1) TAXPAYERS MAKING PRIOR FRAUDULENT OR RECKLESS 
CLAIMS.— 
"(A) IN GENERAL.—No credit shall be allowed under 
this section for any teixable year in the disallowance period. 
"(B) DISALLOWANCE PERIOD.—For purposes of para-
graph (1), the disallowance period is— 
"(i) the period of 10 taxable years after the most 
recent taxable year for which there was a final deter-
mination that the taxpayer's claim of credit under this 
section was due to fraud, and 
I l l STAT. 956 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(ii) the period of 2 taxable years after the most 
recent taxable year for which there was a final deter-
mination that the taxpayer's claim of credit under this 
section was due to reckless or intentional disregard 
of rules and regulations (but not due to fraud). 
"(2) TAXPAYERS MAKING IMPROPER PRIOR CLAIMS.—In the 
case of a taxpayer who is denied credit under this section 
for any taxable year as a result of the deficiency procedures 
under subchapter B of chapter 63, no credit shall be allowed 
under this section for any subsequent taxable year unless the 
taxpayer provides such information as the Secretary may 
require to demonstrate eligibility for such credit.". 
(2) DUE DILIGENCE REQUIREMENT ON INCOME TAX RETURN 
PREPARERS.—Section 6695 is amended by adding at the end 
the following new subsection: 
"(g) FAILURE TO BE DILIGENT IN DETERMINING ELIGIBILITY 
FOR EARNED INCOME CREDIT.—^Any person who is an income tax 
return preparer with respect to any return or claim for refund 
who fails to comply with due diligence requirements imposed by 
the Secretary by regulations with respect to determining eligibility 
for, or the amount of, the credit allowable by section 32 shall 
pay a penalty of $100 for each such failure.". 
(3) EXTENSION PROCEDURES APPLICABLE TO MATHEMATICAL 
OR CLERICAL ERRORS.—Paragraph (2) of section 6213(g) (relating 
to the definition of mathematical or clerical errors) is amended 
by striking "and" at the end of subparagraph (H), by striking 
the period at the end of subparagraph (I) and inserting ", 
and", and by inserting after subparagraph (I) the following 
new subparagraph: 
"(J) an omission of information required by section 
32(k)(2) (relating to taxpayers making improper prior 
claims of earned income credit).". 
(b) 
INCREASE 
IN NET LOSS 
DISREGARDED FOR MODIFIED 
ADJUSTED GROSS INCOME.—Section 32(c)(5)(B)(iv) is amended by 
striking "50 percent" and inserting "75 percent". 
(c) WORKFARE PAYMENTS NOT INCLUDED IN EARNED INCOME.— 
Section 32(c)(2)(B) is amended by striking "and" at the end of 
clause (iii), by striking the period at the end of clause (iv) and 
inserting ", and", and by adding at the end the following new 
clause: 
"(v) no amount described in subparagraph (A) 
received for service performed in work activities as 
defined in paragraph (4) or (7) of section 407(d) of 
the Social Security Act to which the taxpayer is 
assigned im^der any State program under part A of 
title IV of such Act, but only to the extent such amount 
is subsidized under such State program.". 
(d) 
CERTAIN NONTAXABLE INCOME INCLUDED IN MODIFIED 
ADJUSTED GROSS INCOME.—Section 32(c)(5)(B) is amended— 
(1) by striking "and" at the end of clause (iii), 
(2) by striking the period at the end of clause (iv)(III), 
(3) by inserting after clause (iv)(III) the following new 
clauses: 
"(v) interest received or accrued during the taxable 
year which is exempt from tax imposed by this chapter, 
and 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 957 
"(vi) amounts received as a pension or annuity, 
and any distributions or pa3mients received from an 
individual retirement plan, by the taxpayer during the 
taxable year to the extent not included in gross 
income.", and 
(4) by adding at the end the following new sentence: 
"Clause (vi) shall not include any amount which is not includ-
ible in gross income by reason of section 402(c), 403(a)(4), 
403(b), 408(d) (3), (4), or (5), or 457(e)(10).". 
(e) EFFECTIVE DATES.— 
26 use 32 note. 
(1) The amendments made by subsection (a) shall apply 
to taxable years beginning after December 31, 1996. 
(2) The amendments made by subsections (b), (c), and 
(d) shall apply to taxable years beginning after December 31, 
1997. 
SEC. 1086. LIMITATION ON PROPERTY FOR WHICH INCOME FORECAST 
METHOD MAY BE USED. 
(a) LIMITATION.—Subsection (g) of section 167 is amended by 
adding at the end the following new paragraph: 
"(6) LIMITATION ON PROPERTY FOR WHICH INCOME FORECAST 
METHOD M
A
Y BE USED.—The depreciation deduction allowable 
under this section may be determined under the income forecast 
method or any similar method only with respect to— 
"(A) property described in paragraph (3) or (4) of sec-
tion 168(f), 
"(B) copyrights, 
"(C) books, 
"(D) patents, and 
"(E) other property specified in regulations. 
Such methods may not be used with respect to any amortizable 
section 197 intangible (as defined in section 197(c)).". 
(b) DEPRECIATION PERIOD FOR RENT-TO-OWN PROPERTY.— 
(1) IN GENERAL.—Subparagraph (A) of section 168(e)(3) 
(relating to 3-year property) is amended by striking "and" at 
the end of clause (i), by striking the period at the end of 
clause (ii) and inserting ", and", and by adding at the end 
the following new clause: 
"(iii) any qualified rent-to-own property.". 
(2) 4-YEAR CLASS LIFE.—^The table contained in section 
168(g)(3)(B) is amended by inserting before the first item the 
following new item: 
"(AKiii) 
4 ". 
(3) DEFINITION OF QUALIFIED RENT-TO-OWN PROPERTY.— 
Subsection (i) of section 168 is amended by adding at the 
end the following new paragraph: 
"(14) QUALIFIED RENT-TO-OWN PROPERTY.— 
"(A) IN GENERAL.—The term 'quaUfied rent-to-own 
property* means property held by a rent-to-own dealer for 
purposes of being subject to a rent-to-own contract. 
"(B) RENT-TO-OWN DEALER.—The term 'rent-to-own 
dealer' means a person that, in the ordinary course of 
business, regularly enters into rent-to-own contracts with 
customers for the use of consumer property, if a substantial 
portion of those contracts terminate and the property is 
returned to such person before the receipt of all payments 
I l l STAT. 958 
PUBLIC LAW 105-34—AUG. 5, 1997 
required to transfer ownership of the property from such 
person to the customer. 
"(C) CONSUMER PROPERTY.—The term 'consumer prop-
erty* means tangible personal property of a type generally 
used within the home for personal use. 
"(D) RENT-TO-OWN CONTRACT.—The term *rent-to-own 
contract' means any lease for the use of consumer property 
between a rent-to-own dealer and a customer who is an 
individual which— 
"(i) is titled *Rent-to-Own Agreement' or 'Lease 
Agreement with Ownership Option,' or uses other simi-
lar language, 
"(ii) provides for level (or decreasing where no 
payment is less than 40 percent of the largest pay-
ment), regular periodic payments (for a pa3niient period 
which is a week or month), 
"(iii) provides that legal title to such property 
remains with the rent-to-own dealer until the customer 
makes all the payments described in clause (ii) or 
early purchase payments required under the contract 
to acquire legal title to the item of property, 
"(iv) provides a beginning date and a maximum 
period of time for which the contract may be in effect 
that does not exceed 156 weeks or 36 months from 
such beginning date (including renewals or options 
to extend), 
"(v) provides for payments within the 156-week 
or 36-month period that, in the aggregate, generally 
exceed the normal retail price of the consumer property 
plus interest, 
"(vi) provides for pa3anents under the contract that, 
in the aggregate, do not exceed $10,000 per item of 
consumer property, 
"(vii) provides that the customer does not have 
any legal obligation to make all the payments referred 
to in clause (ii) set forth under the contract, and that 
at the end of each pajonent period the customer may 
either continue to use the consumer property by mak-
ing the payment for the next pajmient period or return 
such property to the rent-to-own dealer in good working 
order, in which case the customer does not incur any 
further obligations under the contract and is not enti-
tled to a return of any payments previously made 
under the contract, and 
"(viii) provides that the customer has no right 
to sell, sublease, mortgage, pawn, pledge, encumber, 
or otherwise dispose of the consumer property until 
all the payments stated in the contract have been 
made.". 
26 use 167 note. 
(c) EFFECTIVE DATE.—The amendment made by this section 
shall apply to property placed in service after the date of the 
enactment of this Act. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 959 
SEC. 1087. EXPANSION OF REQUIREMENT THAT INVOLUNTARILY CON-
VERTED PROPERTY BE REPLACED WITH PROPERTY 
ACQUIRED FROM AN UNRELATED PERSON. 
(a) IN GENERAL.—Subsection (i) of section 1033 is amended 
to read as follows: 
"(i) REPLACEMENT PROPERTY MUST BE ACQUIRED FROM UNRE-
LATED PERSON IN CERTAIN CASES.— 
"(1) IN GENERAL.—If the property which is involuntarily 
converted is held by a tsixpayer to which this subsection applies, 
subsection (a) shall not apply if the replacement property or 
stock is acquired from a related person. The preceding sentence 
shall not apply to the extent that the related person acquired 
the replacement property or stock from an unrelated person 
during the period applicable under subsection (a)(2)(B). 
"(2) TAXPAYERS TO WHICH SUBSECTION APPLIES.—This sub-
section shall apply to— 
"(A) a C corporation, 
"(B) a partnership in which 1 or more C corporations 
own, directly or indirectly (determined in accordance with 
section 707(b)(3)), more than 50 percent of the capital 
interest, or profits interest, in such partnership at the 
time of the involuntary conversion, gmd 
"(C) any other taxpayer if, with respect to property 
which is involuntarily converted during the taxable year, 
the aggregate of the amount of realized gain on such prop-
erty on which there is realized gain exceeds $100,000. 
In the case of a partnership, subparagraph (C) shall apply Applicability, 
with respect to the partnership and with respect to each part-
ner. A similar rule shall apply in the case of an S corporation 
and its shareholders. 
"(3) RELATED PERSON.—For purposes of this subsection, 
a person is related to another person if the person bears a 
relationship to the other person described in section 267(b) 
or 707(b)(1).". 
(b) EFFECTIVE DATE.—The amendment made by this section 26USC1003 
shall apply to involuntary conversions occurring after June 8, 1997. note. 
SEC. 1088. TREATMENT OF EXCEPTION FROM INSTALLMENT SALES 
RULES FOR SALES OF PROPERTY BY A MANUFACTURER 
TO A DEALER. 
(a) IN GENERAL.—Paragraph (2) of section 811(c) of the Tax 
Reform Act of 1986 is hereby repealed. 
26 USC 453C 
(b) EFFECTIVE DATE.— 
note. 
(1) IN GENERAL.—The amendment made by this section 26USC453C 
shall apply to taxable years beginning more than 1 year after note. 
the date of the enactment of this Act. 
(2) COORDINATION WITH SECTION 481.—In the case of any 
taxpayer required by this section to chemge its method of 
accounting for £iny taxable year— 
(A) such changes shall be treated as initiated by the 
taxpayer, 
(B) such changes shall be treated as made with the 
consent of the Secretary of the Treasury, and 
(C) the net amount of the adjustments required to 
be taken into account under section 481(a) of the Internal 
Revenue Code of 1986 shall be taken into account ratably 
over the 4 taxable year period beginning with the first 
I l l STAT. 960 
PUBLIC LAW 105-34—AUG. 5, 1997 
taxable year beginning after the date of the enactment 
of this Act. 
SEC. 1089. LIMITATIONS ON CHARITABLE REMAINDER TRUST ELIGI-
BILITY FOR CERTAIN TRUSTS. 
(a) LIMITATION ON NONCHARITABLE DISTRIBUTIONS.— 
(1) IN GENERAL.—Paragraphs (1)(A) and (2)(A) of section 
664(d) (relating to charitable remainder trusts) are each amend-
ed by inserting "nor more than 50 percent" after "not less 
than 5 percent", 
26 use 664 note. 
(2) EFFECTIVE DATE.—The amendment made by paragraph 
(1) shall apply to transfers in trust after June 18, 1997. 
(b) MINIMUM CHARITABLE BENEFIT.— 
(1) CHARITABLE REMAINDER ANNUITY TRUSTS.—Paragraph 
(1) of section 664(d) is amended by striking "and" at the end 
of subparagraph (B), by striking the period at the end of 
subparagraph (C), and by adding at the end the following 
new subparagraph: 
"(D) the value (determined under section 7520) of such 
remainder interest is at least 10 percent of the initial 
net fair market value of all property placed in the trust." 
(2) CHARITABLE REMAINDER UNITRUSTS.—Paragraph (2) of 
section 664(d) is amended by striking "and" at the end of 
subparagraph (B), by striking the period at the end of subpara-
graph (C), and by adding at the end the following new subpara-
graph: 
"(D) with respect to each contribution of property to 
the trust, the value (determined under section 7520) of 
such remainder interest in such property is at least 10 
percent of the net fair market value of such property as 
of the date such property is contributed to the trust.". 
(3) VOID OR REFORMED TRUST.—Paragraph (3) of section 
2055(e) is amended by adding at the end the following new 
subparagraph: 
"(J) VOID OR REFORMED TRUST IN CASES OF INSUFFI-
CIENT REMAINDER INTERESTS.—In the case of a trust that 
would qualify (or could be reformed to qualify pursuant 
to subparagraph (B)) but for failure to satisfy the require-
ment of paragraph (1)(D) or (2)(D) of section 664(d), such 
trust may be— 
"(i) declared null and void ab initio, or 
"(ii) changed by reformation, amendment, or other-
wise to meet such requirement by reducing the payout 
rate or the duration (or both) of any noncharitable 
beneficiary's interest to the extent necessary to satisfy 
such requirement, 
pursuant to a proceeding that is commenced within the 
period required in subparagraph (C)(iii). In a case described 
in clause (i), no deduction shall be allowed under this 
title for any transfer to the trust and any transactions 
entered into by the trust prior to being declared void shall 
be treated as entered into by the transferor.". 
(4) 
SEVERANCE OF CERTAIN ADDITIONAL CONTRIBU-
TIONS.—Subsection (d) of section 664 is amended by adding 
at the end the following new paragraph: 
Regulations. 
"(4) SEVERANCE OF CERTAIN ADDITIONAL CONTRIBUTIONS.— 
If— 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 961 
"(A) any contribution is made to a trust which before 
the contribution is a charitable remainder unitrust, and 
"(B) such contribution would (but for this paragraph) 
result in such trust ceasing to be a charitable unitrust 
by reason of paragraph (2)(D), 
such contribution shall be treated as a transfer to a separate 
trust under regulations prescribed by the Secretary.". 
(5) 
CONFORMING 
AMENDMENT.—Section 2055(e)(3)(G) is 
amended by inserting "(or other proceeding pursuant to 
subparagraph (J)" after "reformation". 
(6) EFFECTIVE DATES.— 
26 use 664 note. 
(A) IN GENERAL.—Except as otherwise provided in this 
paragraph, the amendments made by this subsection shall 
apply to transfers in trust after July 28,1997. 
(B) 
SPECIAL RULE 
FOR CERTAIN DECEDENTS.—The 
amendments made by this subsection shall not apply to 
transfers in trust imder the terms of a will (or other testa-
mentary instrument) executed on or before July 28, 1997, 
if the decedent— 
(i) dies before January 1, 1999, without having 
republished the will (or amended such instrument) 
by codicil or otherwise, or 
(ii) was on July 28, 1997, under a mental disability 
to change the disposition of his property and did not 
regain his competence to dispose of such property 
before the date of his death. 
SEC. 1090. EXPANDED SSA RECORDS FOR TAX ENFORCEMENT. 
(a) EXPANSION OF COORDINATED ENFORCEMENT EFFORTS OF 
IRS AND H H S OFFICE OF CHILD SUPPORT ENFORCEMENT.— 
(1) 
STATE 
REPORTING 
OF 
SSN 
OF 
CHILD.—Section 
454A(e)(4)(D) of the Social Security Act (42 U.S.C. 654a(e)(4)(D)) 
is amended by striking "the birth date of any child" and insert-
ing "the birth date and, beginning not later than October 1, 
1999, the social security number, of any child". 
(2) FEDERAL CASE REGISTRY OF CHILD SUPPORT ORDERS.— 
Section 453(h) of such Act (42 U.S.C. 653(h)) is amended— 
(A) in paragraph (2), by adding at the end the following: 
"Beginning not later than October 1, 1999, the information 
referred to in paragraph (1) shall include the names and 
social security numbers of the children of such individ-
uals."; and 
(B) by adding at the end the following: 
"(3) ADMINISTRATION OF FEDERAL TAX LAWS.—The Secretary 
of the Treasury shall have access to the information described 
in paragraph (2) for the purpose of administering those sections 
of the Internal Revenue Code of 1986 which grant t£ix benefits 
based on support or residence of children.". 
(3) COORDINATION BETWEEN SECRETARIES.—The Secretary 
42 use 653 note. 
of the Treasury aind the Secretary of Health and Human Serv-
ices shall consult regarding the implementation issues resulting 
fi'om the amendments made by this subsection, including 
interim deadlines for States that may be able before October 
1, 1999, to provide the data required by such amendments. 
The Secretaries shall report to Congress on the results of such Reports. 
consultation. 
I l l STAT. 962 
PUBLIC LAW 105-34—AUG. 5, 1997 
42 use 653 note. 
(4) EFFECTIVE DATE.—The amendments made by this sub-
section shall take effect on October 1, 1998. 
(b) REQUIRED SUBMISSION OF SSN'S ON APPLICATIONS.— 
(1) IN GENERAL.—Section 205(c)(2) of the Social Security 
Act (42 U.S.C. 405(c)(2)) is amended— 
(A) in subparagraph (B)(ii), by adding at the end the 
following new sentence: "With respect to an application 
for a social security account number for an individual who 
has not attained the age of 18 before such application, 
such evidence shall include the information described in 
subparagraph (C)(ii).", 
(B) in the second sentence of subparagraph (C)(ii), 
insert "the Commissioner of Social Security and" after 
"available to", and 
(C) by adding at the end the following new subpara-
graph: 
"(H) The Commissioner of Social Security shall share with 
the Secretary of the Treasury the information obtained by the 
Commissioner pursuant to the second sentence of subparagraph 
(B)(ii) and to subparagraph (C)(ii) for the purpose of administering 
those sections of the Internal Revenue Code of 1986 which grant 
tax benefits based on support or residence of children.". 
42 use 405 note. 
(2) EFFECTIVE DATES.— 
(A) The amendment made by paragraph (1)(A) shall 
apply to applications made after the date which is 180 
days after the date of the enactment of this Act. 
(B) The amendments made by subparagraphs (B) and 
(C) of paragraph (1) shall apply to information obtained 
on, before, or after the date of the enactment of this Act. 
SEC. 1091. MODIFICATION OF ESTIMATED TAX SAFE HARBORS. 
(a) IN GENERAL.—Clause (i) of section 6654(d)(1)(C) (relating 
to limitation on use of preceding year's tsix) is amended to read 
as follows: 
"(i) IN GENERAL.—If the adjusted gross income 
shown on the return of the individual for the preceding 
taxable year beginning in any calendar year exceeds 
$150,000, clause (ii) of subparagraph (B) shall be 
applied by substituting the applicable percentage for 
'100 percent'. For purposes of the preceding sentence, 
the applicable percentage shall be determined in 
accordance with the following table: 
The 
applicable 
'^f the preceding taxable year begins in: 
percentage is: 
1998, 1999, or 2000 
105 
2001 
112 
2002 or thereafter 
110. 
This clause shall not apply in the case of a preceding 
taxable year beginning in calendar year 1997.". 
26 use 6654 
(b) EFFECTIVE DATE.—The amendment made by this section 
note. 
shall apply with respect to any installment pajonent for taxable 
years beginning after December 31, 1997. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 963 
TITLE XI—SIMPLIFICATION AND OTHER 
FOREIGN-RELATED PROVISIONS 
Subtitle A—General Provisions 
SEC. 1101. CERTAIN INDIVIDUALS EXEMPT FROM FOREIGN TAX 
CREDIT LIMITATION. 
(a) GENERAL RULE.—Section 904 (relating to limitations on 
foreign tax credit) is amended by redesignating subsection (j) as 
subsection (k) and by inserting after subsection (i) the following 
new subsection: 
"(j) CERTAIN INDIVIDUALS EXEMPT.— 
"(1) IN GENERAL.—In the case of an individual to whom 
this subsection applies for any taxable year— 
"(A) the limitation of subsection (a) shall not apply, 
"(B) no taxes paid or accrued by the individual during 
such taxable year may be deemed paid or accrued under 
subsection (c) in any other taxable year, and 
"(C) no taxes paid or accrued by the individual during 
any other taxable year may be deemed paid or accrued 
under subsection (c) in such taxable year. 
"(2) INDIVIDUALS TO WHOM SUBSECTION APPLIES.—This sub-
section shall apply to an individual for giny taxable year if— 
"(A) the entire amount of such individual's gross 
income for the taxable year from sources without the 
United States consists of qualified passive income, 
"(B) the amount of the creditable foreign taxes paid 
or accrued by the individual during the taxable year does 
not exceed $300 ($600 in the case of a joint return), and 
"(C) such individual elects to have this subsection apply 
for the taxable year. 
"(3) DEFINITIONS.—For purposes of this subsection— 
"(A) QUALIFIED PASSIVE INCOME.—The term 'qualified 
passive income' means any item of gross income i
f
—
-
"(i) such item of income is passive income (as 
defined in subsection (d)(2)(A) without regard to clause 
(iii) thereof), and 
"(ii) such item of income is shown on a payee 
statement furnished to the individual. 
"(B) CREDITABLE FOREIGN TAXES.—The term 'creditable 
foreign taxes' means einy taxes for which a credit is allow-
able under section 901; except that such term shall not 
include any tax unless such tax is shown on a payee 
statement fiimished to such individual. 
"(C) PAYEE STATEMENT.—The term 'payee statement' 
has the meaning given to such term by section 6724(d)(2). 
"(D) ESTATES AND TRUSTS NOT ELIGIBLE.—This sub-
section shall not apply to any estate or trust.". 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
26 use 904 note, 
shall apply to taxable years beginning after December 31, 1997. 
SEC. 1102. EXCHANGE RATE USED IN TRANSLATING FOREIGN TAXES. 
(a) ACCRUED TAXES TRANSLATED BY USING AVERAGE RATE FOR 
YEAR TO WHICH TAXES RELATE.— 
I l l STAT. 964 
PUBLIC LAW 105-34—AUG. 5, 1997 
Notification. 
(1) IN GENERAL.—Subsection (a) of section 986 (relating 
to translation of foreign taxes) is amended to read as follows: 
"(a) FOREIGN INCOME TAXES.— 
"(1) TRANSLATION OF ACCRUED TAXES.— 
"(A) IN GENERAL.—For purposes of determining the 
amount of the foreign tax credit, in the case of a taxpayer 
who takes foreign income taxes into account when accrued, 
the amount of any foreign income taxes (and any adjust-
ment thereto) shall be translated into dollars by using 
the average exchange rate for the taxable year to which 
such taxes relate. 
"(B) EXCEPTION FOR CERTAIN TAXES.—Subparagraph 
(A) shall not apply to any foreign income taxes— 
"(i) paid after the date 2 years after the close 
of the taxable year to which such taxes relate, or 
"(ii) paid before the beginning of the taxable year 
to which such taxes relate. 
"(C) 
EXCEPTION 
FOR INFLATIONARY 
CURRENCIES.— 
Subparagraph (A) shall not apply to any foreign income 
taxes the liability for which is denominated in any inflation-
ary currency (as determined under regulations). 
"(D) CROSS REFERENCE.— 
Tor adjustments where tax is not paid within 2 years, see section 
905(c). 
"(2) TRANSLATION OF TAXES TO WHICH PARAGRAPH (D DOES 
NOT APPLY.—For purposes of determining the amount of the 
foreign tax credit, in the case of any foreign income taxes 
to which subparagraph (A) of paragraph (1) does not apply— 
"(A) such 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 such 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 the original payment of such foreign income taxes. 
"(3) FOREIGN INCOME TAXES.—For purposes of this sub-
section, the term 'foreign income taxes' means any income, 
war profits, or excess profits taxes paid or accrued to any 
foreign country or to any possession of the United States.". 
(2) ADJUSTMENT WHEN NOT PAID WITHIN 2 YEARS AFTER 
YEAR TO WHICH TAXES RELATE.—Subsection (c) of section 905 
is amended to read as follows: 
"(c) ADJUSTMENTS TO ACCRUED TAXES.— 
"(1) IN GENERAL.—If— 
"(A) accrued taxes when paid differ from the amounts 
claimed as credits by the taxpayer, 
"(B) accrued taxes are not paid before the date 2 years 
after the close of the taxable year to which such taxes 
relate, or 
"(C) any tax paid is refunded in whole or in part, 
the taxpayer shall notify the Secretary, who shall redetermine 
the amount of the tax for the year or years affected. The 
^^ 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 965 
Secretary may prescribe adjustments to the pools of post-1986 
foreign income taxes and the pools of post-1986 undistributed 
earnings under sections 902 and 960 in lieu of the redetermina-
tion under the preceding sentence. 
"(2) SPECIAL RULE FOR TAXES NOT PAID WITHIN 2 YEARS.— 
"(A) IN GENERAL.—Except as provided in subparagraph 
(B), in making the redetermination imder paragraph (1), 
no credit shall be allowed for accrued taxes not paid before 
the date referred to in subparagraph (B) of paragraph 
(1). 
"(B) TAXES SUBSEQUENTLY PAID.—^Any such taxes if 
subsequently paid— 
"(i) shall be taken into account— 
"(I) in the case of taxes deemed paid under 
section 902 or section 960, for the taxable year 
in which paid (and no redetermination shall be 
made under this section by reason of such pay-
ment), and 
"(II) in any other case, for the taxable year 
to which such taxes relate, and 
"(ii) shall be translated as provided in section 
986(a)(2)(A). 
"(3) ADJUSTMENTS.—The amount of tax (if any) due on 
any redetermination under paragraph (1) shall be paid by the 
taxpayer on notice and demand by the Secretary, and the 
amount of tax overpaid (if any) shall be credited or refunded 
to the taxpayer in accordance with subchapter B of chapter 
66 (section 6511 et seq.). 
"(4) BOND REQUIREMENTS.—In the case of any tax accrued 
but not paid, the Secretary, as a condition precedent to the 
allowance of the credit provided in this subpart, may require 
the taxpayer to give a bond, with sureties satisfactory to eind 
approved by the Secretary, in such sum as the Secretary may 
require, conditioned on the payment by the taxpayer of any 
amount of tax found due on any such redetermination. Any 
such bond shall contain such further conditions as the Secretary 
may require. 
"(5) OTHER SPECL^L RULES.—In any redetermination under 
paragraph (1) by the Secretary of the amount of tax due from 
the taxpayer for the year or years affected by a refund, the 
amount of the taxes refunded for which credit has been allowed 
under this section shall be reduced by the amount of any 
tax described in section 901 imposed by the foreign country 
or possession of the United States with respect to such refund; 
but no credit under this subpart, or deduction under section 
164, shall be allowed for any taxable year with respect to 
any such tax imposed on the refund. No interest shall be 
assessed or collected on any amount of t£ix due on any redeter-
mination by the Secretary, resulting from a refund to the 
taxpayer, for any period before the receipt of such refund, 
except to the extent interest was paid by the foreign country 
or possession of the United States on such refiind for such 
period.", 
(b) AUTHORITY TO USE AVERAGE RATES.— 
(1) IN GENERAL.—Subsection (a) of section 986 (as amended 
by subsection (a)) is amended by redesignating paragraph (3) 
Ill STAT. 966 
PUBLIC LAW 105-34—AUG. 5, 1997 
as paragraph (4) and inserting after paragraph (2) the following 
new paragraph: 
Regulations. 
"(3) AUTHORITY TO PERMIT USE OF AVERAGE RATES.—To 
the extent prescribed in regulations, the average exchange rate 
for the period (specified in such regulations) during which the 
taxes or adjustment is paid may be used instead of the exchange 
rate as of the time of such payment.". 
(2) DETERMINATION OF AVERAGE RATES.—Subsection (c) of 
section 989 is amended by striking "and" at the end of para-
graph (4), by striking the period at the end of paragraph (5) 
and inserting ", and", and by adding at the end thereof the 
following new paragraph: 
"(6) setting forth procedures for determining the average 
exchange rate for any period.". 
(3) CONFORMING AMENDMENTS.—Subsection (b) of section 
989 is amended by striking "weighted" each place it appears, 
(c) EFFECTIVE DATES.— 
26 use 986 note. 
(1) IN GENERAL.—The amendments made by subsections 
(a)(1) and (b) shall apply to taxes paid or accrued in taxable 
years beginning after December 31,1997. 
26 use 905 note. 
(2) SUBSECTION (a)(2).—The amendment made by subsection 
(a)(2) shall apply to taxes which relate to taxable years begin-
ning after December 31,1997. 
SEC. 1103. ELECTION TO USE SIMPLIFIED SECTION 904 LIMITATION 
FOR ALTERNATIVE MINIMUM TAX. 
(a) GENERAL RULE.—Subsection (a) of section 59 (relating to 
alternative minimum tax foreign tax credit) is amended by adding 
at the end thereof the following new paragraph: 
"(3) ELECTION TO USE SIMPLIFIED SECTION 904 LIMITATION.— 
"(A) IN GENERAL.—In determining the alternative mini-
mum tax foreign tax credit for any taxable year to which 
an election under this paragraph applies— 
"(i) subparagraph (B) of paragraph (1) shall not 
apply, and 
"(ii) the limitation of section 904 shall be based 
on the proportion which— 
"(I) the taxpayer's taxable income (as deter-
mined for purposes of the regular tax) fi*om sources 
without the United States (but not in excess of 
the taxpayer's entire alternative minimum taxable 
income), bears to 
"(II) the taxpayer's entire alternative mini-
mum taxable income for the taxable year. 
"(B) ELECTION.— 
"(i) IN GENERAL.—^An election iinder this paragraph 
may be made only for the taxpayer's first taxable year 
which begins after December 31, 1997, and for which 
the taxpayer claims an alternative minimum tax for-
eign tax credit. 
Applicability. 
"(ii) ELECTION REVOCABLE ONLY WITH CONSENT.— 
An election under this paragraph, once made, shall 
apply to the taxable year for which made and all 
subsequent taxable years unless revoked with the con-
sent of the Secretary.". 
26 use 59 note. 
(b) EFFECTIVE DATE.—The amendment made by this section 
shall apply to taxable years beginning after December 31, 1997. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 967 
SEC. 1104. TREATMENT OF PERSONAL TRANSACTIONS BY INDIVIDUALS 
UNDER FOREIGN CURRENCY RULES. 
(a) GENERAL RULE.—Subsection (e) of section 988 (relating to 
application to individuals) is amended to read as follows: 
"(e) APPLICATION TO INDIVIDUALS.— 
"(1) IN GENERAL.—The preceding provisions of this section 
shall not apply to any section 988 transaction entered into 
by an individual which is a personal transaction. 
"(2) EXCLUSION FOR CERTAIN PERSONAL TRANSACTIONS.— 
If— 
"(A) nonfunctional currency is disposed of by an 
individual in any transaction, and 
"(B) such transaction is a personal transaction, 
no gain shall be recognized for purposes of this subtitle by 
reason of changes in exchange rates after such currency was 
acquired by such individual and before such disposition. The 
preceding sentence shall not apply if the gain which would 
otherwise be recognized on the transaction exceeds $200. 
"(3) PERSONAL TRANSACTIONS.—For purposes of this sub-
section, the term 'personal transaction' means any transaction 
entered into by an individual, except that such term shall 
not include any transaction to the extent that expenses properly 
allocable to such transaction meet the requirements of— 
"(A) section 162 (other than traveling 
expenses 
described in subsection (a)(2) thereof), or 
"(B) section 212 (other than that part of section 212 
dealing with expenses incurred in connection with taxes).". 
(b) EFFECTIVE DATE.—The amendments made by this section 
26 use 988 note. 
shall apply to taxable years beginning after December 31, 1997. 
SEC 1105. FOREIGN TAX CREDIT TREATMENT OF DIVIDENDS FROM 
NONCONTROLLED SECTION 902 CORPORATIONS. 
(a) SEPARATE BASKET ONLY TO APPLY TO PRE-2003 EARNINGS.— 
(1) IN GENERAL.—Subparagraph (E) of section 904(d)(1) 
is amended to read as follows: 
"(E) in the case of a corporation, dividends from non-
controlled section 902 corporations out of earnings and 
profits accumulated in taxable years beginning before Janu-
ary 1, 2003,". 
(2) AGGREGATION OF NON-PFICS.—Subparagraph (E) of sec-
tion 904(d)(2) (relating to noncontroUed section 902 corpora-
tions) is amended by adding at the end the following new 
clause: 
"(iv) ALL NON-PFICS TREATED AS ONE.—^All noncon-
troUed section 902 corporations which are not passive 
foreign investment companies (as defined in section 
1297) shall be treated as one noncontroUed section 
902 corporation for purposes of paragraph (1).". 
(3) CONFORMING AMENDMENTS.—Subparagraphs (C)(iii)(II) 
and (D) of section 904(d)(2) are each amended by inserting 
"out of earnings and profits accumulated in taxable years begin-
ning before January 1, 2003" after "corporation". 
(b) APPLICATION OF LOOK-THRU RULES TO DIVIDENDS OF NON-
CONTROLLED SECTION 902 CORPORATIONS ATTRIBUTABLE TO POST-
2002 EARNINGS.—Section 904(d) is amended by redesignating para-
graphs (4) £ind (5) as paragraphs (5) and (6), respectively, and 
by inserting after paragraph (3) the following new paragraph: 
I l l STAT. 968 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(4) LOOK-THRU APPLIES TO DIVIDENDS FROM NONCON-
TROLLED SECTION 902 CORPORATIONS.— 
"(A) IN GENERAL.—For purposes of this subsection, any 
applicable dividend shall be treated as income in a separate 
category in proportion to the ratio o
f
— 
"(i) the portion of the earnings and profits 
described in subparagraph 
(B)(ii) attributable to 
income in such category, to 
"(ii) the total amount of such earnings and profits. 
"(B) APPLICABLE DIVIDEND.—For purposes of subpara-
graph (A), the term 'applicable dividend' means any divi-
dend— 
"(i) from a noncontrolled section 902 corporation 
with respect to the taxpayer, and 
"(ii) paid out of earnings and profits accumulated 
in taxable years beginning after December 31, 2002. 
Applicability. 
"(C) SPECIAL RULES.— 
"(i) IN GENERAL.—Rules similar to the rules of 
paragraph (3)(F) shall apply for purposes of this para-
graph. 
"(ii) EARNINGS AND PROFITS.—For purposes of this 
paragraph and paragraph (1)(E)— 
"(I) IN GENERAL.—The rules of section 316 
shall apply. 
"(II) REGULATIONS.—The Secretary may pre-
scribe regulations regarding the treatment of dis-
tributions out of earnings and profits for periods 
prior to the taxpayer's acquisition of such stock.". 
26 use 904 note. 
(c) EFFECTIVE DATE.—The amendments made by this section 
shall apply to taxable years beginning after December 31, 2002. 
Subtitle B—Treatment of Controlled 
Foreign Corporations 
SEC. 1111. GAIN ON CERTAIN STOCK SALES BY CONTROLLED FOREIGN 
CORPORATIONS TREATED AS DIVIDENDS. 
(a) GENERAL RULE.—Section 964 (relating to miscellaneous 
provisions) is amended by adding at the end thereof the following 
new subsection: 
"(e) GAIN ON CERTAIN STOCK SALES BY CONTROLLED FOREIGN 
CORPORATIONS TREATED AS DIVIDENDS.— 
"(1) IN GENERAL.—If a controlled foreign corporation sells 
or exchanges stock in any other foreign corporation, gain recog-
nized on such sale or exchange shall be included in the gross 
income of such controlled foreign corporation as a dividend 
to the same extent that it would have been so included under 
section 1248(a) if such controlled foreign corporation were a 
United States person. For purposes of determining the amount 
which would have been so includible, the determination of 
whether such other foreign corporation was a controlled foreign 
corporation shall be made without regard to the preceding 
sentence. 
"(2) SAME COUNTRY EXCEPTION NOT APPLICABLE.—Clause 
(i) of section 954(c)(3)(A) shall not apply to any amount treated 
as a dividend by reason of paragraph (1). 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 969 
"(3) 
CLARIFICATION OF DEEMED SALES.—For purposes of 
this subsection, a controlled foreign corporation shall be treated 
as having sold or exchanged any stock if, under any provision 
of this subtitle, such controlled foreign corporation is treated 
as having gain from the sale or exchange of such stock.". 
(b) AMENDMENT OF SECTION 904(d).—Clause (i) of section 
904(d)(2)(E) is amended by striking "and except as provided in 
regulations, the taxpayer was a United States shareholder in such 
corporation". 
(c) EFFECTIVE DATES.— 
(1) The amendment made by subsection (a) shall apply 
26 USC 964 note, 
to gain recognized on transactions occurring after the date 
of the enactment of this Act. 
(2) The amendment made by subsection (b) shall apply 
26 USC 904 note. 
to distributions after the date of the enactment of this Act. 
SEC. 1112. MISCELLANEOUS MODIFICATIONS TO SUBPART F. 
(a) SECTION 1248 GAIN TAKEN INTO ACCOUNT IN DETERMINING 
PRO RATA SHARE.— 
(1) IN GENERAL.—Paragraph (2) of section 951(a) (defining 
pro rata share of subpart F income) is amended by adding 
at the end thereof the following new sentence: "For purposes 
of subparagraph (B), any gain included in the gross income 
of any person as a dividend under section 1248 shall be treated 
as a distribution received by such person with respect to the 
stock involved.". 
(2) EFFECTIVE DATE.—The amendment made by paragraph 
26 USC 951 note. 
(1) shall apply to dispositions after the date of the enactment 
of this Act. 
(b) BASIS ADJUSTMENTS IN STOCK HELD BY FOREIGN CORPORA-
TION.— 
(1) IN GENERAL.—Section 961 (relating to adjustments to 
basis of stock in controlled foreign corporations and of other 
property) is amended by adding at the end thereof the following 
new subsection: 
"(c) BASIS ADJUSTMENTS IN STOCK HELD BY FOREIGN CORPORA- Regulations. 
TION.—Under regulations prescribed by the Secretary, if a United 
States shareholder is treated under section 958(a)(2) as owning 
any stock in a controlled foreign corporation which is actually 
owned by another controlled foreign corporation, adjustments simi-
lar to the adjustments provided by subsections (a) and (b) shall 
be made to the basis of such stock in the hands of such other 
controlled foreign corporation, but only for the purposes of determin-
ing the amount included imder section 951 in the gross income 
of such United States shareholder (or any other United States 
shareholder who acquires from any person any portion of the 
interest of such United States shareholder by reason of which 
such shareholder was treated as owning such stock, but only to 
the extent of such portion, and subject to such proof of identity 
of such interest as the Secretary may prescribe by regulations).". 
(2) EFFECTIVE DATE.—The amendment made by paragraph 
26 use 961 note. 
(1) shall apply for purposes of determining inclusions for taxable 
years of United States shareholders beginning after December 
31, 1997. 
(c) CLARIFICATION OF TREATMENT OF BRANCH TAX EXEMPTIONS 
OR REDUCTIONS.— 
39-194 O - 97 - 32 : QL 3 Part 1 
I l l STAT. 970 
PUBLIC LAW 105-34—AUG. 5, 1997 
(1) IN GENERAL.—Subsection (b) of section 952 is amended 
by adding at the end thereof the following new sentence: "For 
purposes of this subsection, any exemption (or reduction) with 
respect to the tax imposed by section 884 shall not be teiken 
into account.". 
26 use 952 note. 
(2) EFFECTIVE DATE.—The amendment made by paragraph 
(1) shall apply to taxable years beginning after December 31, 
1986. 
SEC. 1113. INDIRECT FOREIGN TAX CREDIT ALLOWED FOR CERTAIN 
LOWER TIER COMPANIES. 
(a) SECTION 902 CREDIT.— 
(1) IN GENERAL.—Subsection (b) of section 902 (relating 
to deemed taxes increased in case of certain 2nd and 3rd 
tier foreign corporations) is amended to read as follows: 
"(b) DEEMED TAXES INCREASED IN CASE OF CERTAIN LOWER 
TIER CORPORATIONS.— 
"(1) IN GENERAL.—If— 
"(A) any foreign corporation is a member of a qualified 
group, and 
"(B) such foreign corporation owns 10 percent or more 
of the voting stock of another member of such group from 
which it receives dividends in any taxable year, 
such foreign corporation shall be deemed to have paid the 
same proportion of such other member's post-1986 foreign 
income taxes as would be determined under subsection (a) 
if such foreign corporation were a domestic corporation. 
"(2) QUALIFIED GROUP.—For purposes of paragraph (1), the 
term 'qualified group' means— 
"(A) the foreign corporation described in subsection 
(a), and 
"(B) any other foreign corporation if— 
"(i) the domestic corporation owns at least 5 per-
cent of the voting stock of such other foreign corpora-
tion indirectly through a chain of foreign corporations 
connected through stock ownership of at least 10 per-
cent of their voting stock, 
"(ii) the foreign corporation described in subsection 
(a) is the first tier corporation in such chain, and 
"(iii) such other corporation is not below the sixth 
tier in such chain. 
The term 'qualified group' shall not include any foreign corpora-
tion below the third tier in the chain referred to in clause 
(i) unless such foreign corporation is a controlled foreign cor-
poration (as defined in section 957) and the domestic corpora-
tion is a United States shareholder (as defined in section 951(b)) 
in such foreign corporation. Paragraph (1) shall apply to those 
taxes paid by a member of the qualified group below the third 
tier only with respect to periods during which it was a controlled 
foreign corporation.". 
(2) CONFORMING AMENDMENTS.— 
(A) Subparagraph (B) of section 902(c)(3) is amended 
by adding "or" at the end of clause (i) and by striking 
clauses (ii) and (iii) and inserting the following new clause: 
"(ii) the requirements of subsection (b)(2) are met 
with respect to such foreign corporation.". 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 971 
(B) Subparagraph (B) of section 902(c)(4) is amended 
by striking "3rd foreign corporation" and inserting "sixth 
tier foreign corporation". 
(C) The heading for paragraph (3) of section 902(c) 
is amended by striking "WHERE DOMESTIC CORPORATION 
ACQUIRES 10 PERCENT OF FOREIGN CORPORATION" and insert-
ing "WHERE FOREIGN CORPORATION FIRST QUALIFIES". 
(D) Paragraph (3) of section 902(c) is amended by strik-
ing "ownership" each place it appears. 
(b) SECTION 960 CREDIT.—Paragraph (1) of section 960(a) (relat-
ing to special rules for foreign tax credits) is amended to read 
as follows: 
"(1) DEEMED PAID CREDIT.—For purposes of subpart A of Applicability, 
this part, if there is included under section 951(a) in the gross 
income of a domestic corporation any amount attributable to 
earnings and profits of a foreign corporation which is a member 
of a qualified group (as defined in section 902(b)) with respect 
to the domestic corporation, then, except to the extent provided 
in regulations, section 902 shall be applied as if the amount 
so included were a dividend paid by such foreign corporation 
(determined by applying section 902(c) in accordance with sec-
tion 904(d)(3)(B)).". 
(c) EFFECTIVE DATE.— 
26 use 902 note. 
(1) IN GENERAL.—The amendments made by this section 
shall apply to taxes of foreign corporations for taxable years 
of such corporations beginning after the date of enactment 
of this Act. 
(2) SPECIAL RULE.—In the case of any chain of foreign 
corporations described in clauses (i) and (ii) of section 
902(b)(2)(B) of the Internal Revenue Code of 1986 (as amended 
by this section), no liquidation, reorganization, or similar trans-
action in a taxable year beginning after the date of the enact-
ment of this Act shall have the effect of permitting taxes 
to be taken into account under section 902 of the Internal 
Revenue Code of 1986 which could not have been taken into 
account under such section but for such transaction. 
Subtitle C—^Treatment of Passive Foreign 
Investment Companies 
SEC. 1121. UNITED STATES SHAREHOLDERS OF CONTROLLED FOREIGN 
CORPORATIONS NOT SUBJECT TO PFIC INCLUSION. 
Section 1296 is amended by adding at the end the following 
new subsection: 
"(e) EXCEPTION FOR UNITED STATES SHAREHOLDERS OF CON-
TROLLED FOREIGN CORPORATIONS.— 
"(1) IN GENERAL.—For purposes of this part, a corporation 
shall not be treated with respect to a shareholder as a passive 
foreign investment company during the qualified portion of 
such shareholder's holding period with respect to stock in such 
corporation. 
"(2) QUALIFIED PORTION.—For purposes of this subsection, 
the term 'qualified portion' means the portion of the sharehold-
er's holding period— 
"(A) which is after December 31,1997, and 
I l l STAT. 972 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(B) during which the shareholder is a United States 
shareholder (as defined in section 951(b)) of the corporation 
£ind the corporation is a controlled foreign corporation. 
"(3) NEW HOLDING PERIOD IF QUALIFIED PORTION ENDS.— 
"(A) IN GENERAL.—Except as provided in subparagraph 
(B), if the qualified portion of a shareholder's holding period 
with respect to any stock ends after December 31, 1997, 
solely for purposes of this part, the shareholder's holding 
period with respect to such stock shall be treated as begin-
ning as of the first day following such period. 
"(B) EXCEPTION.—Subparagraph (A) shall not apply 
if such stock was, with respect to such shareholder, stock 
in a passive foreign investment company at any time before 
the qualified portion of the shareholder's holding period 
with respect to such stock and no election under section 
1298(b)(1) is made.". 
SEC. 1122. ELECTION OF MARK TO MARKET FOR MARKETABLE STOCK 
IN PASSIVE FOREIGN INVESTMENT COMPANY. 
(a) IN GENERAL.—Part VI of subchapter P of chapter 1 is 
amended by redesignating subpart C as subpart D, by redesignating 
sections 1296 and 1297 as sections 1297 and 1298, respectively, 
and by inserting after subpart B the following new subpart: 
"Subpart C—Election of Mark to Market For 
Marketable Stock 
"Sec. 1296. Election of mark to market for marketable stock. 
'^EC. 1296. ELECTION OF MARK TO MARKET FOR MARKETABLE STOCK. 
"(a) GENERAL RULE.—In the case of marketable stock in a 
passive foreign investment company which is owned (or treated 
under subsection (g) as owned) by a United States person at the 
close of any taxable year of such person, at the election of such 
person— 
"(1) If the fair market value of such stock as of the close 
of such taxable year exceeds its adjusted basis, such United 
States person shall include in gross income for such teixable 
year an amount equal to the amount of such excess. 
"(2) If the adjusted basis of such stock exceeds the fair 
market value of such stock as of the close of such taxable 
year, such United States person shall be allowed a deduction 
for such taxable year equal to the lesser of— 
"(A) the amount of such excess, or 
"(B) the unreversed inclusions with respect to such 
stock. 
"(b) BASIS ADJUSTMENTS.— 
"(1) IN GENERAL.—^The adjusted basis of stock in a passive 
foreign investment company— 
"(A) shall be increased by the amount included in 
the gross income of the United States person under sub-
section (a)(1) with respect to such stock, and 
"(B) shall be decreased by the amount allowed as a 
deduction to the United States person under subsection 
(a)(2) with respect to such stock. 
"(2) SPECIAL RULE FOR STOCK CONSTRUCTIVELY OWNED.— 
In the case of stock in a passive foreign investment company 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 973 
which the United States person is treated as owning under 
subsection (g)— 
"(A) the adjustments under paragraph (1) shall apply Applicability, 
to such stock in the hands of the person actually holding 
such stock but only for purposes of determining the subse-
quent treatment under this chapter of the United States 
person with respect to such stock, and 
"(B) similar adjustments shall be made to the adjusted 
basis of the property by reason of which the United States 
person is treated as owning such stock. 
"(c) CHARACTER AND SOURCE RULES.— 
"(1) ORDINARY TREATMENT.— 
"(A) GAIN.—Any amount included in gross income 
under subsection (a)(1), and any gain on the sale or other 
disposition of marketable stock in a passive foreign invest-
ment company (with respect to which an election imder 
this section is in effect), shall be treated as ordinary income. 
"(B) Loss.—Any— 
"(i) amount allowed as a deduction under sub-
section (a)(2), and 
"(ii) loss on the sale or other disposition of market-
able stock in a passive foreign investment company 
(with respect to which an election under this section 
is in effect) to the extent that the amount of such 
loss does not exceed the unreversed inclusions with 
respect to such stock, 
shall be treated as an ordinary loss. The amount so treated 
shall be treated as a deduction allowable in computing 
adjusted gross income. 
"(2) SOURCE.—The source of any amount included in gross 
income under subsection (a)(1) (or allowed as a deduction under 
subsection (a)(2)) shall be determined in the same manner 
as if such amount were gain or loss (as the case may be) 
from the sale of stock in the passive foreign investment com-
pany. 
"(d) UNREVERSED INCLUSIONS.—For purposes of this section, 
the term 'unreversed inclusions' means, with respect to any stock 
in a passive foreign investment company, the excess (if any) of— 
"(1) the amount included in gross income of the taxpayer 
under subsection (a)(1) with respect to such stock for prior 
taxable years, over 
"(2) the amount allowed as a deduction under subsection 
(a)(2) with respect to such stock for prior taxable years. 
The amount referred to in paragraph (1) shall include any amount 
which would have been included in gross income under subsection 
(a)(1) with respect to such stock for any prior taxable year but 
for section 1291. 
"(e) MARKETABLE STOCK.—For purposes of this section— 
"(1) IN GENERAL..—The term 'marketable stock' means— 
"(A) any stock which is regularly traded on— 
"(i) a national securities exchange which is reg-
istered with the Securities and Exchange Commission 
or the national market system established pursuant 
to section llA of the Securities and Exchange Act 
of 1934, or 
I l l STAT. 974 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(ii) any exchange or other market which the Sec-
retary determines has rules adequate to carry out the 
purposes of this part, 
"(B) to the extent provided in regulations, stock in 
any foreign corporation which is comparable to a regulated 
investment company and which offers for sale or has 
outstanding any stock of which it is the issuer and which 
is redeemable at its net asset value, and 
"(C) to the extent provided in regulations, any option 
on stock described in subparagraph (A) or (B). 
"(2) 
SPECIAL RULE FOR REGULATED INVESTMENT COMPA-
NIES.—In the case of any regulated investment company which 
is offering for sale or has outstanding any stock of which 
it is the issuer and which is redeemable at its net asset value, 
all stock in a passive foreign investment company which it 
owns directly or indirectly shall be treated as marketable stock 
Applicability. 
for purposes of this section. Except as provided in regulations, 
similar treatment as marketable stock shall apply in the case 
of any other regulated investment company which publishes 
net asset valuations at least annually. 
"(£) TREATMENT OF CONTROLLED FOREIGN CORPORATIONS WHICH 
ARE SHAREHOLDERS IN PASSIVE FOREIGN INVESTMENT COMPANIES.— 
In the case of a foreign corporation which is a controlled foreign 
corporation and which owns (or is treated under subsection (g) 
as owning) stock in a passive foreign investment company— 
Applicability. 
"(1) this section (other than subsection (c)(2)) shall apply 
to such foreign corporation in the same manner as if such 
corporation were a United States person, and 
"(2) for purposes of subpart F of part III of subchapter 
N— 
"(A) any amount included in gross income under sub-
section (a)(1) shall be treated as foreign personal holding 
company income described in section 954(c)(1)(A), and 
"(B) any amount allowed as a deduction under sub-
section (a)(2) shall be treated as a deduction allocable to 
foreign personal holding company income so described. 
"(g) 
STOCK OWNED THROUGH CERTAIN FOREIGN ENTITIES.— 
Except as provided in regulations— 
"(1) IN GENERAL.—For purposes of this section, stock owned, 
directly or indirectly, by or for a foreign partnership or foreign 
trust or foreign estate shall be considered as being owned 
proportionately by its partners or beneficiaries. Stock consid-
ered to be owned by a person by reason of the application 
of the preceding sentence shall, for purposes of appljdng such 
sentence, be treated as actually owned by such person. 
"(2) TREATMENT OF CERTAIN DISPOSITIONS.—In any case 
in which a United States person is treated as owning stock 
in a passive foreign investment company by reason of paragraph 
( 1 ) -
"(A) any disposition by the United States person or 
by any other person which results in the United States 
person being treated as no longer owning such stock, and 
"(B) any disposition by the person owning such stock, 
shall be treated as a disposition by the United States person 
of the stock in the passive foreign investment company. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 975 
"(h) COORDINATION WITH SECTION 851(b).—For purposes of 
paragraphs (2) and (3) of section 851(b), any amount included 
in gross income under subsection (a) shall be treated as a dividend. 
"(i) STOCK ACQUIRED FROM A DECEDENT.—In the case of stock 
of a passive foreign investment company which is acquired by 
bequest, devise, or inheritance (or by the decedent's estate) and 
with respect to which an election under this section was in effect 
as of the date of the decedent's death, notwithstanding section 
1014, the basis of such stock in the hands of the person so acquiring 
it shall be the adjusted basis of such stock in the hands of the 
decedent immediately before his death (or, if lesser, the basis which 
would have been determined under section 1014 without regard 
to this subsection). 
"(j) 
COORDINATION WITH SECTION 1291 
FOR FIRST YEAR OF 
ELECTION.— 
"(1) 
TAXPAYERS OTHER THAN 
REGULATED INVESTMENT 
COMPANIES.— 
"(A) IN GENERAL.—If the taxpayer elects the application 
of this section with respect to siny marketable stock in 
a corporation after the beginning of the taxpayer's holding 
period in such stock, and if the requirements of subpara-
graph (B) are not satisfied, section 1291 shall apply to— 
"(i) any distributions with respect to, or disposition 
of, such stock in the first taxable year of the taxpayer 
for which such election is made, and 
"(ii) any amount which, but for section 1291, would 
have been included in gross income under subsection 
(a) with respect to such stock for such taxable year 
in the same manner as if such amount were gain 
on the disposition of such stock. 
"(B) REQUIREMENTS.—The requirements of this 
subparagraph are met if, with respect to each of such 
corporation s taxable years for which such corporation was 
a passive foreign investment company and which begin 
after December 31, 1986, and included £my portion of the 
taxpayer's holding period in such stock, such corporation 
was treated as a qualified electing fund under this part 
with respect to the taxpayer. 
"(2) SPECIAL RULES FOR REGULATED INVESTMENT COMPA-
NIES.— 
"(A) IN GENERAL.—If a regulated investment company 
elects the application of this section with respect to any 
marketable stock in a corporation after the beginning of 
the taxpayer's holding period in such stock, then, with 
respect to such company's first taxable year for which 
such company elects the application of this section with 
respect to such stock— 
"(i) section 1291 shall not apply to such stock 
with respect to any distribution or disposition during, 
or amount included in gross income under this section 
for, such first taxable year, but 
"(ii) such regulated investment company's tax 
under this chapter for such first taxable year shall 
be increased by the aggregate amount of interest which 
would have been determined under section 1291(c)(3) 
if section 1291 were applied without regard to this 
subparagraph. 
I l l STAT. 976 
PUBLIC LAW 105-34—AUG. 5, 1997 
Clause (ii) shall not apply if for the preceding taxable 
year the company elected to mark to market the stock 
held by such company as of the last day of such preceding 
taxable year. 
"(B) DISALLOWANCE 
OF DEDUCTION.—NO deduction 
shall be allowed to any regulated investment company 
for the increase in tax under subparagraph (A)(ii). 
Applicability. 
"(k) ELECTION.—This section shall apply to marketable stock 
in a passive foreign investment company which is held by a United 
States person only if such person elects to apply this section with 
respect to such stock. Such an election shall apply to the taxable 
year for which made and all subsequent taxable years imless— 
"(1) such stock ceases to be marketable stock, or 
"(2) the Secretary consents to the revocation of such elec-
tion. 
"(1) TRANSITION RULE FOR INDIVIDUALS BECOMING SUBJECT TO 
UNITED STATES TAX.—If any individual becomes a United States 
person in a taxable year beginning after December 31, 1997, solely 
for purposes of this section, the adjusted basis (before adjustments 
under subsection (b)) of any marketable stock in a passive foreign 
investment company owned by such individual on the first day 
of such taxable year shall be treated as being the greater of its 
fair market value on such first day or its adjusted basis on such 
first day.". 
(b) COORDINATION WITH INTEREST CHARGE, ETC.— 
(1) Paragraph (1) of section 1291(d) is amended by adding 
at the end the following new flush sentence: 
"Except as provided in section 1296(j), this section also shall 
not apply if an election under section 1296(k) is in effect for 
the taxpayer's taxable year.". 
(2) The subsection heading for subsection (d) of section 
1291 is amended by striking "SUBPART B " and inserting "SUB-
PARTS B AND C". 
(3) Subparagraph (A) of section 1291(a)(3) is amended to 
read as follows: 
"(A) HOLDING PERIOD.—The taxpayer's holding period 
shall be determined under section 1223; except that— 
"(i) for purposes of appl5dng this section to an 
excess distribution, such holding period shall be treated 
as ending on the date of such distribution, and 
"(ii) if section 1296 applied to such stock with 
respect to the taxpayer for any prior taxable year, 
such holding period shall be treated as beginning on 
the first day of the first taxable year beginning after 
the last taxable year for which section 1296 so 
applied.". 
(c) TREATMENT OF MARK-TO-MARKET GAIN UNDER SECTION 
4982.— 
(1) Subsection (e) of section 4982 is amended by adding 
at the end thereof the following new paragraph: 
"(6) 
TREATMENT OF GAIN RECOGNIZED UNDER SECTION 
1296.—For purposes of determining a regulated investment 
company's ordinary income— 
Applicability. 
"(A) notwithstanding paragraph (1)(C), section 1296 
shall be applied as if such company's taxable year ended 
on October 31, and 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 977 
"(B) any ordinary gain or loss from an actual disposi-
tion of stock in a passive foreign investment company dur-
ing the portion of the calendar year after October 31 shall 
be taken into account in determining such regulated invest-
ment company's ordinary income for the following calendar 
year. 
In the case of a company making an election under paragraph 
(4), the preceding sentence sh^l be applied by substituting 
the last day of the companys taxable year for October 31.". 
(2) Subsection (b) of section 852 is amended by adding 
at the end thereof the following new paragraph: 
"(10) SPECIAL RULE FOR CERTAIN LOSSES ON STOCK IN PAS-
SIVE FOREIGN INVESTMENT COMPANY.—^To the extent provided 
in regulations, the taxable income of a regulated investment 
company (other than a company to which an election under 
section 4982(e)(4) applies) shall be computed without regard 
to £iny net reduction in the value of £iny stock of a passive 
foreign investment company with respect to which an election 
under section 1296(k) is in effect occurring after October 31 
of the taxable year, and any such reduction shall be treated 
as occurring on the first day of the following taxable year.". 
(3) Subsection (c) of section 852 is amended by inserting 
after "October 31 of such year" the following: ", without regard 
to any net reduction in the value of any stock of a passive 
foreign investment company with respect to which an election 
under section 1296(k) is in effect occurring after October 31 
of such year,". 
(d) CONFORMING AMENDMENTS.— 
(1) Sections 532(b)(4) and 542(c)(10) are each amended 
by striking "section 1296" and inserting "section 1297". 
(2) Subsection (f) of section 551 is amended by striking 
"section 1297(b)(5)" and inserting "section 1298(b)(5)". 
(3) Subsections (a)(1) and (d) of section 1293 are each 
amended by striking "section 1297(a)" and inserting "section 
1298(a)". 
(4) Paragraph (3) of section 1297(b), as redesignated by 
subsection (a), is hereby repealed. 
(5) The table of sections for subpart D of part VI of sub-
chapter P of chapter 1, as redesignated by subsection (a), is 
amended to read as follows: 
"Sec. 1297. Passive foreign investment company. 
"Sec. 1298. Special rules?. 
(6) The table of subparts for part VI of subchapter P 
of chapter 1 is amended by striking the last item and inserting 
the following new items: 
"Subpart C. Election of mark to market for marketable stock. 
"Subpart D. General provisions.". 
(e) CLARIFICATION OF GAIN RECOGNITION ELECTION.—The last 
sentence of section 1298(b)(1), as so redesignated, is amended by 
inserting "(determined without regard to the preceding sentence)" 
after "investment company". 
SEC. 1123. VALUATION OF ASSETS FOR PASSIVE FOREIGN INVESTMENT 
COMPANY DETERMINATION. 
(a) IN GENERAL.—Section 1297, as redesignated by section 1122, 
is amended by adding at the end the following new subsection: 
"(e) METHODS FOR MEASURING ASSETS.— 
I l l STAT. 978 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(1) DETERMINATION 
USING VALUE.—The determination 
under subsection (a)(2) shall be made on the basis of the value 
of the assets of a foreign corporation if— 
"(A) such corporation is a publicly traded corporation 
for the taxable year, or 
"(B) paragraph (2) does not apply to such corporation 
for the taxable year. 
"(2) DETERMINATION USING ADJUSTED BASES.—The deter-
mination under subsection (a)(2) shall be based on the adjusted 
bases (as determined for the purposes of computing earnings 
and profits) of the assets of a foreign corporation if such corpora-
tion is not described in paragraph (1)(A) and such corporation— 
"(A) is a controlled foreign corporation, or 
"(B) elects the application of this paragraph. 
An election under subparagraph (B), once made, may be revoked 
only with the consent of the Secretary. 
"(3) PUBLICLY TRADED CORPORATION.—For purposes of this 
subsection, a foreign corporation shall be treated as a publicly 
traded corporation if the stock in the corporation is regularly 
traded on— 
"(A) a national securities exchange which is registered 
with the Securities and Exchange Commission or the 
national market system established pursuant to section 
llA of the Securities and Exchange Act of 1934, or 
"(B) any exchange or other market which the Secretary 
determines has rules adequate to carry out the purposes 
of this subsection.", 
(b) CONFORMING AMENDMENTS.—Section 1297(a), as redesig-
nated by section 1122, is amended— 
(1) by striking "(by value)" and inserting "(as determined 
in accordance with subsection (e))", and 
(2) by striking the last two sentences. 
26 use 532 note. 
SEC. 1124. EFFECTIVE DATE. 
The amendments made by this subtitle shall apply to— 
(1) taxable years of United States persons beginning after 
December 31,1997, and 
(2) taxable years of foreign corporations ending with or 
within such taxable years of United States persons. 
Subtitle D—Repeal of Excise Tax on 
Transfers to Foreign Entities 
SEC. 1131. REPEAL OF EXCISE TAX ON TRANSFERS TO FOREIGN ENTI-
TIES; RECOGNITION OF GAIN ON CERTAIN TRANSFERS 
TO FOREIGN TRUSTS AND ESTATES. 
(a) REPEAL OF EXCISE TAX.—Chapter 5 (relating to transfers 
to avoid income t£ix) is hereby repealed. 
(b) RECOGNITION OF GAIN ON CERTAIN TRANSFERS TO FOREIGN 
TRUSTS AND ESTATES.—Subpart F of part I of subchapter J of 
chapter 1 is amended by adding at the end the following new 
section: 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 979 
"SEC. 684. RECOGNITION OF GAIN ON CERTAIN TRANSFERS TO CER-
TAIN FOREIGN TRUSTS AND ESTATES. 
"(a) IN GENERAL.—Except as provided in regulations, in the 
case of any transfer of property by a United States person to 
a foreign estate or trust, for purposes of this subtitle, such transfer 
shall be treated as a sale or exchange for an amount equal to 
the fair market value of the property transferred, and the transferor 
shall recognize as gain the excess o
f
— 
"(1) the fair market value of the property so transferred, 
over 
"(2) the adjusted basis (for purposes of determining gain) 
of such property in the hands of the transferor. 
"(b) EXCEPTION.—Subsection (a) shall not apply to a transfer 
to a trust by a United States person to the extent that any person 
is treated as the owner of such trust under section 671, 
"(c) TREATMENT OF TRUSTS WHICH BECOME FOREIGN TRUSTS.— 
If a trust which is not a foreign trust becomes a foreign trust, 
such trust shall be treated for purposes of this section as having 
transferred, immediately before becoming a foreign trust, all of 
its assets to a foreign trust.". 
(b) OTHER ANTI-AVOIDANCE PROVISIONS REPLACING REPEALED 
EXCISE TAX.— 
(1) GAIN RECOGNITION ON EXCHANGES INVOLVING FOREIGN 
PERSONS.—Section 1035 is amended by redesignating subsection 
(c) as subsection (d) and by inserting after subsection (b) the 
following new subsection: 
"(c) EXCHANGES INVOLVING FOREIGN PERSONS.—To the extent 
provided in regulations, subsection (a) shall not apply to any 
exchange having the effect of transferring property to any person 
other than a United States person.". 
(2) TRANSFERS TO FOREIGN CORPORATIONS.—Section 
367 
is amended by adding at the end the following new subsection: 
"(f) OTHER TRANSFERS.—To the extent provided in regulations, 
if a United States person transfers property to a foreign corporation 
as paid-in surplus or as a contribution to capital (in a transaction 
not otherwise described in this section), such transfer shall be 
treated as a sale or exchange for an amount equal to the fair 
market value of the property transferred, and the transferor shall 
recognize as gain the excess o
f
— 
"(1) the fair market value of the property so transferred, 
over 
"(2) the adjusted basis (for purposes of determining gain) 
of such property in the hands of the transferor.". 
(3) CERTAIN TRANSFERS TO PARTNERSHIPS.—Section 721 is 
amended by adding at the end the following new subsection: 
"(c) REGULATIONS RELATING TO CERTAIN TRANSFERS TO PART-
NERSHIPS.—The Secretary may provide by regulations that sub-
section (a) shall not apply to gain realized on the transfer of property 
to a partnership if such gain, when recognized, will be includible 
in the gross income of a person other than a United States person.". 
(4) REPEAL OF U.S. SOURCE TREATMENT OF DEEMED ROYAL-
TIES.—Subparagraph (C) of section 367(d)(2) is amended to 
read as follows: 
"(C) 
AMOUNTS 
RECEIVED 
TREATED 
AS 
ORDINARY 
INCOME.—For purposes of this chapter, any 
amount 
included in gross income by reason of this subsection shall 
be treated as ordinary income.". 
I l l STAT. 980 
PUBLIC LAW 105-34—AUG. 5, 1997 
(5) TRANSFERS OF INTANGIBLES TO PARTNERSHIPS.— 
(A) Subsection (d) of section 367 is amended by adding 
at the end the following new paragraph: 
"(3) REGULATIONS RELATING TO TRANSFERS OF INTANGIBLES 
TO PARTNERSHIPS.—The Secretary may provide by regulations 
that the rules of paragraph (2) also apply to the transfer 
of intangible property by a United States person to a partner-
ship in circumstances consistent with the purposes of this sub-
section.". 
(B) Section 721 is amended by adding at the end the 
following new subsection: 
"(d) TRANSFERS OF INTANGIBLES.— 
'^or re^^latory authority to treat intangibles transferred to a 
partnership as sold, see section 367(d)i3).". 
(c) TECHNICAL AND CONFORMING AMENDMENTS.— 
(1) Subsection (h) of section 814 is amended by striking 
"or 1491". 
(2) Section 1057 (relating to election to treat transfer to 
foreign trust, etc., as taxable exchange) is hereby repealed. 
(3) Section 6422 is amended by striking paragraph (5) 
and by redesignating paragraphs (6) through (13) as paragraphs 
(5) through (12), respectively. 
(4) The table of chapters for subtitle A is amended by 
striking the item relating to chapter 5. 
(5) The table of sections for part IV of subchapter O of 
chapter 1 is amended by striking the item relating to section 
1057. 
(6) The table of sections for subpart F of part I of sub-
chapter J of chapter 1 is amended by adding at the end the 
following new item: 
"Sec. 684. Recognition of gain on certain transfers to certain foreign trusts 
and estates.". 
26 use 367 note. 
(d) EFFECTIVE DATE.—The amendments made by this section 
shall take effect on the date of the enactment of this Act. 
Subtitle E—Information Reporting 
SEC. 1141. CLARIFICATION OF APPLICATION OF RETURN REQUIRE-
MENT TO FOREIGN PARTNERSHIPS. 
(a) IN GENERAL.—Section 6031 (relating to return of partner-
ship income) is amended by adding at the end the following new 
subsection: 
"(e) FOREIGN PARTNERSHIPS.— 
"(1) EXCEPTION FOR FOREIGN PARTNERSHIP.—Except as pro-
vided in paragraph (2), the preceding provisions of this section 
shall not apply to a foreign partnership. 
"(2) 
CERTAIN FOREIGN PARTNERSHIPS REQUIRED TO FILE 
RETURN.—Except as provided in regulations prescribed by the 
Secretary, this section shall apply to a foreign partnership 
for any taxable year if for such year, such partnership has— 
"(A) gross income derived from sources within the 
United States, or 
"(B) gross income which is effectively connected with 
the conduct of a trade or business within the United States. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 981 
The Secretary may provide simplified filing procedures for for-
eign partnerships to which this section applies.". 
(b) SANCTION FOR FAILURE BY FOREIGN PARTNERSHIP TO COM-
PLY WITH SECTION 6031 To INCLUDE DENIAL OF DEDUCTIONS.— 
Subsection (f) of section 6231 is amended— 
(1) by striking "LOSSES AND" in the heading £ind inserting 
"DEDUCTIONS, LOSSES, AND", and 
(2) by striking "loss or" each place it appears and inserting 
"deduction, loss, or". 
(c) EFFECTIVE DATE.—^The amendments made by this section 26USC6031 
shall apply to taxable years beginning after the date of the enact- note. 
ment of this Act. 
SEC. 1142. CONTROLLED 
FOREIGN PARTNERSHIPS 
SUBJECT TO 
INFORMATION REPORTING COMPARABLE TO INFORMA-
TION REPORTING FOR CONTROLLED FOREIGN COR-
PORATIONS. 
(a) IN GENERAL.—So much of section 6038 (relating to informa-
tion with respect to certain foreign corporations) as precedes para-
graph (2) of subsection (a) is amended to read as follows: 
"SEC. 6038. INFORMATION REPORTING WITH RESPECT TO CERTAIN 
FOREIGN CORPORATIONS AND PARTNERSHIPS. 
"(a) REQUIREMENT.— 
"(1) IN GENERAL.—Every United States person shall fur-
nish, with respect to any foreign business entity which such 
person controls, such information as the Secretary may pre-
scribe relating to— 
"(A) the name, the principal place of business, and 
the nature of business of such entity, and the country 
under whose laws such entity is incorporated (or organized 
in the case of a partnership); 
"(B) in the case of a foreign corporation, its post-1986 
undistributed earnings (as defined in section 902(c)); 
"(C) a balance sheet for such entity listing assets, 
liabilities, and capital; 
"(D) transactions between such entity and— 
"(i) such person, 
"(ii) any corporation or partnership which such 
person controls, and 
"(iii) any United States person owning, at the time 
the transaction takes place— 
"(I) in the case of a foreign corporation, 10 
percent or more of the value of any class of stock 
outstanding of such corporation, and 
"(II) in the case of a foreign partnership, at 
least a 10-percent interest in such partnership; 
and 
"(E)(i) in the case of a foreign corporation, a description 
of the various classes of stock outstanding, and a list show-
ing the name and address of, and number of shares held 
by, each United States person who is a shareholder of 
record owning at any time during the annual accounting 
period 5 percent or more in value of any class of stock 
outstanding of such foreign corporation, and 
"(ii) 
information 
comparable 
to 
the 
information 
described in clause (i) in the case of a foreign partnership. 
Ill STAT. 982 
PUBLIC LAW 105-34—AUG. 5, 1997 
The Secretary may also require the furnishing of any other 
information which is similar or related in nature to that speci-
fied in the preceding sentence or which the Secretary deter-
mines to be appropriate to carry out the provisions of this 
title.". 
(b) DEFINITIONS.— 
(1) IN GENERAL.—Subsection (e) of section 6038 (relating 
to definitions) is amended— 
(A) by redesignating paragraphs (1) and (2) as para-
graphs (2) and (4), respectively, 
(B) by inserting before paragraph (2) (as so redesig-
nated) the following new paragraph: 
"(1) FOREIGN BUSINESS ENTITY.—The term 'foreign business 
entity* means a foreign corporation and a foreign partnership.", 
and 
(C) by inserting after paragraph (2) (as so redesignated) 
the following new paragraph: 
"(3) PARTNERSHIP-RELATED DEFINITIONS.— 
"(A) CONTROL.—^A person is in control of a partnership 
if such person owns directly or indirectly more than a 
50 percent interest in such partnership. 
"(B) 50-PERCENT INTEREST.—For purposes of subpara-
graph (A), a 50-percent interest in a partnership is— 
"(i) an interest equal to 50 percent of the capital 
interest, or 50 percent of the profits interest, in such 
partnership, or 
"(ii) to the extent provided in regulations, an 
interest to which 50 percent of the deductions or losses 
of such partnership are allocated. 
For purposes of the preceding sentence, rules similar to 
the rules of section 267(c) (other thsin paragraph (3)) shall 
apply. 
"(C) 10-PERCENT INTEREST.—A 10-percent interest in 
a partnership is an interest which would be described 
in subparagraph (B) if '10 percent' were substituted for 
'50 percent' each place it appears.". 
(2) CLERICAL AMENDMENT.—The paragraph heading for 
E
aragraph (2) of section 6038(e) (as so redesignated) is amended 
y inserting "OF CORPORATION" after "CONTROL". 
(c) MODIFICATION OF SANCTIONS ON PARTNERSHIPS AND COR-
PORATIONS FOR FAILURE TO FURNISH INFORMATION.— 
(1) IN GENERAL.—Subsection (b) of section 6038 is amend-
ed— 
(A) by striking "$1,000" each place it appears and 
inserting "$10,000", and 
(B) by striking "$24,000" in paragraph (2) and inserting 
"$50,000". 
(d) REPORTING BY 10-PERCENT PARTNERS.—Subsection (a) 
of 
section 6038 is amended by adding at the end the following new 
paragraph: 
"(5) INFORMATION REQUIRED FROM IO-PERCENT PARTNER OF 
CONTROLLED FOREIGN PARTNERSHIP.—In the case of a foreign 
partnership which is controlled by United States persons hold-
ing at least 10-percent interests (but not by any one United 
States person), the Secretary may require each United States 
person who holds a 10-percent interest in such partnership 
to fiimish information relating to such partnership, including 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 983 
information relating to such partner's ownership interests in 
the partnership and allocations to such partner of partnership 
items.". 
(e) TECHNICAL AMENDMENTS.— 
(1) The following provisions of section 6038 are each amend-
ed by striking "foreign corporation" each place it appears and 
inserting "foreign business entity": 
(A) Paragraphs (2) and (3) of subsection (a). 
(B) Subsection (b). 
(C) Subsection (c) other than paragraph (1)(B) thereof. 
(D) Subsection (d). 
(E) Subsection (e)(4) (as redesignated by subsection 
(b)). 
(2) Subparagraph (B) of section 6038(c)(1) is amended by 
inserting "in the case of a foreign business entity which is 
a foreign corporation," after "(B)". 
(3) Paragraph (8) of section 318(b) is amended by striking 
"6038(d)(1)" and inserting "6038(d)(2)". 
(4) Paragraph (4) of section 901(k) is amended by striking 
"foreign corporation" and inserting "foreign corporation or part-
nership". 
(5) The table of sections for subpart A of part III of sub-
chapter A of chapter 61 is amended by striking the item relating 
to section 6038 and inserting the following new item: 
"Sec. 6038. Information reporting with respect to certain foreign corpora-
tions and partnerships.". 
(f) EFFECTIVE DATE.—The amendments made by this section 26 USC 318 note. 
shall apply to annual accounting periods beginning after the date 
of the enactment of this Act. 
SEC. 1143. MODIFICATIONS RELATING TO RETURNS REQUIRED TO BE 
FILED BY REASON OF CHANGES IN OWNERSHIP 
INTERESTS IN FOREIGN PARTNERSHIP. 
(a) No RETURN REQUIRED UNLESS CHANGES INVOLVE 10-PER-
CENT INTEREST IN PARTNERSHIP.— 
(1) IN GENERAL.—Subsection (a) of section 6046A (relating 
to returns as to interests in foreign partnerships) is amended 
by adding at the end the following new sentence: "Paragraphs Applicability. 
(1) and (2) shall apply to any acquisition or disposition only 
if the United States person directly or indirectly holds at least 
a 10-percent interest in such partnership either before or after 
such acquisition or disposition, and paragraph (3) shall apply 
to any change only if the chemge is equivalent to at least 
a 10-percent interest in such partnership.". 
(2) 10-PERCENT INTEREST.—Section 6046A is amended by 
redesignating subsection (d) as subsection (e) and by inserting 
after subsection (c) the following new subsection: 
"(d) 10-PERCENT INTEREST.—For purposes of subsection (a), a 
10-percent interest in a partnership is an interest described in 
section 6038(e)(3)(C).". 
(b) MODIFICATION OF PENALTY ON FAILURE TO REPORT CHANGES 
IN OWNERSHIP INTERESTS IN FOREIGN CORPORATIONS AND PARTNER-
SHIPS.—Subsection (a) of section 6679 (relating to failure to file 
returns, etc., with respect to foreign corporations or foreign partner-
ships) is amended to read as follows: 
"(a) CIVIL PENALTY.— 
I l l STAT. 984 
PUBLIC LAW 105-34—AUG. 5, 1997 
26 use 6046A 
note. 
Applicability. 
"(1) IN GENERAL.—In addition to any criminal penalty pro-
vided by law, any person required to file a return under section 
6035, 6046, or 6046A who fails to file such return at the 
time provided in such section, or who files a return which 
does not show the information required pursuant to such sec-
tion, shall pay a penalty of $10,000, unless it is shown that 
such failure is due to reasonable cause. 
"(2) 
INCREASE IN PENALTY WHERE FAILURE CONTINUES 
AFTER NOTIFICATION.—If any failure described in paragraph 
(1) continues for more than 90 days after the day on which 
the Secretary mails notice of such failure to the United States 
person, such person shall pay a penalty (in addition to the 
amount required under paragraph (1)) of $10,000 for each 30-
day period (or fraction thereof) during which such failure contin-
ues after the expiration of such 90-day period. The increase 
in any penalty under this paragraph shall not exceed $50,000. 
"(3) REDUCED PENALTY FOR RETURNS RELATING TO FOREIGN 
PERSONAL HOLDING COMPANIES.—In the case of a return 
required under section 6035, paragraph (1) shall be applied 
by substituting '$1,000' for '$10,000', and paragraph (2) shall 
not apply.". 
(c) EFFECTIVE DATE.—The amendments made by this section 
shall apply to transfers and changes after the date of the enactment 
of this Act. 
SEC. 1
1
4
4
. 
TRANSFERS OF PROPERTY TO FOREIGN PARTNERSHIPS 
SUBJECT TO INFORMATION REPORTING COMPARABLE 
TO 
INFORMATION 
REPORTING 
FOR 
SUCH 
TRANSFERS 
TO 
FOREIGN 
CORPORATIONS. 
(a) IN GENERAL.—Paragraph (1) of section 6038B(a) (relating 
to notice of certain transfers to foreign corporations) is amended 
to read as follows: 
"(1) transfers property to— 
"(A) a foreign corporation in an exchange described 
in section 332, 351, 354, 355, 356, or 361, or 
"(B) a foreign partnership in a contribution described 
in section 721 or in any other contribution described in 
regulations prescribed by the Secretary,". 
(b) EXCEPTIONS.—Section 6038B is amended by redesignating 
subsection (b) as subsection (c) and by inserting after subsection 
(a) the following new subsection: 
"(b) EXCEPTIONS FOR CERTAIN TRANSFERS TO FOREIGN PARTNER-
SHIPS; SPECIAL RULE.— 
"(1) EXCEPTIONS.—Subsection (a)(1)(B) shall apply to a 
transfer by a United States person to a foreign partnership 
only if— 
"(A) the United States person holds (immediately after 
the transfer) directly or indirectly at least a 10-percent 
interest (as defined in section 6046A(d)) in the partnership, 
or 
"(B) the value of the property transferred (when added 
to the value of the property transferred by such person 
or any related person to such partnership or a related 
partnership during the 12-month period ending on the 
date of the transfer) exceeds $100,000. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 985 
For purposes of the preceding sentence, the value of any trans-
ferred property is its fair market value at the time of its 
transfer. 
"(2) SPECIAL RULE.—If by reason of an adjustment under 
section 482 or otherwise, a contribution described in subsection 
(a)(1) is deemed to have been made, such contribution shall 
be treated for purposes of this section as having been made 
not earlier than the date specified by the Secretary.". 
(c) MODIFICATION OF PENALTY APPLICABLE TO FOREIGN COR-
PORATIONS AND PARTNERSHIPS.— 
(1) IN GENERAL.—Paragraph (1) of section 6038B(b) is 
amended by striking "equal to" and all that follows and insert-
ing "equal to 10 percent of the fair market value of the property 
at the time of the exchange (and, in the case of a contribution 
described in subsection (a)(1)(B), such person shall recognize 
gain as if the contributed property had been sold for such 
value at the time of such contribution).". 
(2) LIMIT ON PENALTY.—Section 6038B(b) is amended by 
adding at the end the following new paragraph: 
"(3) LIMIT ON PENALTY.—The penalty under paragraph (1) 
with respect to any exchange shall not exceed $100,000 unless 
the failure with respect to such exchange was due to intentional 
disregard.". 
(d) EFFECTIVE DATE.— 
26 use 6038B 
(1) IN GENERAL.—The amendments made by this section note. 
shall apply to transfers made after the date of the enactment 
of this Act. 
(2) ELECTION OF RETROACTIVE EFFECT.—Section 1494(c) of 
the Internal Revenue Code of 1986 shall not apply to any 
transfer after August 20, 1996, if all applicable reporting 
requirements under section 6038B of such Code (as amended 
by this section) are satisfied. The Secretary of the Treasury 
or his delegate may prescribe simplified reporting requirements 
under the preceding sentence. 
SEC. 1145. EXTENSION OF STATUTE OF LIMITATIONS FOR FOREIGN 
TRANSFERS. 
(a) IN GENERAL.—Paragraph (8) of section 6501(c) (relating 
to failure to notify Secretary under section 6038B) is amended 
to read as follows: 
"(8) FAILURE TO NOTIFY SECRETARY OF CERTAIN FOREIGN 
TRANSFERS.—In the case of any information which is required 
to be reported to the Secretary under section 6038, 6038A, 
6038B, 6046, 6046A, or 6048, the time for assessment of £iny 
tax imposed by this title with respect to £iny event or period 
to which such information relates shall not expire before the 
date which is 3 years after the date on which the Secretary 
is furnished the information required to be reported under 
such section.". 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to information the due date for the reporting of which 
is after the date of the enactment of this Act. 
I l l STAT. 986 
PUBLIC LAW 105-34—AUG. 5, 1997 
SEC. 1146. INCREASE IN FILING THRESHOLDS FOR RETURNS AS TO 
ORGANIZATION 
OF 
FOREIGN 
CORPORATIONS 
AND 
ACQUISITIONS OF STOCK IN SUCH CORPORATIONS. 
(a) IN GENERAL.—Subsection (a) of section 6046 (relating to 
returns as to organization or reorganization of foreign corporations 
and as to acquisitions of their stock) is amended to read as follows: 
"(a) REQUIREMENT OF RETURN.— 
"(1) IN GENERAL.—A return complying with the require-
ments of subsection (b) shall be made by— 
"(A) each United States citizen or resident who becomes 
an officer or director of a foreign corporation if a United 
States person (as defined in section 7701(a)(30)) meets 
the stock ownership requirements of paragraph (2) with 
respect to such corporation, 
"(B) each United States person— 
"(i) who acquires stock which, when added to any 
stock owned on the date of such acquisition, meets 
the stock ownership requirements of paragraph (2) 
with respect to a foreign corporation, or 
"(ii) who acquires stock which, without regard to 
stock owned on the date of such acquisition, meets 
the stock ownership requirements of paragraph (2) 
with respect to a foreign corporation, 
"(C) each person (not described in subparagraph (B)) 
who is treated as a United States shareholder under section 
953(c) with respect to a foreign corporation, and 
"(D) each person who becomes a United States person 
while meeting the stock ownership requirements of para-
graph (2) with respect to stock of a foreign corporation. 
In the case of a foreign corporation with respect to which 
any person is treated as a United States shareholder under 
section 953(c), subparagraph (A) shall be treated as including 
a reference to each United States person who is an officer 
or director of such corporation. 
"(2) STOCK OWNERSHIP REQUIREMENTS.—A person meets 
the stock ownership requirements of this paragraph with 
respect to any corporation if such person owns 10 percent 
or more of— 
"(A) the total combined voting power of all classes 
of stock of such corporation entitled to vote, or 
"(B) the total value of the stock of such corporation.". 
26 use 6046 
(b) EFFECTIVE DATE.—The amendment made by this section 
note. 
shall take effect on January 1, 1998. 
Subtitle F—Determination of Foreign or 
Domestic Status of Partnerships 
SEC. 1151. DETERMINATION OF FOREIGN OR DOMESTIC STATUS OF 
PARTNERSHIPS. 
(a) IN GENERAL.—Paragraph (4) of section 7701(a) is amended 
by inserting before the period "unless, in the case of a partnership, 
the Secretary provides otherwise by regulations". 
26 use 7701 
(b) EFFECTIVE DATE.—Any regulations issued with respect to 
i^ote. 
the amendment made by subsection (a) shall apply to partnerships 
created or organized after the date determined under section 7805(b) 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 987 
of the Internal Revenue Code of 1986 (without regard to paragraph 
(2) thereof) with respect to such regulations. 
Subtitle G—Other Simplification 
Provisions 
SEC. 1161. TRANSITION RULE FOR CERTAIN TRUSTS. 
(a) IN GENERAL.—Paragraph (3) of section 1907(a) of the Small 
Business Job Protection Act of 1996 is amended by adding at 26USC7701 
the end the following flush sentence: 
"^ote. 
"To the extent prescribed in regulations by the Secretary of 
the Treasury or his delegate, a trust which was in existence 
on August 20, 1996 (other than a trust treated as owned by 
the grantor under subpart E of part I of subchapter J of 
chapter 1 of the Internal Revenue Code of 1986), and which 
was treated as a United States person on the day before the 
date of the enactment of this Act may elect to continue to 
be treated as a United States person notwithstanding section 
7701(a)(30)(E) of such Code.". 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 26 use 7701 
shall take effect as if included in the amendments made by section note. 
1907(a) of the Small Business Job Protection Act of 1996. 
SEC. 1162. REPEAL OF STOCK AND SECURITIES SAFE HARBOR 
REQUIREMENT THAT PRINCIPAL OFFICE BE OUTSIDE 
THE UNITED STATES. 
(a) IN GENERAL.—The last sentence of clause (ii) of section 
864(b)(2)(A) (relating to stock or securities) is amended by striking 
", or in the case of a corporation" and all that follows and inserting 
a period. 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 26 use 864 note. 
shall apply to taxable years beginning after December 31, 1997. 
SEC. 1163. MISCELLANEOUS CLARIFICATIONS. 
(a) ATTRIBUTION OF DEEMED PAID FOREIGN TAXES TO PRIOR 
DISTRIBUTIONS.—Subparagraph (B) of section 902(c)(2) is amended 
by striking "deemed paid with respect to" and inserting "attributable 
to". 
(b) FINANCIAL SERVICES INCOME DETERMINED WITHOUT REGARD 
TO HIGH-TAXED INCOME.—Subclause (II) of section 904(d)(2)(C)(i) 
is amended by striking "subclause (I)" and inserting "subclauses 
(I) and (III)". 
(c) EFFECTIVE DATE.—The amendments made by this section 26 use 902 note. 
shall take effect on the date of the enactment of this Act. 
Subtitle H—Other Provisions 
SEC. 1171. TREATMENT OF COMPUTER SOFTWARE AS FSC EXPORT 
PROPERTY. 
(a) IN GENERAL.—Subparagraph (B) of section 927(a)(2) (relat-
ing to property excluded from eligibility as FSC export property) 
is amended by inserting ", and other than computer software 
(whether or not patented)" before ", for commercial or home use". 
I l l STAT. 988 
PUBLIC LAW 105-34—AUG. 5, 1997 
26 use 927 note. 
(b) EFFECTIVE DATE,—The amendment made by subsection (a) 
shall apply to gross receipts attributable to periods after December 
31, 1997, in taxable years ending after such date. 
SEC. 1172. ADJUSTMENT OF DOLLAR LIMITATION ON SECTION 911 
EXCLUSION. 
(a) GENERAL RULE.—Paragraph (2) of section 911(b) is amended 
(1) by striking "of $70,000" in subparagraph (A) and insert-
ing "equal to the exclusion amount for the calendar year in 
which such taxable year begins", and 
(2) by adding at the end the following new subparagraph: 
"(D) EXCLUSION AMOUNT.— 
"(i) IN GENERAL.—The exclusion amount for any 
calendar year is the exclusion amount determined in 
accordance with the following table (as adjusted by 
clause (ii)): 
"For calendar year— 
The exclusion 
amount is— 
1998 
$72,000 
1999 
74,000 
2000 
76,000 
y 
2001 
78,000 
2002 and thereafter 
80,000. 
"(ii) INFLATION ADJUSTMENT.—In the case of any 
taxable year beginning in a calendar year after 2007, 
the $80,000 amount in clause (i) shall be increased 
by an amount equal to the product of— 
"(I) such dollar amount, and 
"(II) the cost-of-living adjustment determined 
under section 1(f)(3) for the calendar year in which 
the taxable year begins, determined by substitut-
ing '2006' for '1992' in subparagraph (B) thereof. 
If any increase determined under the preceding sen-
tence is not a multiple of $100, such increase shall 
be rounded to the next lowest multiple of $100.". 
26 use 911 note. 
(b) EFFECTIVE DATE.—The amendment made by this section 
shall apply to taxable years beginning after December 31, 1997, 
SEC. 1173. UNITED STATES PROPERTY NOT TO INCLUDE CERTAIN 
ASSETS ACQUIRED BY DEALERS IN ORDINARY COURSE 
OF TRADE OR BUSINESS. 
(a) IN GENERAL.—Section 956(c)(2) is amended by striking "and" 
at the end of subparagraph (H), by striking the period at the 
end of subparagraph (I) and inserting a semicolon, and by adding 
at the end the following new subparagraphs: 
"(J) deposits of cash or securities made or received 
on commercial terms in the ordinary course of a United 
States or foreign person's business as a dealer in securities 
or in commodities, but only to the extent such deposits 
are made or received as collateral or margin for (i) a 
securities loan, notional principal contract, options contract, 
forward contract, or futures contract, or (ii) any other finan-
cial transaction in which the Secretary determines that 
it is customary to post collateral or margin; and 
"(K) an obligation of a United States person to the 
extent the principal amount of the obligation does not 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 989 
exceed the fair market value of readily marketable securi-
ties sold or purchased pursuant to a sale and repurchase 
agreement or otherwise posted or received as collateral 
for the obligation in the ordinary course of its business 
by a United States or foreign person which is a dealer 
in securities or commodities. 
For purposes of subparagraphs (J) and (K), the term 'desder 
in securities' has the meaning given such term by section 
475(c)(1), Eind the term 'dealer in commodities' has the meaning 
given such term by section 475(e), except that such term shall 
include a futures commission merchant.'. 
(b) EFFECTIVE DATE.—The amendments made by this section 
26 use 956 note. 
shall apply to taxable years of foreign corporations beginning after 
December 31, 1997, and to taxable years of United States sharehold-
ers with or within which such taxable years of foreign corporations 
end. 
SEC. 1174. TREATMENT OF NONRESmENT ALIENS ENGAGED IN INTER-
NATIONAL TRANSPORTATION SERVICES. 
(a) SouRCiNG RULES.— 
(1) IN GENERAL.—Section 861(a)(3) is amended by adding 
at the end the following new flush sentence: 
"In addition, except for purposes of sections 79 and 105 and 
subchapter D, compensation for labor or services performed 
in the United States shall not be deemed to be income from 
sources within the United States if the labor or services are 
performed by a nonresident alien individual in connection with 
the individual's temporary presence in the United States as 
a regular member of the crew of a foreign vessel engaged 
in transportation between the United States and a foreign 
country or a possession of the United States.". 
(2) TRANSPORTATION INCOME.—Subparagraph (B) of section 
863(c)(2) is amended by adding at the end the following flush 
sentence: 
"In the case of transportation income derived from, or 
in connection with, a vessel, this subparagraph shall only 
apply if the taxpayer is a citizen or resident alien.". 
(b) PRESENCE IN UNITED STATES.— 
(1) IN GENERAL.—Paragraph (7) of section 7701(b) is amend-
ed by adding at the end the following new subparagraph: 
"(D) 
CREW 
MEMBERS 
TEMPORARILY 
PRESENT.—An 
individual who is temporarily present in the United States 
on any day as a regular member of the crew of a foreign 
vessel engaged in transportation between the United States 
and a foreign country or a possession of the United States 
shall not be treated as present in the United States on 
such day unless such individual otherwise engages in any 
trade or business in the United States on such day.". 
(2) CONFORMING AMENDMENT.—Subparagraph (A) of section 
7701(b)(7) is amended by striking "or (C)" and inserting ", 
(C),or(D)". 
(c) EFFECTIVE DATES.— 
26 use 7701 
(1) IN GENERAL.—The amendments made by this section no^. 
shsdl apply to remuneration for services performed in taxable 
years beginning after December 31, 1997. 
(2) PRESENCE.—^The amendment made by subsection (b) 
shall apply to taxable years beginning after December 31, 1997. 
Ill STAT. 990 
PUBLIC LAW 105-34—AUG. 5, 1997 
SEC, 1175. EXEMPTION FOR ACTIVE FINANCING INCOME. 
(a) EXEMPTION FROM FOREIGN PERSONAL HOLDING COMPANY 
INCOME.—Section 954 is amended by adding at the end the following 
new subsection: 
"(h) SPECIAL RULE FOR INCOME DERIVED IN THE ACTIVE CON-
DUCT OF BANKING, FINANCING, OR SIMILAR BUSINESSES.— 
"(1) IN GENERAL.—For purposes of subsection (c)(1), foreign 
personal holding company income shall not include income 
which is— 
"(A) derived in the active conduct by a controlled for-
eign corporation of a bemking, financing, or similar busi-
ness, but only if the corporation is predominantly engaged 
in the active conduct of such business, 
"(B) received from a person other than a related person 
(within the meaning of subsection (d)(3)) and derived from 
the investments made by a qualifjdng insurance company 
of its reserves or of 80 percent of its xineamed premiums 
(as both are determined in the manner prescribed under 
paragraph (4)), or 
"(C) received from a person other than a related person 
(within the meaning of subsection (d)(3)) and derived from 
investments made by a qualifying insurance company of 
an amount of its assets equal to— 
"(i) in the case of^contracts regulated in the country 
in which sold as property, casualty, or health insurance 
contracts, one-third of its premiums earned on such 
insurance contracts during the taxable year (as defined 
in section 832(b)(4)), and 
"(ii) in the case of contracts regulated in the coun-
try in which sold as life insurance or annuity contracts, 
the greater of— 
"(I) 10 percent of the reserves described in 
subparagraph (B) for such contracts, or 
"(II) in the case of a qualifying insurance com-
pany which is a start-up company, $10,000,000. 
"(2) PRINCIPLES FOR DETERMINING APPLICABLE INCOME.— 
"(A) BANKING AND FINANCING INCOME.—The determina-
tion as to whether income is described in paragraph (1)(A) 
shall be made— 
"(i) except as provided in clause (ii), in accordance 
with the applicable principles of section 904(d)(2)(C)(ii), 
except that such income shall include income from 
all leases entered into in the ordinary course of the 
active conduct of a banking, financing, or similar busi-
ness, £md 
"(ii) in the case of a corporation described in para-
graph (3)(B), in accordance with the applicable prin-
ciples of section 1296(b) (as in effect on the day before 
the enactment of the Taxpayer Relief Act of 1997) 
for determining what is not passive income. 
"(B) INSURANCE INCOME.—Under rules prescribed by 
the Secretary, for purposes of paragraphs (1) (B) and (C)— 
"(i) in the case of contracts which are sepsirate 
account-type contracts (including variable contracts not 
meeting the requirements of section 817), only income 
specifically allocable to such contracts shall be taken 
into account, and 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 991 
"(ii) in the case of other contracts, income not 
allocable under clause (i) shall be allocated ratably 
among such contracts. 
"(C) LOOK-THRU RULES.—The Secretary shall prescribe Regulations. 
regulations consistent with the principles of section 
904(d)(3) which provide that dividends, interest, income 
equivalent to interest, rents, or royalties received or 
accrued from a related person (within the meaning of sub-
section (d)(3)) shall be subject to look-thru treatment for 
purposes of this subsection. 
"(3) PREDOMINANTLY ENGAGED.—For purposes of paragraph 
(1)(A), a corporation shall be deemed predominantly engaged 
in the active conduct of a bsuiking, financing, or similar business 
only if— 
"(A) more than 70 percent of its gross income is derived 
from such business from transactions with persons which 
are not related persons (as defined in subsection (d)(3)) 
and which are located within the country under the laws 
of which the controlled foreign corporation is created or 
organized, or 
"(B) the corporation is— 
"(i) engaged in the active conduct of a banking 
or securities business (within the meaning of section 
1296(b), as in effect before the enactment of the Tax-
payer Relief Act of 1997), or 
"(ii) a qualified bank affiliate or a qualified securi-
ties affiliate (within the meaning of the proposed regu-
lations under such section 1296(b)). 
"(4) METHODS FOR DETERMINING UNEARNED PREMIUMS AND 
RESERVES.—For purposes of paragraph (1)(B)— 
"(A) 
PROPERTY 
AND CASUALTY 
CONTRACTS.—The 
unearned premiums and reserves of a qualifying insurance 
company with respect to property, casualty, or health insur-
ance contracts shall be determined using the same methods 
and interest rates which would be used if such company 
were subject to tax under subchapter L. 
"(B) LIFE INSURANCE AND ANNUITY CONTRACTS.—The 
reserves of a qualifying insurance company with respect 
to life insurance or annuity contracts shall be determined 
under the method described in paragraph (5) which such 
company elects to apply for purposes of this paragraph. 
Such election shall be made at such time and in such 
manner as the Secretary may prescribe and, once made, 
shall be irrevocable without the consent of the Secretary. 
"(C) LIMITATION ON RESERVES.—In no event shall the 
reserve determined under this paragraph for any contract 
as of any time exceed the amount which would be taken 
into account with respect to such contract as of such time 
in determining foreign annual statement reserves (less any 
catastrophe or deficiency reserves). 
"(5) METHODS.—The methods described in this paragraph 
are as follows: 
"(A) U.S. METHOD.—The method which would apply 
if the qualifying insurance company were subject to tax 
under subchapter L, except that the interest rate used 
shall be an interest rate determined for the foreign country 
in which such company is created or organized and which 
I l l STAT. 992 
PUBLIC LAW 105-34—AUG. 5, 1997 
is calculated in the same manner as the Federal mid-
term rate under section 1274(d). 
"(B) FOREIGN METHOD.—A preliminary term method, 
except that the interest rate used shall be the interest 
rate determined for the foreign country in which such 
company is created or organized and which is calculated 
in the same manner as the Federal mid-term rate under 
section 1274(d). If a qualifying insurance company uses 
such a preliminary term method with respect to contracts 
insuring risks located in such foreign country, such method 
shall apply if such company elects the method under this 
clause. 
"(C) CASH SURRENDER VALUE.—A method under which 
reserves are equal to the net surrender value (as defined 
in section 807(e)(1)(A)) of the contract. 
"(6) DEFINITIONS.—For purposes of this subsection— 
"(A) TERMS RELATING TO INSURANCE COMPANIES.— 
"(i) QUALIFYING INSURANCE COMPANY.—The term 
'qualifying insurance company* means any entity 
which— 
"(I) is subject to regulation as an insurance 
company under the laws of its country of incorpora-
tion, 
"(II) realizes at least 50 percent of its net 
written premiums from the insurance or reinsur-
ance of risks located within the country in which 
such entity is created or organized, and 
"(III) is engaged in the active conduct of an 
insurance business and would be subject to tax 
under subchapter L if it were a domestic corpora-
tion. 
"(ii) START-UP COMPANY.—^A qualifying insurance 
company shall be treated as a start-up company if 
such company (and any predecessor) has not been 
engaged in the active conduct of an insurance business 
for more than 5 years as of the beginning of the taxable 
year of such company. 
"(B) LOCATED.—For purposes of paragraph (3)(A)— 
"(i) IN GENERAL.—A person shall be treated as 
located— 
"(I) except as provided in subclause (II), within 
the country in which it maintains an office or 
other fixed place of business through which it 
engages in a trade or business and by which the 
transaction is effected, or 
"(II) in the case of a natural person, within 
the country in which such person is physically 
located when such person enters into a transaction, 
"(ii) 
SPECIAL 
RULE 
FOR 
QUALIFIED 
BUSINESS 
UNITS.—Gross income derived by a corporation's quali-
fied business unit (within the meaning of section 
989(a)) from transactions with persons which are not 
related persons (as defined in subsection (d)(3)) and 
which are located in the country in which the qualified 
business unit both maintains its principal office and 
conducts substantial business activity shall be treated 
as derived from transactions with persons which are 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 993 
not related persons (as defined in subsection (d)(3)) 
and which are located within the country under the 
laws of which the controlled foreign corporation is cre-
ated or organized. 
"(7) ANTI-ABUSE RULES.—For purposes of applying this sub-
section, there shall be disregarded any item of income, gain, 
loss, or deduction with respect to any transaction or series 
of transactions one of the principal purposes of which is qualify-
ing income or gain for the exclusion under this section, includ-
ing any change in the method of computing reserves or any 
other transaction or series of transactions a principal purpose 
of which is the acceleration or deferral of any item in order 
to claim the benefits of such exclusion through the application 
of this subsection. 
"(8) COORDINATION WITH SECTION 953.—This subsection 
shall not apply to investment income allocable to contracts 
that insure related party risks or risks located in a foreign 
country other than the country in which the qualifying insur-
ance comapny is created or organized. 
"(9) APPLICATION.—This subsection shall apply to the first 
full taxable year of a foreign corporation beginning after Decem-
ber 31, 1997, and before January 1, 1999, and to taxable 
years of United States shareholders with or within which such 
taxable year of such foreign corporation ends.". 
(b) 
EXEMPTION 
FROM 
FOREIGN 
BASE 
COMPANY 
SERVICES 
INCOME.—Paragraph (2) of section 954(e) is amended by striking 
"or" at the end of subparagraph (A), by striking the period at 
the end of subparagraph (B) and inserting ", or", and by adding 
at the end the following: 
"(C) in the case of taxable years described in subsection 
(h)(8), the active conduct by a controlled foreign corporation 
of a banking, financing, insurance, or similar business, 
but only if the corporation is predominantly engaged in 
the active conduct of such business (within the meaning 
of subsection (h)(3)) or is a qualifying insurance company.". 
(c) EFFECTIVE DATE.—The amendments made by this section 
26 use 954 note. 
shall apply to the first full taxable year of a foreign corporation 
beginning after December 31, 1997, and before January 1, 1999, 
£ind to taxable years of United States shareholders with or within 
which such taxable year of such foreign corporation ends. 
TITLE 
XII~SIMPLIFICATION 
PROVI-
SIONS RELATING TO INDIVIDUALS 
AND BUSINESSES 
Subtitle A—Provisions Relating to 
Individuals 
SEC. 1201. BASIC STANDARD DEDUCTION AND MINIMUM TAX EXEMP-
TION AMOUNT FOR CERTAIN DEPENDENTS. 
(a) BASIC STANDARD DEDUCTION.— 
(1) IN GENERAL.—Paragraph (5) of section 63(c) (relating 
to limitation on basic standard deduction in the case of certain 
dependents) is amended by striking "shall not exceed" and 
I l l STAT. 994 
PUBLIC LAW 105-34—AUG. 5, 1997 
all that follows and inserting "shall not exceed the greater 
of— 
"(A) $500, or 
"(B) the sum of $250 and such individual's earned 
income.". 
(2) CONFORMING AMENDMENT.—Paragraph (4) of section 
63(c) is amended— • 
(A) by striking "(5)(A)" in the material preceding 
subparagraph (A) and inserting "(5)", and 
(B) by striking "by substituting" and all that follows 
in subparagraph (B) and inserting "by substituting for 'cal-
endar year 1992' in subparagraph (B) thereof— 
"(i) 'calendar year 1987' in the case of the dollar 
amounts contained in paragraph (2) or (5)(A) or sub-
section (f), and 
"(ii) 'calendar year 1997' in the case of the dollar 
amount contained in paragraph (5)(B).". 
(b) MINIMUM TAX EXEMPTION AMOUNT.— 
(1) IN GENERAL.—Subsection (j) of section 59 is amended 
to read as follows: 
"(j) TREATMENT OF UNEARNED INCOME OF MINOR CHILDREN.— 
"(1) IN GENERAL.—In the case of a child to whom section 
Kg) applies, 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(d)(2)) for the taxable year, plus 
"(B) $5,000. 
"(2) INFLATION ADJUSTMENT.—In the case of any taxable 
year beginning in a calendar year after 1998, the dollar amount 
in paragraph (1)(B) shall be increased by an amount equal 
to the product of— 
"(A) such dollar amount, and 
"(B) the cost-of-living adjustment determined under 
section 1(f)(3) for the calendar year in which the taxable 
year begins, determined by substituting '1997' for '1992' 
in subparagraph (B) thereof 
If any increase determined under the preceding sentence is 
not a multiple of $50, such increase shall be rounded to the 
nearest multiple of $50.". 
(2) 
CONFORMING AMENDMENT.—Clause 
(iv) 
of section 
6103(e)(1)(A) is amended by striking "or 59(j)". 
26 use 59 note. 
(c) EFFECTIVE DATE.—The amendments made by this section 
shall apply to taxable years beginning after December 31, 1997. 
SEC. 1202. INCREASE IN AMOUNT OF TAX EXEMPT FROM ESTIMATED 
TAX REQUIREMENTS. 
(a) IN GENERAL.—Paragraph (1) of section 6654(e) (relating 
to exception where tax is small amount) is amended by striking 
"$500" and inserting "$1,000". 
26 use 6654 
(b) EFFECTIVE DATE.—The amendments made by this section 
note. 
shall apply to taxable years beginning after December 31, 1997. 
SEC. 1203. TREATMENT OF CERTAIN REIMBURSED EXPENSES OF 
RURAL MAIL CARRIERS. 
(a) IN GENERAL.—Section 162 (relating to trade or business 
expenses) is amended by redesignating subsection (o) as subsection 
(p) and by inserting after subsection (n) the following new sub-
section: 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 995 
"(o) TREATMENT OF CERTAIN REIMBURSED EXPENSES OF RURAL 
MAIL CARRIERS.— 
"(1) GENERAL RULE.—In the case of any employee of the 
United States Postal Service who performs services involving 
the collection and delivery of mail on a rural route and who 
receives qualified reimbursements for the expenses incurred 
by such employee for the use of a vehicle in performing such 
services— 
"(A) the amount allowable as a deduction imder this 
chapter for the use of a vehicle in performing such services 
shall be equal to the amount of such qualified reimburse-
ments; and 
"(B) such qualified reimbursements shall be treated 
as paid under a reimbursement or other expense allowance 
arrangement for purposes of section 62(a)(2)(A) (and section 
62(c) shall not apply to such qualified reimbursements). 
"(2) DEFINITION OF QUALIFIED REIMBURSEMENTS.—For pur-
poses of this subsection, the term 'qualified reimbursements' 
means the amounts paid by the United States Postal Service 
to employees as an equipment maintenance allowance under 
the 1991 collective bargaining agreement between the United 
States Postal Service and the National Rural Letter Carriers' 
-
^ 
Association. Amounts paid as an equipment maintenance allow-
Eince by such Postal Service under later collective bargaining 
agreements that supersede the 1991 agreement shall be consid-
ered qualified reimbursements if such amounts do not exceed 
the amounts that would have been paid under the 1991 agree-
ment, adjusted for changes in the Consumer Price Index (as 
defined in section 1(f)(5)) since 1991.". 
(b) TECHNICAL AMENDMENT.—Section 6008 of the Technical 
and Miscellaneous Revenue Act of 1988 is hereby repealed. 
26 USC 162 note. 
(c) EFFECTIVE DATE.—The amendments made by this section 
26 use 162 note, 
shall apply to taxable years beginning after December 31, 1997. 
SEC. 1204. TREATMENT OF TRAVELING EXPENSES OF CERTAIN FED-
ERAL EMPLOYEES ENGAGED IN CRIMINAL INVESTIGA-
TIONS. 
(a) IN GENERAL.—Subsection (a) of section 162 is amended 
by adding at the end the following new sentence: "The preceding 
sentence shall not apply to £iny Federal employee during any period 
for which such employee is certified by the Attorney General (or 
the designee thereof) as traveling on behalf of the United States 
in temporary duty status to investigate, or provide support services 
for the investigation of, a Federal crime.". 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
26 use 162 note. 
shall apply to amounts paid or incurred with respect to taxable 
years ending afber the date of the enactment of this Act. 
SEC. 1205. PAYMENT OF TAX BY COMMERCIALLY ACCEPTABLE MEANS. 
(a) GENERAL RULE.—Section 6311 is amended to read as follows: 
"SEC. 6311. PAYMENT OF TAX BY COMMERCIALLY ACCEPTABLE MEANS. 
"(a) AUTHORITY TO RECEIVE.—It shall be lawful for the Sec-
retary to receive for internal revenue taxes (or in pa5nnent for 
internal revenue stamps) any commercially acceptable mesins that 
the Secretary deems appropriate to the extent and under the condi-
tions provided in regulations prescribed by the Secretary. 
I l l STAT. 996 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(b) ULTIMATE LIABILITY.—If a check, money order, or other 
method of pa)rment, including payment by credit card, debit card, 
or charge card so received is not duly paid, or is paid and subse-
quently charged back to the Secretary, the person by whom such 
check, or money order, or other method of payment has been ten-
dered shall remain liable for the payment of the tax or for the 
stamps, and for all legal penalties and additions, to the same 
extent as if such check, money order, or other method of payment 
had not been tendered. 
"(c) LIABILITY OF BANKS AND OTHERS.—If any certified, treasur-
er's, or cashier's check (or other guaranteed draft), or any money 
order, or any other means of payment that has been guaranteed 
by a financial institution (such as a credit card, debit card, or 
charge card transaction which has been guaranteed expressly by 
a financial institution) so received is not duly paid, the United 
States shall, in addition to its right to exact payment from the 
party originally indebted therefor, have a lien for— 
"(1) the amount of such check (or draft) upon all assets 
of the financial institution on which drawn, 
"(2) the amount of such money order upon all the assets 
of the issuer thereof, or 
"(3) the guaranteed amoimt of any other transaction upon 
all the assets of the institution making such guarantee, 
and such amount shall be paid out of such assets in preference 
to any other claims whatsoever against such financial institution, 
issuer, or guaranteeing institution, except the necessary costs and 
expenses of administration and the reimbursement of the United 
States for the amoimt expended in the redemption of the circulating 
notes of such financial institution. 
"(d) PAYMENT BY OTHER MEANS.— 
"(1) AUTHORITY TO PRESCRIBE REGULATIONS.—The Sec-
retary shall prescribe such regulations as the Secretary deems 
necessary to receive payment by commercially acceptable 
means, including regulations that— 
"(A) specify which methods of payment by commercially 
acceptable means will be acceptable, 
"(B) specify when pajnnent by such means will be 
considered received, 
"(C) identify types of nontax matters related to pay-
ment by such means that are to be resolved by persons 
ultimately liable for payment and financial intermediaries, 
without the involvement of the Secretary, and 
"(D) ensure that tax matters will be resolved by the 
Secretary, 
without 
the 
involvement 
of 
financial 
intermediaries. 
"(2) AUTHORITY TO ENTER INTO CONTRACTS.—Notwithstand-
ing section 3718(f) of title 31, United States Code, the Secretary 
is authorized to enter into contracts to obtain services related 
to receiving pajrment by other means where cost beneficial 
to the Government. The Secretary may not pay any fee or 
provide any other consideration under such contracts. 
"(3) SPECIAL PROVISIONS FOR USE OF CREDIT CARDS.—If 
use of credit cards is accepted as a method of payment of 
taxes pursuant to subsection (a)— 
"(A) a pa)anent of internal revenue taxes (or a payment 
for internal revenue stamps) by a person by use of a credit 
card shall not be subject to section 161 of the Truth in 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 997 
Lending Act (15 U.S.C. 1666), or to any similar provisions 
of State law, if the error alleged by the person is an 
error relating to the underlying tax liability, rather than 
an error relating to the credit card account such as a 
computational error or numerical transposition in the credit 
card transaction or an issue as to whether the person 
authorized pa5anent by use of the credit card, 
"(B) a payment of internal revenue taxes (or a pa5mnient 
for internal revenue stamps) shall not be subject to section 
170 of the Truth in Lending Act (15 U.S.C. 1666i), or 
to any similar provisions of State law, 
"(C) a payment of internal revenue taxes (or a payment 
for internal revenue stamps) by a person by use of a debit 
card shall not be subject to section 908 of the Electronic 
Fund Transfer Act (15 U.S.C. 1693f), or to any similar 
provisions of State law, if the error alleged by the person 
is an error relating to the underlying tax liability, rather 
than an error relating to the debit card account such as 
a computational error or numerical transposition in the 
debit card transaction or an issue as to whether the person 
authorized payment by use of the debit card, 
"(D) the term 'creditor' under section 103(f) of the 
Truth in Lending Act (15 U.S.C. 1602(f)) shall not include 
the Secretary with respect to credit card transactions in 
pa3nnent of internal revenue taxes (or payment for internal 
revenue stamps), and 
"(E) notwithstanding any other provision of law to 
the contrary, in the case of payment made by credit card 
or debit card transaction of an amount owed to a person 
as the result of the correction of an error under section 
161 of the Truth in Lending Act (15 U.S.C. 1666) or section 
908 of the Electronic Fund Transfer Act (15 U.S.C. 1693f), 
the Secretary is authorized to provide such amount to 
such person as a credit to that person's credit card or 
debit card account through the applicable credit card or 
debit card system. 
"(e) CONFIDENTIALITY OF INFORMATION.— 
"(1) IN GENERAL.—Except as otherwise authorized by this 
subsection, no person may use or disclose any information 
relating to credit or debit card transactions obtained pursuant 
to section 6103(k)(8) other than for purposes directly related 
to the processing of such transactions, or the billing or collection 
of amounts charged or debited pursuant thereto. 
"(2) EXCEPTIONS.— 
"(A) Debit or credit card issuers or others acting on 
behalf of such issuers may also use and disclose such 
information for purposes directly related to servicing an 
issuer's accounts. 
"(B) Debit or credit card issuers or others directly 
involved in the processing of credit or debit card trans-
actions or the billing or collection of amounts charged or 
debited thereto may also use and disclose such information 
for purposes directly related to— 
"(i) statistical risk and profitability assessment; 
"(ii) transferring receivables, accounts, or interest 
therein; 
"(iii) auditing the account information; 
I l l STAT. 998 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(iv) compljdng with Federal, State, or local law; 
and 
"(v) properly authorized civil, criminal, or regu-
latory investigation by Federal, State, or local authori-
ties. 
"(3) PROCEDURES.—Use and disclosure of information under 
this paragraph shall be made only to the extent authorized 
by written procedures promulgated by the Secretary. 
"(4) CROSS REFERENCE.— 
Tor provision ^rovidinsr for civil damages for violation of para-
graph (1), see section 7431. . 
(b) CLERICAL AMENDMENT.—The table of sections for subchapter 
B of chapter 64 is amended by striking the item relating to section 
6311 and inserting the following: 
"Sec. 6311. Pajrment of tax by commercially acceptable means.". 
(c) AMENDMENTS TO SECTIONS 6103 AND 7431 WITH RESPECT 
TO DISCLOSURE AUTHORIZATION.— 
(1) Subsection (k) of section 6103 (relating to confidentiality 
and disclosure of returns and return information) is amended 
by adding at the end the following new paragraph: 
"(8) DISCLOSURE OF INFORMATION TO ADMINISTER SECTION 
6311.—The Secretary may disclose returns or return information 
to financial institutions and others to the extent the Secretary 
deems necessary for the administration of section 6311. Disclo-
sures of information for purposes other than to accept pa5rments 
by checks or money orders shall be made only to the extent 
authorized by written procedures promulgated by the Sec-
retsiry.". 
(2) Section 7431 (relating to civil damages for unauthorized 
disclosure of returns and return information) is amended by 
adding at the end the following new subsection: 
"(g) SPECIAL RULE FOR INFORMATION OBTAINED UNDER SECTION 
6103(k)(8).—For purposes of this section, any reference to section 
6103 shall be treated as including a reference to section 6311(e).". 
(3) Section 6103(p)(3)(A) is amended by striking "or (6)" 
and inserting "(6), or (8)". 
26 use 6103 
(d) EFFECTIVE DATE.—The amendments made by this section 
note. 
shall take effect on the day 9 months after the date of the enactment 
of this Act. 
Subtitle B—Provisions Relating to 
Businesses Generally 
SEC. 1211. MODIFICATIONS TO LOOK-BACK METHOD FOR LONG-TERM 
CONTRACTS. 
(a) LOOK-BACK METHOD NOT TO APPLY IN CERTAIN CASES.— 
Subsection (b) of section 460 (relating to percentage of completion 
method) is amended by adding at the end the following new para-
graph: 
"(6) ELECTION TO HAVE LOOK-BACK METHOD NOT APPLY IN 
DE MINIMIS CASES.— 
"(A) AMOUNTS TAKEN INTO ACCOUNT AFTER COMPLETION 
OF CONTRACT.—Paragraph (1)(B) shall not apply with 
respect to any taxable year (beginning after the taxable 
year in which the contract is completed) if— 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 999 
"(i) the cumulative taxable income (or loss) under 
the contract as of the close of such taxable year, is 
within 
"(ii) 10 percent of the cumulative look-back tsixable 
income (or loss) under the contract as of the close 
of the most recent taxable year to which paragraph 
(1)(B) applied (or would have applied but for subpara-
graph (B)). 
"(B) DE MINIMIS DISCREPANCIES.—Paragraph (1)(B) 
shall not apply in any case to which it would otherwise 
apply if— 
"(i) the cumulative taxable income (or loss) under 
the contract as of the close of each prior contract year, 
is within 
"(ii) 10 percent of the cumulative look-back income 
(or loss) under the contract as of the close of such 
prior contract year. 
"(C) DEFINITIONS.—For purposes of this paragraph— 
"(i) CONTRACT YEAR.—The term 'contract year' 
means any taxable year for which income is taken 
into account under the contract. 
"(ii) LOOK-BACK INCOME OR LOSS.—The look-back 
income (or loss) is the amount which would be the 
taxable income (or loss) under the contract if the alloca-
tion method set forth in paragraph (2)(A) were used 
in determining taxable income. 
"(iii) DISCOUNTING NOT APPLICABLE.—The amounts 
taken into account after the completion of the contract 
shall be determined without regard to any discounting 
under the 2nd sentence of paragraph (2). 
"(D) CONTRACTS TO WHICH PARAGRAPH APPLIES.—This 
paragraph shall only apply if the taxpayer msikes £in elec-
tion under this subparagraph. Unless revoked with the 
consent of the Secretary, such an election shall apply to 
all long-term contracts completed during the taxable year 
for which election is made or during any subsequent taxable 
year.", 
(b) MODIFICATION OF INTEREST RATE.— 
(1) IN GENERAL.—Subparagraph (C) of section 460(b)(2) 
is amended by striking "the overpayment rate established by 
section 6621" and inserting "the adjusted overpayment rate 
(as defined in paragraph (7))". 
(2) ADJUSTED OVERPAYMENT RATE.—Subsection (b) of sec-
tion 460 is amended by adding at the end the following new 
paragraph: 
"(7) ADJUSTED OVERPAYMENT RATE.— 
"(A) IN GENERAL.—The adjusted overpayment rate for 
any interest accrual period is the overpayment rate in 
effect under section 6621 for the calendar quarter in which 
such interest accrual period begins. 
"(B) 
INTEREST 
ACCRUAL PERIOD.—For purposes of 
subparagraph (A), the term 'interest accrual period' means 
the period— 
"(i) beginning on the day after the return due 
date for any taxable year of the taxpayer, and 
"(ii) ending on the return due date for the following 
taxable year. 
I l l STAT. 1000 
PUBLIC LAW 105-34—AUG. 5, 1997 
For purposes of the preceding sentence, the term 'return 
due date' means the date prescribed for fihng the return 
of the tax imposed by this chapter (determined without 
regard to extensions).". 
26 u s e 460 note. 
(c) EFFECTIVE DATE.— 
(1) IN GENERAL.—Except as provided in paragraph (2), the 
amendments made by this section shall apply to contracts 
completed in taxable years ending after the date of the enact-
ment of this Act. 
(2) SUBSECTION (b).—The amendments made by subsection 
(b) shall apply for purposes of section 167(g) of the Internal 
Revenue Code of 1986 to property placed in service after 
September 13, 1995. 
SEC. 1212. MINIMUM TAX TREATMENT OF CERTAIN PROPERTY AND 
CASUALTY INSURANCE COMPANIES. 
(a) IN GENERAL.—Clause (i) of section 56(g)(4)(B) (relating to 
inclusion of items included for purposes of computing earnings 
and profits) is amended by adding at the end the following new 
sentence: "In the case of any insurance company taxable under 
section 831(b), this clause shall not apply to any amount not 
described in section 834(b).", 
26 use 56 note. 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31, 1997. 
SEC. 1213. QUALIFIED LESSEE CONSTRUCTION ALLOWANCES FOR 
SHORT-TERM LEASES. 
(a) IN GENERAL.—Part III of subchapter B of chapter 1 is 
amended by inserting after section 109 the following new section: 
"SEC. 110. QUALIFIED LESSEE CONSTRUCTION ALLOWANCES FOR 
SHORT-TERM LEASES. 
"(a) IN GENERAL.—Gross income of a lessee does not include 
any amount received in cash (or treated as a rent reduction) by 
a lessee from a lessor— 
"(1) under a short-term lease of retail space, and 
"(2) for the purpose of such lessee's constructing or improv-
ing qualified long-term real property for use in such lessee's 
trade or business at such retail space, 
but only to the extent that such amount does not exceed the 
amount expended by the lessee for such construction or improve-
ment. 
"(b) CONSISTENT TREATMENT BY LESSOR.—Qualified long-term 
real property constructed or improved in connection with any 
amount excluded from a lessee's income by reason of subsection 
(a) shall be treated as nonresidential real property of the lessor 
(including for purposes of section 168(i)(8)(B)). 
"(c) DEFINITIONS.—For purposes of this section— 
"(1) QUALIFIED LONG-TERM REAL PROPERTY.—The term 
'qualified long-term real property' means nonresidential real 
property which is part of, or otherwise present at, the retail 
space referred to in subsection (a) and which reverts to the 
lessor at the termination of the lease. 
"(2) 
SHORT-TERM 
LEASE.—The term 'short-term lease' 
means a lease (or other agreement for occupancy or use) of 
retail space for 15 years or less (as determined under the 
rules of section 168(i)(3)). 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1001 
"(3) RETAIL SPACE.—The term 'retail space' means real 
property leased, occupied, or otherwise used by a lessee in 
its trade or business of selling tangible personal property or 
services to the general public. 
"(d) 
INFORMATION REQUIRED TO B E FURNISHED TO SEC- Regulations. 
RETARY.—Under regulations, the lessee and lessor described in sub-
section (a) shall, at such times and in such manner as may be 
provided in such regulations, furnish to the Secretary— 
"(1) information concerning the amounts received (or treat-
ed as a rent reduction) and expended as described in subsection 
(a), and 
"(2) any other information which the Secretary deems nec-
essary to carry out the provisions of this section.". 
(b) TREATMENT AS INFORMATION RETURN.—Subparagraph (A) 
of section 6724(d)(1)(A) is amended by striking "or" at the end 
of clause (vii), by adding "or" at the end of clause (viii), and by 
adding at the end the following new clause: 
"(ix) section 110(d) (relating to qualified lessee 
construction allowances for short-term leases),". 
(c) CROSS REFERENCE.—Paragraph (8) of section 168(i) (relating 
to treatment of leasehold improvements) is amended by adding 
at the end the following new subparagraph: 
"(C) CROSS REFERENCE.— 
T o r treatment of qualified long-term real property constructed 
or improved in connection with cash or rent reduction from lessor 
to lessee, see section llOCb).". 
(d) CLERICAL AMENDMENT.—The table of sections for part III 
of subchapter B of chapter 1 is amended by inserting after the 
item relating to section 109 the following new item: 
"Sec. 110. Qualified lessee construction allowances for short-term leases.". 
(e) EFFECTIVE DATE.—The amendments made by this section 
26 use no note, 
shall apply to leases entered into after the date of the enactment 
of this Act. 
Subtitle C—Simplification Relating to 
Electing Large Partnerships 
PART I—GENERAL PROVISIONS 
SEC. 1221, SIMPLIFIED FLOW-THROUGH FOR ELECTING LARGE PART-
NERSHIPS. 
(a) GENERAL RULE.—Subchapter K (relating to partners and 
partnerships) is amended by adding at the end the following new 
part: 
"PART IV—SPECIAL RULES FOR ELECTING 
LARGE PARTNERSHIPS 
"Sec. 771. Application of subchapter to electing large partnerships. 
"Sec. 772. Simplified flow-through. 
"Sec. 773. Computations at partnership level. 
"Sec. 774. Other modifications. 
"Sec. 775. Electing large partnership defined. 
"Sec. 776. Special rules for partnerships holding oil and gas properties. 
"Sec. 777. Regulations. 
39-194 O - 97 - 33 : QL 3 Part 1 
I l l STAT. 1002 
PUBLIC LAW 105-34—AUG. 5, 1997 
"SEC. 771. APPLICATION OF SUBCHAPTER TO ELECTING LARGE PART-
NERSHIPS. 
"The preceding provisions of this subchapter to the extent 
inconsistent with the provisions of this part shall not apply to 
an electing large partnership and its partners. 
"SEC. 772. SIMPLIFIED FLOW-THROUGH. 
"(a) GENERAL RULE.—In determining the income tax of a part-
ner of an electing large partnership, such partner shall take into 
account separately such partner's distributive share of the partner-
ship's— 
"(1) taxable income or loss from passive loss limitation 
activities, 
^x 
"(2) taxable income or loss from other activities, 
"(3) net capital gain (or net capital loss)— 
"(A) to the extent allocable to passive loss limitation 
activities, and 
"(B) to the extent allocable to other activities, 
"(4) tax-exempt interest, 
"(5) applicable net AMT adjustment separately computed 
for— 
"(A) passive loss limitation activities, and 
"(B) other activities, 
"(6) general credits, 
"(7) low-income housing credit determined under section 
42, 
"(8) rehabilitation credit determined under section 47, 
"(9) foreign income taxes, 
"(10) the credit allowable under section 29, and 
"(11) other items to the extent that the Secretary deter-
mines that the separate treatment of such items is appropriate. 
"(b) SEPARATE COMPUTATIONS.—In determining the amounts 
required under subsection (a) to be separately tsiken into account 
by any partner, this section and section 773 shall be applied sepa-
rately with respect to such partner by taking into account such 
partner's distributive share of the items of income, gain, loss, deduc-
tion, or credit of the partnership. 
Applicability. 
"(c) TREATMENT AT PARTNER LEVEL,— 
"(1) IN GENERAL.—Except as provided in this subsection, 
rules similar to the rules of section 702(b) shall apply to any 
partner's distributive share of the amounts referred to in sub-
section (a). 
"(2) INCOME OR LOSS FROM PASSIVE LOSS LIMITATION ACTIVI-
TIES.—For purposes of this chapter, any partner's distributive 
share of any income or loss described in subsection (a)(1) shall 
be treated as an item of income or loss (as the case may 
be) from the conduct of a trade or business which is a single 
passive activity (as defined in section 469). A similar rule 
shall apply to a partner's distributive share of amounts referred 
to in paragraphs (3)(A) and (5)(A) of subsection (a). 
"(3) INCOME OR LOSS FROM OTHER ACTIVITIES.— 
"(A) IN GENERAL.—For purposes of this chapter, any 
partner's distributive share of any income or loss described 
in subsection (a)(2) shall be treated as an item of income 
or expense (as the case may be) with respect to property 
held for investment. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1003 
"(B) DEDUCTIONS FOR LOSS NOT SUBJECT TO SECTION 
67.—The deduction under section 212 for any loss described 
in subparagraph (A) shall not be treated as a miscellaneous 
itemized deduction for purposes of section 67. 
"(4) TREATMENT OF NET CAPITAL GAIN OR LOSS.—For pur-
poses of this chapter, any partner's distributive share of any 
gain or loss described in subsection (a)(3) shall be treated 
as a long-term capital gain or loss, as the case may be. 
"(5) MINIMUM TAX TREATMENT.—In determining the alter-
native minimum taxable income of any partner, such partner's 
distributive share of any applicable net AMT adjustment shall 
be taken into account in lieu of making the separate adjust-
ments provided in sections 56, 57, and 58 with respect to 
the items of the partnership. Except as provided in regulations, 
the applicable net AMT adjustment shall be treated, for pur-
poses of section 53, as an adjustment or item of tax preference 
not specified in section 53(d)(l)(B)(ii). 
"(6) GENERAL CREDITS.—A partner's distributive share of 
the amount referred to in paragraph (6) of subsection (a) shall 
be taken into account as a current year business credit. 
"(d) OPERATING RULES.—For purposes of this section— 
"(1) PASSIVE LOSS LIMITATION ACTIVITY.—The term 'passive 
loss limitation activity* means— 
"(A) any activity which involves the conduct of a trade 
or business, and 
"(B) any rental activity. 
For purposes of the preceding sentence, the term 'trade or 
business' includes any activity treated as a trade or business 
under paragraph (5) or (6) of section 469(c). 
"(2) TAX-EXEMPT INTEREST.—The term 'tax-exempt interest' 
means interest excludable fi-om gross income under section 
103. 
"(3) APPLICABLE NET AMT ADJUSTMENT.— 
"(A) IN GENERAL.—The applicable net AMT adjustment 
is— 
"(i) with respect to taxpayers other than corpora-
tions, the net adjustment determined by using the 
adjustments applicable to individuals, and 
"(ii) with respect to corporations, the net adjust-
ment determined by using the adjustments applicable 
to corporations. 
"(B) NET ADJUSTMENT.—The term 'net adjustment' 
means the net adjustment in the items attributable to 
gassive loss activities or other activities (as the case may 
e) which would result if such items were determined with 
the adjustments of sections 56, 57, and 58. 
"(4) TREATMENT OF CERTAIN SEPARATELY STATED ITEMS.— 
"(A) EXCLUSION FOR CERTAIN PURPOSES.—In determin-
ing the amounts referred to in paragraphs (1) and (2) 
of subsection (a), any net capital gain or net capital loss 
(as the case may be), and any item referred to in subsection 
(a)(ll), shall be excluded. 
"(B) ALLOCATION RULES.—The net capital gain shall 
be treated— 
"(i) as allocable to passive loss limitation activities 
to the extent the net capital gain does not exceed 
the net capital gain determined by only taking into 
I l l STAT. 1004 
PUBLIC LAW 105-34—AUG. 5, 1997 
account gains and losses from sales and exchanges 
of property used in connection with such activities, 
and 
"(ii) as allocable to other activities to the extent 
such gain exceeds the amount allocated under clause 
(i). 
Applicability. 
A similar rule shall apply for purposes of allocating any 
net capital loss. 
"(C) NET CAPITAL LOSS.—The term 'net capital loss' 
means the excess of the losses from sales or exchanges 
of capital assets over the gains from sales or exchange 
of capital assets. 
"(5) GENERAL CREDITS.—The term 'general credits' means 
any credit other than the low-income housing credit, the 
rehabilitation credit, the foreign tax credit, and the credit allow-
able under section 29. 
"(6) FOREIGN INCOME TAXES.—The term 'foreign income 
taxes' means taxes described in section 901 which are paid 
or accrued to foreign countries and to possessions of the United 
States. 
"(e) SPECIAL RULE FOR UNRELATED BUSINESS TAX.—In the case 
of a partner which is an organization subject to tax under section 
511, such partner's distributive share of any items shall be taken 
into account separately to the extent necessary to comply with 
the provisions of section 512(c)(1). 
"(f) SPECIAL RULES FOR APPLYING PASSIVE LOSS LIMITATIONS.— 
If any person holds an interest in an electing large partnership 
other than as a limited partner— 
"(1) paragraph (2) of subsection (c) shall not apply to such 
partner, and 
"(2) such partner's distributive share of the partnership 
items eJlocable to passive loss limitation activities shall be 
taken into account separately to the extent necessary to comply 
with the provisions of section 469. 
The preceding sentence shall not apply to any items allocable to 
an interest held as a limited partner. 
"SEC. 773. COMPUTATIONS AT PARTNERSHIP LEVEL. 
"(a) GENERAL RULE.— 
"(1) TAXABLE INCOME.—The taxable income of an electing 
l£irge partnership shall be computed in the same manner as 
in the case of an individual except that— 
"(A) the items described in section 772(a) shall be 
separately stated, and 
Applicability. 
"(B) the modifications of subsection (b) shall apply. 
"(2) ELECTIONS.—^All elections affecting the computation 
of the taxable income of an electing large partnership or the 
computation of any credit of an electing large partnership shall 
be made by the partnership; except that the election under 
section 901, and Einy election under section 108, shall be made 
by each partner separately. 
"(3) LIMITATIONS, ETC.— 
"(A) IN GENERAL.—Except as provided in subparagraph 
(B), all limitations and other provisions affecting the com-
putation of the taxable income of an electing large partner-
ship or the computation of any credit of an electing large 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1005 
partnership shall be applied at the partnership level (and 
not at the partner level). 
"(B) 
CERTAIN 
LIMITATIONS 
APPLIED 
AT PARTNER 
LEVEL.—The following provisions shall be applied at the 
partner level (and not at the partnership level): 
"(i) Section 68 (relating to overall limitation on 
itemized deductions). 
"(ii) Sections 49 and 465 (relating to at risk limita-
tions). 
"(iii) Section 469 (relating to limitation on passive 
activity losses and credits). 
"(iv) Any other provision specified in regulations. 
"(4) COORDINATION WITH OTHER PROVISIONS.—Paragraphs Applicability. 
(2) and (3) shall apply notwithstanding any other provision 
of this chapter other than this part. 
"(b) MODIFICATIONS TO DETERMINATION OF TAXABLE INCOME.— 
In determining the taxable income of an electing large partnership— 
"(1) CERTAIN DEDUCTIONS NOT ALLOWED.—The following 
deductions shall not be allowed: 
"(A) The deduction for personal exemptions provided 
in section 151. 
"(B) The net operating loss deduction provided in sec-
tion 172. 
"(C) The additional itemized deductions for individuals 
provided in part VII of subchapter B (other than section 
212 thereof). 
"(2) CHARITABLE DEDUCTIONS.—In determining the amount 
allowable under section 170, the limitation of section 170(b)(2) 
shall apply. 
"(3) COORDINATION WITH SECTION 67.—In Ueu of applying 
section 67, 70 percent of the amount of the miscellaneous 
itemized deductions shall be disallowed. 
"(c) SPECIAL RULES FOR INCOME FROM DISCHARGE OF INDEBTED-
NESS.—If an electing large partnership has income from the dis-
charge of any indebtedness— 
"(1) such income shall be excluded in determining the 
amounts referred to in section 772(a), and 
"(2) in determining the income tax of any partner of such 
partnership— 
"(A) such income shall be treated as an item required 
to be separately taken into account under section 772(a), 
and 
"(B) the provisions of section 108 shall be applied with-
out regard to this part. 
"SEC. 774. OTHER MODIFICATIONS. 
"(a) TREATMENT OF CERTAIN OPTIONAL ADJUSTMENTS, ETC.— 
In the case of an electing large partnership— 
"(1) computations under section 773 shall be made without 
regard to any adjustment under section 743(b) or 108(b), but 
"(2) a partner's distributive share of any amount referred 
to in section 772(a) shall be appropriately adjusted to take 
into account any adjustment under section 743(b) or 108(b) 
with respect to such partner. 
"(b) CREDIT RECAPTURE DETERMINED AT PARTNERSHIP LEVEL.— 
"(1) IN GENERAL.—In the case of an electing large partner-
ship— 
I l l STAT. 1006 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(A) any credit recapture shall be taken into account 
by the partnership, and 
"(B) the amount of such recapture shall be determined 
as if the credit with respect to which the recapture is 
made had been fully utilized to reduce tax. 
"(2) 
METHOD OF TAKING RECAPTURE INTO ACCOUNT.—An 
electing large partnership shall take into account a credit recap-
ture by reducing the amount of the appropriate current year 
credit to the extent thereof, and if such recapture exceeds 
the amount of such current year credit, the partnership shall 
be liable to pay such excess. 
"(3) DISPOSITIONS NOT TO TRIGGER RECAPTURE.—NO credit 
recapture shall be required by reason of any transfer of an 
interest in an electing large partnership. 
"(4) CREDIT RECAPTURE.—For purposes of this subsection, 
the term 'credit recapture' means any increase in tax under 
section 42(j) or 50(a). 
"(c) 
PARTNERSHIP NOT TERMINATED BY REASON OF CHANGE 
IN OWNERSHIP.—Subparagraph (B) of section 708(b)(1) shall not 
apply to an electing large partnership. 
"(d) PARTNERSHIP ENTITLED TO CERTAIN CREDITS.—The follow-
ing shall be allowed to an electing large partnership and shall 
not be taken into account by the partners of such partnership: 
"(1) The credit provided by section 34. 
"(2) Any credit or refund xinder section 852(b)(3)(D). 
"(e) TREATMENT OF R E M I C RESIDUALS.—For purposes of apply-
ing section 860E(e)(6) to any electing large partnershij)— 
"(1) all interests in such partnership shall be treated as 
held by disqualified organizations, 
"(2) in lieu of appljdng subparagraph (C) of section 
860E(e)(6), the amount subject to tax under section 860E(e)(6) 
shall be excluded from the gross income of such partnership, 
and 
"(3) subparagraph (D) of section 860E(e)(6) shall not apply. 
"(f) SPECIAL RULES FOR APPLYING CERTAIN INSTALLMENT SALE 
RULES.—In the case of an electing large partnership— 
"(1) the provisions of sections 453(1)(3) and 453A shall 
be applied at the partnership level, and 
"(2) in determining the amount of interest payable under 
such sections, such partnership shall be treated as subject 
to tax under this chapter at the highest rate of tax in effect 
under section 1 or 11. 
"SEC. 775. ELECTING LARGE PARTNERSHIP DEFINED. 
"(a) GENERAL RULE.—For purposes of this part— 
"(1) IN GENERAL.—^The term 'electing large partnership' 
means, with respect to any partnership taxable year, any part-
nership if— 
"(A) the number of persons who were partners in such 
partnership in the preceding partnership taxable year 
equaled or exceeded 100, and 
"(B) such partnership elects the application of this 
part. 
To the extent provided in regulations, a partnership shall cease 
to be treated as an electing large partnership for any partner-
ship taxable year if in such taxable year fewer than 100 persons 
were partners in such partnership. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1007 
"(2) ELECTION.—The election under this subsection shall Applicability. 
apply to the taxable year for which made and all subsequent 
taxable years unless revoked with the consent of the Secretary. 
"(b) 
SPECIAL RULES FOR CERTAIN SERVICE PARTNERSHIPS.— 
"(1) 
CERTAIN PARTNERS NOT COUNTED.—For purposes of 
this section, the term 'partner' does not include any individual 
performing substantial services in connection with the activities 
of the partnership and holding an interest in such partnership, 
or an individual who formerly performed substantial services 
in connection with such activities and who held an interest 
in such partnership at the time the individual performed such 
services. 
"(2) EXCLUSION.—For purposes of this part, an election 
under subsection (a) shall not be effective with respect to any 
partnership if substantially all the partners of such partner-
ship— 
"(A) are individuals performing substantial services 
in connection with the activities of such partnership or 
are personal service corporations (as defined in section 
269A(b)) the owner-employees (as defined in section 
269A(b)) of which perform such substantial services, 
"(B) are retired partners who had performed such 
substantial services, or 
"(C) are spouses of partners who are performing (or 
had previously performed) such substantial services. 
"(3) 
SPECDVL RULE FOR LOWER TIER PARTNERSHIPS.—For 
purposes of this subsection, the activities of a partnership shall 
include the activities of any other partnership in which the 
partnership owns directly an interest in the capital and profits 
of at least 80 percent. 
"(c) EXCLUSION OF COMMODITY POOLS.—For purposes of this 
part, an election under subsection (a) shall not be effective with 
respect to any partnership the principal activity of which is the 
buying and selling of commodities (not described in section 1221(1)), 
or options, futures, or forwards with respect to such commodities. 
"(d) 
SECRETARY MAY RELY ON TREATMENT ON RETURN.—If, 
on the partnership return of any partnership, such partnership 
is treated as an electing large partnership, such treatment shall 
be binding on such partnership and all partners of such partnership 
but not on the Secretary. 
"SEC. 776. SPECIAL RULES FOR PARTNERSHIPS HOLDING OIL AND 
GAS PROPERTIES. 
"(a) COMPUTATION OF PERCENTAGE DEPLETION.—In the case 
of an electing large partnership, except as provided in subsection 
( b ) -
"(1) the allow£ince for depletion under section 611 with 
respect to any partnership oil or gas property shall be computed 
at the peirtnership level without regard to any provision of 
section 613A requiring such allowance to be computed sepa-
rately by each partner, 
"(2) such allowance shall be determined without regard 
to the provisions of section 613A(c) limiting the amount of 
production for which percentage depletion is allowable and 
without regard to paragraph (1) of section 613 
A(d), and 
"(3) paragraph (3) of section 705(a) shall not apply. 
"(b) TREATMENT OF CERTAIN PARTNERS.— 
I l l STAT. 1008 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(1) IN GENERAL.—In the case of a disqualified person, 
the treatment under this chapter of such person's distributive 
share of any item of income, gain, loss, deduction, or credit 
attributable to any partnership oil or gas property shall be 
determined without regard to this part. Such person's distribu-
tive share of any such items shall be excluded for purposes 
of making determinations under sections 772 and 773. 
"(2) DISQUALIFIED PERSON.—For purposes of paragraph (1), 
the term 'disqualified person' means, with respect to any part-
nership taxable year— 
"(A) any person referred to in paragraph (2) or (4) 
of section 613A(d) for such person's taxable year in which 
such partnership taxable year ends, and 
"(B) any other person if such person's average daily 
production of domestic crude oil and natural gas for such 
person's taxable year in which such partnership taxable 
year ends exceeds 500 barrels. 
"(3) AVERAGE DAILY PRODUCTION.—For purposes of para-
graph (2), a person's average daily production of domestic crude 
oil and natural gas for any taxable year shall be computed 
as provided in section 613A(c)(2)— 
"(A) by taking into account all production of domestic 
crude oil and natural gas (including such person's propor-
tionate share of any production of a partnership), 
"(B) by treating 6,000 cubic feet of natural gas as 
a barrel of crude oil, and 
"(C) by treating as 1 person all persons treated as 
1 taxpayer under section 613A(c)(8) or among whom alloca-
tions are required under such section. 
"SEC. 777. REGULATIONS. 
"The Secretary shall prescribe such regulations as may be 
appropriate to carry out the purposes of this part.". 
(b) CLERICAL AMENDMENT.—The table of parts for subchapter 
K of chapter 1 is amended by adding at the end the following 
new item: 
"Part IV. Special rules for electing large partnerships.". 
26 use 771 note. 
(c) EFFECTIVE DATE.—The amendments made by this section 
shall apply to partnership taxable years beginning after December 
31, 1997. 
SEC. 1222. SIMPLIFIED AUDIT PROCEDURES FOR ELECTING LARGE 
PARTNERSfflPS. 
(a) GENERAL RULE.—Chapter 63 is amended by adding at the 
end thereof the following new subchapter: 
^'Subchapter D—Treatment of electing large partnerships 
"Part I. Treatment of partnership items and adjustments. 
"Part II. Partnership level adjustments. 
"Part III. Definitions and special rules. 
"PART I—TREATMENT OF PARTNERSHIP 
ITEMS AND ADJUSTMENTS 
"Sec. 6240. Application of subchapter. 
"Sec. 6241. Partner's return must be consistent with partnership return. 
"Sec. 6242. Procedures for taking partnership adjustments into account. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1009 
"SEC. 6240. APPLICATION OF SUBCHAPTER. 
"(a) GENERAL RULE.—This subchapter shall only apply to elect-
ing large partnerships aind partners in such partnerships. 
"(b) COORDINATION WITH OTHER PARTNERSHIP AUDIT PROCE-
DURES.— 
"(1) IN GENERAL.—Subchapter C of this chapter shall not 
apply to any electing large partnership other than in its capac-
ity as a partner in another partnership which is not an electing 
large partnership. 
"(2) TREATMENT WHERE PARTNER IN OTHER PARTNERSHIP.— 
If an electing large partnership is a partner in another partner-
ship which is not an electing large partnership— 
"(A) subchapter C of this chapter shall apply to items 
of such electing large partnership which are partnership 
items with respect to such other partnership, but 
"(B) any adjustment under such subchapter C shall 
be taken into account in the manner provided by section 
6242. 
"SEC. 
6241. 
PARTNER'S 
RETURN 
MUST 
BE 
CONSISTENT 
WITH 
PARTNER-
SHIP 
RETURN. 
"(a) GENERAL RULE.—^A partner of any electing large partner-
ship shall, on the partner's return, treat each partnership item 
attributable to such partnership in a manner which is consistent 
with the treatment of such partnership item on the partnership 
return. 
"(b) 
UNDERPAYMENT 
DUE 
TO 
INCONSISTENT 
TREATMENT 
ASSESSED AS MATH ERROR.—Any underpayment of t£ix by a partner 
by reason of failing to comply with the requirements of subsection 
(a) shall be assessed and collected in the same manner as if such 
underpajmaent were on account of a mathematical or clerical error 
appearing on the partner's return. Paragraph (2) of section 6213(b) 
shall not apply to any assessment of an underpayment referred 
to in the preceding sentence. 
"(c) ADJUSTMENTS NOT TO AFFECT PRIOR YEAR OF PARTNERS.— 
"(1) IN GENERAL.—Except as provided in paragraph (2), 
subsections (a) £ind (b) shall apply without regard to any adjust-
ment to the partnership item under part II. 
"(2) CERTAIN CHANGES IN DISTRIBUTIVE SHARE TAKEN INTO 
ACCOUNT BY PARTNER.— 
"(A) IN GENERAL.—To the extent that any adjustment 
under part II involves a change under section 704 in a 
partner's distributive share of the amount of any partner-
ship item shown on the partnership return, such adjust-
ment shall be taken into account in applying this title 
to such partner for the partner's taxable year for which 
such item was required to be taken into account. 
"(B) COORDINATION WITH DEFICIENCY PROCEDURES.— 
"(i) IN GENERAL.—Subchapter B shall not apply 
to the assessment or collection of £iny underpa3rment 
of tax attributable to an adjustment referred to in 
subparagraph (A). 
"(ii) ADJUSTMENT NOT PRECLUDED.—Notwithstand-
ing any other law or rule of law, nothing in subchapter 
B (or in any proceeding under subchapter B) shall 
preclude the assessment or collection of any underpay-
ment of tax (or the allowance of any credit or renind 
I l l STAT. 1010 
PUBLIC LAW 105-34—AUG. 5, 1997 
of any overpayment of tax) attributable to an adjust-
ment referred to in subparagraph (A) and such assess-
ment or collection or allowance (or any notice thereof) 
shall not preclude any notice, proceeding, or determina-
tion under subchapter B. 
"(C) PERIOD OF LIMITATIONS.—The period f o r -
"(i) assessing any underpayment of tax, or 
"(ii) filing a claim for credit or refund of any over-
payment of tax, 
attributable to an adjustment referred to in subparagraph 
(A) shall not expire before the close of the period prescribed 
by section 6248 for making adjustments with respect to 
the partnership t£ixable year involved. 
"(D) TIERED STRUCTURES.—If the partner referred to 
in subparagraph (A) is smother partnership or an S corpora-
tion, the rules of this paragraph shall also apply to persons 
holding interests in such partnership or S corporation (as 
the case may be); except that, if such partner is an electing 
large partnership, the adjustment referred to in subpara-
graph (A) shall be taken into account in the manner pro-
vided by section 6242. 
"(d) ADDITION TO TAX FOR FAILURE TO COMPLY WITH SECTION.— 
Tor addition to tax in case of partner's disregard of require-
ments of this section, see part II of subchapter A of chapter 68. 
"SEC. 6242. PROCEDURES FOR TAKING PARTNERSHIP ADJUSTMENTS 
INTO ACCOUNT. 
"(a) ADJUSTMENTS FLOW THROUGH TO PARTNERS FOR YEAR 
IN WHICH ADJUSTMENT TAKES EFFECT.— 
"(1) IN GENERAL.—If any partnership adjustment with 
respect to any partnership item takes effect (within the mean-
ing of subsection (d)(2)) during any partnership teixable year 
and if an election under paragraph (2) does not apply to such 
adjustment, such adjustment shall be taken into account in 
determining the amount of such item for the partnership tax-
able year in which such adjustment takes effect. In applying 
this title to any person who is (directly or indirectly) a partner 
in such partnersnip during such partnership taxable year, such 
adjustment shall be treated as an item actually arising during 
such tsixable year. 
"(2) PARTNERSHIP LLVBLE IN CERTAIN CASES.—If— 
"(A) a partnership elects under this paragraph to not 
take an adjustment into account under paragraph (1), 
"(B) a partnership does not make such an election 
but in filing its return for any partnership taxable year 
fails to take fully into account any partnership adjustment 
as required under paragraph (1), or 
"CO any partnership adjustment involves a reduction 
in a credit which exceeds the amount of such credit deter-
mined for the partnership taxable year in which the adjust-
ment takes effect, 
the partnership shall pay to the Secretary an amount deter-
mined by applying the rules of subsection (bX4) to the adjust-
ments not so taken into account and any excess referred to 
in subparagraph (C). 
"(3) OFFSETTING ADJUSTMENTS TAKEN INTO ACCOUNT.—If 
a partnership adjustment requires another adjustment in a 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1011 
taxable year after the adjusted year and before the partnership 
taxable year in which such partnership adjustment takes effect, 
such other adjustment shall be taken into account under this 
subsection for the partnership taxable year in which such part-
nership adjustment takes effect. 
"(4) COORDINATION WITH PART II.—Amounts taken into 
account under this subsection for any partnership taxable year 
shall continue to be treated as adjustments for the adjusted 
year for purposes of determining whether such amounts may 
be readjusted under part IL 
"(b) PARTNERSHIP LIABLE FOR INTEREST AND PENALTIES.— 
"(1) IN GENERAL.—If a partnership adjustment takes effect 
during any partnership taxable year and such adjustment 
results in an imputed underpajnnent for the adjusted year, 
the partnership— 
"(A) shall pay to the Secretary interest computed under 
paragraph (2), and 
"(B) shall be liable for any penalty, addition to tax, 
or additional amount as provided in paragraph (3). 
"(2) 
DETERMINATION 
OF 
AMOUNT 
OF 
INTEREST.—The 
interest computed under this paragraph with respect to any 
partnership adjustment is the interest which would be deter-
mined under chapter 67— 
"(A) on the imputed underpayment determined under 
paragraph (4) with respect to such adjustment, 
"(B) for the period beginning on the day after the 
return due date for the adjusted year and ending on the 
return due date for the partnership taxable year in which 
such adjustment teikes effect (or, if earlier, in the case 
of any adjustment to which subsection (a)(2) applies, the 
date on which the pajmient under subsection (a)(2) is 
made). 
Proper adjustments in the amount determined under the 
preceding sentence shall be made for adjustments required 
for partnership taxable years after the adjusted year and before 
the year in which the partnership adjustment takes effect by 
reason of such partnership adjustment. 
"(3) PENALTIES.—^A partnership shall be liable for any pen-
alty, addition to tax, or additional amount for which it would 
have been liable if such partnership had been an individual 
subject to tax under chapter 1 for the adjusted year and the 
imputed underpayment determined under paragraph (4) were 
an actual underpayment (or understatement) for such year. 
"(4) IMPUTED UNDERPAYMENT.—For purposes of this sub-
section, the imputed underpajnnent determined under this 
paragraph with respect to any partnership adjustment is the 
underpayment (if any) which would result— 
"(A) by netting all adjustments to items of income, 
gain, loss, or deduction and by treating any net increase 
in income as an underpa3anent equal to the amount of 
such net increase multiplied by the highest rate of tax 
in effect under section 1 or 11 for the adjusted year, and 
"(B) by taking adjustments to credits into account as 
increases or decreases (whichever is appropriate) in the 
amount of tax. 
I l l STAT. 1012 
PUBLIC LAW 105-34—AUG. 5, 1997 
For purposes of the preceding sentence, any net decrease in 
a loss shall be treated as an increase in income and a similar 
rule shall apply to a net increase in a loss. 
"(c) ADMINISTRATIVE PROVISIONS.— 
"(1) IN GENERAL.—^Any payment required by subsection 
(a)(2) or (b)(1)(A)— 
"(A) shall be assessed and collected in the same msmner 
as if it were a t£ix imposed by subtitle C, and 
"(B) shall be paid on or before the return due date 
for the partnership taxable year in which the partnership 
adjustment takes effect. 
"(2) INTEREST.—For purposes of determining interest, any 
payment required by subsection (a)(2) or (b)(1)(A) shall be treat-
ed as an underpayment of tax. 
"(3) PENALTIES.— 
"(A) IN GENERAL.—In the case of any failure by any 
partnership to pay on the date prescribed therefor any 
amount required by subsection (a)(2) or (b)(1)(A), there 
is hereby imposed on such partnership a penalty of 10 
percent of the underpayment. For purposes of the preceding 
sentence, the term *underpa5rment' means the excess of 
any payment required under this section over the amount 
(if any) paid on or before the date prescribed therefor. 
"(B) ACCURACY-RELATED AND FRAUD PENALTIES MADE 
APPLICABLE.—For purposes of part II of subchapter A of 
chapter 68, any pajonent required by subsection (a)(2) shall 
be treated as an underpayment of tax. 
"(d) DEFINITIONS AND SPECIAL RULES.—For purposes of this 
section— 
"(1) PARTNERSHIP ADJUSTMENT.—The term 'partnership 
adjustment' means any adjustment in the amount of any part-
nership item of an electing large partnership. 
"(2) WHEN ADJUSTMENT TAKES EFFECT.—A partnership 
adjustment takes effect— 
"(A) in the case of an adjustment pursuant to the 
decision of a court in a proceeding brought under part 
II, when such decision becomes final, 
"(B) in the case of an adjustment pursuant to any 
administrative adjustment request under section 6251, 
when such adjustment is allowed by the Secretary, or 
"(C) in any other case, when such adjustment is made. 
"(3) ADJUSTED YEAR.—The term 'adjusted year' means the 
partnership taxable year to which the item being adjusted 
relates. 
"(4) RETURN DUE DATE.—The term 'return due date' means, 
with respect to any taxable year, the date prescribed for filing 
the partnership return for such taxable year (determined with-
out regard to extensions). 
"(5) ADJUSTMENTS INVOLVING CHANGES IN CHARACTER.— 
Under regulations, appropriate adjustments in the application 
of this section shall be made for purposes of taking into account 
partnership adjustments which involve a change in the char-
acter of any item of income, gain, loss, or deduction, 
"(e) PAYMENTS NONDEDUCTIBLE.—NO deduction shall be allowed 
under subtitle A for any payment required to be made by an 
electing large partnership under this section. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1013 
*TART II—PARTNERSHIP LEVEL 
ADJUSTMENTS 
"Subpart A. Adjustments by Secretary. 
"Subpart B. Claims for adjustments by partnership. 
"Subpart A—^Adjustments by Secretary 
"Sec. 6245. Secretarial authority. 
"Sec. 6246. Restrictions on partnership adjustments. 
"Sec. 6247. Judicial review of partnership adjustment. 
"Sec. 6248. Period of limitations for making adjustments. 
"SEC. 6245. SECRETARIAL AUTHORITY. 
"(a) GENERAL RULE.—The Secretary is authorized and directed 
to make adjustments at the partnership level in any partnership 
item to the extent necessary to have such item be treated in 
the manner required. 
"(b) NOTICE OF PARTNERSHIP ADJUSTMENT.— 
"(1) IN GENERAL.—If the Secretary determines that a part-
nership adjustment is required, the Secretary is authorized 
to send notice of such adjustment to the partnership by certified 
mail or registered mail. Such notice shall be sufficient if mailed 
to the partnership at its last known address even if the partner-
ship has terminated its existence. 
"(2) FURTHER NOTICES RESTRICTED.—If the Secretary mails 
a notice of a partnership adjustment to any partnership for 
any partnership taxable year and the partnership files a peti-
tion under section 6247 with respect to such notice, in the 
absence of a showing of fraud, malfeasance, or misrepresenta-
tion of a material fact, the Secretary shall not mail another 
such notice to such partnership with respect to such taxable 
year. 
"(3) AUTHORITY TO RESCIND NOTICE WITH PARTNERSHIP CON-
SENT.—The Secretary may, with the consent of the partnership, 
rescind any notice of a partnership adjustment mailed to such 
partnership. Any notice so rescinded shall not be treated as 
a notice of a partnership adjustment, for purposes of this sec-
tion, section 6246, and section 6247, and the taxpayer shall 
have no right to bring a proceeding under section 6247 with 
respect to such notice. 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. 
"SEC. 6246. R E S T R I C T I O N S ON PARTNERSHIP ADJUSTMENTS. 
"(a) GENERAL RULE.—Except as otherwise provided in this chap-
ter, no adjustment to any partnership item may be made (and 
no levy or proceeding in any court for the collection of any amount 
resulting from such adjustment may be made, begun or prosecuted) 
before— 
"(1) the close of the 90th day after the day on which 
a notice of a partnership adjustment was mailed to the partner-
ship, and 
"(2) if a petition is filed under section 6247 with respect 
to such notice, the decision of the court has become final. 
"(b) PREMATURE ACTION MAY BE ENJOINED.—Notwithstanding 
section 7421(a), any action which violates subsection (a) may be 
I l l STAT. 1014 
PUBLIC LAW 105-34—AUG. 5, 1997 
enjoined in the proper court, including the Tax Court. The Tax 
Court shall have no jurisdiction to enjoin any action under this 
subsection unless a timely petition has been filed under section 
6247 and then only in respect of the adjustments that are the 
subject of such petition. 
"(c) EXCEPTIONS TO RESTRICTIONS ON ADJUSTMENTS.— 
"(1) 
ADJUSTMENTS ARISING OUT OF MATH OR CLERICAL 
ERRORS.— 
Applicability. 
"(A) IN GENERAL.—If the partnership is notified that, 
on account of a mathematical or clerical error appearing 
on the partnership return, an adjustment to a partnership 
item is required, rules similar to the rules of paragraphs 
(1) and (2) of section 6213(b) shall apply to such adjust-
ment. 
"(B) SPECIAL RULE.—If an electing large partnership 
is a partner in another electing large partnership, any 
adjustment on account of such partnership's failure to com-
ply with the requirements of section 6241(a) with respect 
to its interest in such other partnership shall be treated 
as an adjustment referred to in subparagraph (A), except 
that paragraph (2) of section 6213(b) shall not apply to 
such adjustment. 
"(2) PARTNERSHIP MAY WAIVE RESTRICTIONS.—The partner-
ship shall at any time (whether or not a notice of partnership 
adjustment has been issued) have the right, by a signed notice 
in writing filed with the Secretary, to waive the restrictions 
provided in subsection (a) on the making of any partnership 
adjustment. 
"(d) LIMIT WHERE NO PROCEEDING BEGUN.—If no proceeding 
under section 6247 is begun with respect to any notice of a partner-^ 
ship adjustment during the 90-day period described in subsection 
(a), the amount for which the partnership is liable under section 
6242 (and any increase in any partner's liability for tax under 
chapter 1 by reason of any adjustment under section 6242(a)) shall 
not exceed the amount determined in accordance with such notice. 
"SEC. 6247. JUDICIAL REVIEW OF PARTNERSHIP ADJUSTMENT. 
"(a) GENERAL RULE.—^Within 90 days after the date on which 
a notice of a partnership adjustment is mailed to the partnership 
with respect to any partnership taxable year, the partnership may 
file a petition for a readjustment of the partnership items for 
such taxable year with— 
"(1) the Tax Court, 
"(2) the district court of the United States for the district 
in which the partnership's principal place of business is located, 
or 
"(3) the Claims Court. 
"(b) JURISDICTIONAL REQUIREMENT FOR BRINGING ACTION IN 
DISTRICT COURT OR CLAIMS COURT.— 
"(1) IN GENERAL.—A readjustment petition under this sec-
tion may be filed in a district court of the United States 
or the Claims Court only if the partnership filing the petition 
deposits with the Secretary, on or before the date the petition 
is filed, the amount for which the partnership would be liable 
under section 6242(b) (as of the date of the filing of the petition) 
if the partnership items were adjusted as provided by the 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1015 
notice of partnership adjustment. The court may by order pro-
vide that the jurisdictional requirements of this paragraph 
are satisfied where there has been a good faith attempt to 
satisfy such requirement and any shortfall of the amount 
required to be deposited is timely corrected. 
"(2) INTEREST PAYABLE.—Any amount deposited under 
paragraph (1), while deposited, shall not be treated as a pay-
ment of tax for purposes of this title (other than chapter 67). 
"(c) SCOPE OF JUDICIAL REVIEW.—A court with which a petition 
is filed in accordance with this section shall have jurisdiction to 
determine all partnership items of the partnership for the partner-
ship taxable year to which the notice of partnership adjustment 
relates and the proper allocation of such items among the partners 
(and the applicability of any penalty, addition to tax, or additional 
amount for which the partnership may be liable under section 
6242(b)). 
"(d) DETERMINATION OF COURT REVIEWABLE.—Any determina-
tion by a court under this section shall have the force and effect 
of a decision of the Tax Court or a final judgment or decree of 
the district court or the Claims Court, as the case may be, and 
shall be reviewable as such. The date of any such determination 
shall be treated as being the date of the court's order entering 
the decision. 
"(e) EFFECT OF DECISION DISMISSING ACTION.—If an action 
brought under this section is dismissed other than by reason of 
a rescission under section 6245(b)(3), the decision of the court 
dismissing the action shall be considered as its decision that the 
notice of partnership adjustment is correct, and an appropriate 
order shall be entered in the records of the court. 
"SEC. 6248. PERIOD OF LIMITATIONS FOR MAKING ADJUSTMENTS. 
"(a) GENERAL RULE.—Except as otherwise provided in this sec-
tion, no adjustment under this subpart to any partnership item 
for any partnership taxable year may be made after the date 
which is 3 years after the later o
f
— 
"(1) the date on which the partnership return for such 
taxable year was filed, or 
"(2) the last day for filing such return for such year (deter-
mined without regard to extensions). 
"(b) EXTENSION BY AGREEMENT.—The period described in sub-
section (a) (including an extension period under this subsection) 
may be extended by an agreement entered into by the Secretary 
and the partnership before the expiration of such period. 
"(c) SPECIAL RULE IN CASE OF FRAUD, ETC.— 
"(1) FALSE RETURN.—In the case of a false or fraudulent 
partnership return with intent to evade tax, the adjustment 
may be made at any time. 
"(2) SUBSTANTIAL OMISSION OF INCOME.—If any partnership 
omits from gross income an amount properly includible therein 
which is in excess of 25 percent of the amount of gross income 
stated in its return, subsection (a) shall be applied by substitut-
ing *6 years' for '3 years'. 
"(3) No RETURN.—In the case of a failure by a partnership 
to file a return for any taxable year, the adjustment may 
be made at any time. 
"(4) RETURN FILED BY SECRETARY.—For purposes of this 
section, a return executed by the Secretary under subsection 
Ill STAT. 1016 
PUBLIC LAW 105-34—AUG. 5, 1997 
(b) of section 6020 on behalf of the partnership shall not be 
treated as a return of the partnership. 
"(d) SUSPENSION WHEN SECRETARY MAILS NOTICE OF ADJUST-
MENT.—If notice of a partnership adjustment with respect to any 
taxable year is mailed to the partnership, the running of the period 
specified in subsection (a) (as modified by the other provisions 
of this section) shall be suspended— 
"(1) for the period during which an action may be brought 
under section 6247 (and, if a petition is filed under section 
6247 with respect to such notice, until the decision of the 
court becomes final), and 
"(2) for 1 year thereafter. 
"Subpart B—Claims for Adjustments by 
Partnership 
"Sec. 6251. Administrative adjustment requests. 
"Sec. 6252. Judicial review where administrative adjustment request is not 
allowed in full. 
"SEC. 6251. ADMINISTRATIVE ADJUSTMENT REQUESTS. 
"(a) GENERAL RULE.—^A partnership may file a request for 
an administrative adjustment of partnership items for any partner-
ship taxable year at any time which is— 
"(1) within 3 years after the later of— 
"(A) the date on which the partnership return for such 
year is filed, or 
"(B) the last day for filing the partnership return for 
such year (determined without regard to extensions), and 
"(2) before the mailing to the partnership of a notice of 
a partnership adjustment with respect to such taxable year. 
"(b) SECRETARIAL ACTION.—If a partnership files an administra-
tive adjustment request under subsection (a), the Secretary may 
allow any part of the requested adjustments. 
"(c) SPECIAL RULE IN CASE OF EXTENSION UNDER SECTION 
6248.—If the period described in section 6248(a) is extended pursu-
ant to an agreement under section 6248(b), the period prescribed 
by subsection (a)(1) shall not expire before the date 6 months 
after the expiration of the extension under section 6248(b). 
"SEC. 6252. JUDICIAL REVIEW WHERE ADMINISTRATIVE ADJUSTMENT 
REQUEST IS NOT ALLOWED IN FULL. 
"(a) IN GENERAL.—If any part of an administrative adjustment 
request filed under section 6251 is not allowed by the Secretary, 
the partnership may file a petition for an adjustment with respect 
to the partnership items to which such part of the request relates 
with— 
"(1) the Tax Court, 
"(2) the district court of the United States for the district 
in which the principal place of business of the partnership 
is located, or 
"(3) the Claims Court. 
"(b) PERIOD FOR FILING PETITION.—A petition may be filed 
under subsection (a) with respect to partnership items for a partner-
ship taxable year only— 
"(1) aft;er the expiration of 6 months from the date of 
filing of the request under section 6251, and 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1017 
"(2) before the date which is 2 years after the date of 
such request. 
The 2-year period set forth in paragraph (2) shall be extended 
for such period as may be agreed upon in writing by the partnership 
and the Secretary. 
"(c) COORDINATION WITH SUBPART A.— 
"(1) NOTICE OF PARTNERSHIP ADJUSTMENT BEFORE FILING 
OF PETITION.—No petition may be filed under this section after 
the Secretary mails to the partnership a notice of a partnership 
adjustment for the partnership taxable year to which the 
request under section 6251 relates. 
"(2) 
NOTICE OF PARTNERSHIP ADJUSTMENT AFTER FILING 
BUT BEFORE HEARING OF PETITION.—If the Secretary mails to 
the partnership a notice of a partnership adjustment for the 
partnership taxable year to which the request under section 
6251 relates after the filing of a petition under this subsection 
but before the hearing of such petition, such petition shall 
be treated as an action brought under section 6247 with respect 
to such notice, except that subsection (b) of section 6247 shall 
not apply. 
"(3) NOTICE MUST BE BEFORE EXPIRATION OF STATUTE OF 
LIMITATIONS.—^A notice of a partnership adjustment for the 
partnership taxable year shall be taken into account under 
paragraphs (1) and (2) only if such notice is mailed before 
the expiration of the period prescribed by section 6248 for 
making adjustments to partnership items for such taxable year. 
"(d) SCOPE OF JUDICIAL REVIEW.—Except in the case described 
in paragraph (2) of subsection (c), a court with which a petition 
is filed in accordance with this section shall have jurisdiction to 
determine only those partnership items to which the part of the 
request under section 6251 not allowed by the Secretary relates 
and those items with respect to which the Secretary asserts adjust-
ments as offsets to the adjustments requested by the partnership. 
"(e) DETERMINATION OF COURT REVIEWABLE.—^Any determina-
tion by a court under this section shall have the force and effect 
of a decision of the Tax Court or a final judgment or decree of 
the district court or the Claims Court, as the case may be, and 
shall be reviewable as such. The date of any such determination 
shall be treated as being the date of the court's order entering 
the decision. 
"PART III—DEFINITIONS AND SPECIAL RULES 
"Sec. 6255. Definitions and special rules. 
"SEC. 6255. DEFINITIONS AND SPECIAL RULES. 
"(a) DEFINITIONS.—For purposes of this subchapter— 
"(1) ELECTING LARGE PARTNERSHIP.—The term 'electing 
large partnership' has the meaning given to such term by 
section 775. 
"(2) PARTNERSHIP ITEM.—The term 'partnership item' has 
the meaning given to such term by section 6231(a)(3). 
"(b) 
PARTNERS BOUND BY ACTIONS OF PARTNERSHIP, ETC.— 
"(1) DESIGNATION OF PARTNER.—Each electing large part-
nership shall designate (in the manner prescribed by the Sec-
retary) a partner (or other person) who shall have the sole 
I l l STAT. 1018 
PUBLIC LAW 105-34—AUG. 5, 1997 
authority to act on behalf of such partnership under this sub-
chapter. In any case in which such a designation is not in 
effect, the Secretary may select any partner as the partner 
with such authority. 
"(2) BINDING EFFECT.—An electing large partnership and 
all partners of such partnership shall be bound— 
"(A) by actions taken under this subchapter by the 
partnership, and 
"(B) by any decision in a proceeding brought under 
this subchapter. 
"(c) PARTNERSHIPS HAVING PRINCIPAL PLACE OF BUSINESS OUT-
SIDE THE UNITED STATES.—For purposes of sections 6247 and 6252, 
a principal place of business located outside the United States 
shall be treated as located in the District of Columbia. 
"(d) 
TREATMENT WHERE PARTNERSHIP CEASES TO EXIST.—If 
a partnership ceases to exist before a partnership adjustment imder 
this subchapter takes effect, such adjustment shall be taken into 
account by the former partners of such partnership under regula-
tions prescribed by the Secretary. 
"(e) DATE DECISION BECOMES FINAL.—For purposes of this sub-
chapter, the principles of section 7481(a) shall be applied in deter-
mining the date on which a decision of a district court or the 
Claims Court becomes final. 
"(f) PARTNERSHIPS IN CASES UNDER TITLE 11 OF THE UNITED 
STATES CODE.— 
"(1) 
SUSPENSION OF PERIOD OF LIMITATIONS ON MAKING 
ADJUSTMENT, ASSESSMENT, OR COLLECTION.—The running of 
any period of limitations provided in this subchapter on making 
a partnership adjustment (or provided by section 6501 or 6502 
on the assessment or collection of any amount required to 
be paid under section 6242) shall, in a case under title 11 
of the United States Code, be suspended during the period 
during which the Secretary is prohibited by reason of such 
case from making the adjustment (or assessment or collection) 
and— 
"(A) for adjustment or assessment, 60 days thereafter, 
and 
"(B) for collection, 6 months thereafter. 
Applicability. 
A rule similar to the rule of section 6213(f)(2) shall apply 
for purposes of section 6246. 
"(2) SUSPENSION OF PERIOD OF LIMITATION FOR FILING FOR 
JUDICIAL REVIEW.—The running of the period specified in sec-
tion 6247(a) or 6252(b) shall, in a case under title 11 of the 
United States Code, be suspended during the period during 
which the partnership is prohibited by reason of such case 
from filing a petition under section 6247 or 6252 and for 60 
days thereafter. 
"(g) REGULATIONS.—The Secretary shall prescribe such regula-
tions as may be necessary to carry out the provisions of this sub-
chapter, including regulations— 
"(1) to prevent abuse through manipulation of the provi-
sions of this subchapter, and 
"(2) providing that this subchapter shall not apply to any 
case described in section 6231(c)(1) (or the regulations pre-
scribed thereunder) where the application of this subchapter 
to such a case would interfere with the effective and efficient 
enforcement of this title. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1019 
In any case to which this subchapter does not apply by reason Applicability. 
of paragraph (2), rules similar to the rules of sections 6229(f) 
and 6255(f) shall apply.". 
(b) CONFORMING AMENDMENTS.— 
(1) Subsection (a) of section 7421 is amended by inserting 
"6246(b)," after "6213(a),". 
(2) Subsection (c) of section 7459 is amended by striking 
"or section 6228(a)" and inserting ", 6228(a), 6247, or 6252". 
(3) Subparagraph (E) of section 7482(b)(1) is amended by 
striking "or 6228(a)" and inserting ", 6228(a), 6247, or 6252". 
(4)(A) The text of section 7485(b) is amended by striking 
"or 6228(a)" and inserting ", 6228(a), 6247, or 6252". 
(B) The subsection heading for section 7485(b) is amended 
to read as follows: 
"(b) BOND IN CASE OF APPEAL OF CERTAIN PARTNERSHIP-
RELATED DECISIONS.—". 
(c) CLERICAL AMENDMENT.—The table of subchapters for chap-
ter 63 is amended by adding at the end thereof the following 
new item: 
"Subchapter D. Treatment of electing large partnerships.". 
SEC. 1223. DUE DATE FOR FURNISHING INFORMATION TO PARTNERS 
OF ELECTING LARGE PARTNERSHIPS. 
(a) GENERAL RULE.—Subsection (b) of section 6031 (relating 
to copies to partners) is amended by adding at the end the following 
new sentence: "In the case of an electing large partnership (as 
defined in section 775), such information shall be furnished on 
or before the first March 15 following the close of such taxable 
year.". 
(b) TREATMENT AS INFORMATION RETURN.—Section 6724 is 
amended by adding at the end the following new subsection: 
"(e) SPECIAL RULE FOR CERTAIN PARTNERSHIP RETURNS.—If 
any partnership return under section 6031(a) is required under 
section 6011(e) to be filed on magnetic media or in other machine-
readable form, for purposes of this part, each schedule required 
to be included with such return with respect to each partner shall 
be treated as a separate information return.". 
SEC. 1224. RETURNS REQUIRED ON MAGNETIC MEDIA. 
Paragraph (2) of section 6011(e) (relating to returns on magnetic 
media) is amended by adding at the end thereof the following 
new sentence: 
"Notwithstanding the preceding sentence, the Secretary shall 
require partnerships having more than 100 partners to file 
returns on magnetic media.". 
SEC. 1225. TREATMENT OF PARTNERSHIP ITEMS OF INDIVIDUAL 
RETIREMENT ACCOUNTS. 
Subsection (b) of section 6012 is amended by adding at the 
end thereof the following new paragraph: 
"(6) IRA SHARE OF PARTNERSHIP INCOME.—In the case of 
a trust which is exempt from taxation under section 408(e), 
for purposes of this section, the trust's distributive share of 
items of gross income and gain of any partnership to which 
subchapter C or D of chapter 63 applies shall be treated as 
equal to the trust's distributive share of the taxable income 
of such partnership.". 
I l l STAT. 1020 
PUBLIC LAW 105-34—AUG. 5, 1997 
26 use 6011 
SEC. 1226. EFFECTIVE DATE. 
The amendments made by this part shall apply to partnership 
taxable years ending on or after December 31, 1997. 
PART 
II—PROVISIONS 
RELATED 
TO 
TEFRA 
PARTNERSHIP 
PROCEEDINGS 
SEC. 1231. TREATMENT OF PARTNERSHIP ITEMS IN DEFICIENCY 
PROCEEDINGS. 
(a) IN GENERAL.—Subchapter C of chapter 63 is amended by 
adding at the end the following new section: 
"SEC. 6234. DECLARATORY JUDGMENT RELATING TO TREATMENT OF 
ITEMS 
OTHER 
THAN PARTNERSHIP 
ITEMS WITH 
RESPECT TO AN OVERSHELTERED RETURN. 
Notice. 
"(a) GENERAL RULE.—If— 
"(1) a taxpayer files an oversheltered return for a taxable 
year, 
"(2) the Secretary makes a determination with respect to 
the treatment of items (other than partnership items) of such 
taxpayer for such taxable year, and 
"(3) the adjustments resulting from such determination 
do not give rise to a deficiency (as defined in section 6211) 
but would give rise to a deficiency if there were no net loss 
from partnership items, 
the Secretary is authorized to send a notice of adjustment reflecting 
such determination to the taxpayer by certified or registered mail. 
"(b) OVERSHELTERED RETURN.—For purposes of this section, 
the term 'oversheltered return' means an income tax return which— 
"(1) shows no taxable income for the taxable year, and 
"(2) shows a net loss from partnership items. 
"(c) JUDICIAL REVIEW IN THE TAX COURT.—Within 90 days, 
or 150 days if the notice is addressed to a person outside the 
United States, after the day on which the notice of adjustment 
authorized in subsection (a) is mailed to the taxpayer, the taxpayer 
may file a petition with the Tax Court for redetermination of 
the adjustments. Upon the filing of such a petition, the Tax Court 
shall have jurisdiction to make a declaration with respect to all 
items (other than partnership items and affected items which 
require partner level determinations as described in section 
6230(a)(2)(A)(i)) for the taxable year to which the notice of adjust-
ment relates, in accordance with the principles of section 6214(a). 
Any such declaration shall have the force and effect of a decision 
of the Tax Court and shall be reviewable as such. 
"(d) FAILURE TO FILE PETITION.— 
"(1) IN GENERAL.—Except as provided in paragraph (2), 
if the taxpayer does not file a petition with the Tax Court 
within the time prescribed in subsection (c), the determination 
of the Secretary set forth in the notice of adjustment that 
was mailed to the taxpayer shall be deemed to be correct. 
"(2) EXCEPTION.—Paragraph (1) shall not apply after the 
date that the taxpayer— 
"(A) files a petition with the Tax Court within the 
time prescribed in subsection (c) with respect to a subse-
quent notice of adjustment relating to the same taxable 
year, or 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1021 
"(B) files a claim for refund of an overpayment of 
tax under section 6511 for the taxable year involved. 
If a claim for refund is filed by the taxpayer, then solely 
for purposes of determining (for the taxable year involved) 
the amount of any computational adjustment in connection 
with a partnership proceeding under this subchapter (other 
than under this section) or the amount of £iny deficiency attrib-
utable to affected 
items in a proceeding under 
section 
6230(a)(2), the items that are the subject of the notice of adjust-
ment shall be presumed to have been correctly reported on 
the taxpayer's return during the pendency of the refund claim 
(and, if within the time prescribed by section 6532 the taxpayer 
commences a civil action for refund under section 7422, until 
the decision in the refund action becomes final). 
"(e) LIMITATIONS PERIOD.— 
"(1) IN GENERAL.—^Any notice to a taxpayer under sub-
section (a) shall be mailed before the expiration of the period 
prescribed by section 6501 (relating to the period of limitations 
on assessment). 
"(2) SUSPENSION WHEN SECRETARY MAILS NOTICE OF ADJUST-
MENT.—If the Secretary mails a notice of adjustment to the 
taxpayer for a taxable year, the period of limitations on the 
making of assessments shall be suspended for the period during 
which the Secretary is prohibited from making the assessment 
(and, in any event, if a proceeding in respect of the notice 
of adjustment is placed on the docket of the Tax Court, until 
the decision of the Tax Court becomes final), and for 60 days 
thereafter. 
"(3) RESTRICTIONS ON ASSESSMENT.—Except as otherwise 
provided in section 6851, 6852, or 6861, no assessment of a 
deficiency with respect to any tax imposed by subtitle A attrib-
utable to anv item (other than a partnership item or any 
item affected oy a partnership item) shall be made— 
"(A) until the expiration of the applicable 90-day or 
150-day period set forth in subsection (c) for filing a petition 
with the Tax Court, or 
"(B) if a petition has been filed with the Tax Court, 
until the decision of the Tax Court has become final. 
"(f) 
FURTHER NOTICES OF ADJUSTMENT RESTRICTED.—If 
the 
Secretary mails a notice of adjustment to the teixpayer for a taxable 
year and the taxpayer files a petition with the Tax Court within 
the time prescribed in subsection (c), the Secretary may not mail 
another such notice to the taxpayer with respect to the same taxable 
year in the absence of a showing of fraud, malfeasance, or misrepre-
sentation of a material fact. 
"(g) 
COORDINATION WITH OTHER PROCEEDINGS UNDER THIS 
SUBCHAPTER.— 
"(1) IN GENERAL.—The treatment of any item that has 
been determined pursuant to subsection (c) or (d) shall be 
taken into account in determining the amount of any computa-
tional adjustment that is made in connection with a partnership 
proceeding under this subchapter (other than under this sec-
tion), or the amount of any deficiency attributable to affected 
items in a proceeding under section 6230(a)(2), for the taxable 
year involved. Notwithstanding any other law or rule of law 
pertaining to the period of limitations on the making of assess-
ments, for purposes of the preceding sentence, any adjustment 
I l l STAT. 1022 
PUBLIC LAW 105-34—AUG. 5, 1997 
made in accordance with this section shall be taken into account 
regardless of whether any assessment has been made with 
respect to such adjustment. 
"(2) 
SPECIAL RULE IN CASE OF COMPUTATIONAL ADJUST-
MENT.—In the case of a computational adjustment that is made 
in connection with a partnership proceeding under this sub-
chapter (other than under this section), the provisions of para-
graph (1) shall apply only if the computational adjustment 
is made within the period prescribed by section 6229 for assess-
ing any tax under subtitle A which is attributable to any 
partnership item or affected item for the taxable year involved. 
"(3) CONVERSION TO DEFICIENCY PROCEEDING.—If— 
"(A) after the notice referred to in subsection (a) is 
mailed to a taxpayer for a taxable year but before the 
expiration of the period for filing a petition with the Tax 
Court under subsection (c) (or, if a petition is filed with 
the Tax Court, before the Tax Court makes a declaration 
for that taxable year), the treatment of any partnership 
item for the taxable year is finally determined, or any 
such item ceases to be a partnership item pursuant to 
section 6231(b), and 
"(B) as a result of that final determination or cessation, 
a deficiency can be determined with respect to the items 
that are the subject of the notice of adjustment, 
the notice of adjustment shall be treated as a notice of deficiency 
under section 6212 and any petition filed in respect of the 
notice shall be treated as an action brought imder section 
6213. 
"(4) FINALLY DETERMINED.—For purposes of this subsection, 
the treatment of partnership items shall be treated as finally 
determined if— 
"(A) the Secretary enters into a settlement agreement 
(within the meaning of section 6224) with the taxpayer 
regarding such items, 
"(B) a notice of final partnership administrative adjust-
ment has been issued and— 
"(i) no petition has been filed under section 6226 
and the time for doing so has expired, or 
"(ii) a petition has been filed under section 6226 
and the decision of the court has become final, or 
"(C) the period within which any tax attributable to 
such items may be assessed against the taxpayer has 
expired. 
"(h) SPECIAL RULES IF SECRETARY INCORRECTLY DETERMINES 
APPLICABLE PROCEDURE,— 
"(1) 
SPECIAL RULE IF SECRETARY ERRONEOUSLY MAILS 
NOTICE OF ADJUSTMENT.—If the Secretary erroneously deter-
mines that subchapter B does not apply to a taxable year 
of a taxpayer and consistent with that determination timely 
mails a notice of adjustment to the taxpayer pursuant to sub-
section (a) of this section, the notice of adjustment shall be 
treated as a notice of deficiency under section 6212 and any 
petition that is filed in respect of the notice shall be treated 
as an action brought under section 6213. 
"(2) 
SPECIAL RULE IF SECRETARY ERRONEOUSLY MAILS 
NOTICE OF DEFICIENCY.—If the Secretary erroneously deter-
mines that subchapter B applies to a taxable year of a taxpayer 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1023 
£ind consistent with that determination timely mails a notice 
of deficiency to the taxpayer pursuant to section 6212, the 
notice of deficiency shall be treated as a notice of adjustment 
under subsection (a) and any petition that is filed in respect 
of the notice shall be treated as an action brought under sub-
section (c).". 
(b) TREATMENT OF PARTNERSHIP ITEMS IN DEFICIENCY PROCEED-
INGS.—Section 6211 (defining deficiency) is amended by adding 
at the end the following new subsection: 
"(c) COORDINATION WITH SUBCHAPTER C—In determining the 
amount of any deficiency for purposes of this subchapter, adjust-
ments to partnership items shall be made only as provided in 
subchapter C". 
(c) CLERICAL AMENDMENT.—The table of sections for subchapter 
C of chapter 63 is amended by adding at the end the following 
new item: 
"Sec. 6234. Declaratory judgment relating to treatment of items other than 
partnership items with respect to an oversheltered return.". 
(d) EFFECTIVE DATE.—^The amendments made by thi? section 
26 use 6211 
shall apply to partnership taxable years ending after the date note. 
of the enactment of this Act. 
SEC. 1232. PARTNERSHIP RETURN TO BE DETERMINATIVE OF AUDIT 
PROCEDURES TO BE FOLLOWED. 
(a) IN GENERAL.—Section 6231 (relating to definitions and spe-
cial rules) is amended by adding at the end the following new 
subsection: 
"(g) PARTNERSHIP RETURN TO BE DETERMINATIVE OF WHETHER 
SUBCHAPTER APPLIES.— 
"(1) DETERMINATION THAT SUBCHAPTER APPLIES.—If, on the 
basis of a partnership return for a taxable year, the Secretary 
reasonably determines that this subchapter applies to such 
partnership for such year but such determination is erroneous, 
then the provisions of this subchapter are hereby extended 
to such partnership (and its items) for such taxable year and 
to partners of such partnership. 
"(2) DETERMINATION THAT SUBCHAPTER DOES NOT APPLY.— 
If, on the basis of a partnership return for a taxable year, 
the Secretary reasonably determines that this subchapter does 
not apply to such partnership for such year but such determina-
tion is erroneous, then the provisions of this subchapter shall 
not apply to such partnership (and its items) for such taxable 
year or to partners of such partnership.". 
(b) EFFECTIVE DATE.—The amendment made by this section 26USC6231 
shall apply to partnership taxable years ending after the date ^°^-
of the enactment of this Act. 
SEC. 1233. PROVISIONS RELATING TO STATUTE OF LIMITATIONS. 
(a) 
SUSPENSION 
OF STATUTE 
WHERE 
UNTIMELY 
PETITION 
FILED.—Paragraph (1) of section 6229(d) (relating to suspension 
where Secretary makes administrative adjustment) is amended by 
striking all that follows "section 6226" and inserting the following: 
"(and, if a petition is filed under section 6226 with respect to 
such administrative adjustment, until the decision of the court 
becomes final), and". 
Ill STAT. 1024 
PUBLIC LAW 105-34—AUG. 5, 1997 
(b) SUSPENSION OF STATUTE DURING BANKRUPTCY PROCEED-
ING.—Section 6229 is amended by adding at the end the following 
new subsection: 
"(h) SUSPENSION DURING PENDENCY OF BANKRUPTCY PROCEED-
ING.—If a petition is filed naming a partner as a debtor in a 
bankruptcy proceeding under title 11 of the United States Code, 
the running of the period of limitations provided in this section 
with respect to such partner shall be suspended— 
"(1) for the period during which the Secretary is prohibited 
by reason of such bankruptcy proceeding from making an 
assessment, and 
"(2) for 60 days thereafter.". 
(c) TAX MATTERS PARTNER IN BANKRUPTCY.—Section 6229(b) 
is amended by redesignating paragraph (2) as paragraph (3) and 
by inserting after paragraph (1) the following new paragraph: 
"(2) 
SPECIAL RULE WITH RESPECT TO DEBTORS IN TITLE 
11 CASES.—Notwithstanding any other law or rule of law, if 
£in agreement is entered into under paragraph (1)(B) and the 
agreement is signed by a person who would be the tax matters 
partner but for the fact that, at the time that the agreement 
is executed, the person is a debtor in a bankruptcy proceeding 
under title 11 of the United States Code, such agreement shall 
be binding on all partners in the partnership unless the Sec-
retary has been notified of the bankruptcy proceeding in accord-
ance with regulations prescribed by the Secretary.". 
26 use 6229 
(d) EFFECTIVE DATES.— 
note. 
(1) SUBSECTIONS (a) AND (b).—The amendments made by 
subsections (a) and (b) shall apply to partnership taxable years 
with respect to which the period under section 6229 of the 
Internal Revenue Code of 1986 for assessing tax has not expired 
on or before the date of the enactment of this Act. 
(2) SUBSECTION (c).—The amendment made by subsection 
(c) shall apply to agreements entered into after the date of 
the enactment of this Act. 
SEC. 1234. EXPANSION OF SMALL PARTNERSHIP EXCEPTION. 
(a) IN GENERAL.—Clause (i) of section 6231(a)(1)(B) (relating 
to exception for small partnerships) is amended to read as follows: 
"(i) IN GENERAL.—The term 'partnership' shall not 
include any partnership having 10 or fewer partners 
each of whom is an individual (other than a non-
resident alien), a C corporation, or an estate of a 
deceased partner. For puiposes of the preceding sen-
tence, a husband and wife (and their estates) shall 
be treated as 1 partner.". 
26 use 6231 
(b) EFFECTIVE DATE.—The amendment made by this section 
i^ote. 
shall apply to partnership taxable years ending after the date 
of the enactment of this Act. 
SEC. 1235. EXCLUSION OF PARTIAL SETTLEMENTS FROM 1-YEAR 
LIMITATION ON ASSESSMENT. 
(a) IN GENERAL.—Subsection (f) of section 6229 (relating to 
items becoming nonpartnership items) is amended— 
(1) 
by striking "(f) ITEMS BECOMING NONPARTNERSHIP 
ITEMS.—If' and inserting the following: 
"(f) SPECIAL RULES.— 
"(1) ITEMS BECOMING NONPARTNERSHIP ITEMS.—If, 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1025 
(2) by moving the text of such subsection 2 ems to the 
right, £ina 
(3) by adding at the end the following new paragraph: 
"(2) SPECIAL RULE FOR PARTL\L SETTLEMENT AGREEMENTS.— 
If a partner enters into a settlement agreement with the Sec-
retary with respect to the treatment of some of the partnership 
items in dispute for a partnership taxable year but other part-
nership items for such year remain in dispute, the period 
of limitations for assessing any tax attributable to the settled 
items shall be determined as if such agreement had not been 
entered into.", 
(b) EFFECTIVE DATE.—The amendment made by this section 26 use 6229 
shall apply to settlements entered into after the date of the enact- note. 
ment of this Act. 
SEC. 1236. EXTENSION OF TIME FOR FILING A REQUEST FOR ADMINIS-
TRATIVE ADJUSTMENT. 
(a) IN GENERAL.—Section 6227 (relating to administrative 
adjustment requests) is amended by redesignating subsections (b) 
and (c) as subsections (c) and (d), respectively, and by inserting 
after subsection (a) the following new subsection: 
"(b) SPECIAL RULE IN CASE OF EXTENSION OF PERIOD OF LIMITA-
TIONS UNDER SECTION 6229.—The period prescribed by subsection 
(a)(1) for filing of a request for an administrative adjustment shall 
be extended— 
"(1) for the period within which an assessment may be 
made pursuant to an agreement (or any extension thereof) 
under section 6229(b), and 
"(2) for 6 months thereafter.". 
(b) EFFECTIVE DATE.—The amendment made by this section 26 use 6227 
shall take effect as if included in the amendments made by section note. 
402 of the Tax Equity and Fiscal Responsibility Act of 1982. 
SEC. 1237. AVAILABILITY OF INNOCENT SPOUSE RELIEF IN CONTEXT 
OF PARTNERSHIP PROCEEDINGS. 
(a) IN GENERAL.—Subsection (a) of section 6230 is amended 
by adding at the end the following new paragraph: 
"(3) 
SPECIAL RULE IN CASE OF ASSERTION BY PARTNER'S 
SPOUSE OF INNOCENT SPOUSE RELIEF.— 
"(A) Notwithstanding section 6404(b), if the spouse 
of a partner asserts that section 6013(e) applies with 
respect to a liability that is attributable to any adjustment 
to a partnership item, then such spouse may file with 
the Secretary within 60 days after the notice of computa-
tional adjustment is mailed to the spouse a request for 
abatement of the assessment specified in such notice. Upon 
receipt of such request, the Secretary shall abate the 
assessment. Any reassessment of the tax with respect to 
which an abatement is made under this subparagraph shall 
be subject to the deficiency procedures prescribed by sub-
chapter B. The period for making any such reassessment 
shall not expire before the expiration of 60 days after 
the date of such abatement. 
"(B) If the spouse files a petition with the Tax Court 
pursuant to section 6213 with respect to the request for 
abatement described in subparagraph (A), the Tax Court 
shall only have jurisdiction pursuant to this section to 
determine whether the requirements of section 6013(e) 
I l l STAT. 1026 
PUBLIC LAW 105-34—AUG. 5, 1997 
have been satisfied. For purposes of such determination, 
the treatment of partnership items under the settlement, 
the final partnership administrative adjustment, or the 
decision of the court (whichever is appropriate) that gave 
rise to the liability in question shall be conclusive. 
Applicability. 
"(C) Rules similar to the rules contained in subpara-
graphs (B) and (C) of paragraph (2) shall apply for purposes 
of this paragraph.". 
(b) CLAIMS FOR REFUND.—Subsection (c) of section 6230 is 
amended by adding at the end the following new paragraph: 
"(5) RULES FOR SEEKING INNOCENT SPOUSE RELIEF.— 
"(A) IN GENERAL.—The spouse of a partner may file 
a claim for refund on the ground that the Secretary failed 
to relieve the spouse under section 6013(e) from a liability 
that is attributable to an adjustment to a partnership 
item. 
"(B) 
TIME 
FOR FILING 
CLAIM.—Any claim 
under 
subparagraph (A) shall be filed within 6 months after the 
day on which the Secretary mails to the spouse the notice 
of computational adjustment referred to in subsection 
(a)(3)(A). 
"(C) SUIT IF CLAIM NOT ALLOWED.—If the claim under 
subparagraph (B) is not allowed, the spouse may bring 
suit with respect to the claim within the period specified 
in paragraph (3). 
"(D) PRIOR DETERMINATIONS ARE BINDING.—For pur-
poses of any claim or suit under this paragraph, the treat-
ment of partnership items under the settlement, the final 
partnership administrative adjustment, or the decision of 
the court (whichever is appropriate) that gave rise to the 
liability in question shall be conclusive.". 
(c) TECHNICAL AMENDMENTS.— 
(1) Paragraph (1) of section 6230(a) is amended by striking 
"paragraph (2)" and inserting "paragraph (2) or (3)". 
(2) Subsection (a) of section 6503 is amended by striking 
"section 6230(a)(2)(A)" and inserting "paragraph (2)(A) or (3) 
of section 6230(a)". 
26 use 6230 
(d) EFFECTIVE DATE.—The amendments made by this section 
^ote. 
shall take effect as if included in the amendments made by section 
402 of the Tax Equity and Fiscal Responsibility Act of 1982. 
SEC. 1238. DETERMINATION OF PENALTIES AT PARTNERSfflP LEVEL. 
(a) IN GENERAL.—Section 6221 (relating to tax treatment deter-
mined at partnership level) is amended by striking "item" and 
inserting "item (and the applicability of any penalty, addition to 
tax, or additional amount which relates to an adjustment to a 
partnership item)". 
(b) CONFORMING AMENDMENTS.— 
(1) Subsection (£) of section 6226 is amended— 
(A) by striking "relates and" and inserting "relates,", 
and 
(B) by inserting before the period ", and the applicabil-
ity of any penalty, addition to tax, or additional amount 
which relates to an adjustment to a partnership item". 
(2) Clause (i) of section 6230(a)(2)(A) is amended to read 
as follows: 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1027 
"(i) affected items which require partner level 
determinations (other than penalties, additions to tax, 
and additional amounts that relate to adjustments to 
partnership items), or". 
(3)(A) Subparagraph (A) of section 6230(a)(3), as added 
by section 1237, is amended by inserting "(including any liabil-
ity for any penalties, additions to tax, or additional amounts 
relating to such adjustment)" after "partnership item". 
(B) Subparagraph (B) of such section is amended by insert-
ing "(and the applicability of any penalties, additions to tax, 
or additional amounts)" after "partnership items". 
(C) Subparagraph (A) of section 6230(c)(5), as added by 
section 1237, is amended by inserting before the period "(includ-
ing any liability for any penalties, additions to t£ix, or additional 
amounts relating to such adjustment)". 
(D) Subparagraph (D) of section 6230(c)(5), as added by 
section 1237, is amended by inserting "(and the applicability 
of any penalties, additions to tax, or additional amounts)" after 
"partnership items". 
(4) Paragraph (1) of section 6230(c) is amended by striking 
"or" at the end of subparagraph (A), by striking the period 
at the end of subparagraph (B) and inserting ", or", and by 
adding at the end the following new subparagraph: 
"(C) the Secretary erroneously imposed any penalty, 
addition to tax, or additional amount which relates to an 
adjustment to a partnership item.". 
(5) So much of subparagraph (A) of section 6230(c)(2) as 
precedes "shall be filed" is amended to read as follows: 
"(A) UNDER PARAGRAPH (D (A) OR (O.—Any claim under 
subparagraph (A) or (C) of paragraph (1)". 
(6) Paragraph (4) of section 6230(c) is amended by adding 
at the end the following: "In addition, the determination under 
the final partnership administrative adjustment or under the 
decision of the court (whichever is appropriate) concerning the 
applicability of any penalty, addition to tax, or additional 
amount which relates to an adjustment to a partnership item 
shall also be conclusive. Notwithstanding the preceding sen-
tence, the partner shall be allowed to assert any partner level 
defenses that may apply or to challenge the amount of the 
computational adjustment.". 
(c) EFFECTIVE DATE.—The amendments made by this section 
26 use 6221 
shall apply to partnership taxable years ending after the date note. 
of the enactment of this Act. 
SEC. 1239. PROVISIONS RELATING TO COURT JURISDICTION, ETC. 
(a) TAX COURT JURISDICTION TO ENJOIN PREMATURE ASSESS-
MENTS OF DEFICIENCIES ATTRIBUTABLE TO PARTNERSHIP ITEMS.— 
Subsection (b) of section 6225 is amended by striking "the proper 
court." and inserting "the proper court, including the Tax Court. 
The Tax Court shall have no jurisdiction to enjoin any action 
or proceeding under this subsection unless a timely petition for 
a readjustment of the partnership items for the taxable year has 
been filed and then only in respect of the adjustments that are 
the subject of such petition.". 
(b) JURISDICTION TO CONSIDER STATUTE OF LIMITATIONS WITH 
RESPECT TO PARTNERS.—Paragraph (1) of section 6226(d) is amend-
ed by adding at the end the following new sentence: 
I l l STAT. 1028 
PUBLIC LAW 105-34—AUG. 5, 1997 
"Notwithstanding subparagraph (B), any person treated under 
subsection (c) as a party to an action shall be permitted to 
participate in such action (or file a readjustment petition under 
subsection (b) or paragraph (2) of this subsection) solely for 
the purpose of asserting that the period of limitations for assess-
ing any tax attributable to partnership items has expired with 
respect to such person, and the court having jurisdiction of 
such action shall have jurisdiction to consider such assertion.". 
(c) TAX COURT JURISDICTION TO DETERMINE OVERPAYMENTS 
ATTRIBUTABLE TO AFFECTED ITEMS.— 
(1) Paragraph (6) of section 6230(d) is amended by striking 
"(or an affected item)". 
(2) Paragraph (3) of section 6512(b) is amended by adding 
at the end the following new sentence: 
"In the case of a credit or refund relating to an affected item 
(within the meaning of section 6231(a)(5)), the preceding sen-
tence shall be applied by substituting the periods under sections 
6229 and 6230(d) for the periods imder section 6511(b)(2), (c), 
and (d).". 
(d) VENUE ON APPEAL.— 
(1) Paragraph (1) of section 7482(b) is amended by striking 
"or" at the end of subparagraph (D), by striking the period 
at the end of subparagraph (E) and inserting ", or", and by 
inserting after subparagraph (E) the following new subpara-
graph: 
"(F) in the case of a petition under section 6234(c)— 
"(i) the legal residence of the petitioner if the peti-
tioner is not a corporation, smd 
"(ii) the place or office applicable under subpara-
graph (B) if the petitioner is a corporation.". 
(2) The last sentence of section 7482(b)(1) is amended by 
striking "or 6228(a)" and inserting ", 6228(a), or 6234(c)". 
(e) OTHER PROVISIONS.— 
(1) Subsection (c) of section 7459 is amended by striking 
"or section 6228(a)" and inserting ", 6228(a), or 6234(c)". 
(2) Subsection (o) of section 6501 is amended by adding 
at the end the following new paragraph: 
"(3) For declaratory judgment relating to treatment of items 
other than partnership items with respect to an oversheltered 
return, see section 6234.". 
(3) Subsection (a) of section 7421, as amended by section 
1222, is amended by inserting "6225(b)," after "6213(a),". 
26 use 6225 
(f) EFFECTIVE DATE.—The amendments made by this section 
i^ote. 
shall apply to partnership taxable years ending after the date 
of the enactment of this Act. 
SEC. 1240. TREATMENT OF PREMATURE PETITIONS FILED BY NOTICE 
PARTNERS OR 5-PERCENT GROUPS. 
(a) IN GENERAL.—Subsection (b) of section 6226 (relating to 
judicial review of final partnership administrative adjustments) 
is amended by redesignating paragraph (5) as paragraph (6) and 
by inserting after paragraph (4) the following new paragraph: 
"(5) TREATMENT OF PREMATURE PETITIONS.—If— 
"(A) a petition for a readjustment of partnership items 
for the taxable year involved is filed by a notice partner 
(or a 5-percent group) during the 90-day period described 
in subsection (a), and 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1029 
"(B) no action is brought under paragraph (1) during 
the 60-day period described therein with respect to such 
taxable year which is not dismissed, 
such petition shall be treated for purposes of paragraph (1) 
as filed on the last day of such 60-day period.". 
(b) EFFECTIVE DATE.—The amendment made by this section 26 use 6226 
shall apply to petitions filed after the date of the enactment of note. 
this Act. 
SEC. 1241. BONDS IN CASE OF APPEALS FROM CERTAIN PROCEEDING. 
(a) IN GENERAL.—Subsection (b) of section 7485 (relating to 
bonds to stay assessment of collection) is amended— 
(1) by inserting "penalties," after "any interest,", and 
(2) by striking "aggregate of such deficiencies" and inserting 
"aggregate liability of the parties to the action". 
(b) EFFECTIVE DATE.—The amendment made by this section 26 use 7485 
shall take effect as if included in the amendments made by section note. 
402 of the Tax Equity and Fiscal Responsibility Act of 1982. 
SEC. 1242. SUSPENSION OF INTEREST WHERE DELAY IN COMPUTA-
TIONAL ADJUSTMENT RESULTING FROM CERTAIN 
SETTLEMENTS. 
(a) IN GENERAL.—Subsection (c) of section 6601 (relating to 
interest on underpayment, nonpajnnent, or extension of time for 
payment, of tax) is amended by adding at the end the following 
new sentence: "In the case of a settlement under section 6224(c) 
which results in the conversion of partnership items to nonpartner-
ship items pursuant to section 6231(b)(1)(C), the preceding sentence 
shall apply to a computational adjustment resulting from such 
settlement in the same manner as if such adjustment were a 
deficiency and such settlement were a waiver referred to in the 
preceding sentence.". 
(b) EFFECTIVE DATE.—^The amendment made by this section 26USC6601 
shall apply to adjustments with respect to partnership taxable note. 
years beginning after the date of the enactment of this Act. 
SEC. 1243. SPECIAL RULES FOR ADMINISTRATIVE ADJUSTMENT 
REQUESTS WITH RESPECT TO BAD DEBTS OR WORTH-
LESS SECURITIES. 
(a) GENERAL RULE.—Section 6227 (relating to administrative 
adjustment requests) is amended by adding at the end the following 
new subsection: 
"(e) REQUESTS WITH RESPECT TO BAD DEBTS OR WORTHLESS 
SECURITIES.—In the case of that portion of any request for an 
administrative adjustment which relates to the deductibility by 
the partnership under section 166 of a debt as a debt which became 
worthless, or under section 165(g) of a loss from worthlessness 
of a security, the period prescribed in subsection (a)(1) shall be 
7 years from the last day for filing the partnership return for 
the year with respect to which such request is made (determined 
without regard to extensions).". 
(b) EFFECTIVE DATE.— 
26 use 6227 
(1) IN GENERAL.—The amendment made by subsection (a) note, 
shall take effect as if included in the amendments made by 
section 402 of the Tax Equity and Fiscal Responsibility Act 
of 1982. 
(2) TREATMENT OF REQUESTS FILED BEFORE DATE OF ENACT-
MENT.—In the case of that portion of any request (filed before 
I l l STAT. 1030 
PUBLIC LAW 105-34—AUG. 5, 1997 
the date of the enactment of this Act) for an administrative 
adjustment which relates to the deductibility of a debt as a 
debt which became worthless or the deductibility of a loss 
from the worthlessness of a security— 
(A) paragraph (2) of section 6227(a) of the Internal 
Revenue Code of 1986 shall not apply, 
(B) the period for filing a petition under section 6228 
of the Internal Revenue Code of 1986 with respect to such 
request shall not expire before the date 6 months after 
the date of the enactment of this Act, and 
(C) such a petition may be filed without regard.to 
whether there was a notice of the beginning of an adminis-
trative proceeding or a final partnership administrative 
adjustment. 
PART 
III—PROVISION 
RELATING 
TO 
CLOSING 
OF PARTNERSHIP 
TAXABLE 
YEAR 
WITH 
RE-
SPECT 
TO 
DECEASED 
PARTNER, 
ETC. 
SEC. 1246. CLOSING OF PARTNERSHIP TAXABLE YEAR WITH RESPECT 
TO DECEASED PARTNER, ETC. 
(a) GENERAL RULE.—Subparagraph (A) of section 706(c)(2) 
(relating to disposition of entire interest) is amended to read as 
follows: 
"(A) 
DISPOSITION OF ENTIRE INTEREST.—The taxable 
year of a partnership shall close with respect to a partner 
whose entire interest in the partnership 
terminates 
(whether by reason of death, liquidation, or otherwise).". 
(b) CLERICAL AJ^IENDMENT.—The paragraph heading for para-
graph (2) of section 706(c) is amended to read as follows: 
"(2) TREATMENT OF DISPOSITIONS.—". 
26 use 706 note. 
(c) EFFECTIVE DATE.—The amendments made by this section 
shall apply to partnership taxable years beginning after December 
31,1997. 
Subtitle D—Provisions Relating to Real 
Estate Investment Trusts 
SEC. 1251. CLARIFICATION OF LIMITATION ON MAXIMUM NUMBER OF 
SHAREHOLDERS. 
(a) RULES RELATING TO DETERMINATION OF OWNERSHIP.— 
(1) FAILURE TO ISSUE SHAREHOLDER DEMAND LETTER NOT 
TO DISQUALIFY REIT.—Section 857(a) (relating to requirements 
applicable to real estate investment trusts) is amended by 
striking paragraph (2) and by redesignating paragraph (3) as 
paragrapn (2). 
(2) 
SHAREHOLDER DEMAND LETTER REQUIREMENT; 
PEN-
ALTY.—Section 857 (relating to taxation of real estate invest-
ment trusts and their beneficiaries) is amended by redesignat-
ing subsection (f) as subsection (g) and by inserting after sub-
section (e) the following new subsection: 
"(f) REAL ESTATE INVESTMENT TRUSTS TO ASCERTAIN OWNER-
SHIP.— 
"(1) IN GENERAL.—Each real estate investment trust shall 
each taxable year comply with regulations prescribed by the 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1031 
Secretary for the purposes of ascertaining the actual ownership 
of the outstanding shares, or certificates of beneficial interest, 
of such trust. 
"(2) FAILURE TO COMPLY.— 
"(A) IN GENERAL.—If a real estate investment trust 
fails to comply with the requirements of paragraph (1) 
for a taxable year, such trust shall pay (on notice and 
demand by the Secretary and in the same manner as 
tax) a penalty of $25,000. 
"(B) INTENTIONAL DISREGARD.—If any failure under 
paragraph (1) is due to intentional disregard of the require-
ment under paragraph (1), the penalty under subparagraph 
(A) shall be $50,000. 
"(C) FAILURE TO COMPLY AFTER NOTICE.—The Secretary 
may require a real estate investment trust to take such 
actions as the Secretary 
determines 
appropriate to 
ascertain actual ownership if the trust fails to meet the 
requirements of paragraph (1). If the trust fails to take 
such actions, the trust shall pay (on notice and demand 
by the Secretary and in the same manner as t£ix) £in 
additional penalty equal to the penalty determined under 
subparagraph (A) or (B), whichever is applicable. 
"(D) REASONABLE CAUSE.—No penalty shall be imposed 
under this paragraph with respect to any failure if it is 
shown that such failure is due to reasonable cause and 
not to willful neglect.". 
(b) COMPLL^NCE WITH CLOSELY HELD PROHIBITION.— 
(1) IN GENERAL.—Section 856 (defining real estate invest-
ment trust) is amended by adding at the end the following 
new subsection: 
"(k) REQUIREMENT THAT ENTITY NOT BE CLOSELY HELD TREAT-
ED AS MET IN CERTAIN CASES.—A corporation, trust, or associa-
tion— 
"(1) which for a taxable year meets the requirements of 
section 857(f)(1), and 
"(2) which does not know, or exercising reasonable diligence 
would not have known, whether the entity failed to meet the 
requirement of subsection (a)(6), 
shall be treated as having met the requirement of subsection (a)(6) 
for the taxable year.". 
(2) CONFORMING AMENDMENT.—Paragraph (6) of section 
856(a) is amended by inserting "subject to the provisions of 
subsection (k)," before "which is not". 
SEC. 1262. DE MINIMIS RULE FOR TENANT SERVICES INCOME. 
(a) IN GENERAL.—Paragraph (2) of section 856(d) (defining rents 
fi-om real property) is amended by striking subparagraph (C) and 
the last sentence and inserting: 
"(C) any impermissible tenant service income (as 
defined in paragraph (7)).". 
(b) IMPERMISSIBLE TENANT SERVICE INCOME.—Section 856(d) 
is amended by adding at the end the following new paragraph: 
"(7) IMPERMISSIBLE TENANT SERVICE INCOME.—For purposes 
of paragraph (2)(C)— 
"(A) IN GENERAL.—The term 'impermissible tenant 
service income' means, with respect to any real or personal 
I l l STAT. 1032 
PUBLIC LAW 105-34—AUG. 5, 1997 
property, any amount received or accrued directly or 
indirectly by the real estate investment trust for— 
"(i) services furnished or rendered by the trust 
to the tenants of such property, or 
"(ii) managing or operating such property. 
"(B) DISQUALIFICATION OF ALL AMOUNTS WHERE MORE 
THAN DE MINIMIS AMOUNT.—If the amount described in 
subparagraph (A) with respect to a property for any taxable 
year exceeds 1 percent of all amounts received or accrued 
during such taxable year directly or indirectly by the real 
estate investment trust with respect to such property, the 
impermissible tenant service income of the trust with 
respect to the property shall include all such amounts. 
"(C) EXCEPTIONS.—For purposes of subparagraph (A)— 
"(i) services furnished or rendered, or management 
or operation provided, through an independent contrac-
tor from whom the trust itself does not derive or receive 
any income shall not be treated as furnished, rendered, 
or provided by the trust, and 
"(ii) there shall not be taken into account any 
amount which would be excluded from unrelated busi-
ness taxable income under section 512(b)(3) if received 
bv an organization described in section 511(a)(2). 
"(D) AMOUNT ATTRIBUTABLE TO IMPERMISSIBLE SERV-
ICES.—For purposes of subparagraph (A), the amount treat-
ed as received for any service (or management or operation) 
shall not be less than 150 percent of the direct cost of 
the trust in furnishing or rendering the service (or provid-
ing the management or operation). 
"(E) COORDINATION WITH LIMITATIONS.—For purposes 
of paragraphs (2) and (3) of subsection (c), amounts 
described in subparagraph (A) shall be included in the 
gross income of the corporation, trust, or association.". 
SEC. 1253. ATTRroUTION RULES APPLICABLE TO STOCK OWNERSHIP. 
Section 856(d)(5) (relating to constructive'ownership of stock) 
is amended by striking "except that" and all that follows and 
inserting "except that— 
"(A) '10 percent' shall be substituted for '50 percent' 
in subparagraph (C) of paragraphs (2) and (3) of section 
318(a), and 
"(B) section 318(a)(3)(A) shall be applied in the case 
of a partnership by taking into account only partners who 
own (directly or indirectly) 25 percent or more of the capital 
interest, or the profits interest, in the partnership.". 
SEC. 1254. CREDIT FOR TAX PAID BY REIT ON RETAINED CAPITAL 
GAINS. 
(a) GENERAL RULE.—Paragraph (3) of section 857(b) (relating 
to capital gains) is amended by redesignating subparagraph (D) 
as subparagraph (E) and by inserting after subparagraph (C) the 
following new subparagraph: 
"(D) TREATMENT BY SHAREHOLDERS OF UNDISTRIBUTED 
CAPITAL GAINS.— 
"(i) Every shareholder of a real estate investment 
trust at the close of the trust's taxable year shall 
include, in computing his long-term capital gains in 
his return for his taxable year in which the last day 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1033 
of the trust's taxable year falls, such amount as the 
trust shall designate in respect of such shares in a 
written notice mailed to its shareholders at any time 
prior to the expiration of 60 days after the close of 
its taxable year (or mailed to its shareholders or hold-
ers of beneficial interests with its annual report for 
the taxable year), but the amount so includible by 
£iny shareholder shall not exceed that part of the 
amount subjected to tax in subparagraph (A)(ii) which 
he would have received if all of such amount had 
been distributed as capital gain dividends by the trust 
to the holders of such shares at the close of its taxable 
year. 
"(ii) For purposes of this title, every such share-
holder shall be deemed to have paid, for his taxable 
year under clause (i), the tax imposed by subparagraph 
(A)(ii) on the amounts required by this subparagraph 
to be included in respect of such shares in computing 
his long-term capital gains for that year; and such 
shareholders shall be allowed credit or refund as the 
case may be, for the tax so deemed to have been 
paid by him. 
"(iii) The adjusted basis of such shares in the 
hands of the holder shall be increased with respect 
to the amounts required by this subparagraph to be 
included in computing his long-term capital gains, by 
the difference between the amount of such includible 
gains and the tax deemed paid by such shareholder 
in respect of such shares under clause (ii). 
"(iv) In the event of such designation, the tax 
imposed by subparagraph (A)(ii) shall be paid by the 
real estate investment trust within 30 days after the 
close of its taxable year. 
"(v) The earnings and profits of such real estate 
investment trust, £ind the earnings and profits of any 
such shareholder which is a corporation, shall be appro-
priately adjusted in accordance with regulations pre-
scribed by the Secretary. 
"(vi) As used in this subparagraph, the terms 
'shares' and 'shareholders' shall include beneficial 
interests and holders of beneficial interests, respec-
tively.", 
(b) CONFORMING AMENDMENTS.— 
(1) Clause (i) of section 857(b)(7)(A) is amended by striking 
"subparagraph (B)" and inserting "subparagraph (B) or (D)". 
(2) Clause (iii) of section 852(b)(3)(D) is amended by strik-
ing "by 65 percent" and all that follows and inserting "by 
the difference between the amount of such includible gains 
and the tsix deemed paid by such shareholder in respect of 
such shares under clause (ii).". 
SEC. 1255. REPEAL OF 30-PERCENT GROSS INCOME REQUIREMENT. 
(a) GENERAL RULE.—Subsection (c) of section 856 (relating to 
limitations) is amended— 
(1) by adding "and" at the end of paragraph (3), 
(2) by striking paragraphs (4) and (8), and 
39-194 O - 97 - 34 : QL 3 Part 1 
I l l STAT. 1034 
PUBLIC LAW 105-34—AUG. 5, 1997 
(3) by redesignating paragraphs (5), (6), and (7) as para-
graphs (4), (5), and (6), respectively, 
(b) CONFORMING AMENDMENTS.— 
(1) Subparagraph (G) of section 856(c)(5), as redesignated 
by subsection (a), is amended by striking "and such agreement 
shall be treated as a security for purposes of paragraph (4)(A)". 
(2) Paragraph (5) of section 857(b) is amended by striking 
"section 856(c)(7)" and inserting "section 856(c)(6)". 
(3) Subparagraph (C) of section 857(b)(6) is amended by 
striking 
"section 
856(c)(6)(B)" 
and 
inserting 
"section 
856(c)(5)(B)". 
SEC. 1256. MODIFICATION OF EARNINGS AND PROFITS RULES FOR 
DETERMINING WHETHER REIT HAS EARNINGS AND 
PROFITS FROM NON-REIT YEAR. 
Subsection (d) of section 857 is amended by adding at the 
end the following new paragraph: 
"(3) DISTRIBUTIONS TO MEET REQUIREMENTS OF SUBSECTION 
(a)(2)(B).—^Any distribution which is made in order to comply 
with the requirements of subsection (a)(2)(B)— 
"(A) shall be treated for purposes of this subsection 
and subsection (a)(2)(B) as made from the earliest accumu-
lated earnings and profits (other than earnings and profits 
to which subsection (a)(2)(A) applies) rather than the most 
recently accumulated earnings and profits, and 
"(B) to the extent treated under subparagraph (A) as 
made from accumulated earnings and profits, shall not 
be treated as a distribution for purposes of subsection 
(b)(2)(B).". 
SEC. 
1
2
5
7
. 
TREATMENT 
OF 
FORECLOSURE 
PROPERTY. 
(a) GRACE PERIODS.— 
(1) INITIAL PERIOD.—Paragraph (2) of section 856(e) (relat-
ing to special rules for foreclosure property) is amended by 
striking "on the date which is 2 years after the date the trust 
acquired such property" and inserting "as of the close of the 
3d taxable year following the taxable year in which the trust 
acquired such property'. 
(2) EXTENSION.—Paragraph (3) of section 856(e) is amend-
ed— 
(A) by striking "or more extensions" and inserting 
"extension", and 
(B) by striking the last sentence and inserting: "Any 
such extension shall not extend the grace period beyond 
the close of the 3d taxable year following the last taxable 
year in the period under paragraph (2).". 
(b) REVOCATION OF ELECTION.—Paragraph (5) of section 856(e) 
is amended by striking the last sentence and inserting: "A real 
estate investment trust may revoke any such election for a taxable 
year by filing the revocation (in the manner provided by the Sec-
retary) on or before the due date (including any extension of time) 
for filing its return of tax under this chapter for the taxable year. 
If a trust revokes an election for any property, no election may 
be made by the trust under this paragraph with respect to the 
property for any subsequent taxable year.". 
(c) CERTAIN ACTIVITIES NOT TO DISQUALIFY PROPERTY.—Para-
graph (4) of section 856(e) is amended by adding at the end the 
following new flush sentence: 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1035 
"For purposes of subparagraph (C), property shall not be treated 
as used in a trade or business by reason of any activities 
of the real estate investment trust with respect to such property 
to the extent that such activities would not result in amounts 
received or accrued, directly or indirectly, with respect to such 
property being treated as other than rents from real property.". 
SEC. 1258. PAYMENTS UNDER HEDGING INSTRUMENTS. 
Section 856(c)(5)(G) (relating to treatment of certain interest 
rate agreements), as redesignated by section 1255, is amended 
to read as follows: 
"(G) TREATMENT OF CERTAIN HEDGING INSTRUMENTS.— 
Except to the extent provided by regulations, any— 
"(i) payment to a real estate investment trust 
under an interest rate swap or cap agreement, option, 
futures contract, forward rate agreement, or any simi-
lar financial instrument, entered into by the trust in 
a transaction to reduce the interest rate risks with 
respect to any indebtedness incurred or to be incurred 
by the trust to acquire or carry real estate assets, 
and 
"(ii) gain from the sale or other disposition of any 
such investment, 
shall be treated as income qualifying under paragraph 
(2).". 
SEC. 1259. EXCESS NONCASH INCOME. 
Section 857(e)(2) (relating to determination of amount of excess 
noncash income) is amended— 
(1) by striking subparagraph (B), 
(2) by striking the period at the end of subparagraph (C) 
and inserting a comma, 
(3) by redesignating subparagraph (C) (as amended by 
paragraph (2)) as subparagraph (B), and 
(4) by adding at the end the following new subparagraphs: 
"(C) the amount (if any) by which— 
"(i) the amounts includible in gross income with 
respect to instruments to which section 860E(a) or 
1272 applies, exceed 
"(ii) the amount of money and the fair market 
value of other property received during the taxable 
year under such instruments, and 
"(D) amounts includible in income by reason of can-
cellation of indebtedness.", 
SEC. 1260. PROHEBITED TRANSACTION SAFE HARBOR. 
Clause (iii) of section 857(b)(6)(C) (relating to certain sales 
not to constitute prohibited transactions) is amended by striking 
"(other than foreclosure property)" in subclauses (I) and (II) and 
inserting "(other than sales of foreclosure property or sales to which 
section 1033 applies)". 
SEC. 1261. SHARED APPRECIATION MORTGAGES. 
(a) BANKRUPTCY 
SAFE HARBOR.—Section 856(j) (relating to 
treatment of shared appreciation mortgages) is amended by 
redesignating paragraph (4) as paragraph (5) and by inserting 
after paragraph (3) the following new pairagraph: 
"(4) COORDINATION WITH 4-YEAR HOLDING PERIOD.— 
I l l STAT. 1036 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(A) IN GENERAL.—For purposes of section 857(b)(6)(C), 
if a real estate investment trust is treated as having sold 
secured property under paragraph (3)(A), the trust shall 
be treated as having held such property for at least 4 
years if— 
"(i) the secured property is sold or otherwise dis-
posed of pursuant to a case under title 11 of the United 
States Code, 
"(ii) the seller is under the jurisdiction of the court 
in such case, and 
"(iii) the disposition is required by the court or 
is pursuant to a plan approved by the court. 
"(B) EXCEPTION.—Subparagraph (A) shall not apply 
if— 
"(i) the secured property was acquired by the seller 
with the intent to evict or foreclose, or 
"(ii) the trust knew or had reason to know that 
default on the obligation described in paragraph (5)(A) 
would occur.", 
(b) CLARIFICATION OF DEFINITION OF SHARED APPRECIATION 
PROVISION.—Clause (ii) of section 856(j)(5)(A) is amended by insert-
ing before the period "or appreciation in value as of any specified 
date". 
SEC. 1262. WHOLLY OWNED SUBSIDIARIES. 
Section 856(i)(2) (defining qualified REIT subsidiary) is amend-
ed by striking "at all times during the period such corporation 
was in existence". 
26 use 852 note. 
SEC. 1263. EFFECTIVE DATE. 
The amendments made by this part shall apply to taxable 
years beginning after the date of the enactment of this Act. 
Subtitle E—Provisions Relating to 
Regulated Investment Companies 
SEC. 1271. REPEAL OF 30-PERCENT GROSS INCOME LIMITATION. 
(a) GENERAL RULE.—Subsection (b) of section 851 (relating 
to limitations) is amended by striking paragraph (3), by adding 
"£ind" at the end of paragraph (2), and by redesignating paragraph 
(4) as paragraph (3). 
(b) TECHNICAL AMENDMENTS.— 
(1) The material following paragraph (3) of section 851(b) 
(as redesignated by subsection (a)) is amended— 
(A) by striking out "paragraphs (2) and (3)" and insert-
ing "paragraph (2)", and 
(B) by striking out the last sentence thereof. 
(2) Subsection (c) of section 851 is amended by striking 
"subsection (b)(4)" each place it appears (including the heading) 
and inserting "subsection (b)(3)". 
(3) Subsection (d) of section 851 is amended by striking 
"subsections (b)(4)" and inserting "subsections (b)(3)". 
(4) Paragraph (1) of section 851(e) is amended by striking 
"subsection (b)(4)" and inserting "subsection (b)(3)". 
(5) Paragraph (4) of section 851(e) is amended by striking 
"subsections (b)(4)" and inserting "subsections (b)(3)". 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1037 
(6) Section 851 is amended by striking subsection (g) and 
redesignating subsection (h) as subsection (g). 
(7) Subsection (g) of section 851 (as redesignated by para-
graph (6)) is amended by striking paragraph (3). 
(8) Section 817(h)(2) is amended— 
(A) by striking "851(b)(4)" in subparagraph (A) and 
inserting "851(b)(3)", and 
(B) by striking "851(b)(4)(A)(ir in subparagraph (B) 
and inserting "851(b)(3)(A)(i)". 
(9) Section 1092(f)(2) is amended by striking "Except for 
purposes of section 851(b)(3), the" and inserting "The". 
(c) EFFECTIVE DATE.—The amendments made by this section 
26 use 817 note. 
shall apply to taxable years beginning after the date of the enact-
ment of this Act. 
Subtitle F—Taxpayer Protections 
SEC. 1281. REASONABLE CAUSE EXCEPTION FOR CERTAIN PENALTIES. 
(a) INFORMATION ON DEDUCTIBLE EMPLOYEE CONTRIBUTIONS.— 
Subsection (g) of section 6652 (relating to information required 
in connection with deductible employee contributions) is amended 
by adding at the end the following new sentence: "No penalty 
shall be imposed under this subsection on any failure wnich is 
shown to be due to reasonable cause and not willful neglect.". 
(b) REPORTS ON STATUS AS QUALIFIED SMALL BUSINESS.—Sub-
section (k) of section 6652 (relating to failure to make reports 
required under section 1202) is amended by adding at the end 
the following new sentence: "No penalty shall be imposed under 
this subsection on £iny failure which is shown to be due to reason-
able cause and not willful neglect.". 
(c) RETURNS OF PERSONAL HOLDING COMPANY TAX BY FOREIGN 
CORPORATIONS.—Section 6683 (relating to failure of foreign corpora-
tion to file return of personal holding company tax) is amended 
by adding at the end the following new sentence: "No penalty 
shall be imposed under this section on any failure which is shown 
to be due to reasonable cause and not willful neglect.". 
(d) FAILURE TO MAKE REQUIRED PAYMENTS.—Subparagraph 
(A) of section 7519(f)(4) is amended by adding at the end the 
following new sentence: "No penalty shall be imposed under this 
subparagraph on any failure which is shown to be due to reasonable 
cause and not willful neglect.", 
(e) EFFECTIVE DATE.—The amendments made by this section 26 use 6652 
shall apply to taxable years beginning after the date of the enact- ^^te. 
ment ofthis Act. 
SEC 1282. CLARIFICATION OF PERIOD FOR FILING CLAIMS FOR 
REFUNDS. 
(a) IN GENERAL.—Paragraph (3) of section 6512(b) (relating 
to overpayment determined by Tax Court) is amended by adding 
at the end the following flush sentence: 
"In a case described in subparagraph (B) where the date of 
the mailing of the notice of deficiency is during the third 
year after the due date (with extensions) for filing the return 
. of t£ix and no return was filed before such date, the applicable 
period under subsections (a) and (b)(2) of section 6511 shall 
be 3 years.". 
Ill STAT. 1038 
PUBLIC LAW 105-34—AUG. 5, 1997 
26 use 6512 
note. 
26 use 6103 
note. 
26 use 6501 
note. 
Notice. 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to claims for credit or refund for tsixable years ending 
after the date of the enactment of this Act. 
SEC. 1283. REPEAL OF AUTHORITY TO DISCLOSE WHETHER PROSPEC-
TIVE JUROR HAS BEEN AUDITED. 
(a) IN GENERAL.—Subsection (h) of section 6103 (relating to 
disclosure to certain Federal officers and employees for purposes 
of tax administration, etc.) is amended by striking paragraph (5) 
£ind by redesignating paragraph (6) as paragraph (5). 
(b) CONFORMING AMENDMENT.—Paragraph (4) of section 6103(p) 
is amended by striking "(h)(6)" each place it appeeirs sind inserting 
"(h)(5)". 
(c) EFFECTIVE DATE.—The amendments made by this section 
shall apply to judicial proceedings commenced after the date of 
the enactment of this Act. 
SEC. 1284. CLARIFICATION OF STATUTE OF LIMITATIONS. 
(a) IN GENERAL.—Subsection (a) of section 6501 (relating to 
limitations on assessment and collection) is amended by adding 
at the end thereof the following new sentence: "For purposes of 
this chapter, the term 'return' means the return required to be 
filed by the taxpayer (and does not include a return of any person 
from whom the taxpayer has received an item of income, gain, 
loss, deduction, or credit).". 
(b) EFFECTIVE DATE.—The amendment made by this section 
shall apply to taxable years beginning after the date of the enact-
ment of this Act. 
SEC 1286. AWARDING OF ADMINISTRATIVE COSTS. 
(a) RIGHT TO APPEAL TAX COURT DECISION.—Subsection (f) 
of section 7430 (relating to right of appeal) is amended by adding 
at the end the following new paragraph: 
"(3) APPEAL OF TAX COURT DECISION.—An order of the Tax 
Court disposing of a petition under paragraph (2) shsdl be 
reviewable in the same manner as a decision of the Tax Court, 
but only with respect to the matters determined in such order.". 
(b) PERIOD FOR APPLYING TO IRS FOR COSTS.—Subsection (b) 
of section 7430 (relating to limitations) is amended by adding at 
the end the following new paragraph: 
"(5) 
PERIOD FOR APPLYING TO IRS FOR ADMINISTRATIVE 
COSTS.—An award may be made under subsection (a) by the 
Internal Revenue Service for reasonable administrative costs 
only if the prevailing party files an application with the Internal 
Revenue Service for such costs before the 91st day after the 
date on which the final decision of the Internal Revenue Service 
as to the determination of the tax, interest, or penalty is mailed 
to such party.". 
(c) PERIOD FOR PETITIONING OF TAX COURT FOR REVIEW OF 
DENIAL OF COSTS.—Paragraph (2) of section 7430(f) (relating to 
right of appeal) is amended— 
(1) by striking "appeal to" and inserting "the filing of a 
petition for review with", and 
(2) by adding at the end the following new sentence: "If 
the Secretary sends by certified or registered mail a notice 
of such decision to the petitioner, no proceeding in the Tax 
Court may be initiated under this paragraph unless such peti-
tion is filed before the 91st day after the date of such mailing.". 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1039 
(d) EFFECTIVE DATE.—The amendments made by this section 
26 use 7430 
shall apply to civil actions or proceedings commenced after the note. 
date of the enactment of this Act. 
TITLE 
XIII—SIMPLIFICATION 
PROVI-
SIONS RELATING TO ESTATE AND 
GIFT TAXES 
SEC. 1301. GIFTS TO CHARITIES EXEMPT FROM GIFT TAX FILING 
REQUIREMENTS. 
(a) IN GENERAL.—Section 6019 is amended by striking "or" 
at the end of paragraph (1), by adding "or" at the end of paragraph 
(2), and by inserting after paragraph (2) the following new para-
graph: 
"(3) a transfer with respect to which a deduction is allowed 
under section 2522 but only if— 
"(A)(i) such transfer is of the donor's entire interest 
in the property transferred, and 
"(ii) no other interest in such property is or has been 
transferred (for less than adequate and full consideration 
in money or money's worth) from the donor to a person, 
or for a use, not described in subsection (a) or (b) of section 
2522, or 
"(B) such transfer is described in section 2522(d),". 
(b) EFFECTIVE DATE.—The amendment made by this section 
shall apply to gifts made after the date of the enactment of this 
Act. 
SEC. 1302. CLARIFICATION OF WAIVER OF CERTAIN RIGHTS OF RECOV-
ERY. 
(a) AMENDMENT TO SECTION 2207A.—Paragraph (2) of section 
2207A(a) (relating to right of recovery in the case of certain marital 
deduction property) is amended to read as follows: 
"(2) DECEDENT MAY OTHERWISE DIRECT.—Paragraph (1) 
shall not apply with respect to any property to the extent 
that the decedent in his will (or a revocable trust) specifically 
indicates an intent to waive any right of recovery under this 
subchapter with respect to such property.". 
(b) AMENDMENT TO SECTION 2207B.—Paragraph (2) of section 
2207B(a) (relating to right of recovery where decedent retained 
interest) is amended to read as follows: 
"(2) 
DECEDENT MAY OTHERWISE DIRECT.—Paragraph (1) 
shall not apply with respect to any property to the extent 
that the decedent in his will (or a revocable trust) specifically 
indicates an intent to waive any right of recovery under this 
subchapter with respect to such property.". 
(c) EFFECTIVE DATE.—The amendments made by this section 
shall apply with respect to the estates of decedents dying after 
the date of the enactment of this Act. 
SEC. 1303. TRANSITIONAL RULE UNDER SECTION 2056A, 
(a) GENERAL RULE.—In the case of any trust created under 
an instrument executed before the date of the enactment of the 
Revenue Reconciliation Act of 1990, such trust shall be treated 
as meeting the requirements of paragraph (1) of section 2056A(a) 
26 use 6019 
note. 
26 use 2207A 
note. 
26 use 2056A 
note. 
I l l STAT. 1040 
PUBLIC LAW 105-34—AUG. 5, 1997 
of the Internal Revenue Code of 1986 if the trust instrument 
requires that all trustees of the trust be individual citizens of 
the United States or domestic corporations. 
(b) EFFECTIVE DATE.—The provisions of subsection (a) shall 
take effect as if included in the provisions of section 11702(g) 
of the Revenue Reconciliation Act of 1990. 
SEC. 1304. TREATMENT FOR ESTATE TAX PURPOSES OF SHORT-TERM 
OBLIGATIONS HELD BY NONRESIDENT ALIENS. 
(a) IN GENERAL.—Subsection (b) of section 2105 is amended 
by striking "and" at the end of paragraph (2), by striking the 
period at the end of paragraph (3) and inserting ", and", and 
by inserting after paragraph (3) the following new paragraph: 
"(4) obligations which would be original issue discount 
obligations as defined in section 871(g)(1) but for subparagraph 
(B)(i) thereof, if any interest thereon (were such interest 
received by the decedent at the time of his death) would not 
be effectively connected with the conduct of a trade or business 
within the United States.". 
26 use 2105 
(b) EFFECTIVE DATE.—The amendment made by this section 
note. 
shall apply to estates of decedents dying after the date of the 
enactment of this Act. 
SEC. 1305. CERTAIN REVOCABLE TRUSTS TREATED AS PART OF 
ESTATE. 
(a) IN GENERAL.—Subpart A of part I of subchapter J (relating 
to estates, trusts, beneficiaries, and decedents) is amended by add-
ing at the end the following new section: 
"SEC. 6
4
6
. 
CERTAIN REVOCABLE TRUSTS TREATED AS PART OF 
ESTATE. 
"(a) GENERAL RULE.—For purposes of this subtitle, if both 
the executor (if any) of an estate and the trustee of a qualified 
revocable trust elect the treatment provided in this section, such 
trust shall be treated and taxed as part of such estate (£ind not 
as a separate trust) for all taxable years of the estate ending 
after the date of the decedent's death and before the applicable 
date. 
"(b) DEFINITIONS.—For purposes of subsection (a)— 
"(1) QUALIFIED REVOCABLE TRUST.—The term 'qualified rev-
ocable trust' means any trust (or portion thereof) which was 
treated under section 676 as owned by the decedent of the 
estate referred to in subsection (a) by reason of a power in 
the grantor (determined without regard to section 672(e)). 
"(2) APPLICABLE DATE.—The term 'applicable date' means— 
"(A) if no return of tax imposed by chapter 11 is 
required to be filed, the date which is 2 years after the 
date of the decedent's death, and 
"(B) if such a return is required to be filed, the date 
which is 6 months after the date of the final determination 
of the liability for tax imposed by chapter 11. 
"(c) ELECTION.—The election under subsection (a) shall be made 
not later than the time prescribed for filing the return of tax 
imposed by this chapter for the first taxable year of the estate 
(determined with regard to extensions) and, once made, shall be 
irrevocable.". 
(b) 
COMPARABLE 
TREATMENT 
UNDER 
GENERATION-SKIPPING 
TAX.—Paragraph (1) of section 2652(b) is amended by adding at 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1041 
the end the following new sentence: "Such term shall not include 
any trust during any period the trust is treated as part of an 
estate under section 646.". 
(c) CLERICAL AMENDMENT.—^The table of sections for such sub-
part A is amended by adding at the end the following new item: 
"Sec. 646. Certain revocable trusts treated as part of estate.". 
(d) EFFECTIVE DATE.—The amendments made by this section 
26 use 646 note. 
shall apply with respect to estates of decedents dying after the 
date of the enactment of this Act. 
SEC. 1306. DISTRIBUTIONS DURING FIRST 65 DAYS OF TAXABLE YEAR 
OF ESTATE. 
(a) IN GENERAL.—Subsection (b) of section 663 (relating to 
distributions in first 65 days of taxable year) is amended by insert-
ing "an estate or" before "a trust" each place it appears. 
(b) CONFORMING AMENDMENT.—Paragraph (2) of section 663(b) 
is amended by striking "the fiduciary of such trust" and inserting 
"the executor of such estate or the fiduciary of such trust (as 
the case may be)". 
(c) EFFECTIVE DATE.—The amendments made by this section 26 use 663 note, 
shall apply to taxable years beginning after the date of the enact-
ment of this Act. 
SEC. 1307. SEPARATE SHARE RULES AVAILABLE TO ESTATES. 
(a) IN GENERAL.—Subsection (c) of section 663 (relating to 
separate shares treated as separate trusts) is amended— 
(1) by inserting before the last sentence the following new 
sentence: "Rules similar to the rules of the preceding provisions 
of this subsection shall apply to treat substantially separate 
and independent shares of different beneficiaries in an estate 
having more than 1 beneficiary as separate estates.", and 
(2) by inserting "or estates" after "trusts" in the last sen-
tence. 
(b) CONFORMING AMENDMENT.—The subsection heading of sec-
tion 663(c) is amended by inserting "ESTATES OR" before "TRUSTS". 
(c) EFFECTIVE DATE.—The amendments made by this section 26 USC 663 note, 
shall apply to estates of decedents dying after the date of the 
enactment of this Act. 
SEC. 1308. EXECUTOR OF ESTATE AND BENEFICIARIES TREATED AS 
RELATED PERSONS FOR DISALLOWANCE OF LOSSES, 
ETC. 
(a) DISALLOWANCE OF LOSSES.—Subsection (b) of section 267 
(relating to losses, expenses, and interest with respect to trans-
actions between related taxpayers) is amended by striking "or" 
at the end of paragraph (11), by striking the period at the end 
of paragraph (12) and inserting "; or", and by adding at the end 
the following new paragraph: 
"(13) Except in the case of a sale or exchange in satisfaction 
of a peciiniary bequest, an executor of an estate and a bene-
ficiary of such estate.". 
(b) ORDINARY INCOME FROM GAIN FROM SALE OF DEPRECIABLE 
PROPERTY.—Subsection (b) of section 1239 is amended by striking 
the period at the end of paragraph (2) and inserting ", and" and 
by adding at the end the following new paragraph: 
I l l STAT. 1042 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(3) except in the case of a sale or exchange in satisfaction 
of a pecuniary bequest, an executor of an estate £ind a bene-
ficiary of such estate.". 
26 use 267 note. 
(c) EFFECTIVE DATE.—The amendments made by this section 
shall apply to taxable years beginning after the date of the enact-
ment of this Act. 
SEC. 1309. TREATMENT OF FUNERAL TRUSTS. 
(a) IN GENERAL.—Subpart F of part I of subchapter J of chapter 
1 is amended by adding at the end the following new section: 
"SEC. 
685. 
TREATMENT 
OF 
FUNERAL 
TRUSTS. 
"(a) IN GENERAL.—In the case of a qualified funeral trust— 
"(1) subparts B, C, D, and E shall not apply, and 
"(2) no deduction shall be allowed by section 642(b). 
"(b) QUALIFIED FUNERAL TRUST.—For purposes of this sub-
section, the term 'qualified funeral trust' means any trust (other 
than a foreign trust) if— 
"(1) the trust arises as a result of a contract with a person 
engaged in the trade or business of providing funeral or burial 
services or property necessary to provide such services, 
"(2) the sole purpose of the trust is to hold, invest, and 
reinvest funds in the trust and to use such funds solely to 
make payments for such services or property for the benefit 
of the beneficiaries of the trust, 
"(3) the only beneficiaries of such trust are individuals 
with respect to whom such services or property are to be 
provided at their death under contracts described in paragraph 
(1), 
"(4) the only contributions to the trust are contributions 
by or for the benefit of such beneficiaries, 
"(5) the trustee elects the application of this subsection, 
and 
"(6) the trust would (but for the election described in para-
graph (5)) be treated as owned under subpart E by the pur-
chasers of the contracts described in paragraph (1). 
"(c) DOLLAR LIMITATION ON CONTRIBUTIONS.— 
"(1) IN GENERAL.—The term 'qualified funeral trust' shall 
not include any trust which accepts aggregate contributions 
by or for the benefit of an individual in excess of $7,000. 
"(2) RELATED TRUSTS.—For purposes of paragraph (1), all 
trusts having trustees which are related persons shall be treat-
ed as 1 trust. For purposes of the preceding sentence, persons 
are related if— 
"(A) the relationship between such persons is described 
in section 267 or 707(b), 
"(B) such persons are treated as a single employer 
under subsection (a) or (b) of section 52, or 
"(C) the Secretary determines that treating such per-
sons as related is necessary to prevent avoidance of the 
purposes of this section. 
"(3) INFLATION ADJUSTMENT.—In the case of any contract 
referred to in subsection (b)(1) which is entered into during 
any calendar year after 1998, the dollar amount referred to 
paragraph (1) shall be increased by an amount equal to— 
"(A) such dollar amount, multiplied by 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1043 
"(B) the cost-of-living adjustment determined under 
section 1(f)(3) for such calendar year, by substituting 'cal-
endar year 1997' for 'calendar year 1992' in subparagraph 
(B) thereof. 
If any dollar amount after being increased under the preceding 
sentence is not a multiple of $100, such dollar amount shall 
be rounded to the nearest multiple of $100. 
"(d) APPLICATION OF RATE SCHEDULE.—Section 1(e) shall be 
applied to each qualified funeral trust by treating each beneficiary's 
interest in each such trust as a separate trust. 
"(e) TREATMENT OF AMOUNTS REFUNDED TO PURCHASER ON 
CANCELLATION.—No gain or loss shall be recognized to a purchaser 
of a contract described in subsection (b)(1) by reason of any payment 
fi-om such trust to such purchaser by reason of cancellation of 
such contract. If £iny payment referred to in the preceding sentence 
consists of property other than money, the basis of such property 
in the hands of such purchaser shall be the same as the trust's 
basis in such property immediately before the payment. 
"(f) SIMPLIFIED REPORTING.—The Secretary may prescribe rules 
for simplified reporting of all trusts having a single trustee.". 
(b) CLERICAL AMENDMENT.—The table of sections for subpart 
F of part I of subchapter J of chapter 1 is amended by adding 
at the end the following new item: 
"Sec. 685. Treatment of funeral trusts.". 
(c) EFFECTIVE DATE.—The amendments made by this section 
26 usc 685 note. 
shall apply to taxable years ending after the date of the enactment 
of this Act. 
SEC. 1310. ADJUSTMENTS FOR GIFTS WITHIN 3 YEARS OF DECEDENT'S 
DEATH. 
(a) GENERAL RULE.—Section 2035 is amended to read as follows: 
"SEC 2035. ADJUSTMENTS FOR CERTAIN GIFTS MADE WITHIN 3 YEARS 
OF DECEDENTS DEATH. 
"(a) INCLUSION OF CERTAIN PROPERTY IN GROSS ESTATE.—If— 
"(1) the decedent made a transfer (by trust or otherwise) 
of an interest in any property, or relinquished a power with 
respect to any property, during the 3-year period ending on 
the date of the decedent's death, and 
"(2) the value of such property (or an interest therein) 
would have been included in the decedent's gross estate under 
section 2036, 2037, 2038, or 2042 if such transferred interest 
or relinquished power had been retained by the decedent on 
the date of his death, 
the value of the gross estate shall include the value of any property 
(or interest therein) which would have been so included. 
"(b) INCLUSION OF GIFT TAX ON GIFTS MADE DURING 3 YEARS 
BEFORE DECEDENT'S DEATH.—The amount of the gross estate (deter-
mined without regard to this subsection) shall be increased by 
the amount of any t£ix paid under chapter 12 by the decedent 
or his estate on any gift made by the decedent or his spouse 
during the 3-year period ending on the date of the decedent's 
death. 
"(c) OTHER RULES RELATING TO TRANSFERS WITHIN 3 YEARS 
OF DEATH.— 
"(1) IN GENERAL.—For purposes of— 
Ill STAT. 1044 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(A) section 303(b) (relating to distributions in redemp-
tion of stock to pay death taxes), 
"(B) section 2032A (relating to special valuation of 
certain farms, etc., real property), and 
"(C) subchapter C of chapter 64 (relating to lien for 
taxes); 
the value of the gross estate shall include the value of all 
property to the extent of any interest therein of which the 
decedent has at any time made a transfer, by trust or otherwise, 
during the 3-year period ending on the date of the decedent's 
death. 
"(2) COORDINATION WITH SECTION eiee.—An estate shall 
be treated as meeting the 35 percent of adjusted gross estate 
requirement of section 6166(a)(1) only if the estate meets such 
requirement both with and without the application of p£iragraph 
(1). 
"(3) MARITAL AND SMALL TRANSFERS.—Paragraph (1) shall 
not apply to any transfer (other than a transfer with respect 
to a life insurance policy) made during a calendar year to 
any donee if the decedent was not required by section 6019 
(other than by reason of section 6019(2)) to file £uiy gift tax 
return for such year with respect to transfers to such donee. 
"(d) EXCEPTION.—Subsection (a) shall not apply to any bona 
fide sale for an adequate and fiiU consideration in money or money's 
worth. 
"(e) TREATMENT OF CERTAIN TRANSFERS FROM REVOCABLE 
TRUSTS.—For purposes of this section and section 2038, any transfer 
from any portion of a trust during any period that such portion 
was treated under section 676 as owned by the decedent by reason 
of a power in the grantor (determined without regard to section 
672(e)) shall be treated as a transfer made directly by the 
decedent.". 
(b) CLERICAL AMENDMENT.—The table of sections for part III 
of subchapter A of chapter 11 is amended by striking "gifts" in 
the item relating to section 2035 and inserting "certain gifts". 
26 use 2035 
(c) EFFECTIVE DATE.—^The amendments made by this section 
note. 
shall apply to the estates of decedents dying after the date of 
the enactment of this Act. 
SEC. 1311. CLARIFICATION OF TREATMENT OF SURVIVOR ANNUITIES 
UNDER QUALIFIED TERMINABLE INTEREST RULES. 
(a) IN GENERAL.—Subparagraph (C) of section 2056(b)(7) is 
amended by inserting "(or, in the case of an interest in an euinuity 
arising under the community property laws of a State, included 
in the gross estate of the decedent under section 2033)" after 
"section 2039". 
26 use 2056 
(b) EFFECTIVE DATE.—The amendment made by this section 
note. 
shall apply to estates of decedents dying after the date of the 
enactment of this Act. 
SEC. 1312. TREATMENT UNDER QUALIFIED DOMESTIC TRUST RULES 
OF FORMS OF OWNERSHIP WfflCH ARE NOT TRUSTS. 
(a) IN GENERAL.—Subsection (c) of section 2056A (defining 
qualified domestic trust) is amended by adding at the end the 
allowing new paragraph: 
"(3) TRUST.—To the extent provided in regulations pre-
scribed by the Secretary, the term 'trust' includes other arrange-
ments which have subst£intially the same effect as a trust.". 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1045 
(b) EFFECTIVE DATE.—The amendment made by this section 
shall apply to estates of decedents dying after the date of the 
enactment of this Act. 
SEC. 1313. OPPORTUNITY TO CORRECT CERTAIN FAILURES UNDER 
SECTION 2032A. 
(a) GENERAL RULE.—Paragraph (3) of section 2032A(d) (relating 
to modification of election and agreement to be permitted) is amend-
ed to read as follows: 
"(3) MODIFICATION OF ELECTION AND AGREEMENT TO BE 
PERMITTED.—The Secretary shall prescribe procedures which 
provide that in any case in which the executor makes an 
election under paragraph (1) (and submits the agreement 
referred to in paragraph (2)) within the time prescribed there-
for, but— 
"(A) the notice of election, as filed, does not contain 
all required information, or 
"(B) signatures of 1 or more persons required to enter 
into the agreement described in paragraph (2) are not 
included on the agreement as filed, or the agreement does 
not contain all required information, 
the executor will have a reasonable period of time (not exceed-
ing 90 days) after notification of such failures to provide such 
information or signatures.". 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to the estates of decedents dying after the date of 
the enactment of this Act. 
SEC. 1314. AUTHORITY TO WAIVE REQUIREMENT OF UNITED STATES 
TRUSTEE FOR QUALIFIED DOMESTIC TRUSTS. 
(a) IN GENERAL.—Subparagraph (A) of section 2056A(a)(l) is 
amended by inserting "except as provided in regulations prescribed 
by the Secretary," before "requires". 
(b) EFFECTIVE DATE.—The amendment made by this section 
shall apply to estates of decedents dying after the date of the 
enactment of this Act. 
26 use 2056A 
note. 
Regulations. 
26 use 2032A 
note. 
26 use 2056A 
note. 
TITLE 
XIV~SIMPLIFICATION 
PROVI-
SIONS RELATING TO EXCISE TAXES, 
TAX-EXEMPT 
BONDS, AND OTHER 
MATTERS 
Subtitle A—Excise Tax Simplification 
PART 
I—EXCISE 
TAXES 
ON 
HEAVY 
TRUCKS 
AND LUXURY 
CARS 
SEC. 1401. INCREASE IN DE MINIMIS LIMIT FOR AFTER-MARKET ALTER-
ATIONS FOR HEAVY TRUCKS AND LUXURY CARS. 
(a) IN GENERAL.—Sections 4003(a)(3)(C) and 4051(b)(2)(B) 
(relating to exceptions) are each amended by striking "$200" and 
inserting "$1,000''. 
I l l STAT. 1046 
PUBLIC LAW 105-34—AUG. 5, 1997 
26 use 4003 
(b) EFFECTIVE DATE.—The amendments made by subsection 
"ot^- 
(a) shall apply to installations on vehicles sold after the date of 
the enactment of this Act. 
SEC. 1402. CREDIT FOR TIRE TAX IN LIEU OF EXCLUSION OF VALUE 
OF TIRES IN COMPUTING PRICE. 
(a) IN GENERAL.—Subsection (e) of section 4051 is amended 
to read as follows: 
"(e) CREDIT AGAINST TAX FOR TIRE TAX.—If— 
"(1) tires are sold on or in connection with the sale of 
any article, and 
"(2) tax is imposed by this subchapter on the sale of such 
tires, 
there shall be allowed as a credit against the tax imposed by 
this subchapter an amount equal to the tax (if any) imposed by 
section 4071 on such tires.". 
(b) CONFORMING AMENDMENT.—Subparagraph (B) of section 
4052(b)(1) is amended by striking clause (iii), by adding "and" 
at the end of clause (ii), and by redesignating clause (iv) as clause 
(iii). 
26 use 4051 
(c) EFFECTIVE DATE.—The amendments made by this section 
note. 
shall take effect on January 1, 1998. 
PART II—PROVISIONS RELATED TO DISTILLED 
SPIRITS, WINES, AND BEER 
SEC. 1411. CREDIT OR REFUND FOR IMPORTED BOTTLED DISTILLED 
SPIRITS RETURNED TO DISTILLED SPIRITS PLANT. 
(a) IN GENERAL.—Section 5008(c)(1) (relating to distilled spirits 
returned to bonded premises) is amended by striking "withdrawn 
from bonded premises on pa3mient or determination of tax" and 
inserting "on which tax has been determined or psdd". 
26 use 5008 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
note. 
shall take effect on the 1st day of the 1st calendar quarter that 
begins at least 180 days after the date of the enactment of this 
Act. 
SEC. 1412. AUTHORITY TO CANCEL OR CREDIT EXPORT BONDS WITH-
OUT SUBMISSION OF RECORDS. 
(a) IN GENERAL.—Section 5175(c) (relating to cancellation of 
credit of export bonds) is amended by striking "on the submission 
of and all that follows and inserting "if there is such proof of 
exportation as the Secretary may by regulations require.". 
26 use 5175 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
note. 
shall take effect on the 1st day of the 1st calendar quarter that 
begins at least 180 days after the date of the enactment of this 
Act. 
SEC. 1413. REPEAL OF REQUIRED MAINTENANCE OF RECORDS ON 
PREMISES OF DISTILLED SPIRITS PLANT. 
(a) IN GENERAL.—Section 5207(c) (relating to preservation and 
inspection) is amended by striking "shall be kept on the premises 
where the operations covered by the record are carried on and". 
26 use 5207 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
note. 
shall take effect on the 1st day of the 1st calendar quarter that 
begins at least 180 days after the date of the enactment of this 
Act. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1047 
SEC. 1414. FERMENTED MATERIAL FROM ANY BREWERY MAY BE 
RECEIVED AT A DISTILLED SPIRITS PLANT. 
(a) IN GENERAL.—Section 5222(b)(2) (relating to receipt) is 
amended to read as follows: 
"(2) beer conveyed without payment of tax from brewery 
premises, beer which has been lawfully removed from brewery 
premises upon determination of taix, or". 
(b) CLARIFICATION OF AUTHORITY TO PERMIT REMOVAL OF BEER 
WITHOUT PAYMENT OF TAX FOR USE AS DISTILLING MATERIAL.— 
Section 5053 (relating to exemptions) is amended by redesignating 
subsection (f) as subsection (i) and by inserting after subsection 
(e) the following new subsection: 
"(f) REMOVAL FOR USE AS DISTILLING MATERIAL.—Subject to 
such regulations as the Secretary may prescribe, beer may be 
removed from a brewery without payment of tax to any distilled 
spirits plant for use as distilling material.". 
(c) CLARIFICATION OF REFUND AND CREDIT OF TAX.—Section 
5056 (relating to refund and credit of tax, or relief from liability) 
is amended— 
(1) by redesignating subsection (c) as subsection (d) and 
by inserting after subsection (b) the following new subsection: 
"(c) BEER RECEIVED AT A DISTILLED SPIRITS PLANT.—Any tax 
paid by any brewer on beer produced in the United States may 
be refunded or credited to the brewer, without interest, or if the 
teix has not been paid, the brewer may be relieved of liability 
therefor, under regulations as the Secretary may prescribe, if such 
beer is received on the bonded premises of a distilled spirits plant 
pursuant to the provisions of section 5222(b)(2), for use in the 
production of distilled spirits.", and 
(2) by striking "or rendering unmerchantable" in subsection 
(d) 
(as 
so 
redesignated) 
and 
inserting 
"rendering 
unmerchantable, or receipt on the bonded premises of a distilled 
spirits plant". 
(d) EFFECTIVE DATE.—The amendments made by this section 
26 use 5053 
shall take effect on the 1st day of the 1st calendar quarter that note. 
begins at least 180 days after the date of the enactment of this 
Act. 
S E C 1415. REPEAL OF REQUIREMENT FOR WHOLESALE DEALERS IN 
LIQUORS TO POST SIGN. 
(a) IN GENERAL.—Section 5115 (relating to sign required on 
premises) is hereby repealed. 
(b) CONFORMING AMENDMENTS.— 
(1) Section 5681(a) is amended by striking ", and every 
wholesale dealer in liquors," and by striking "section 5115(a) 
or . 
(2) Section 5681(c) is amended— 
(A) by striking "or wholesale liquor establishment, on 
which no sign required by section 5115(a) or" and inserting 
"on which no sign required by", and 
(B) by striking "or wholesale liquor establishment, or 
who" and inserting "or who". 
(3) The table of sections for subpart D of part II of sub-
chapter A of chapter 51 is amended by striking the item relating 
to section 5115. 
(c) EFFECTIVE DATE.—The amendments made by this section 26 use 5681 
shall take effect on the date of the enactment of this Act. 
note. 
I l l STAT. 1048 
PUBLIC LAW 105-34—AUG. 5, 1997 
SEC. 1416. REFUND OF TAX TO WINE RETURNED TO BOND NOT LIMITED 
TO UNMERCHANTABLE WINE. 
(a) IN GENERAL.—Section 5044(a) (relating to refund of tax 
on 
unmerchantable 
wine) 
is 
amended 
by 
striking 
"as 
unmerchantable". 
(b) CONFORMING AMENDMENTS.— 
(1) Section 5361 is amended by striking "unmerchantable". 
(2) The section heading for section 5044 is amended by 
striking "UNMERCHANTABLE". 
(3) The item relating to section 5044 in the table of sections 
for subpart C of part I of subchapter A of chapter 51 is amended 
by striking "unmerchantable". 
26 use 5044 
(c) EFFECTIVE DATE.—The amendments made by this section 
J^ote. 
shall take effect on the 1st day of the 1st calendar quarter that 
begins at least 180 days after the date of the enactment of this 
Act. 
SEC. 1417. USE OF ADDITIONAL AMELIORATING MATERIAL IN CERTAIN 
WINES. 
(a) IN GENERAL.—Section 5384(b)(2)(D) (relating to ameliorated 
fruit and berry wines) is amended by striking "loganberries, cur-
rants, or gooseberries," and inserting "any fruit or berry with a 
natural fixed acid of 20 parts per thousand or more (before any 
correction of such fruit or berry)". 
26 use 5384 
(b) EFFECTIVE DATE.—The amendment made by this section 
note. 
shall take effect on the 1st day of the 1st calendar quarter that 
begins at least 180 days after the date of the enactment of this 
Act. 
SEC. 1418. DOMESTICALLY PRODUCED BEER MAY BE WITHDRAWN 
FREE OF TAX FOR USE OF FOREIGN EMBASSIES, LEGA-
TIONS, ETC. 
(a) IN GENERAL.—Section 5053 (relating to exemptions), as 
amended by section 1414(b), is amended by inserting after sub-
section (f) the following new subsection: 
"(g) REMOVALS FOR USE OF FOREIGN EMBASSIES, LEGATIONS, 
E T C — 
"(1) IN GENERAL.—Subject to such regulations as the Sec-
retary may prescribe— 
"(A) beer may be withdrawn from the brewery without 
pajmtient of tax for transfer to any customs bonded ware-
house for entry pending withdrawal therefrom as provided 
in subparagraph (B), and 
"(B) beer entered into any customs bonded warehouse 
under subparagraph (A) may be withdrawn for consump-
tion in the United States by, and for the official and family 
use of, such foreign governments, organizations, and 
individuals as are entitled to withdraw imported beer from 
such warehouses free of tax. 
Beer transferred to any customs bonded warehouse under 
subparagraph (A) shall be entered, stored, and accounted for 
in such warehouse under such regulations and bonds as the 
Secretary may prescribe, and may be withdrawn therefrom 
by such governments, organizations, and individuals free of 
tax under the same conditions and procedures as imported 
beer. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1049 
"(2) OTHER RULES TO APPLY.—Rules similar to the rules 
of paragraphs (2) and (3) of section 5362(e) shall apply for 
purposes of this subsection.", 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 26 use 5053 
shall take effect on the 1st day of the 1st calendar quarter that note. 
begins at least 180 days after the date of the enactment of this 
Act. 
SEC. 1419. BEER MAY BE WITHDRAWN FREE OF TAX FOR DESTRUC-
TION. 
(a) IN GENERAL.—Section 5053 (relating to exemptions), as 
amended by section 1418(a), is amended by inserting after sub-
section (g) the following new subsection: 
"(h) REMOVALS FOR DESTRUCTION.—Subject to such regulations 
as the Secretary may prescribe, beer may be removed from the 
brewery without pa5anent of tax for destruction.". 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 26USC5053 
shall take effect on the 1st day of the 1st calendar quarter that note, 
begins at least 180 days after the date of the enactment of this 
Act. 
SEC. 1420. AUTHORITY TO ALLOW DRAWBACK ON EXPORTED BEER 
WITHOUT SUBMISSION OF RECORDS. 
(a) IN GENERAL.—The first sentence of section 5055 (relating 
to drawback of tax on beer) is amended by striking "found to 
have been paid" and all that follows and inserting "paid on such 
beer if there is such proof of exportation as the Secretary may 
by regulations require.". 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 26 use 5055 
shall take effect on the 1st day of the 1st calendar quarter that 
"o^. 
begins at least 180 days after the date of the enactment of this 
Act. 
SEC. 1421. TRANSFER TO BREWERY OF BEER IMPORTED IN BULK WITH-
OUT PAYMENT OF TAX. 
(a) IN GENERAL.—Part II of subchapter G of chapter 51 is 
amended by adding at the end the following new section: 
"SEC. 5418. BEER IMPORTED IN BULK. 
"Beer imported or brought into the United States in bulk 
containers may, under such regulations as the Secretary may pre-
scribe, be withdrawn from customs custody and transferred in such 
bulk containers to the premises of a brewery without payment 
of the internal revenue tax imposed on such beer. The proprietor 
of a brewery to which such beer is transferred shall become liable 
for the tax on the beer withdrawn from customs custody under 
this section upon release of the beer from customs custody, and 
the importer, or the person bringing such beer into the United 
States, shall thereupon be relieved of the liability for such tax.". 
(b) CLERICAL AMENDMENT.—The table of sections for such part 
II is amended by adding at the end the following new item: 
"Sec. 5418. Beer imported in bulk.". 
(c) EFFECTIVE DATE.—The amendments made by this section 26 use 5418 
shall take effect on the 1st day of the 1st calendar quarter that 
"o^. 
begins at least 180 days after the date of the enactment of this 
Act. 
Ill STAT. 1050 
PUBLIC LAW 105-34—AUG. 5, 1997 
SEC. 1422. TRANSFER TO BONDED WINE CELLARS OF WINE IMPORTED 
IN BULK WITHOUT PAYMENT OF TAX. 
(a) IN GENERAL.—Part II of subchapter F of chapter 51 is 
amended by inserting after section 5363 the following new section: 
"SEC. 5364. WINE IMPORTED IN BULK 
**Wine imported or brought into the United States in bulk 
containers may, under such regulations as the Secretary may pre-
scribe, be withdrawn from customs custody and transferred in such 
bulk containers to the premises of a bonded wine cellar without 
payment of the internal revenue tax imposed on such wine. The 
proprietor of a bonded wine cellar to which such wine is transferred 
shall become liable for the tax on the wine withdrawn from customs 
custody under this section upon release of the wine from customs 
custody, and the importer, or the person bringing such wine into 
the United States, shall thereupon be relieved of the liability for 
such tax.". 
(b) CLERICAL AMENDMENT.—The table of sections for such part 
II is amended by inserting after the item relating to section 5363 
the following new item: 
"Sec. 5364. Wine imported in bulk.". 
26 use 5364 
(c) EFFECTIVE DATE.—The amendments made by this section 
note. 
shall take effect on the 1st day of the 1st calendar quarter that 
begins at least 180 days after the date of the enactment of this 
Act. 
PART III—OTHER EXCISE TAX PROVISIONS 
SEC. 1431. AUTHORITY TO GRANT EXEMPTIONS FROM REGISTRATION 
REQUIREMENTS. 
(a) IN GENERAL.—Section 4222(b)(2) (relating to export) is 
amended— 
(1) by striking "in the case of any sale or resale for export,", 
and 
(2) by striking "EXPORT" and inserting "UNDER REGULA-
TIONS". 
26 use 4222 
(b) EFFECTIVE DATE.—The amendments made by subsection 
note. 
(a) shall take effect on the date of the enactment of this Act. 
SEC. 1432. REPEAL OF EXPIRED PROVISIONS. 
(a) PIGGY-BACK TRAILERS.—Section 4051 (relating to imposition 
of tax on heavy trucks and trailers sold at retail) is amended 
by striking subsection (d) and by redesignating subsection (e) as 
subsection (d). 
(b) DEEP SEABED MINING.— 
(1) IN GENERAL.—Subchapter F of chapter 36 (relating to 
tax on removal of hard mineral resources from deep seabed) 
is hereby repealed. 
(2) CONFORMING AMENDMENT.—The table of subchapters 
for chapter 36 is amended by striking the item relating to 
subchapter F. 
(c) OZONE-DEPLETING CHEMICALS.— 
(1) Paragraph (1) of section 4681(b) is amended by striking 
subparagraphs (B) and (C) and inserting the following new 
subparagraph: 
"(B) BASE TAX AMOUNT.—The base tax amount for pur-
poses of subparagraph (A) with respect to any sale or 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1051 
use during any calendar year after 1995 shall be $5.35 
increased by 45 cents for each year after 1995.". 
(2) Subsection (g) of section 4682 is amended to read as 
follows: 
"(g) 
CHEMICALS USED AS PROPELLANTS IN 
METERED-DOSE 
INHALERS.— 
"(1) EXEMPTION FROM TAX.— 
"(A) IN GENERAL.—No tax shall be imposed by section 
4681 on— 
"(i) any use of any substance as a propellant in 
metered-dose inhalers, or 
"(ii) any qualified sale by the manufacturer, pro-
ducer, or importer of any substance. 
"(B) QUALIFIED SALE.—For purposes of subparagraph 
(A), the term 'qualified sale' means any sale by the manu-
facturer, producer, or importer of any substance— 
"(i) for use by the purchaser as a propellant in 
metered dose inhalers, or 
"(ii) for resale by the purchaser to a 2d purchaser 
for such use by the 2d purchaser. 
The preceding sentence shall apply only if the manufac- Applicability, 
turer, producer, and importer, and the 1st and 2d pur-
chasers (if anv) meet such registration requirements as 
may be prescrioed by the Secretary. 
"(2) OVERPAYMENTS.—If any substance on which t£ix was 
f
)aid under this subchapter is used by any person as a propel-
ant in metered-dose inhalers, credit or refund without interest 
shall be allowed to such person in an amount equal to the 
tax so paid. Amounts payable under the preceding sentence 
with respect to uses during the taxable year shall be treated 
as described in section 34(a) for such year unless claim thereof 
has been timely filed under this paragraph.". 
SEC. 1433. SIMPLIFICATION OF IMPOSITION OF EXCISE TAX ON 
ARROWS. 
(a) IN GENERAL.—Subsection (b) of section 4161 (relating to 
imposition of tax) is amended to read as follows: 
"(b) Bows A
N
D ARROWS, ETC.— 
"(1) Bows.— 
"(A) IN GENERAL.—There is hereby imposed on the 
sale by the manufacturer, producer, or importer of any 
bow which has a draw weight of 10 pounds or more, a 
tax equal to 11 percent of the price for which so sold. 
"(B) 
PARTS 
AND 
ACCESSORIES.—There 
is 
hereby 
imposed upon the sale by the msuiufacturer, producer, or 
importer— 
"(i) of any part of accessory suitable for inclusion 
in or attachment to a bow described in subparagraph 
(A), and 
"(ii) of any quiver suitable for use with arrows 
described in paragraph (2), 
a tax equivalent to 11 percent of the price for which so 
sold. 
"(2) ARROWS.—There is hereby imposed on the sale by 
the manufacturer, producer, or importer of any shaft, point, 
nock, or vane of a type used in the manufacture of any arrow 
which after its assembly— 
Ill STAT. 1052 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(A) measures 18 inches overall or more in length, 
or 
"(B) measures less than 18 inches overall in length 
but is suitable for use with a bow described in paragraph 
(IXA), 
a tax equal to 12,4 percent of the price for which so sold. 
"(3) COORDINATION WITH SUBSECTION (a).—NO tax shall 
be imposed under this subsection with respect to any article 
taxable under subsection (a).". 
26 use 4161 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
"lote. 
shall apply to articles sold by the manufacturer, producer, or 
importer after September 30, 1997. 
SEC. 1434. MODIFICATIONS TO RETAIL TAX ON HEAVY TRUCKS. 
(a) CERTAIN REPAIRS AND MODIFICATIONS NOT TREATED AS 
MANUFACTURE.—Section 4052 is amended by redesignating the sub-
section defining a long-term lease as subsection (e) and by adding 
at the end the following new subsection: 
"(f) 
CERTAIN REPAIRS AND MODIFICATIONS NOT TREATED AS 
MANUFACTURE.— 
"(1) IN GENERAL.—An article described in section 4051(a)(1) 
shall not be treated as manufactured or produced solely by 
reason of repairs or modifications to the article (including any 
modification which changes the transportation function of the 
article or restores a wrecked article to a functionEd condition) 
if the cost of such repairs and modifications does not exceed 
75 percent of the retail price of a comparable new article. 
"(2) EXCEPTION.—Paragraph (1) shall not apply if the article 
(as repaired or modified) would, if new, be taxable under section 
4051 and the article when new was not taxable under this 
section or the corresponding provision of prior law.". 
(b) 
SIMPLIFICATION 
OF 
CERTIFICATION 
PROCEDURES 
WITH 
RESPECT TO SALES OF TAXABLE ARTICLES.— 
(1) REPEAL OF REGISTRATION REQUIREMENT.—Subsection (d) 
of section 4052 is amended by striking "rules of—" and all 
that follows through "shall appl)r" and inserting "rules of sub-
sections (c) £ind (d) of section 4216 (relating to partial payments) 
shall apply". 
(2) REQUIREMENT TO MODIFY REGULATIONS.—Section 4052 
is amended by adding at the end the following new subsection: 
"(g) REGULATIONS.—The Secretary shall prescribe regulations 
which permit, in lieu of any other certification, persons who are 
purchasing articles taxable under this subchapter for resale or 
leasing in a long-term lease to execute a statement (made under 
penalties of perjury) on the sale invoice that such sale is for resale. 
The Secretary shall not impose any registration requirement as 
a condition of using such procedure.". 
26 use 4052 
(c) EFFECTIVE DATE.—The amendments made by this section 
note. 
shall take effect on January 1,1998. 
SEC. 1435. SKYDIVING FLIGHTS EXEMPT FROM TAX ON TRANSPOR-
TATION OF PERSONS BY AIR. 
(a) IN GENERAL.—Section 4261 (relating to imposition of tax 
on transportation of persons by air), as previously amended by 
this Act, is amended by redesignating subsection (h) as subsection 
(i) and by inserting after subsection (g) the following new subsection: 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1053 
"(h) EXEMPTION FOR SKYDIVING USES.—No tax shall be imposed 
by this section or section 4271 on any air transportation exclusively 
for the purpose of skydiving.". 
(b) TRANSPORTATION TREATED AS NONCOMMERCIAL AVIATION.— 
The last sentence of section 4041(c)(2) is amended by inserting 
before the period "or by reason of section 4261(h)". 
(c) EFFECTIVE DATES.— 
(1) SUBSECTION (a).—The amendment made by subsection 26USC4261 
(a) shall apply to amounts paid after September 30, 1997. note. 
(2) SUBSECTION (b).—The amendment made by subsection 
26 use 4041 
(b) shall take effect on October 1, 1997. 
note. 
SEC. 1436. ALLOWANCE OR CREDIT OF REFUND FOR TAX-PAID AVIA-
TION FUEL PURCHASED BY REGISTERED PRODUCER OF 
AVIATION FUEL. 
(a) IN GENERAL.—Section 4091 (relating to aviation fuel) is 
amended by adding at the end the following new subsection: 
"(d) REFUND OF TAX-PAID AVIATION FUEL TO REGISTERED PRO-
DUCER OF FUEL.—If— 
"(1) a producer of aviation fuel is registered under section 
4101, and 
"(2) such producer establishes to the satisfaction of the 
Secretary that a prior tax was paid (and not credited or 
refunded) on aviation fuel held by such producer, 
then an amount equal to the tax so paid shall be allowed as 
a refund (without interest) to such producer in the same manner 
as if it were an overpayment of tax imposed by this section.". 
(b) CONFORMING AMENDMENT.—The last sentence of section 
6416(d) is amended by inserting before the period "or to the tax 
imposed by section 4091 in the case of refunds described in section 
4091(d)". 
(c) EFFECTIVE DATE.—The amendments made by this section 26 use 4091 
shall apply to fuel acquired by the producer after September 30, note. 
1997. 
Subtitle B—Tax-Exempt Bond Provisions 
SEC. 1441. REPEAL OF $100,000 LIMITATION ON UNSPENT PROCEEDS 
UNDER 1-YEAR EXCEPTION FROM REBATE. 
Subclause (I) of section 148(f)(4)(B)(ii) (relating to additional 
period for certain bonds) is amended by striking "the lesser of 
5 percent of the proceeds of the issue or $100,000" and inserting 
"5 percent of the proceeds of the issue". 
SEC. 1442. EXCEPTION FROM REBATE FOR EARNINGS ON BONA FIDE 
DEBT SERVICE FUND UNDER CONSTRUCTION 
BOND 
RULES. 
Subparagraph (C) of section 148(f)(4) is amended by adding 
at the end the following new clause: 
"(xvii) TREATMENT OF BONA FIDE DEBT SERVICE 
FUNDS.—If the spending requirements of clause (ii) 
are met with respect to the available construction pro-
ceeds of a construction issue, then paragraph (2) shall 
not apply to earnings on a bona fide debt service fund 
for such issue.". 
I l l STAT. 1054 
PUBLIC LAW 105-34—AUG. 5, 1997 
SEC. 1443. REPEAL OF DEBT SERVICE-BASED LIMITATION ON INVEST-
MENT IN CERTAIN NONPURPOSE INVESTMENTS. 
Subsection (d) of section 148 (relating to special rules for reason-
ably required reserve or replacement fund) is amended by striking 
paragraph (3). 
SEC. 1444. REPEAL OF EXPIRED PROVISIONS. 
(a) Paragraph (2) of section 148(c) is amended by striking 
subparagraph (B) and by redesignating subparagraphs (C), (D), 
and (E) as subparagraphs (B), (C), and (D), respectively. 
(b) Paragraph (4) of section 148(f) is amended by striking 
subparagraph (E), 
26 use 148 note. SEC. 1445. EFFECTIVE DATE. 
The amendments made by this subtitle shall apply to bonds 
issued after the date of the enactment of this Act. 
Subtitle C—^Tax Court Procedures 
SEC, 1461. OVERPAYMENT DETERMINATIONS OF TAX COURT. 
(a) APPEAL OF ORDER.—Paragraph (2) of section 6512(b) (relat-
ing to jurisdiction to enforce) is amended by adding at the end 
the following new sentence: "An order of the Tax Court disposing 
of a motion under this p£iragraph 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.". 
(b) DENIAL OF JURISDICTION REGARDING CERTAIN CREDITS AND 
REDUCTIONS.—Subsection (b) of section 6512 (relating to overpay-
ment determined by Tax Court) is amended by adding at the 
end the following new paragraph: 
"(4) DENIAL OF JURISDICTION REGARDING CERTAIN CREDITS 
AND REDUCTIONS.—The Tax Court shall have no jurisdiction 
under this subsection to restrain or review any credit or reduc-
tion made by the Secretary under section 6402,". 
26 use 6512 
(c) EFFECTIVE DATE.—The amendments made by this section 
note. 
shall take effect on the date of the enactment of this Act. 
SEC. 1452. REDETERMINATION OF INTEREST PURSUANT TO MOTION. 
(a) IN GENERAL.—Subsection (c) of section 7481 (relating to 
jurisdiction over interest determinations) is amended to read as 
follows: 
"(c) JURISDICTION OVER INTEREST DETERMINATIONS.— 
"(1) IN GENERAL.—Notwithstanding subsection (a), if, 
within 1 year after the date the decision of the Tax Court 
becomes final under subsection (a) in a case to which this 
subsection applies, the taxpayer files a motion in the Tax 
Court for a redetermination of the amount of interest involved, 
then the Tax Court may reopen the case solely to determine 
whether the taxpayer has made an overpayment of such 
interest or the Secretary has made an underpayment of such 
interest and the amount thereof. 
"(2) CASES TO WHICH THIS SUBSECTION APPLIES.—This sub-
section shall apply where— 
"(A)(i) an assessment has been made by the Secretary 
imder section 6215 which includes interest as imposed 
by this title, and 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1055 
"(ii) the taxpayer has paid the entire amount of the 
deficiency plus interest claimed by the Secretary, and 
"(B) the Tax Court finds under section 6512(b) that 
the taxpayer has made an overpa3nnent. 
"(3) SPECIAL RULES.—If the Tax Court determines under 
this subsection that the taxpayer has made an overpayment 
of interest or that the Secretary has made an underpayment 
of interest, then that determination shall be treated under 
section 6512(b)(1) as a determination of £in overpayment of 
t£ix. AQ order of the Tax Court redetermining interest, when 
entered upon the records of the court, shall be reviewable 
in the same manner as a decision of the Tax Court.". 
(b) EFFECTIVE DATE.—The amendment made by this section 26 use 7481 
shall take effect on the date of the enactment of this Act. 
^°^-
SEC. 1453. APPLICATION OF NET WORTH REQUIREMENT FOR AWARDS 
OF LITIGATION COSTS. 
(a) IN GENERAL.—Paragraph (4) of section 7430(c) (defining 
prevailing party) is amended oy adding at the end thereof the 
following new subparagraph: 
"(D) SPECIAL RULES FOR APPLYING NET WORTH REQUIRE-
MENT.—In 
applying 
the 
requirements 
of 
section 
2412(d)(2)(B) of title 28, United States Code, for purposes 
of subparagraph (A)(iii) of this paragraph— 
"(i) the net worth limitation in clause (i) of such 
section shall apply to— 
"(I) an estate but shall be determined as of 
the date of the decedent's death, and 
"(II) a trust but shall be determined as of 
the last day of the taxable year involved in the 
proceeding, and 
"(ii) individuals filing a joint return shall be treat-
ed as separate individuals for purposes of clause (i) 
of such section.". 
(b) EFFECTIVE DATE.—The amendment made by this section 26 use 7430 
shall apply to proceedings commenced after the date of the enact- note. 
ment of this Act. 
SEC. 1454. PROCEEDINGS FOR DETERMINATION OF EMPLOYMENT STA-
TUS. 
(a) IN GENERAL.—Subchapter B of chapter 76 (relating to 
proceedings by taxpayers and third parties) is amended by 
redesignating section 7436 as section 7437 and by inserting after 
section 7435 the following new section: 
"SEC. 7436. PROCEEDINGS FOR DETERMINATION OF EMPLOYMENT 
STATUS. 
"(a) CREATION OF REMEDY.—If, in connection with an audit 
of any person, there is an actual controversy involving a determina-
tion by the Secretary as part of an examination that— 
"(1) one or more individuals performing services for such 
person are employees of such person for purposes of subtitle 
C, or 
"(2) such person is not entitled to the treatment under 
subsection (a) of section 530 of the Revenue Act of 1978 with 
respect to such an individual, 
upon the filing of an appropriate pleading, the Tax Court may 
determine whether such a determination by the Secretary is correct. 
I l l STAT. 1056 
PUBLIC LAW 105-34—AUG. 5, 1997 
Any such redetermination by the Tax Court shall have the force 
and effect of a decision of the Tax Court and shall be reviewable 
as such. 
"(b) LIMITATIONS.— 
"(1) PETITIONER.—A pleading may be filed under this sec-
tion only by the person for whom the services are performed. 
"(2) TIME FOR FILING ACTION.—If the Secretary sends by 
certified or registered mail notice to the petitioner of a deter-
mination by the Secretary described in subsection (a), no 
proceeding may be initiated under this section with respect 
to such determination unless the pleading is filed before the 
91st day after the date of such mailing. 
"(3) 
NO ADVERSE 
INFERENCE FROM TREATMENT WHILE 
ACTION IS PENDING.—If, during the pendency of any proceeding 
brought under this section, the petitioner changes his treatment 
for employment tax purposes of any individual whose employ-
ment status as an employee is involved in such proceeding 
(or of any individual holding a substantially similar position) 
to treatment as an employee, such change shall not be taken 
into account in the Tax Court's determination under this sec-
tion. 
"(c) SMALL CASE PROCEDURES.— 
"(1) IN GENERAL.—^At the option of the petitioner, concurred 
in by the Tax Court or a division thereof before the hearing 
of the case, proceedings under this section may (notwithstand-
ing the provisions of section 7453) be conducted subject to 
the rules of evidence, practice, and procedure applicable under 
section 7463 if the amount of employment taxes placed in 
dispute is $10,000 or less for each calendar quarter involved. 
"(2) FINALITY OF DECISIONS.—A decision entered in any 
proceeding conducted under this subsection shall not be 
reviewed in any other court and shall not be treated as a 
precedent for any other case not involving the same petitioner 
and the same determinations. 
"(3) CERTAIN RULES TO APPLY.—Rules similar to the rules 
of the last sentence of subsection (a), and subsections (c), (d), 
and (e), of section 7463 shall apply to proceedings conducted 
under this subsection. 
Applicability. 
"(d) SPECIAL RULES.— 
"(1) RESTRICTIONS ON ASSESSMENT AND COLLECTION PEND-
ING ACTION, ETC.—The principles of subsections (a), (b), (c), 
(d), and (f) of section 6213, section 6214(a), section 6215, section 
6503(a), section 6512, and section 7481 shall apply to proceed-
ings brought under this section in the same manner as if 
the Secretary's determination described in subsection (a) were 
a notice of deficiency. 
"(2) AWARDING OF COSTS AND CERTAIN FEES.—Section 7430 
shall apply to proceedings brought under this section. 
"(e) EMPLOYMENT TAX.—The term 'employment tax' means any 
tax imposed by subtitle C". 
(b) CONFORMING AMENDMENTS.— 
(1) Subsection (d) of section 6511 is amended by adding 
at the end the following new paragraph: 
"(7) SPECIAL PERIOD OF LIMITATION WITH RESPECT TO SELF-
EMPLOYMENT TAX IN CERTAIN CASES.—If— 
"(A) the claim for credit or refund relates to an overpay-
ment of the tax imposed by chapter 2 (relating to the 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1057 
tax on self-employment income) attributable to Tax Court 
determination in a proceeding under section 7436, and 
"(B) the allowance of a credit or refund of such overpay-
ment is otherwise prevented by the operation of any law 
or rule of law other than section 7122 (relating to com-
promises), 
such credit or refund may be allowed or made if claim therefor 
is filed on or before the last day of the second year after 
the calendar year in which such determination becomes final.". 
(2) Subsection (a) of section 7421 is amended by striking 
"and 7429(b)" and inserting "7429(b), and 7436". 
(3) Sections 7453 and 7481(b) are each amended by striking 
"section 7463" and inserting "section 7436(c) or 7463". 
(4) The table of sections for subchapter B of chapter 76 
is amended by striking the last item and inserting the following: 
"Sec. 7436. Proceedings for determination of employment status. 
"Sec. 7437. Cross references.". 
(c) EFFECTIVE DATE.—The amendments made by this section 26 use 6511 
shall take effect on the date of the enactment of this Act. 
^°^-
Subtitle D—Other Provisions 
SEC. 1461. EXTENSION OF DUE DATE OF FIRST QUARTER ESTIMATED 
TAX PAYMENT BY PRIVATE FOUNDATIONS. 
(a) IN GENERAL.—Paragraph (3) of section 6655(g) is amended 
by adding at the end the following new sentence: "In the case 
of a private foundation, subsection (c)(2) shall be applied by 
substituting 'May 15' for 'April 15'.". 
(b) EFFECTIVE DATE.-—The amendment made by subsection (a) 26 USC 6655 
shall apply for purposes of determining underpayments of estimated note. 
tax for taxable years beginning after the date of the enactment 
of this Act. 
SEC. 1462. CLARIFICATION OF AUTHORITY TO WITHHOLD PUERTO 
RICO INCOME TAXES FROM SALARIES OF FEDERAL 
EMPLOYEES. 
(a) IN GENERAL.—Subsection (c) of section 5517 of title 5, United 
States Code, is amended by striking "or territory or possession" 
and inserting ", territory, possession, or commonwealth". 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 5 use 5517 note. 
shall take effect on Jemuary 1, 1998. 
SEC. 1463. CERTAIN NOTICES DISREGARDED UNDER PROVISION 
INCREASING INTEREST RATE ON LARGE CORPORATE 
UNDERPAYMENTS. 
(a) GENERAL RULE.—Subparagraph (B) of section 6621(c)(2) 
(defining applicable date) is amended by adding at the end the 
following new clause: 
"(iii) EXCEPTION FOR LETTERS OR NOTICES INVOLV-
ING SMALL AMOUNTS.—For purposes of this paragraph, 
any letter or notice shall be disregarded if the amount 
of the deficiency or proposed deficiency (or the assess-
ment or proposed assessment) set forth in such letter 
or notice is not greater than $100,000 (determined 
by not taking into account any interest, penalties, or 
additions to tax).". 
39-194 O - 97 - 35 : QL 3 Part 1 
I l l STAT. 1058 
PUBLIC LAW 105-34—AUG. 5, 1997 
26 use 6621 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
^°^^- 
shall apply for purposes of determining interest for periods after 
December 31, 1997. 
TITLE XV—PENSIONS AND EMPLOYEE 
BENEFITS 
Subtitle A—Simplification 
SEC. 1501. MATCHING CONTRffiUTIONS OF SELF-EMPLOYED INDIVID-
UALS NOT TREATED AS ELECTIVE EMPLOYER CONTRIBU-
TIONS. 
(a) IN GENERAL.—Section 402(g) (relating to limitation on exclu-
sion for elective deferrals) is amended by adding at the end the 
following: 
"(9) 
MATCHING 
CONTRIBUTIONS ON 
BEHALF 
OF 
SELF-
EMPLOYED INDIVIDUALS NOT TREATED AS ELECTIVE EMPLOYER 
CONTRIBUTIONS.—Except as provided in section 401(k)(3)(D)(ii), 
any matching contribution described in section 401(m)(4)(A) 
which is made on behalf of a self-employed individual (as 
defined in section 401(c)) shall not be treated as an elective 
employer contribution under a qualified cash or deferred 
arrangement (as defined in section 401(k)) for purposes of this 
title.". 
(b) 
CONFORMING 
AMENDMENT 
FOR 
SIMPLE 
RETIREMENT 
ACCOUNTS.—Section 408(p) (relating to simple retirement accounts) 
is amended by adding at the end the following: 
"(8) 
MATCHING CONTRIBUTIONS ON 
BEHALF 
OF 
SELF-
EMPLOYED INDIVIDUALS NOT TREATED AS ELECTIVE EMPLOYER 
CONTRIBUTIONS.—Any matching contribution described in para-
graph (2)(A)(iii) which is made on behalf of a self-employed 
individual (as defined in section 401(c)) shall not be treated 
as an elective employer contribution to a simple retirement 
account for purposes of this title.". 
(c) EFFECTIVE DATES.— 
26 use 402 note. 
(1) ELECTIVE DEFERRALS.—The amendment made by sub-
section (a) shall apply to years beginning after December 31, 
1997. 
26 use 408 note. 
(2) SIMPLE RETIREMENT ACCOUNTS.—The amendment made 
by subsection (b) shall apply to years beginning after December 
31, 1996. 
SEC. 1502. MODIFICATION OF PROHIBITION OF ASSIGNMENT OR 
ALIENATION. 
(a) AMENDMENT TO ERISA.—Section 206(d) of the Employee 
Retirement Income Security Act of 1974 (29 U.S.C. 1056(d)) is 
amended by adding at the end the following: 
"(4) Paragraph (1) shall not apply to any offset of a participant's 
benefits provided under an employee pension benefit plan against 
an amount that the participant is ordered or required to pay to 
the plan if— 
"(A) the order or requirement to pay arises— 
"(i) under a judgment of conviction for a crime involving 
such plan, 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1059 
"(ii) under a civil judgment (including a consent order 
or decree) entered by a court in an action brought in 
connection with a violation (or alleged violation) of part 
4 of this subtitle, or 
"(iii) pursuant to a settlement agreement between the 
Secretary and the participant, or a settlement agreement 
between the Pension Benefit Guaranty Corporation and 
the participant, in connection with a violation (or alleged 
violation) of part 4 of this subtitle by a fiduciary or any 
other person, 
"(B) the judgment, order, decree, or settlement agreement 
expressly provides for the offset of all or part of the amount 
ordered or required to be paid to the plan against the partici-
pant's benefits provided under the plan, and 
"(C) in a case in which the survivor annuity requirements 
of section 205 apply with respect to distributions fi*om the 
plan to the participant, if the participant has a spouse at 
the time at which the offset is to be made— 
"(i) either— 
"(I) such spouse has consented in writing to such 
offset and such consent is witnessed by a notary public 
or representative of the plan (or it is established to 
the satisfaction of a plan representative that such con-
sent may not be obtained by reason of circumstances 
described in section 205(c)(2)(B)), or 
"(II) an election to waive the right of the spouse 
to a qualified joint and survivor annuity or a qualified 
preretirement survivor annuity is in effect in accord-
ance with the requirements of section 205(c), 
"(ii) such spouse is ordered or required in such judg-
ment, order, decree, or settlement to pay an amount to 
the plan in connection with a violation of part 4 of this 
subtitle, or 
"(iii) in such judgment, order, decree, or settlement, 
such spouse retains the right to receive the survivor annu-
ity under a qualified joint and survivor annuity provided 
pursuant to section 205(a)(1) and under a qualified pre-
retirement survivor annuity provided pursuant to section 
205(a)(2), determined in accordance with paragraph (5). 
A plan shall not be treated as failing to meet the requirements 
of section 205 solely by reason of an offset under this paragraph. 
"(5)(A) The survivor annuity described in paragraph (4)(C)(iii) 
shall be determined as if— 
"(i) the participant terminated employment on the date 
of the offset, 
"(ii) there was no offset, 
"(iii) the plan permitted commencement of benefits only 
on or after normal retirement age, 
"(iv) the plan provided only the minimum-required qualified 
joint and survivor annuity, and 
"(v) the amount of the qualified preretirement survivor 
annuity under the plan is equal to the amount of the survivor 
ainnuity payable under the minimum-required qualified joint 
and survivor annuity. 
"(B) For purposes of this paragraph, the term 'minimum-
required qualified joint and survivor annuity' means the qualified 
joint and survivor annuity which is the actuarial equivalent of 
I l l STAT. 1060 
PUBLIC LAW 105-34—AUG. 5, 1997 
the participant's accrued benefit (within the meaning of section 
3(23)) and under which the survivor annuity is 50 percent of the 
amount of the annuity which is payable during the joint hves 
of the participant and the spouse.". 
(b) AMENDMENT TO 1986 CODE.—Section 401(a)(13) (relating 
to assignment and alienation) is amended by adding at the end 
the following: 
"(C) 
SPECIAL 
RULE 
FOR 
CERTAIN 
JUDGMENTS 
AND 
SETTLEMENTS.—Subparagraph (A) shall not apply to any 
offset of a participant's benefits provided under a plan 
against an amount that the participant is ordered or 
required to pay to the plan if— 
"(i) the order or requirement to pay arises— 
"(I) under a judgment of conviction for a crime 
involving such plan, 
"(II) under a civil judgment (including a con-
sent order or decree) entered by a court in an 
action brought in connection with a violation (or 
alleged violation) of part 4 of subtitle B of title 
I of the Employee Retirement Income Security Act 
of 1974, or 
"(III) pursuant to a settlement agreement 
between the Secretary of Labor and the partici-
pant, or a settlement agreement between the Pen-
sion Benefit Guaranty Corporation and the partici-
pant, in connection with a violation (or alleged 
violation) of part 4 of such subtitle by a fiduciary 
or any other person, 
"(ii) the judgment, order, decree, or settlement 
agreement expressly provides for the offset of all or 
part of the amount ordered or required to be paid 
to the plan against the participant's benefits provided 
under the plan, and 
"(iii) in a case in which the survivor annuity 
requirements of section 401(a)(ll) apply with respect 
to distributions from the plan to the participant, if 
the participant has a spouse at the time at which 
the offset is to be made— 
"(I) either such spouse has consented in writ-
ing to such offset and such consent is witnessed 
by a notary public or representative of the plan 
(or it is established to the satisfaction of a plan 
representative that such consent may not be 
obtained by reason of circumstances described in 
section 417(a)(2)(B)), or an election to waive the 
right of the spouse to either a qualified joint and 
survivor annuity or a qualified 
preretirement 
survivor annuity is in effect in accordance with 
the requirements of section 417(a), 
"(II) such spouse is ordered or required in 
such judgment, order, decree, or settlement to pay 
an amount to the plan in connection with a viola-
tion of part 4 of such subtitle, or 
"(III) in such judgment, order, decree, or settle-
ment, such spouse retains the right to receive the 
survivor annuity under a qualified joint and survi-
vor 
annuity 
provided 
pursuant 
to 
section 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1061 
401(a)(ll)(A)(i) and under a qualified preretire-
ment survivor annuity provided pursuant to sec-
tion 401(a)(ll)(A)(ii), determined in accordance 
with subparagraph (t)). 
A plan shall not be treated as failing to meet the require-
ments of this subsection, subsection (k), section 403(b), 
or section 409(d) solely by reason of an offset described 
in this subparagraph. 
"(D) SURVIVOR ANNUITY.— 
"(i) IN GENERAL.—The survivor annuity described 
in subparagraph (C)(iii)(III) shall be determined as 
if— 
"(I) the participant terminated emplo5nnent on 
the date of the offset, 
"(II) there was no offset, 
"(III) the plan permitted commencement of 
benefits only on or after normal retirement age, 
"(IV) the plan provided only the minimum-
required qualified joint and survivor annuity, and 
"(V) the amount of the qualified preretirement 
survivor annuity under the plan is equal to the 
amount of the survivor annuity payable under the 
minimum-required qualified joint and survivor 
annuity. 
"(ii) DEFINITION.—For purposes of this subpara-
graph, the term 'minimum-required qualified joint and 
survivor annuity* means the qualified joint and survi-
vor annuity which is the actuarial equivalent of the 
participant's accrued benefit (within the meaning of 
section 411(a)(7)) and under which the survivor annu-
ity is 50 percent of the amount of the annuity which 
is payable during the joint lives of the participant 
and the spouse.", 
(c) EFFECTIVE DATE.—^The amendments made by this section 
26 use 40i note, 
shall apply to judgments, orders, and decrees issued, and settlement 
agreements entered into, on or after the date of the enactment 
of this Act. 
SEC. 1603. ELIMINATION OF PAPERWORK BURDENS ON PLANS. 
(a) ELIMINATION OF UNNECESSARY FILING REQUIREMENTS.—Sec-
tion 101(b) of the Employee Retirement Income Security Act of 
1974 (29 U.S.C. 1021(b)) is amended by striking paragraphs (1), 
(2), and (3) and by redesignating paragraphs (4) and (5) as para-
graphs (1) and (2), respectively. 
(b) ELIMINATION OF PLAN DESCRIPTION.— 
(1) IN GENERAL.—Section 102(a) of the Employee Retire-
ment Income Security Act of 1974 (29 U.S.C. 1022(a)) is amend-
ed— 
(A) by striking paragraph (2), and 
(B) by striking "(a)(1)" and inserting "(a)". 
(2) CONFORMING AMENDMENTS.— 
(A) Section 102(b) of such Act (29 U.S.C. 1022(b)) is 
amended by striking "The plan description and summary 
plan description shall contain" and inserting "The summary 
plan description shall contain". 
(B) The heading for section 102 of such Act is amended 
by striking "PLAN DESCRIPTION AND". 
Ill STAT. 1062 
PUBLIC LAW 105-34—AUG. 5, 1997 
(c) FURNISHING OF REPORTS.— 
(1) IN GENERAL.—Section 104(a)(1) of the Employee Retire-
ment Income Security Act of 1974 (29 U.S.C. 1024(a)(1)) is 
amended to read as follows: 
"SEC. 104. (a)(1) The administrator of any employee benefit 
plan subject to this part shall file with the Secretary the annual 
report for a plan year within 210 days after the close of such 
year (or within such time as may be required by regulations promul-
Public 
gated by the Secretary in order to reduce duplicative filing). The 
information. 
Secretary shall make copies of such annual reports available for 
inspection in the public document room of the Department of 
Labor.". 
(2) SECRETARY MAY REQUEST DOCUMENTS.— 
(A) IN GENERAL.—Section 104(a) of such Act (29 U.S.C. 
1024(a)) is amended by adding at the end the following: 
"(6) The administrator of any employee benefit plan subject 
to this part shall furnish to the Secretary, upon request, any docu-
ments relating to the employee benefit plan, including but not 
limited to, the latest summary plan description (including any sum-
maries of plan changes not contained in the summary plan descrip-
tion), and the bsirgaining agreement, trust agreement, contract, 
or other instrument under which the plan is established or oper-
ated.". 
(B) PENALTY.—Section 502(c) of such Act (29 U.S.C. 
1132(c)) is amended by redesignating paragraph (6) as 
paragraph (7) and by inserting after paragraph (5) the 
following: 
"(6) If, within 30 days of a request by the Secretary to a 
plan administrator for documents under section 104(a)(6), the plan 
administrator fails to furnish the material requested to the Sec-
retsiry, the Secretary may assess a civil pensdty against the plan 
administrator of up to $100 a day fi*om the date of such failure 
(but in no event in excess of $1,000 per request). No penalty 
shall be imposed under this paragraph for any failure resulting 
firom matters reasonably beyond the control of the plan adminis-
trator.". 
(d) CONFORMING AMENDMENTS.— 
(1) Section 104(b)(1) of the Employee Retirement Income 
Security Act of 1974 (29 U.S.C. 1024(b)(1)) is amended by 
striking "section 102(a)(1)" each place it appears and inserting 
"section 102(a)". 
(2) Section 104(b)(2) of such Act (29 U.S.C. 1024(b)(2)) 
is amended by striking "the plan description £ind" and inserting 
"the latest updated summary plan description and". 
(3) Section 104(b)(4) of such Act (29 U.S.C. 1024(b)(4)) 
is amended by striking "plan description". 
(4) Section 106(a) of such Act (29 U.S.C. 1026(a)) is amend-
ed by striking "descriptions,". 
(5) Section 107 of such Act (29 U.S.C. 1027) is amended 
by striking "description or". 
(6) Section 108(2)(B) of such Act (29 U.S.C. 1028(2)(B)) 
is amended by striking "plan descriptions, annual reports," 
and inserting "annual reports". 
(7) Section 502(a)(6) of such Act (29 U.S.C. 1132(a)(6)) 
is amended by striking "or (5)" and inserting "(5), or (6)". 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1063 
(e) TECHNICAL CORRECTION.—Section 1144(c) of the Social Secu-
rity Act (42 U.S.C. 1320b-14(c)) is amended by redesignating para-
graph (9) as paragraph (8). 
SEC. 1504. MODIFICATION OF 403(b) EXCLUSION ALLOWANCE TO CON-
FORM TO 415 MODIFICATIONS. 
(a) DEFINITION OF COMPENSATION.— 
(1) IN GENERAL.—Section 403(b)(3) (defining includible com-
pensation) is amended by adding at the end the following: 
"Such term includes— 
"(A) any elective deferral (as defined in section 
402(g)(3)), and 
"(B) any amount which is contributed or deferred by 
the employer at the election of the employee and which 
is not includible in the gross income of the employee by 
reason of section 125 or 457.". 
(2) EFFECTIVE DATE.—The amendment made by this sub- 
26 USC 403 note. 
section shall apply to years beginning after December 31, 1997. 
(b) REPEAL OF RULES IN SECTION 415(e).—The Secretary of 
the Treasury shall modify the regulations regEirding the exclusion 
allowance under section 403(b)(2) of the Internal Revenue Code 
of 1986 to reflect the amendment made by section 1452(a) of the 
Small Business Job Protection Act of 1996. Such modification shall Effective date. 
t£ike effect for years beginning after December 31,1999. 
SEC. 1505. EXTENSION OF MORATORIUM ON APPLICATION OF CERTAIN 
NONDISCRIMINATION RULES TO STATE AND LOCAL 
GOVERNMENTS. 
(a) GENERAL NONDISCRIMINATION AND PARTICIPATION RULES.— 
(1) NONDISCRIMINATION REQUIREMENTS.—Section 401(a)(5) 
(relating to qualified pension, profit-sharing, and stock bonus 
plans) is amended by adding at the end the following: 
"(G) STATE AND LOCAL GOVERNMENTAL PLANS.—Para-
graphs (3) and (4) shall not apply to a governmental plan 
(within the meaning of section 414(d)) maintained by a 
State or locfd government or political subdivision thereof 
(or agency or instrumentality thereof).". 
(2) 
ADDITIONAL PARTICIPATION REQUIREMENTS.—Section 
401(a)(26)(H) (relating to additional participation requirements) 
is amended to read as follows: 
"(H) EXCEPTION FOR STATE AND LOCAL GOVERNMENTAL 
PLANS.—^This paragraph shall not apply to a governmental 
E
lan (within the meaning of section 414(d)) maintained 
y a State or local government or political subdivision 
thereof (or agency or instrumentality thereof).". 
(3) MINIMUM PARTICIPATION STANDARDS.—Section 410(c)(2) 
(relating to application of participation standards to certain 
plans) is amended to read as follows: 
"(2) A plan described in paragraph (1) shall be treated 
as meeting the requirements of this section for purposes of 
section 401(a), except that in the case of a plan described 
in subparagraph (B), (C), or (D) of paragraph (1), this paragraph 
shall apply only if such plan meets the requirements of section 
401(a)(3) (as in effect on September 1,1974).". 
(b) PARTICIPATION AND DISCRIMINATION STANDARDS FOR QUALI-
FIED CASH OR DEFERRED ARRANGEMENTS.—Section 401(k)(3) (relat-
ing to application of participation and discrimination standards) 
is amended by adding at the end the following: 
I l l STAT. 1064 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(G) A governmental plan (within the meaning of sec-
tion 414(d)) maintained by a State or local government 
or political subdivision thereof (or agency or instrumental-
ity thereof) shall be treated as meeting the requirements 
of this paragraph.", 
(c) NONDISCRIMINATION RULES FOR SECTION 403(b) PLANS.— 
Section 403(b)(12) (relating to nondiscrimination requirements) is 
amended by adding at the end the following: 
"(C) 
STATE AND LOCAL GOVERNMENTAL PLANS.—For 
purposes of paragraph (1)(D), the requirements of subpara-
graph (A)(i) (other than those relating to section 401(a)(17)) 
shall not apply to a governmental plan (within the meaning 
of section 414(d)) maintained by a State or local government 
or political subdivision thereof (or agency or instrumental-
ity thereof).". 
26 use 401 note. 
(d) EFFECTIVE DATES.— 
(1) IN GENERAL.—The amendments made by this section 
apply to taxable years beginning on or after the date of enact-
ment of this Act. 
(2) TREATMENT FOR YEARS BEGINNING BEFORE DATE OF 
ENACTMENT.—^A governmental plan (within the meaning of sec-
tion 414(d) of the Internal Revenue Code of 1986) maintained 
by a State or local government or political subdivision thereof 
(or agency or instrumentality thereof) shall be treated as 
satisfying the requirements of sections 401(a)(3), 401(a)(4), 
401(a)(26), 401(k), 401(m), 403 (b)(1)(D) and (b)(12), and 410 
of such Code for all taxable years beginning before the date 
of enactment of this Act. 
SEC. 
1606. CLARIFICATION OF CERTAIN RULES RELATING TO 
EMPLOYEE STOCK OWNERSHIP PLANS OF S CORPORA-
TIONS. 
(a) CERTAIN CASH DISTRIBUTIONS PERMITTED.— 
(1) Paragraph (2) of section 409(h) is amended by adding 
at the end the following new subparagraph: 
"(B) EXCEPTION FOR CERTAIN PLANS RESTRICTED FROM 
DISTRIBUTING SECURITIES.— 
"(i) IN GENERAL.—^A plan to which this subpara-
graph applies shall not be treated as failing to meet 
the requirements of this subsection or section 401(a) 
merely because it does not permit a participant to 
exercise the right described in paragraph (1)(A) if such 
plan provides that the participant entitled to a distribu-
tion has a right to receive the distribution in cash, 
except that such plan may distribute employer securi-
ties subject to a requirement that such securities may 
be resold to the employer under terms which meet 
the requirements of paragraph (1)(B). 
"(ii) APPLICABLE PLANS.—This subparagraph shall 
apply to a plan which otherwise meets the require-
ments of this subsection or section 4975(e)(7) and which 
is established and maintained by— 
"(I) an employer whose charter or bylaws 
restrict 
the 
ownership 
of 
substantially 
all 
outstanding employer securities to employees or 
to a trust described in section 401(a), or 
"(II) an S corporation.". 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1065 
(2) Paragraph (2) of section 409(h), as in effect before 
the amendment made by paragraph (1), is amended— 
(A) by striking "A plan which" in the first sentence 
and inserting the following: 
"(A) IN GENERAL.—A plan which", and 
(B) by striking the last sentence. 
(b) 
CERTAIN 
SHAREHOLDER-EMPLOYEES NOT 
TREATED AS 
OWNER-EMPLOYEES.— 
(1) AMENDMENT TO I986 CODE.— 
(A) IN GENERAL.—Section 4975(f) is amended by adding 
at the end the following new paragraph: 
"(6) 
EXEMPTIONS NOT TO APPLY TO CERTAIN 
TRANS-
ACTIONS.— 
"(A) IN GENERAL.—In the case of a trust described 
in section 401(a) which is part of a plan providing contribu-
tions or benefits for employees some or all of whom are 
owner-employees (as defined in section 401(c)(3)), the 
exemptions provided by subsection (d) (other than para-
graphs (9) and (12)) shall not apply to a transaction in 
which the plan directly or indirectly— 
"(i) lends any part of the corpus or income of 
the plan to, 
"(ii) pays any compensation for personal services 
rendered to the plan to, or 
"(iii) acquires for the plan any property from, or 
sells any property to, 
any such owner-employee, a member of the family (as 
defined in section 267(c)(4)) of any such owner-employee, 
or any corporation in which any such owner-employee owns, 
directly or indirectly, 50 percent or more of the total com-
bined voting power of all classes of stock entitled to vote 
or 50 percent or more of the total value of shares of all 
classes of stock of the corporation. 
"(B) 
SPECIAL RULES FOR SHAREHOLDER-EMPLOYEES, 
E T C . -
"(i) IN GENERAL.—For purposes of subparagraph 
(A), the following shall be treated as owner-employees: 
"(I) A shareholder-employee. 
"(II) A participant or beneficiary of an individ-
ual 
retirement 
plan 
(as defined 
in 
section 
7701(a)(37)). 
"(Ill) An employer or association of employees 
which establishes such an individual retirement 
plan under section 408(c). 
^'(ii) 
EXCEPTION 
FOR 
CERTAIN 
TRANSACTIONS 
INVOLVING 
SHAREHOLDER-EMPLOYEES.—Subparagraph 
(A)(iii) shall not apply to a transaction which consists 
of a sale of employer securities to an employee stock 
ownership plan (as defined in subsection (e)(7)) by 
a shareholder-employee, a member of the family (as 
defined in section 267(c)(4)) of such shareholder-
employee, or a corporation in which such a shareholder-
employee owns stock representing a 50 percent or 
greater interest described in subparagraph (A). 
"(C) 
SHAREHOLDER-EMPLOYEE.—For 
purposes 
of 
subparagraph (B), the term 'shareholder-employee' means 
an employee or officer of an S corporation who owns (or 
I l l STAT. 1066 
PUBLIC LAW 105-34—AUG. 5, 1997 
is considered as owning within the meaning of section 
318(a)(1)) more than 5 percent of the outstanding stock 
of the corporation on any day during the taxable year 
of such corporation.". 
(B) 
CONFORMING AMENDMENTS.—Section 4975(d) 
is 
amended— 
(i) by strikmg "The prohibitions" and inserting 
"Except as provided in subsection (f)(6), the prohibi-
tions", and 
(ii) by striking the last two sentences thereof. 
(2) AMENDMENT TO ERISA.—Section 408(d) of the Employee 
Retirement Income Security Act of 1974 (29 U.S.C. 1108(d)) 
is amended to read as follows: 
"(d)(1) Section 407(b) and subsections (b), (c), and (e) of this 
section shall not apply to a transaction in which a plan directly 
or indirectly— 
"(A) lends any part of the corpus or income of the plan 
to, 
"(B) pays any compensation for personal services rendered 
to the plan to, or 
"(C) acquires for the plan any property from, or sells any 
property to, 
any person who is with respect to the plan an owner-employee 
(as defined in section 401(c)(3) of the Internal Revenue Code of 
1986), a member of the family (as defined in section 267(c)(4) 
of such Code) of any such owner-employee, or any corporation 
in which any such owner-employee owns, directly or indirectly, 
50 percent or more of the total combined voting power of all classes 
of stock entitled to vote or 50 percent or more of the total value 
of shares of all classes of stock of the corporation. 
"(2)(A) For purposes of paragraph (1), the following shall be 
treated as owner-employees: 
"(i) A shareholder-employee. 
"(ii) A participant or beneficiary of an individual retirement 
plan (as defined in section 7701(a)(37) of the Internal Revenue 
Code of 1986). 
"(iii) An employer or association of employees which estab-
lishes such an individual retirement plan under section 408(c) 
of such Code. 
"(B) Paragraph (1)(C) shall not apply to a transaction which 
consists of a sale of employer securities to an employee stock owner-
ship plan (as defined in section 407(d)(6)) by a shareholder-
employee, a member of the family (as defined in section 267(c)(4) 
of such Code) of any such owner-employee, or a corporation in 
which such a shareholder-employee owns stock representing a 50 
percent or greater interest described in paragraph (1). 
"(3) For purposes of paragraph (2), the term 'shareholder-
employee' meeins an employee or officer of eui S corporation (as 
defined in section 1361(a)(1) of such Code) who owns (or is consid-
ered as owning within the meaning of section 318(a)(1) of such 
Code) more than 5 percent of the outstanding stock of the corpora-
tion on any day during the tsixable year of such corporation.". 
26 use 409 note. 
(c) EFFECTIVE DATE.—The amendments made by this section 
shall apply to taxable years beginning aft;er December 31, 1997. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1067 
SEC. 1507. MODIFICATION OF 10-PERCENT TAX FOR NONDEDUCTIBLE 
CONTRIBUTIONS. 
(a) IN GENERAL.—Section 4972(c)(6)(B) (relating to exceptions) 
is amended to read as follows: 
"(B) so much of the contributions to 1 or more defined 
contribution plans which are not deductible when contrib-
uted solely because of section 404(a)(7) as does not exceed 
the greater of— 
"(i) the amount of contributions not in excess of 
6 percent of compensation (within the meaning of sec-
tion 404(a)) paid or accrued (during the taxable year 
for which the contributions were made) to beneficiaries 
under the plans, or 
"(ii) the sum o
f
— 
"(I) the amount of contributions described in 
section 401(m)(4)(A), plus 
"(II) the amount of contributions described in 
section 402(g)(3)(A).". 
(b) EFFECTIVE DATE.—The amendments made by this section 26 use 4972 
shall apply to taxable years beginning after December 31, 1997. note. 
SEC. 1508. MODIFICATION OF FUNDING REQUIREMENTS FOR CERTAIN 
PLANS. 
(a) FUNDING RULES FOR CERTAIN PLANS.—Section 769 of the 
Retirement Protection Act of 1994 is amended by adding at the 
26 USC 412 note. 
end the following new subsection: 
"(c) TRANSITION RULES FOR CERTAIN PLANS.— 
Appiicabiuty. 
"(1) IN GENERAL.—In the case of a plan that— 
"(A) was not required to pay a variable rate premium 
for the plan year beginning in 1996; 
"(B) has not, in any plan year beginning after 1995 
and before 2009, merged with another plan (other than 
a plan sponsored by an employer that was in 1996 within 
the controlled group of the plan sponsor); and 
"(C) is sponsored by a company that is engaged pri-
marily in the interurban or interstate passenger bus serv-
ice, 
the transition rules described in paragraph (2) shall apply 
for any plan year beginning after 1996 and before 2010. 
"(2) TRANSITION RULES.—The transition rules described in 
this paragraph are as follows: 
"(A) For purposes of section 412(1)(9)(A) of the Internal 
Revenue Code of 1986 and section 302(d)(9)(A) of the 
Employee Retirement Income Security Act of 1974— 
"(i) the funded current liability percentage for any 
plan year beginning after 1996 and before 2005 shall 
be treated as not less than 90 percent if for such 
plan year the funded current liability percentage is 
at least 85 percent, and 
"(ii) the funded current liability percentage for any 
plan year beginning after 2004 and before 2010 shall 
be treated as not less than 90 percent if for such 
plan year the funded current liability percentage satis-
fies the minimum percentage determined according to 
the following table: 
Ill STAT. 1068 
PUBLIC LAW 105-34—AUG. 5, 1997 
"In the case of a plan year beginning in: 
The minimum per-
centage is: 
2005 
86 percent 
2006 
87 percent 
2007 
88 percent 
2008 
89 percent 
2009 and thereafter 
90 percent. 
"(B) Sections 412(c)(7)(E)(i)(I) of such Code and 
302(c)(7)(E)(i)(I) of such Act shall be applied— 
"(i) by substituting *85 percent' for *90 percent' 
for plan years beginning after 1996 and before 2005, 
and 
"(ii) by substituting the minimum percentage speci-
fied in the table contained in subparagraph (A)(ii) for 
*90 percent' for plan years beginning after 2004 and 
before 2010. 
"(C) In the event the funded current liability percent-
age of a plan is less than 85 percent for any plan year 
beginning after 1996 and before 2005, the transition rules 
under subparagraphs (A) and (B) shall continue to apply 
to the plan if contributions for such a plan year are made 
to the plan in an amount equal to the lesser o
f
— 
"(i) the amount necessary to result in a funded 
current liability percentage of 85 percent, or 
"(ii) the greater of— 
"(I) 2 percent of the plan's current liability 
as of the beginning of such plan year, or 
"(II) the amount necessary to result in a 
funded current liability percentage of 80 percent 
as of the end of such plan year. 
Applicability. 
For the plan year beginning in 2005 and for each of the 
3 succeeding plan years, the transition rules under sub-
paragraphs (A) and (B) shall continue to apply to the 
plan for such plan year only if contributions to the plan 
for such plan year equal at least the expected increase 
in current liability due to benefits accruing during such 
plan year.". 
26 use 412 note. 
(b) EFFECTIVE DATE.—The amendment made by this section 
shall apply to plan years beginning after December 31,1996. 
26 use 402 note. 
SEC. 1509. CLARIFICATION OF DISQUALIFICATION RULES RELATING 
TO ACCEPTANCE OF ROLLOVER CONTRIBUTIONS. 
The Secretary of the Treasury or his delegate shall clarify 
that, under the Internal Revenue Service regulations protecting 
pension plans from disqualification by reason of the receipt of 
invalid rollover contributions under section 402(c) of the Internal 
Revenue Code of 1986, in order for the administrator of the plan 
receiving any such contribution to reasonably conclude that the 
contribution is a valid rollover contribution it is not necessary 
for the distributing plan to have a determination letter with respect 
to its status as a qualified plan under section 401 of such Code. 
SEC. 1510. NEW TECHNOLOGIES IN RETIREMENT PLANS. 
Regulations. 
(a) IN GENERAL.—Not later than December 31, 1998, the Sec-
26 use 401 note, retary of the Treasury and the Secretary of Labor shall each issue 
guidance which is designed to— 
(1) interpret the notice, election, consent, disclosure, and 
time requirements (and related recordkeeping requirements) 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1069 
under the Internal Revenue Code of 1986 and the Employee 
Retirement Income Security Act of 1974 relating to retirement 
plans as applied to the use of new technologies by plan sponsors 
and administrators while maintaining the protection of the 
rights of participgmts and beneficiaries, £ind 
(2) clarify the extent to which writing requirements under 
the Internal Revenue Code of 1986 relating to retirement plans 
shall be interpreted to permit paperless transactions, 
(b) APPLICABILITY OF FINAL REGULATIONS.—Final regulations 
applicable to the guidance regarding new technologies described 
in subsection (a) shall not be effective until the first plan year 
beginning at least 6 months after the issuance of such final regula-
tions. 
Subtitle B—Other Provisions Relating to 
Pensions and Employee Benefits 
SEC. 1521. INCREASE IN CURRENT LIABILITY FUNDING LIMIT. 
(a) AMENDMENT TO 1986 CODE.—Section 412(c)(7) (relating to 
full-funding limitation) is amended— 
(A) by striking "150 percent" in subparagraph (A)(i)(I) 
and inserting "the applicable percentage", and 
(B) by adding at the end the following: 
"(F) 
APPLICABLE 
PERCENTAGE.—For 
purposes 
of 
subparagraph (A)(i)(I), the applicable percentage shall be 
determined in accordance with the following table: 
"In the case of any plan year begin- The applicable percentage is— 
ning in— 
1999 or 2000 
155 
2001 or 2002 
160 
2003 or 2004 
165 
2005 and succeeding years 
170.". 
(b) AMENDMENT TO ERISA.—Section 302(c)(7) of the Employee 
Retirement Income Security Act of 1974 (29 U.S.C. 1082(c)(7)) is 
amended— 
(A) by striking "150 percent" in subparagraph (A)(i)(I) 
and inserting "the applicable percentage", and 
(B) by adding at the end the following: 
"(F) APPLICABLE PERCENTAGE.—For purposes of subpara-
graph (A)(i)(I), the applicable percentage shall be determined 
in accordance with the following table: 
"In the case of any plan year begfin- The applicable percentage is— 
ning in— 
1999 or 2000 
155 
2001 or 2002 
160 
2003 or 2004 
165 
2005 and succeeding years 
170.". 
(c) SPECIAL AMORTIZATION RULE.— 
(1) CODE AMENDMENT.—Section 412(b)(2) is amended by 
striking "and" at the end of subparagraph (C), by striking 
the period at the end of subparagraph (D) £ind inserting ", 
and", and by inserting after subparagraph (D) the following: 
"(E) the amount necessary to amortize in equal annual 
installments (until fully amortized) over a period of 20 
years the contributions which would be required to be 
39-194 O - 97 - 36 :QL 3 Parti 
Ill STAT. 1070 
PUBLIC LAW 105-34—AUG. 5, 1997 
made under the plan but for the provisions of subsection 
(c)(7)(A)(i)(I).". 
(2) ERISA AMENDMENT.—Section 302(b)(2) of the Employee 
Retirement Income Security Act of 1974 (29 U.S.C. 1082(b)(2)) 
is amended by striking "and" at the end of subparagraph (C), 
by striking the period at the end of subparagraph (D) and 
inserting ", £uid", and by inserting after subparagraph (D) the 
following: 
"(E) the amount necessary to amortize in equal annual 
installments (until fully amortized) over a period of 20 years 
the contributions which would be required to be made under 
the plan but for the provisions of subsection (c)(7)(A)(i)(I).". 
(3) CONFORMING AMENDMENTS.— 
(A) Section 412(c)(7)(D) is amended by adding "and" 
at the end of clause (i), by striking ", and" at the end 
of clause (ii) and inserting a period, and by striking clause 
(iii). 
(B) Section 302(c)(7)(D) of the Employee Retirement 
Income Security Act of 1974 (29 U.S.C. 1082(c)(7)(D)) is 
amended by adding "and" at the end of clause (i), by 
striking ", and" at the end of clause (ii) and inserting 
a period, and by striking clause (iii). 
26 use 412 note. 
(d) EFFECTIVE DATES.— 
(1) IN GENERAL.—The amendments made by this section 
shall apply to plan years beginning after December 31, 1998. 
(2) 
SPECIAL RULE FOR UNAMORTIZED BALANCES UNDER 
EXISTING LAW.—The unamortized balance (as of the close of 
the plan year preceding the plan's first year beginning in 1999) 
of 
any 
amortization 
base 
established 
under 
section 
412(c)(7)(D)(iii) of such Code and section 302(c)(7)(D)(iii) of such 
Act (as repealed by subsection (c)(3)) for any plan year begin-
ning before 1999 shall be amortized in equal annual install-
ments (until fully amortized) over a period of years equal to 
the excess o
f
— 
(A) 20 years, over 
(B) the number of years since the amortization base 
was established. 
SEC. 1522. SPECIAL RULES FOR CHURCH PLANS. 
(a) IN GENERAL.—Section 414(e)(5) (relating to special rules 
for chaplains and self-employed ministers) is amended— 
(1) by striking "not eligible to participate" in subparagraph 
(C) and inserting "not otherwise participating", and 
(2) by adding at the end the following new subparagraph: 
"(E) EXCLUSION.—In the case of a contribution to a 
church plan made on behalf of a minister described in 
subparagraph (A)(i)(II), such contribution shall not be 
included in the gross income of the minister to the extent 
that such contribution would not be so included if the 
minister was an employee of a church.". 
26 use 414 note. 
(b) EFFECTIVE DATE.—The amendments made by this section 
shall apply to years beginning after December 31, 1997. 
SEC. 1523. REPEAL OF APPLICATION OF UNRELATED BUSINESS 
INCOME TAX TO ESOPS. 
(a) IN GENERAL.—Section 512(e) is amended by adding at the 
end the following new paragraph: 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1071 
"(3) EXCEPTION FOR ESOPS.—This subsection shall not apply 
to employer securities (within the meaning of section 409(1)) 
held by an employee stock ownership plan described in section 
4975(e)(7).". 
(b) EFFECTIVE DATE.—The amendments made by this section 
26 use 512 note. 
shall apply to teixable years beginning after December 31, 1997. 
SEC. 1524. DIVERSIFICATION OF SECTION 401(k) PLAN INVESTMENTS. 
(a) LIMITATIONS ON INVESTMENT IN EMPLOYER SECURITIES AND 
EMPLOYER REAL PROPERTY BY CASH OR DEFERRED ARRANGE-
MENTS.—Section 407(b) of the Employee Retirement Income Secu-
rity Act of 1974 (29 U.S.C. 1107(b)) is amended by redesignating 
paragraph (2) as paragraph (3) and by inserting after paragraph 
(1) the following new paragraph: 
"(2)(A) If this paragraph applies to an eligible individual 
account plan, the portion of such plan which consists of 
applicable elective deferrals (and earnings allocable thereto) 
shall be treated as a separate plan— 
"(i) which is not an eligible individual account plan, 
and 
"(ii) to which the requirements of this section apply. 
"(B)(i) This paragraph shall apply to any eligible individual Applicability. 
account plan if any portion of the plan's applicable elective 
deferrals (or earnings allocable thereto) are required to be 
invested 
in qualifying 
employer 
securities 
or 
qualifying 
employer real property or both— 
"(I) pursuant to the terms of the plan, or 
"(II) at the direction of a person other than the partici-
pant on whose behalf such elective deferrals are made 
to the plan (or a beneficiary). 
"(ii) This paragraph shall not apply to an individual account 
plan for a pl£in year if, on the last day of the preceding plan 
year, the fair market VEilue of the assets of all individual 
account plans maintained by the employer equals not more 
than 10 percent of the fair market value of the assets of 
all pension plans (other than multiemployer plans) maintained 
by the employer. 
"(iii) This paragraph shall not apply to an individual 
account plan that is an employee stock ownership plan as 
defined in section 4975(e)(7) of the Internal Revenue Code 
of 1986. 
"(iv) This paragraph shall not apply to an individual 
account plan if, pursuant to the terms of the plan, the portion 
of £iny employee's applicable elective deferrals which is required 
to be invested in qualifying employer securities and qualifying 
employer real property for any year may not exceed 1 percent 
of the employee's compensation which is tsiken into account 
under the plan in determining the maximum amount of the 
employee's applicable elective deferrals for such year. 
"(C) For purposes of this paragraph, the term 'applicable 
elective deferral' means any elective deferral (as defined in 
section 402(g)(3)(A) of the Internal Revenue Code of 1986) 
which is made pursuant to a qualified cash or deferred arrange-
ment as defined in section 401(k) of the Internal Revenue 
Code of 1986.". 
I l l STAT. 1072 
PUBLIC LAW 105-34—AUG. 5, 1997 
29 use 1107 
(b) EFFECTIVE DATE.—The amendments made by this section 
•^ot^- 
shall apply to elective deferrals for plan years beginning after 
December 31, 1998. 
SEC. 1525. SECTION 401 (K) PLANS FOR CERTAIN IRRIGATION AND 
DRAINAGE ENTITIES. 
(a) IN GENERAL.—Subparagraph (B) of section 401(k)(7) (relat-
ing to rural cooperative plan) is amended— 
(1) by striking "and" at the end of clause (iii), by redesignat-
ing clause (iv) as clause (v), and by inserting after clause 
(iii) the following new clause: 
"(iv) any organization which— 
"(I) is a mutual irrigation or ditch company 
described in section 501(c)(12) (without regard to 
the 85 percent requirement thereof), or 
"(II) is a district organized under the laws 
of a State as a municipal corporation for the pur-
pose of irrigation, water conservation, or drainage, 
and", and 
(2) in clause (v), as so redesignated, by striking "or (iii)" 
and inserting ", (iii), or (iv)". 
26 use 401 note. 
(b) EFFECTIVE DATE.—The amendments made by subsection 
(a) shall apply to years beginning after December 31, 1997. 
SEC. 1526. PORTABILITY OF PERMISSIVE SERVICE CREDIT UNDER 
GOVERNMENTAL PENSION PLANS. 
(a) IN GENERAL.—Section 415 (relating to limitations on bene-
fits and contributions under qualified plans) is amended by adding 
at the end the following new subsection: 
"(n) 
SPECIAL RULES RELATING TO PURCHASE OF PERMISSIVE 
SERVICE CREDIT.— 
"(1) IN GENERAL.—If an employee makes 1 or more con-
tributions to a defined benefit governmental plan (within the 
meaning of section 414(d)) to purchase permissive service credit 
under such plan, then the requirements of this section shall 
be treated as met only if— 
"(A) the requirements of subsection (b) are met, deter-
mined by treating the accrued benefit derived from all 
such contributions as an annual benefit for purposes of 
subsection (b), or 
"(B) the requirements of subsection (c) are met, deter-
mined i
D
y treating all such contributions as annual addi-
tions for purposes of subsection (c). 
"(2) APPLICATION OF LIMIT.—For purposes of— 
"(A) appljdng paragraph (1)(A), the plan shall not fail 
to meet the reduced limit under subsection (b)(2)(C) solely 
by reason of this subsection, and 
"(B) applying paragraph (1)(B), the plan shall not fail 
to meet the percentage limitation under subsection (c)(1)(B) 
solely by reason of this subsection. 
"(3) PERMISSIVE SERVICE CREDIT.—For purposes of this sub-
section— 
"(A) IN GENERAL.—The term 'permissive service credit' 
mesins service credit— 
"(i) recognized by the governmental plan for pur-
poses of calculating a participant's benefit under the 
plan. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1073 
"(ii) which such participant has not received under 
such governmental plan, and 
"(iii) which such participant may receive only by 
making a voluntary additional contribution, in an 
amount determined under such governmental plan, 
which does not exceed the amount necessary to fund 
the benefit attributable to such service credit. 
"(B) LIMITATION ON NONQUALIFIED SERVICE CREDIT.— 
A plan shall fail to meet the requirements of this section 
if— 
"(i) more than 5 years of permissive service credit 
attributable to nonqualified service are taken into 
account for purposes of this subsection, or 
"(ii) any permissive service credit attributable to 
nonqualified service is taken into account under this 
subsection before the employee has at least 5 years 
of participation imder the plan. 
"(C) NONQUALIFIED SERVICE.—For purposes of subpara-
graph (B), the term 'nonqualified service' mesms service 
for which permissive service credit is allowed other than— 
"(i) service (including parental, medical, sabbatical, 
and similar leave) as an employee of the Government 
of the United States, any State or political subdivision 
thereof, or any agency or instrumentality of any of 
the foregoing (other than military service or service 
for credit which was obtained as a result of a repay-
ment described in subsection (k)(3)), 
"(ii) service (including parental, medical, sabbati-
cal, and similar leave) as an employee (other th£in 
as an employee described in clause (i)) of £in edu-
cational 
organization 
described 
in 
section 
170(b)(l)(A)(ii) which is a public, private, or sectarian 
school which provides elementary or secondary edu-
cation (through grade 12), as determined imder State 
law, 
"(iii) service as an employee of an association of 
employees who are described in clause (i), or 
"(iv) military service (other than qualified militaiy 
service under section 414(u)) recognized by such 
governmental plan. 
In the case of service described in clauses (i), (ii), or (iii), 
such service will be nonqualified service if recognition of 
such service would cause a participant to receive a retire-
ment benefit for the same service under more than one 
plan.". 
(b) SPECIAL RULE FOR REPAYMENT OF CASHOUTS.—Section 
415(k) (relating to special rules) is amended by adding at the 
end the following new paragraph: 
"(3) REPAYMENTS OF CASHOUTS UNDER 
GOVERNMENTAL 
PLANS.—In the case of any repayment of contributions (includ-
ing interest thereon) to the governmental plan with respect 
to an amount previously refunded upon a forfeiture of service 
credit under the plan or under another governmental plan 
maintained by a State or local government employer within 
the same State, any such repayment shall not be taken into 
account for purposes of this section.". 
(c) EFFECTIVE DATES.— 
26 use 4i5 note. 
I l l STAT. 1074 
PUBLIC LAW 105-34—AUG. 5, 1997 
(1) IN GENERAL.—The amendments made by this section 
shall apply to permissive service credit contributions made 
in years beginning after December 31, 1997. 
(2) TRANSITION RULE.— 
(A) IN GENERAL.—In the case of an eligible participant 
in a governmental plan (within the meaning of section 
414(d) of the Internal Revenue Code of 1986), the limita-
tions of section 415(c)(1) of such Code shall not be applied 
to reduce the amount of permissive service credit which 
may be purchased to an amount less than the amount 
which was allowed to be purchased under the terms of 
the plan as in effect on the date of the enactment of 
this Act. 
(B) ELIGIBLE PARTICIPANT.—For purposes of subpara-
graph (A), an eligible participant is an individual who 
first became a participant in the plan before the first 
plan year beginning after the last day of the calendar 
year in which the next regular session (following the date 
of the enactment of this Act) of the governing body with 
authority to amend the plan ends. 
SEC. 1527. REMOVAL OF DOLLAR LIMITATION ON BENEFIT PAYMENTS 
FROM A DEFINED BENEFIT PLAN MAINTAINED FOR CER-
TAIN POLICE AND FIRE EMPLOYEES. 
(a) IN GENERAL.—Subparagraph (G) of section 415(b)(2) is 
amended by striking "participant—" and all that follows and insert-
ing "participant, subparagraph (C) of this paragraph shall not 
apply.". 
26 use 415 note. 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to years beginning after December 31, 1996. 
SEC. 1528. SURVIVOR BENEFITS FOR PUBLIC SAFETY OFFICERS 
KILLED IN THE LINE OF DUTY. 
(a) IN GENERAL.—Section 101 (relating to certain death bene-
fits) is amended by adding at the end the following new subsection: 
"(h) SURVIVOR BENEFITS ATTRIBUTABLE TO SERVICE BY A PUBLIC 
SAFETY OFFICER WHO IS KILLED IN THE LINE OF DUTY.— 
"(1) IN GENERAL.—Gross income shall not include any 
amount paid as a survivor annuity on account of the death 
of a public safety officer (as such term is defined in section 
1204 of the Omnibus Crime Control and Safe Streets Act of 
1968) killed in the line of duty— 
"(A) if such annuity is provided, under a governmental 
plan which meets the requirements of section 401(a), to 
the spouse (or a former spouse) of the public safety officer 
or to a child of such officer; and 
"(B) to the extent such annuity is attributable to such 
officer's service as a public safety officer. 
"(2) EXCEPTIONS.—Paragraph (1) shall not apply with 
respect to the death of any public safety officer if, as determined 
in accordance with the provisions of the Omnibus Crime Control 
and Safe Streets Act of 1968— 
"(A) the death was caused by the intentional mis-
conduct of the officer or by such officer's intention to bring 
about such officer's death; 
"(B) the officer was voluntarily intoxicated (as defined 
in section 1204 of such Act) at the time of death; 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1075 
"(C) the officer was performing such officer's duties 
in a grossly neghgent manner at the time of death; or 
"(D) the payment is to an individual whose actions 
were a substantial contributing factor to the death of the 
officer.", 
(b) EFFECTIVE DATE.—The amendments made by this section 
26 use loi note. 
shall apply to amounts received in taxable years beginning after 
December 31, 1996, with respect to individuals dying after such 
date. 
SEC. 1529. TREATMENT OF CERTAIN DISABILITY BENEFITS RECEIVED 
BY FORMER POLICE OFFICERS OR FIREFIGHTERS. 
(a) GENERAL RULE.—For purposes of determining whether any 
amount to which this section applies is excludable from gross income 
under section 104(a)(1) of the Internal Revenue Code of 1986, the 
following conditions shall be treated as personal injuries or sickness 
in the course of employment: 
(1) Heart disease. 
(2) Hypertension. 
(b) AMOUNTS TO WHICH SECTION APPLIES.—This section shall 
apply to any amount— 
(1) which is payable— 
(A) to an individual (or to the survivors of an individ-
ual) who was a full-time employee of any police department 
or fire department which is organized and operated by 
a State, by any political subdivision thereof, or by any 
agency or instrumentality of a State or political subdivision 
thereof, and 
(B) under a State law (as amended on May 19, 1992) 
which irrebuttably presumed that heart disease and hyper-
tension are work-related illnesses but only for employees 
separating from service before July 1, 1992; and 
(2) which was received in calendar year 1989, 1990, or 
1991. 
(c) WAIVER OF STATUTE OF LIMITATIONS.—If, on the date of 
the enactment of this Act (or at any time within the 1-year period 
beginning on such date of enactment), credit or refund of any 
overpayment of tax resulting from the provisions of this section 
is barred by any law or rule of law (including res judicata), then 
credit or refund of such overpayment shall, nevertheless, be allowed 
or made if claim therefore is filed before the date 1 year after 
such date of enactment. 
SEC. 1530. GRATUITOUS TRANSFERS FOR THE BENEFIT OF EMPLOY-
EES. 
(a) IN GENERAL.—Subparagraph (C) of section 664(d)(1) and 
subparagraph (C) of section 664(d)(2) are each amended by striking 
the period at the end thereof and inserting "or, to the extent 
the remainder interest is in qualified employer securities (as defined 
in subsection (g)(4)), all or part of such securities are to be trans-
ferred to an employee stock ownership plan (as defined in section 
4975(e)(7)) in a qualified gratuitous transfer (as defined by 
subsection (g)).". 
(b) QUALIFIED GRATUITOUS TRANSFER DEFINED.—Section 664 
is amended by adding at the end the following new subsection: 
"(g) QUALIFIED GRATUITOUS TRANSFER OF QUALIFIED EMPLOYER 
SECURITIES.— 
I l l STAT. 1076 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(1) IN GENERAL.—For purposes of this section, the term 
'qualified gratuitous transfer' means a transfer of quahfied 
employer securities to an employee stock ownership plan (as 
defined in section 4975(e)(7)) but only to the extent that— 
"(A) the securities transferred previously passed fi*om 
a decedent dying before January 1, 1999, to a trust 
described in paragraph (1) or (2) of subsection (d), 
"(B) no deduction under section 404 is allowable with 
respect to such transfer, 
"(C) such plan contains the provisions required by para-
graph (3), 
"(D) such plan treats such securities as being attrib-
utable to employer contributions but without regard to 
the limitations otherwise applicable to such contributions 
under section 404, and 
"(E) the employer whose employees are covered by 
the plan described in this paragraph files with the Sec-
retary a verified written statement consenting to the 
application of sections 4978 and 4979A with respect to 
such employer. 
"(2) EXCEPTION.—The term 'quahfied gratuitous transfer' 
shall not include a transfer of qualified employer securities 
to an employee stock ownership plan unless— 
"(A) such plan was in existence on August 1, 1996, 
"(B) at the time of the transfer, the decedent and 
members of the decedent's family (within the meaning of 
section 2032A(e)(2)) own (directly or through the applica-
tion of section 318(a)) no more than 10 percent of the 
value of the stock of the corporation referred to in para-
graph (4), and 
"(C) immediately after the transfer, such plan owns 
(after the application of section 318(a)(4)) at least 60 per-
cent of the value of the outstanding stock of the corporation. 
"(3) PLAN REQUIREMENTS.—^A plan contains the provisions 
required by this paragraph if such plan provides that— 
"(A) the qualified employer securities so transferred 
are allocated to plan participants in a manner consistent 
with section 401(a)(4), 
"(B) plan participants are entitled to direct the plan 
as to the manner in which such securities which are enti-
tled to vote and are allocated to the account of such partici-
pant are to be voted, 
"(C) an independent trustee votes the securities so 
transferred which are not allocated to plan participants, 
"(D) each participant who is entitled to a distribution 
fi*om the plan has the rights described in subparagraphs 
(A) and (B) of section 409(h)(1), 
"(E) such securities are held in a suspense account 
under the plan to be allocated each year, up to the limita-
tions under section 415(c), after first allocating all other 
annual additions for the limitation year, up to the limita-
tions under sections 415 (c) and (e), and 
"(F) on termination of the plan, all securities so trans-
ferred which are not allocated to plan participants as of 
such termination are to be transferred to, or for the use 
of, an organization described in section 170(c). 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1077 
For purposes of the preceding sentence, the term 'independent 
trustee' means any trustee who is not a member of the family 
(within the meaning of section 2032A(e)(2)) of the decedent 
or a 5-percent shareholder. A plan shall not fail to be treated 
as meeting the requirements of section 401(a) by reason of 
meeting the requirements of this subsection, 
"(4) QUALIFIED EMPLOYER SECURITIES.—For purposes of this 
section, the term 'qualified employer securities' means employer 
securities (as defined in section 409(1)) which are issued by 
a domestic corporation— 
"(A) which has no outstanding stock which is readily 
tradable on an established securities market, and 
"(B) which has only 1 class of stock. 
"(5) TREATMENT OF SECURITIES ALLOCATED BY EMPLOYEE 
STOCK OWNERSHIP PLAN TO PERSONS RELATED TO DECEDENT 
OR 5-PERCENT SHAREHOLDERS.— 
"(A) IN GENERAL.—If any portion of the assets of the 
plan attributable to securities acquired by the plan in 
a qualified gratuitous transfer are allocated to the account 
of— 
"(i) any person who is related to the decedent 
(within the meaning of section 267(b)) or a member 
of the decedent's family (within the meaning of section 
2032A(e)(2)), or 
"(ii) any person who, at the time of such allocation 
or at any time during the 1-year period ending on 
the date of the acquisition of qualified employer securi-
ties by the plan, is a 5-percent shareholder of the 
employer maintaining the plan, 
the plan shall be treated as having distributed (at the 
time of such allocation) to such person or shareholder the 
amount so allocated. 
"(B) 
5-PERCENT 
SHAREHOLDER.—For 
purposes 
of 
subparagraph (A), the term *5-percent shareholder' means 
any person who owns (directly or through the application 
of section 318(a)) more than 5 percent of the outstanding 
stock of the corporation which issued such qualified 
employer securities or of any corporation which is a member 
of the same controlled group of corporations (within the 
meaning of section 409(1)(4)) as such corporation. For pur-
poses of the preceding sentence, section 318(a) shall be 
applied without regard to the exception in paragraph 
(2)(B)(i) thereof 
"(C) CROSS REFERENCE.— 
T o r excise tax on allocations described in subparagraph (A), see 
section 4979A. 
"(6) TAX ON FAILURE TO TRANSFER UNALLOCATED SECURITIES 
TO CHARITY ON TERMINATION OF PLAN.—If the requirements 
of paragraph (3)(F) are not met with respect to any securities, 
there is hereby imposed a tax on the employer maintaining 
the plan in an amount equal to the sum of— 
"(A) the amount of the increase in the tax which would 
be imposed by chapter 11 if such securities were not trans-
ferred as described in paragraph (1), and 
"(B) interest on such amount at the underpayment 
rate under section 6621 (and compounded daily) from the 
I l l STAT. 1078 
PUBLIC LAW 105-34~AUG. 5, 1997 
due date for filing the return of the tax imposed by chapter 
11.". 
(c) CONFORMING AMENDMENTS.— 
(1) Section 401(a)(1) is amended by inserting "or by a 
charitable remainder trust pursuant to a qualified gratuitous 
transfer (as defined in section 664(g)(1))," after "stock bonus 
plans),". 
(2) Section 404(a)(9) is amended by inserting after subpara-
graph (B) the following new subparagraph: 
"(C) A qualified gratuitous transfer (as defined in sec-
tion 664(g)(1)) shall have no effect on the amount or 
amounts otherwise deductible under paragraph (3) or (7) 
or under this paragraph.". 
(3) Section 415(c)(6) is amended by adding at the end 
thereof the following new sentence: 
"The amount of any qualified gratuitous transfer (as defined 
in section 664(g)(1)) allocated to a participant for any limitation 
year shall not exceed the limitations imposed by this section, 
but such amount shall not be taken into account in determining 
whether any other amount exceeds the limitations imposed 
by this section.". 
(4) Section 415(e) is amended— 
(A) by redesignating paragraph (6) as paragraph (7), 
and 
(B) by inserting after paragraph (5) the following new 
paragraph: 
"(6) SPECIAL RULE FOR QUALIFIED GRATUITOUS TRANSFERS.— 
Any qualified gratuitous transfer of qualified employer securi-
ties (as defined by section 664(g)) shall not be taken into 
account in calculating, and shall not be subject to, the limita-
tions provided in this subsection.". 
(5) Subparagraph (B) of section 664(d)(1) and subparagraph 
(B) of section 664(d)(2) are each amended by inserting "and 
other than qualified gratuitous transfers described in subpara-
graph (C)" after "subparagraph (A)". 
(6) Paragraph (4) of section 674(b) is amended by inserting 
before the period "or to an employee stock ownership plan 
(as defined in section 4975(e)(7)) in a qualified gratuitous trans-
fer (as defined in section 664(g)(1))". 
(7) Section 2055(a) is amended— 
(i) by striking "or" at the end of paragraph (3), 
(ii) by striking the period at the end of paragraph 
(4) and inserting "; or", and 
(iii) by inserting after paragraph (4) the following new 
paragraph: 
"(5) to an employee stock ownership plan if such transfer 
qualifies as a qualified gratuitous transfer of qualified employer 
securities within the meaning of section 664(g).". 
(8) Paragraph (8) of section 2056(b) is amended to read 
as follows: 
"(8) SPECIAL RULE FOR CHARITABLE REMAINDER TRUSTS.— 
"(A) IN GENERAL.—If the surviving spouse of the 
decedent is the only beneficiary of a qualified charitable 
remainder trust who is not a charitable beneficiary nor 
an ESOP beneficiary, paragraph (1) shall not apply to 
any interest in such trust which passes or has passed 
from the decedent to such surviving spouse. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1079 
"(B) DEFINITIONS.—For purposes of subparagraph (A)— 
"(i) CHARITABLE BENEFICIARY.—The term 'chari-
table beneficiary mesuis any beneficiary which is an 
organization described in section 170(c). 
"(ii) ESOP BENEFICIARY.—The term 'ESOP bene-
ficiary* means any beneficiary which is an employee 
stock ownership plan (as defined in section 4975(e)(7)) 
that holds a remainder interest in qualified employer 
securities (as defined in section 664(g)(4)) to be trans-
ferred to such plan in a qualified gratuitous transfer 
(as defined in section 664(g)(1)). 
"(iii) QUALIFIED CHARITABLE REMAINDER TRUST.— 
The term 'qualified charitable remainder trust' mesins 
a charitable remainder annuity trust or a charitable 
remainder unitrust (described in section 664).". 
(9) Section 4947(b) is amended by inserting after paragraph 
(3) the following new paragraph: 
"(4) SECTION SOT.—The provisions of section 507(a) shall 
not apply to a trust which is described in subsection (a)(2) 
by reason of a distribution of qualified employer securities 
(as defined in section 664(g)(4)) to an employee stock ownership 
plan (as defined in section 4975(e)(7)) in a quaUfied gratuitous 
transfer (as defined by section 664(g)).". 
(10) The last sentence of section 4975(e)(7) is amended 
by inserting "and section 664(g)" after "section 409(n)". 
(11) Subsection (a) of section 4978 is amended— 
(A) by inserting "or acquired any qualified employer 
securities in a qualified gratuitous transfer to which section 
664(g) applied" afi;er "section 1042 applied", and 
(B) by inserting before the comma at the end of para-
graph (2) "60 percent of the total value of all employer 
securities as of such disposition in the case of any qualified 
employer securities acquired in a qualified gratuitous trans-
fer to which section 664(g) applied)". 
(12) Paragraph (2) of section 4978(b) is amended— 
(A) by inserting "or acquired in the qualified gratuitous 
transfer to which section 664(g) applied" after "section 1042 
applied", and 
(B) by inserting "or to which section 664(g) applied" 
after "section 1042 applied" in subparagraph (A) thereof. 
(13) Subsection (c) of section 4978 is amended by striking 
"written statement" and all that follows and inserting "written 
statement described in section 664(g)(1)(E) or in section 
1042(b)(3) (as the case may be).". 
(14) Paragraph (2) of section 4978(e) is amended by striking 
the period and inserting "; except that such section shall be 
applied without regard to subparagraph (B) thereof for purposes 
of applying this section and section 4979A with respect to 
securities acquired in a qualified gratuitous transfer (as defined 
in section 664(g)(1)).". 
(15) Subsection (a) of section 4979A is amended to read 
as follows: 
"(a) IMPOSITION OF TAX.—If— 
"(1) there is a prohibited allocation of qualified securities 
by £iny employee stock ownership pl£in or eligible worker-owned 
cooperative, or 
"(2) there is an allocation described in section 664(g)(5)(A), 
Ill STAT. 1080 
PUBLIC LAW 105-34—AUG. 5, 1997 
there is hereby imposed a tax on such allocation equal to 50 percent 
\ 
of the amount involved.". 
(16) Subsection (c) of section 4979A is amended to read 
as follows: 
"(c) LIABILITY FOR TAX.—The tax imposed by this section shall 
be paid by— 
"(1) the employer sponsoring such plan, or 
"(2) the eligible worker-owned cooperative, 
which made the written statement described in section 664(g)(1)(E) 
or in section 1042(b)(3)(B) (as the case may be).". 
(17) Section 4979A is amended by redesignating subsection 
(d) as subsection (e) and by inserting after subsection (c) the 
following new subsection: 
"(d) SPECIAL STATUTE OF LIMITATIONS FOR TAX ATTRIBUTABLE 
TO CERTAIN ALLOCATIONS.—The statutory period for the assessment 
of any tax imposed by this section on an allocation described in 
subsection (a)(2) of qualified employer securities shall not expire 
before the date which is 3 years from the later of— 
"(1) the 1st allocation of such securities in connection with 
a qualified gratuitous transfer (as defined in section 664(g)(1)), 
or 
"(2) the date on which the Secretary is notified of the 
allocation described in subsection (a)(2).". 
26 use 401 note. 
(d) EFFECTIVE DATE.—The amendments made by this section 
shall apply to transfers made by trusts to, or for the use of, an 
employee stock ownership plan after the date of the enactment 
of this Act. 
Subtitle C—Provisions Relating to Certain 
Health Acts 
SEC. 1531. AMENDMENTS TO THE INTERNAL REVENUE CODE OF 1986 
TO IMPLEMENT THE NEWBORNS' AND MOTHERS' HEALTH 
PROTECTION ACT OF 1996 AND THE MENTAL HEALTH 
PARITY ACT OF 1996. 
(a) IN GENERAL.—Subtitle K is amended— 
(1) by striking all that precedes section 9801 £ind inserting 
the following: 
"Subtitle K—Group Health Plan 
Requirements 
"CHAPTER 100. Group health plan requirements. 
"CHAPTER 100—GROUP HEALTH PLAN REQUIREMENTS 
"Subchapter A. Requirements relating to portability, access, and renewabil-
ity. 
"Subchapter B. Other requirements. 
"Subchapter C. Greneral provisions. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1081 
"Subchapter A—Requirements Relating to Portability, 
Access, and Renewability 
"Sec. 9801. Increased portability through limitation on preexisting condi-
tion exclusions. 
"Sec. 9802. Prohibiting discrimination against individual participants and 
beneficiaries based on health status. 
"Sec. 9803. Guaranteed renewability in multiemployer plans and certain 
multiple employer welfare arrangements.', 
(2) by redesignating sections 9804, 9805, and 9806 as sec-
tions 9831, 9832, and 9833, respectively, 
(3) by inserting before section 9831 (as so redesignated) 
the following: 
"Subchapter C—General Provisions 
"Sec. 9831. Greneral exceptions. 
"Sec. 9832. Definitions. 
"Sec. 9833. Regulations.", and 
(4) by inserting after section 9803 the following: 
"Subchapter B—Other Requirements 
"Sec. 9811. Standards relating to benefits for mothers and newborns. 
"Sec. 9812. Parity in the application of certain limits to mental health ben-
efits. 
"SEC. 9811. STANDARDS RELATING TO BENEFITS FOR MOTHERS AND 
NEWBORNS. 
"(a) REQUIREMENTS FOR MINIMUM HOSPITAL STAY FOLLOWING 
BIRTH.— 
"(1) IN GENERAL.—A group health pl£in may not— 
"(A) except as provided in paragraph (2)— 
"(i) restrict benefits for any hospital length of stay 
in connection with childbirth for the mother or newborn 
child, following a normal vaginal delivery, to less thsin 
48 hours, or 
"(ii) restrict benefits for any hospital length of 
stay in connection with childbirth for the mother or 
newborn child, following a caesarean section, to less 
than 96 hours; or 
"(B) require that a provider obtain authorization from 
the plan or the issuer for prescribing any length of stay 
required under subparagraph (A) (without regard to para-
graph (2)). 
"(2) EXCEPTION.—Paragraph (1)(A) shall not apply in 
connection with any group health plan in any case in which 
the decision to discharge the mother or her newborn child 
prior to the expiration of the minimum length of stay otherwise 
required under paragraph (1)(A) is made by an attending pro-
vider in consultation with the mother. 
"(b) PROHIBITIONS.—A group health plan may not— 
"(1) deny to the mother or her newborn child eligibility, 
or continued eligibility, to enroll or to renew coverage under 
the terms of the plan, solely for the purpose of avoiding the 
requirements of this section; 
"(2) provide monetary pajnnents or rebates to mothers to 
encourage such mothers to accept less than the minimum 
protections available under this section; 
I l l STAT. 1082 
PUBLIC LAW 105-34—AUG. 5, 1997 
"(3) penalize or otherwise reduce or limit the reimburse-
ment of an attending provider because such provider provided 
care to an individual participant or beneficiary in accordance 
with this section; 
"(4) provide incentives (monetary or otherwise) to an 
attending provider to induce such provider to provide care 
to an individual participant or beneficiary in a manner 
inconsistent with this section; or 
"(5) subject to subsection (c)(3), restrict benefits for any 
portion of a period within a hospital length of stay required 
under subsection (a) in a manner which is less favorable than 
the benefits provided for any preceding portion of such stay. 
"(c) RULES OF CONSTRUCTION.— 
"(1) Nothing in this section shall be construed to require 
a mother who is a participant or beneficiary— 
"(A) to give birth in a hospital; or 
"(B) to stay in the hospital for a fixed period of time 
following the birth of her child. 
"(2) This section shall not apply with respect to any group 
health plan which does not provide benefits for hospital lengths 
of stay in connection with childbirth for a mother or her new-
bom child. 
"(3) Nothing in this section shall be construed as preventing 
a group health plan from imposing deductibles, coinsurance, 
or other cost-sharing in relation to benefits for hospital lengths 
of stay in connection with childbirth for a mother or newborn 
child under the plan, except that such coinsurance or other 
cost-sharing for any portion of a period within a hospital length 
of stay required under subsection (a) may not be greater than 
such coinsurance or cost-sharing for any preceding portion of 
such stay. 
"(d) LEVEL AND TYPE OF REIMBURSEMENTS.—Nothing in this 
section shall be construed to prevent a group health plan from 
negotiating the level and type of reimbursement with a provider 
for care provided in accordance with this section. 
"(f) PREEMPTION; EXCEPTION FOR HEALTH INSURANCE COVERAGE 
IN CERTAIN STATES.—The requirements of this section shall not 
apply with respect to health insurance coverage if there is a State 
law (including a decision, rule, regulation, or other State action 
having the effect of law) for a State that regulates such coverage 
that is described in any of the following paragraphs: 
"(1) Such State law requires such coverage to provide for 
at least a 48-hour hospital length of stay following a normal 
vaginal delivery and at least a 96-hour hospital length of stay 
following a caesarean section. 
"(2) Such State law requires such coverage to provide for 
maternity and pediatric care in accordance with guidelines 
established by the American College of Obstetricians and Gyne-
cologists, the American Academy of Pediatrics, or other estab-
lished professional medical associations. 
"(3) Such State law requires, in connection with such cov-
erage for maternity care, that the hospital length of stay for 
such care is left to the decision of (or required to be made 
by) the attending provider in consultation with the mother. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1083 
"SEC. 9812. PARITY IN THE APPLICATION OF CERTAIN LIMITS TO MEN-
TAL HEALTH BENEFITS. 
"(a) IN GENERAL.— 
"(1) AGGREGATE LIFETIME LIMITS.—In the case of a group 
health plan that provides both medical and surgical benefits 
and mental health benefits— 
"(A) No LIFETIME LIMIT.—If the plan does not include 
an aggregate lifetime limit on substantially all medical 
and surgical benefits, the plan may not impose any aggre-
gate lifetime limit on mental health benefits. 
"(B) LIFETIME LIMIT.—If the plan includes an aggregate 
lifetime limit on substantially all medical £ind surgical 
benefits (in this paragraph referred to as the 'applicable 
lifetime limit'), the plan shall either— 
"(i) apply the applicable lifetime limit both to the 
medical and surgical benefits to which it otherwise 
would apply and to mental health benefits and not 
distinguish in the application of such limit between 
such medical and surgical benefits and mental health 
benefits; or 
"(ii) not include £uiy aggregate lifetime limit on 
mental health benefits that is less than the applicable 
lifetime limit. 
"(C) RULE IN CASE OF DIFFERENT LIMITS.—In the case 
of a plan that is not described in subparagraph (A) or 
(B) and that includes no or different aggregate lifetime 
limits on different categories of medical and surgical bene-
fits, the Secretary shall establish rules under which 
subparagraph (B) is applied to such plan with respect 
to mental health benefits by substituting for the applicable 
lifetime limit an average aggregate lifetime limit that is 
computed taking into account the weighted average of the 
aggregate lifetime limits applicable to such categories. 
"(2) ANNUAL LIMITS.—In the case of a group health plan 
that provides both medical and surgical benefits and mental 
health benefits— 
"(A) No ANNUAL LIMIT.—If the plan does not include 
an annual limit on substantially all medical and surgical 
benefits, the plan may not impose any annual limit on 
mental health benefits. 
"(B) ANNUAL LIMIT.—If the plan includes an annual 
limit on substantially all medical and surgical benefits 
(in this paragraph referred to as the 'applicable annual 
limit'), the plan shall either— 
"(i) apply the applicable annual limit both to medi-
cal and surgical benefits to which it otherwise would 
apply and to mental health benefits euid not distinguish 
in the application of such limit between such medical 
and surgical benefits and mental health benefits; or 
"(ii) not include any annual limit on mental health 
benefits that is less than the applicable annual limit. 
"(C) RULE IN CASE OF DIFFERENT LIMITS.—In the case 
of a plan that is not described in subparagraph (A) or 
(B) and that includes no or different annual limits on 
different categories of medical and surgical benefits, the 
Secretary shall establish rules under which subparagraph 
(B) is applied to such plan with respect to mental health 
I l l STAT. 1084 
PUBLIC LAW 105-34—AUG. 5, 1997 
benefits by substituting for the applicable annual limit 
an average annual limit that is computed taking into 
account the weighted average of the annual 
limits 
applicable to such categories. 
"(b) CONSTRUCTION.—Nothing in this section shall be con-
strued— 
"(1) as requiring a group health plan to provide any mental 
health benefits; or 
"(2) in the case of a group health plan that provides mental 
health benefits, as affecting the terms and conditions (including 
cost sharing, limits on numbers of visits or days of coverage, 
and requirements relating to medical necessity) relating to 
the amount, duration, or scope of mental health benefits under 
the plan, except as specifically provided in subsection (a) (in 
regard to parity in the imposition of aggregate lifetime limits 
and annual limits for mental health benefits). 
"(c) EXEMPTIONS.— 
"(1) SMALL EMPLOYER EXEMPTION.—This section shall not 
apply to any group health plan for any plan year of a small 
employer (as defined in section 4980D(d)(2)). 
"(2) INCREASED COST EXEMPTION.—This section shall not 
apply with respect to a group health plan if the application 
of this section to such plan results in an increase in the cost 
under the plan of at least 1 percent. 
"(d) SEPARATE APPLICATION TO EACH OPTION OFFERED.—In the 
case of a group health plan that offers a participant or beneficiary 
two or more benefit package options under the plan, the require-
ments of this section shall be applied separately with respect to 
each such option. 
"(e) DEFINITIONS.—For purposes of this section: 
"(1) AGGREGATE LIFETIME LIMIT.—The term 'aggregate life-
time limit' means, with respect to benefits under a group health 
plan, a dollar limitation on the total amount that may be 
paid with respect to such benefits under the plan with respect 
to an individual or other coverage unit. 
"(2) ANNUAL LIMIT.—The term 'annual limit' means, with 
respect to benefits under a group health plan, a dollar limitation 
on the total amount of benefits that may be paid with respect 
to such benefits in a 12-month period under the plan with 
respect to an individual or other coverage unit. 
"(3) MEDICAL OR SURGICAL BENEFITS.—The term 'medical 
or surgical benefits' means benefits with respect to medical 
or surgical services, as defined under the terms of the plan, 
but does not include mental health benefits. 
"(4) MENTAL HEALTH BENEFITS.—The term 'mental health 
benefits' means benefits with respect to mental health services, 
as defined under the terms of the plan, but does not include 
benefits with respect to treatment of substance abuse or chemi-
cal dependency. 
"(f) SUNSET.—^This section shall not apply to benefits for services 
furnished on or after September 30, 2001.'. 
(b) CONFORMING AMENDMENTS.— 
(1) Chapter 100 of such Code is further amended— 
(A) in the last sentence of section 9801(c)(1), by striking 
"section 9805(c)" and inserting "section 9832(c)"; 
(B) in section 9831(b), by striking "9805(c)(1)" and 
inserting "9832(c)(1)"; 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1085 
(C) in section 9831(c)(1), by striking "9805(c)(2)" and 
inserting "9832(c)(2)"; 
(D) in section 9831(c)(2), by striking "9805(c)(3)" and 
inserting "9832(c)(3)"; and 
(E) in section 9831(c)(3), by striking "9805(c)(4)" and 
inserting "9832(c)(4)". 
(2) Section 4980D of such Code is amended— 
(A) in subsection (a), by striking "plan portability, 
access, and renewability" and inserting "plans"; 
(B) in subsection (c)(3)(B)(i)(I), by striking "9805(d)(3)" 
and inserting "9832(d)(3)"; 
(C) in subsection (d)(1), by inserting "(other than a 
failure attributable to section 9811)" after "on any failure"; 
(D) in subsection (d)(3), by striking "9805" and insert-
ing "9832"; 
(E) in subsection (f)(1), by striking "9805(a)" and insert-
ing "9832(a)". 
(3) The table of subtitles for such Code is amended by 
striking the item relating to subtitle K and inserting the follow-
ing new item: 
"SUBTITLE K. Group health plan requirements.". 
(c) EFFECTIVE DATE.—The amendments made by this section 
shall apply with respect to group health plans for plan years begin-
ning on or after January 1, 1998. 
SEC. 1532. SPECIAL RULES RELATING TO CHURCH PLANS. 
(a) IN GENERAL.—Section 9802 (relating to prohibiting discrimi-
nation against individual participants and beneficiaries based on 
health status) is amended by adding at the end the following 
new subsection: 
"(c) SPECIAL RULES FOR CHURCH PLANS.—A church plan (as 
defined in section 414(e)) shall not be treated as failing to meet 
the requirements of this section solely because such plan requires 
evidence of good health for coverage o
f
— 
"(1) both any employee of an employer with 10 or less 
employees (determined without regard to section 414(e)(3)(C)) 
and any self-employed individual, or 
"(2) any individual who enrolls after the first 90 days 
of initial eligibility under the plan. 
This subsection shall apply to a plan for any year only if the 
plan included the provisions described in the preceding sentence 
on July 15, 1997, and at all times thereafter before the beginning 
of such year.". 
(b) EFFECTIVE DATE.—The amendments made by subsection 
(a) shall take effect as if included in the amendments made by 
section 401(a) of the Health Insurance Portability and Accountabil-
ity Act of 1996. 
26 use 4980D 
note. 
26 use 9802 
note. 
Subtitle D—Provisions Relating to Plan 
Amendments 
SEC. 1541. PROVISIONS RELATING TO PLAN AMENDMENTS. 
(a) IN GENERAL.—If this section applies to any plan or contract 
amendment— 
26 use 411 note. 
I l l STAT. 1086 
PUBLIC LAW 105-34—AUG. 5, 1997 
(1) such plan or contract shall be treated as being operated 
in accordance with the terms of the plan during the period 
described in subsection (b)(2)(A), and 
(2) such plan shall not fail to meet the requirements of 
section 411(d)(6) of the Internal Revenue Code of 1986 or section 
204(g) of the Employee Retirement Income Security Act of 
1974 by reason of such amendment. 
(b) AMENDMENTS TO WHICH SECTION APPLIES.— 
(1) IN GENERAL.—This section shall apply to £iny amend-
ment to any plan or annuity contract which is made— 
(A) pursuant to any amendment made by this title 
or subtitle H of title X, and 
(B) before the first day of the first plan year beginning 
on or after January 1, 1999. 
In the case of a governmental plan (as defined in section 
414(d) of the Internal Revenue Code of 1986), this paragraph 
shall be applied by substituting "2001" for "1999". 
(2) CONDITIONS.—This section shall not apply to any 
amendment unless— 
(A) during the period— 
(i) beginning on the date the legislative amend-
ment described in paragraph (1)(A) takes effect (or 
in the case of a plan or contract amendment not 
required by such legislative amendment, the effective 
date specified by the plan), and 
(ii) ending on the date described in paragraph 
(1)(B) (or, if earlier, the date the plan or contract 
amendment is adopted), 
the plan or contract is operated as if such plan or contract 
amendment were in effect, and 
(B) such plan or contract amendment applies retro-
actively for such period. 
TITLE XVI—TECHNICAL AMENDMENTS 
RELATED TO SMALL BUSINESS JOB 
PROTECTION ACT OF 1996 AND OTHER 
LEGISLATION 
26 use 1 note. 
SEC. 1600. COORDINATION WITH OTHER TITLES. 
For purposes of appljdng the amendments made by any title 
of this Act other than this title, the provisions of this title shall 
be treated as having been enacted immediately before the provisions 
of such other titles. 
SEC. 1601. AMENDMENTS RELATED TO SMALL BUSINESS JOB PROTEC-
TION ACT OF 1996. 
(a) AMENDMENTS RELATED TO SUBTITLE A.— 
(1) AMENDMENT RELATED TO SECTION iiie.—Paragraph (1) 
of section 6050R(c) is amended by striking "name and address" 
and inserting "name, address, and phone number of the 
information contact". 
(2) AMENDMENT TO SECTION iiie.—Paragraphs (1) and 
(2)(C) of section 1116(b) of the Small Business Job Protection 
Act of 1996 shall each be applied as if the reference to chapter 
68 were a reference to chapter 61. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1087 
(b) AMENDMENT RELATED TO SUBTITLE B.—Subsection (c) of 
section 52 is amended by striking "targeted jobs credit" and insert-
ing "work opportunity credit". 
(c) AMENDMENTS RELATED TO SUBTITLE C — 
(1) AMENDMENT RELATED TO SECTION 1302.—Subparagraph 
(B) of section 1361(e)(1) is amended by striking "and" at the 
end of clause (i), striking the period at the end of clause 
(ii) and inserting ", and", and adding at the end the following 
new clause: 
"(iii) any charitable remainder annuity trust or 
charitable remainder unitrust (as defined in section 
664(d)).". 
(2) EFFECTIVE DATE FOR SECTION 1307.— 
26 use 1377 
(A) Notwithstanding section 1317 of the Small Business note. 
Job Protection Act of 1996, the amendments made by sub-
sections (a) and (b) of section 1307 of such Act shall apply 
to determinations made after December 31, 1996. 
(B) In no event shall the 120-day period referred to 
in section 1377(b)(1)(B) of the Internal Revenue Code of 
1986 (as added by such section 1307) expire before the 
end of the 120-day period beginning on the date of the 
enactment of this Act. 
(3) AMENDMENT RELATED TO SECTION 1308.—Subparagraph 
(A) of section 1361(b)(3) is amended by striking "For purposes 
of this title" and inserting "Except as provided in regulations 
prescribed by the Secretary, for purposes of this title". 
(4) AMENDMENTS RELATED TO SECTION 1316.— 
(A) Paragraph (2) of section 512(e) is amended by strik-
ing "within the meaning of section 1012" and inserting 
"as defined in section 1361(e)(1)(C)". 
(B) Paragraph (7) of section 1361(c) is redesignated 
as paragraph (6). 
(C) Subparagraph (B) of section 1361(b)(1) is amended 
by striking "subsection (c)(7)" and inserting "subsection 
(c)(6)". 
(D) Paragraph (1) of section 512(e) is amended by 
striking 
"section 
1361(c)(7)" and inserting 
"section 
1361(c)(6)". 
(d) AMENDMENTS RELATED TO SUBTITLE D.— 
(1) AMENDMENTS RELATED TO SECTION 1421.— 
(A) Subsection (i) of section 408 is amended in the 
last sentence by striking "30 days" and inserting "31 days". 
(B) Subparagraph (H) of section 408(k)(6) is amended 
by striking "if the terms of such pension" £ind inserting 
"of an employer if the terms of simplified employee pensions 
of such employer". 
(C)(i) Subparagraph (B) of section 408(1)(2) is amend-
ed— 
(I) by inserting "and the issuer of an annuity estab-
lished under such an arrangement" after "under sub-
section (p)", and 
(II) in clause (i), by inserting "or issuer" after 
"trustee". 
(ii) Paragraph (2) of section 6693(c) is amended— 
(I) by inserting "or issuer" after "trustee", and 
(II) in the heading, by inserting "AND ISSUER" after 
"trustee". 
Ill STAT. 1088 
PUBLIC LAW 105-34—AUG. 5, 1997 
(D) Subsection (p) of section 408 is amended by adding 
at the end the following new paragraph: 
"(8) COORDINATION WITH MAXIMUM LIMITATION UNDER SUB-
SECTION (a).—In the case of any simple retirement accoimt, 
subsections (a)(1) and (b)(2) shall be applied by substituting 
'the sum of the dollar amount in effect under paragraph 
(2)(A)(ii) of this subsection and the employer contribution 
required under subparagraph (A)(iii) or (B)(i) of paragraph (2) 
of this subsection, whichever is applicable' for '$2,000'.". 
(E) Clause (i) of section 408(p)(2)(D) is amended by 
adding at the end the following new sentence: "If only 
individuals other than employees described in subpara-
graph (A) or (B) of section 410(b)(3) are eligible to partici-
pate in such arrangement, then the preceding sentence 
shall be applied without regard to any qualified plan in 
which only employees so described are eligible to partici-
pate.". 
(F) Subparagraph (D) of section 408(p)(2) is amended 
by adding at the end the following new clause: 
Applicability. 
"(iii) GRACE PERIOD.—In the case of an employer 
who establishes and maintains a plan under this sub-
section for 1 or more years and who fails to meet 
any requirement of this subsection for any subsequent 
year due to any acquisition, disposition, or similar 
transaction involving another such employer, rules 
similar to the rules of section 410(b)(6)(C) shall apply 
for purposes of this subsection.". 
(G) Paragraph (5) of section 408(p) is amended in the 
text preceding subparagraph (A) by striking "simplified" 
and inserting "simple". 
(2) AMENDMENTS RELATED TO SECTION 1422.— 
(A) Clause (ii) of section 401(k)(ll)(D) is amended by 
striking the period and inserting "if such plan allows only 
contributions required under this paragraph.". 
(B) Paragraph (11) of section 401(k) is amended by 
adding at the end the following new subparagraph: 
"(E) COST-OF-LIVING ADJUSTMENT.—The Secretary shall 
adjust the $6,000 amount under subparagraph (B)(i)(I) at 
the same time and in the same manner as under section 
408(p)(2)(E).". 
(C) Subparagraph (A) of section 404(a)(3) is amended— 
(i) in clause (i), by striking "not in excess of and 
all that follows and inserting the following: "not in 
excess of the greater o
f
— 
"(I) 15 percent of the compensation otherwise 
E
aid or accrued during the taxable year to the 
eneficiaries under the stock bonus or profit-shar-
ing plan, or 
"(II) the amount such employer is required 
to contribute to such trust under section 401(k)(ll) 
for such year.", and 
(ii) in clause (ii), by striking "15 percent" and 
all that follows and inserting the following "the amount 
described in subclause (I) or (II) of clause (i), whichever 
is greater, with respect to such taxable year.". 
(D) Subparagraph (B) of section 401(k)(ll) is amended 
by adding at the end the following new clause: 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1089 
"(iii) ADMINISTRATIVE REQUIREMENTS.— 
"(I) IN GENERAL.—Rules similar to the rules Applicability. 
of subparagraphs (B) and (C) of section 408(p)(5) 
shall apply for purposes of this subparagraph. 
"(II) 
NOTICE 
OF 
ELECTION 
PERIOD.—The 
requirements of this subparagraph shall not be 
treated as met with respect to any year unless 
the employer notifies each employee eligible to 
participate, within a reasonable period of time 
before the 60th day before the beginning of such 
year (and, for the first year the employee is so 
eligible, the 60th day before the first day such 
employee is so eligible), of the rules similar to 
the rules of section 408(p)(5)(C) which apply by 
reason of subclause (I).". 
(3) AMENDMENT RELATED TO SECTION 1433.—The heading 
of paragraph (11) of section 401(m) is amended by striking 
"ALTERNATIVE" and inserting "ADDITIONAL ALTERNATIVE". 
(4) CLARIFICATION OF SECTION 1450.— 
26 use 403 note. 
(A) Section 403(b)(ll) of the Internal Revenue Code 
of 1986 shall not apply with respect to a distribution from 
a contract described in section 1450(b)(1) of such Act to 
the extent that such distribution is not includible in income 
by reason of— 
(i) in the case of distributions before January 1, 
1998, section 403 (b)(8) or (b)(10) of such Code (deter-
mined after the application of section 1450(b)(2) of 
such Act), and 
(ii) in the case of distributions on and after such 
date, such section 403(b)(1). 
(B) This paragraph shall apply as if included in section Applicability. 
1450 of the Small Business Job Protection Act of 1996. 
(5) AMENDMENT RELATED TO SECTION 1451.—Clause (ii) of 
section 205(c)(8)(A) of the Employee Retirement Income Secu-
rity Act of 1974 is amended by striking "Secretary" and insert- 
29 USC 1055. 
ing "Secretary of the Treasury". 
(6) AMENDMENTS RELATED TO SECTION I46I.— 
(A) Section 414(e)(5)(A) is amended to read as follows: 
"(A) CERTAIN MINISTERS MAY PARTICIPATE.—For pur-
poses of this part— 
"(i) IN GENERAL.—^A duly ordained, commissioned, 
or licensed minister of a church is described in para-
graph (3)(B) if, in connection with the exercise of their 
ministry, the minister— 
"(I) is a self-employed individual (within the 
meaning of section 401(c)(1)(B), or 
"(II) is employed by an organization other than 
an organization which is described in section 
501(c)(3) and with respect to which the minister 
shares common religious bonds. 
"(ii) 
TREATMENT AS EMPLOYER AND EMPLOYEE.— 
For purposes of sections 403(b)(1)(A) and 404(a)(10), 
a minister described in clause (i)(I) shall be treated 
as employed by the minister's own employer which 
is an organization described in section 501(c)(3) and 
exempt from tax under section 501(a).". 
Ill STAT. 1090 
PUBLIC LAW 105-34—AUG. 5, 1997 
(B) Section 403(b)(1)(A) is amended by striking "or" 
at the end of clause (i), by inserting "or" at the end of 
clause (ii), and by adding at the end the following new 
clause: 
"(iii) for the minister 
described 
in section 
414(e)(5)(A) by the minister or by an employer,". 
(7) AMENDMENT RELATED TO SECTION 1462.—The paragraph 
(7) of section 414(q) added by section 1462 of the Small Business 
Job Protection Act of 1996 is redesignated as paragraph (9). 
(e) AMENDMENT RELATED TO SUBTITLE E.—Subparagraph (A) 
of section 956(b)(1) is amended by inserting "to the extent such 
amount was accumulated in prior taxable years" after "section 
316(a)(1)". 
(f) AMENDMENTS RELATED TO SUBTITLE F.— 
(1) AMENDMENTS RELATED TO SECTION leoi.— 
(A) The heading of section 30A is amended to read 
as follows: 
"SEC. 30A. PUERTO RICO ECONOMIC ACTIVITY CREDIT.". 
(B) The table of sections for subpart B of part IV 
of subchapter A of chapter 1 is amended in the item relating 
to section 30A by striking "Puerto Rican" and inserting 
"Puerto Rico". 
(C) Paragraph (1) of section 55(c) is amended by strik-
ing "Puerto Rican" and inserting "Puerto Rico". 
(2) AMENDMENTS RELATED TO SECTION leoe.— 
(A) Clause (ii) of section 9503(c)(2)(A) is amended by 
striking "(or with respect to qualified diesel-powered high-
way vehicles purchased before January 1, 1999)". 
(B) Subparagraph (A) of section 9503(e)(5) is amended 
by striking "; except that" and all that follows and inserting 
a period. 
(3) AMENDMENTS RELATED TO SECTION I607.— 
(A) Subsection (f) of section 4001 (relating to 
phasedown of tax on luxury passenger automobiles) is 
amended— 
(i) by inserting "and section 4003(a)" after "sub-
section (a)", and 
(ii) by inserting ", each place it appears," before 
"the percentage". 
(B) Subsection (g) of section 4001 (relating to termi-
nation) is amended by striking "tax imposed by this section" 
and inserting "taxes imposed by this section eind section 
4003" and by striking "or use" and inserting ", use, or 
installation". 
Applicability. 
(C) The amendments made by this paragraph shall 
26 use 4001 
apply to sales after the date of the enactment of this 
Act. 
(4) AMENDMENTS RELATED TO SECTION leoe.— 
(A) Subsection (1) of section 4041 is amended— 
(i) by inserting "or a fixed-wing aircraft" after "heli-
copter", and 
(ii) in the heading, by striking "HELICOPTER". 
(B) The last sentence of section 4041(a)(2) is amended 
by striking "section 4081(a)(2)(A)" and inserting "section 
4081(a)(2)(A)(i)". 
note. 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1091 
(C) Subsection (b) of section 4092 is amended by strik-
ing "section 4041(c)(4)" and inserting "section 4041(c)(2)". 
(D) Subsection (g) of section 4261 (as redesignated 
by title X) is amended by inserting "on that flight" after 
"dedicated". 
(E) Paragraph (1) of section 1609(h) of such Act is 26USC4091 
amended by striking "paragraph (3)(A)(i)" and inserting note. 
"paragraph (3)(A)". 
(F) Paragraph (4) of section 1609(h) of such Act is 
amended by inserting before the period "or exclusively for 
the use described in section 4092(b) of such Code". 
(5) AMENDMENTS RELATED TO SECTION leie.— 
(A) Subparagraph (A) of section 593(e)(1) is amended 
by inserting "(and, in the case of an S corporation, the 
accumulated adjustments account, as defined in section 
1368(e)(1))" after "1951,". 
(B) Paragraph (7) of section 1374(d) is amended by 
adding at the end the following new sentence: "For purposes 
of applying this section to any amount includible in income 
by reason of section 593(e), the preceding sentence shall 
be applied without regard to the phrase '10-year'.". 
(6) AMENDMENTS RELATED TO SECTION I62I.— 
(A) Subparagraph (A) of section 860L(b)(l) is amended 
in the text preceding clause (i) by striking "after the startup 
date" and inserting "on or after the startup date". 
(B) Paragraph (2) of section 860L(d) is amended by 
striking 
"section 
8601(c)(2)" 
and 
inserting 
"section 
8601(b)(2)". 
(C) Subparagraph (B) of section 860L(e)(2) is amended 
by inserting "other thsin foreclosure property" after "any 
permitted asset". 
(D) Subparagraph (A) of section 860L(e)(3) is amended 
by striking "if the FASIT" and all that follows and inserting 
the following new flush text after clause (ii): 
"if the FASIT were treated as a REMIC and permitted 
assets (other than cash or cash equivalents) were treated 
as qualified mortgages.". 
(E)(i) Paragraph (3) of section 860L(e) is amended by 
adding at the end the following new subparagraph: 
"(D) 
INCOME FROM DISPOSITIONS OF FORMER HEDGE 
ASSETS.—Paragraph (2)(A) shall not apply to income 
derived from the disposition of— 
"(i) an asset which was described in subsection 
(c)(1)(D) when first acquired by the FASIT but on 
the date of such disposition was no longer described 
in subsection (c)(l)(D)(ii), or 
"(ii) a contract right to acquire an asset described 
in clause (i).". 
(ii) Subparagraph (A) of section 860L(e)(2) is amended 
by inserting "except as provided in paragraph (3)," before 
"the receipt . 
(g) AMENDMENTS RELATED TO SUBTITLE G.— 
(1) EXTENSION OF PERIOD FOR CLAIMING REFUNDS FOR ALCO- 
26 use 6427 
HOL FUELS.—Notwithstanding section 6427(i)(3)(C) of the note. 
Internal Revenue Code of 1986, a claim filed under section 
6427(f) of such Code for any period after September 30, 1995, 
Eind before October 1, 1996, shall be treated as timely filed 
Ill STAT. 1092 
PUBLIC LAW 105-34—AUG. 5, 1997 
if filed before the 60th day after the date of the enactment 
of this Act. 
26 use 6501. 
(2) AMENDMENTS TO SECTIONS 1703 AND I704.—Sections 
1703(n)(8) and 17040")(4)(B) of the Small Business Job Protec-
tion Act of 1996 shall each be applied as if such sections 
referred to section 1702 instead of section 1602. 
(h) AMENDMENTS RELATED TO SUBTITLE H . — 
(1) AMENDMENTS RELATED TO SECTION isoe.— 
(A) Subparagraph (B) of section 529(e)(1) is amended 
by striking "subsection (c)(2)(C)" and inserting "subsection 
(c)(3)(C)". 
(B) Subparagraph (C) of section 529(e)(1) is amended 
by inserting "(or agency or instrumentality thereof)" after 
"local government". 
(C) Paragraph (2) of section 1806(c) of the Small Busi-
26 use 529 note. 
ness Job Protection Act of 1996 is amended by striking 
so much of the first sentence as follows subparagraph (B)(ii) 
and inserting the following: 
Applicability. 
"then such program (as in effect on August 20, 1996) shall 
be treated as a qualified State tuition program with respect 
to contributions (and earnings allocable thereto) pursuant to 
contracts entered into under such program before the first 
date on which such program meets such requirements (deter-
mined without regard to this paragraph) and the provisions 
of such program (as so in effect) shall apply in lieu of section 
529(b) of the Internal Revenue Code of 1986 with respect to 
such contributions and earnings.". 
(2) AMENDMENTS RELATED TO SECTION I807.— 
(A) Paragraph (2) of section 23(a) is amended to read 
as follows: 
"(2) YEAR CREDIT ALLOWED.—^The credit under paragraph 
(1) with respect to any expense shall be allowed— 
"(A) in the case of any expense paid or incurred before 
the taxable year in which such adoption becomes final, 
for the taxable year following the taxable year during which 
such expense is paid or incurred, and 
"(B) in the case of an expense paid or incurred during 
or after the taxable year in which such adoption becomes 
final, for the taxable year in which such expense is paid 
or incurred.". 
(B) Subparagraph (B) of section 23(b)(2) is amended 
by striking "determined—" and all that follows and insert-
ing the following: "determined without regard to sections 
911, 931, and 933.". 
(C) Paragraph (1) of section 137(b) (relating to adoption 
assistance programs) is amended by striking "amount 
excludable from gross income" and inserting "of the 
amounts paid or expenses incurred which may be taken 
into account". 
(D)(i) Subparagraph (C) of section 414(n)(3) is amended 
by inserting "137," after "132,". 
(ii) Paragraph (2) of section 414(t) is amended by 
inserting "137," after "132,". 
(iii) Paragraph (1) of section 6039GD(d) is amended 
by striking "or 129" and inserting "129, or 137". 
(i) AMENDMENTS RELATED TO SUBTITLE I.— 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1093 
(1) AMENDMENT RELATED TO SECTION I90I.—Subsection (b) 
of section 6048 is amended in the heading by striking 
"GRANTOR" and inserting "OWNER". 
(2) AMENDMENTS RELATED TO SECTION I903.— 
Clauses (ii) and (iii) of section 679(a)(3)(C) are each 
amended by inserting ", owner," after "grantor". 
(3) AMENDMENTS RELATED TO SECTION I907.— 
(A) Clause (ii) of section 7701(a)(30)(E) is amended 
by striking "fiduciaries" and inserting "persons". 
(B) Subsection (b) of section 641 is amended by adding 
at the end the following new sentence: "For purposes of 
this subsection, a foreign trust or foreign estate shall be 
treated as a nonresident alien individual who is not present 
in the United States at any time.". 
(4) EFFECTIVE DATE RELATED TO SUBTITLE I.—The Secretary 
26 use 770i 
of the Treasury may by regulations or other administrative ^°^^-
guidance provide that the amendments made by section 1907(a) 
of the Small Business Job Protection Act of 1996 shall not 
apply to a trust with respect to a reasonable period beginning 
on the date of the enactment of such Act, if— 
(A) such trust is in existence on August 20, 1996, 
and is a United States person for purposes of the Internal 
Revenue Code of 1986 on such date (determined without 
regard to such amendments), 
(B) no election is in effect under section 1907(a)(3)(B) 
of such Act with respect to such trust, 
(C) before the expiration of such reasonable period, 
such trust makes the modifications necessary to be treated 
as a United States person for purposes of such Code (deter-
mined with regard to such amendments), and 
(D) such trust meets such other conditions as the Sec-
retary may require. 
(j) EFFECTIVE DATE.— 
26 use 23 note. 
(1) IN GENERAL.—Except as provided in paragraph (2), the 
amendments made by this section shall take effect as if included 
in the provisions of the Small Business Job Protection Act 
of 1996 to which they relate. 
(2) CERTAIN ADMINISTRATIVE REQUIREMENTS WITH RESPECT 
TO CERTAIN PENSION PLANS.—The amendment made by sub-
section (d)(2)(D) shall apply to calendar years beginning after 
the date of the enactment of this Act. 
SEC. 1602. AMENDMENTS RELATED TO HEALTH INSURANCE PORT-
ABILITY AND ACCOUNTABILITY ACT OF 1996. 
(a) AMENDMENTS P SLATED TO SECTION 301.— 
(1) Paragraph (2) of section 26(b) is amended by striking 
"and" at the end of subparagraph (N), by striking the period 
at the end of subparagraph (O) and inserting ", and", and 
by adding at the end the following new subparagraph: 
"(P) section 220(f)(4) (relating to additional tax on 
medical savings account distributions not used for qualified 
medical expenses).". 
(2) Paragraph (3) of section 220(c) is amended by striking 
subparagraph (A) and redesignating subparagraphs (B) through 
(D) as subparagraphs (A) through (C), respectively. 
Ill STAT. 1094 
PUBLIC LAW 105-34—AUG. 5, 1997 
(3) Subparagraph (C) of section 220(d)(2) is amended by 
striking "an eligible individual" and inserting "described in 
clauses (i) and (ii) of subsection (c)(1)(A)". 
(4) Subsection (a) of section 6693 is amended by adding 
at the end the following new sentence: 
"This subsection shall not apply to any report which is an informa-
tion return described in section 6724(d)(l)(C)(i) or a payee statement 
described in section 6724(d)(2)(X).". 
(5) Paragraph (4) of section 4975(c) is amended by striking 
"if, with respect to such transaction" and all that follows and 
inserting the following: "if section 220(e)(2) applies to such 
transaction.". 
(b) AMENDMENT RELATED TO SECTION 321.—Subparagraph (B) 
of section 7702B(c)(2) is amended in the last sentence by inserting 
"described in subparagraph (A)(i)" after "chronically ill individual". 
(c) AMENDMENTS RELATED TO SECTION 322.—Subparagraph (B) 
of section 162(1)(2) is amended by adding at the end the following 
new sentence: "The preceding sentence shall be applied separately 
with respect to— 
"(i) plans which include coverage for qualified long-
term care services (as defined in section 7702B(c)) or 
are qualified long-term care insurance contracts (as 
defined in section 7702B(b)), and 
"(ii) plans which do not include such coverage and 
are not such contracts.". 
(d) AMENDMENTS RELATED TO SECTION 323.— 
(1) Paragraph (1) of section 6050Q(b) is amended by insert-
ing ", address, and phone number of the information contact" 
after "name". 
(2)(A) Paragraph (2) of section 6724(d) is amended by strik-
ing so much as follows subparagraph (Q) and precedes the 
last sentence, and inserting the following new subparagraphs: 
"(R) section 6050R(c) (relating to returns relating to 
certain purchases offish), 
"(S) section 6051 (relating to receipts for employees), 
"(T) section 6052(b) (relating to returns regarding pay-
ment of wages in the form of group-term life insurance), 
"(U) section 6053(b) or (c) (relating to reports of tips), 
"(V) section 6048(b)(1)(B) (relating to foreign trust 
reporting requirements), 
"(W) section 4093(c)(4)(B) (relating to certain pur-
chasers of diesel and aviation fuels), 
"(X) section 408(i) (relating to reports with respect 
to individual retirement plans) to any person other than 
the Secretary with respect to the amount of payments 
made to such person, or 
"(Y) section 6047(d) (relating to reports by plan 
administrators) to any person other than the Secretary 
with respect to the amount of payments made to such 
person.". 
(B) Subsection (e) of section 6652 is amended in the last 
sentence by striking "section 6724(d)(2)(X)" and inserting "sec-
tion 6724(d)(2)(Y)". 
(e) AMENDMENT RELATED TO SECTION 325.—Clauses (ii) and 
(iii) of section 7702B(g)(4)(B) are each amended by striking "Sec-
retary" and inserting "appropriate State regulatory agency^'. 
(f) AMENDMENTS RELATED TO SECTION 501.— 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1095 
(1) Paragraph (4) of section 264(a) is amended by striking 
subparagraph (A) and all that follows through "by the tax-
payer," and inserting the following: 
"(A) is or was an officer or employee, or 
"(B) is or was financially interested in, 
any trade or business carried on (currently or formerly) by 
the taxpayer.". 
(2) The last 2 sentences of section 264(d)(2)(B)(ii) are 
amended to read as follows: 
"For purposes of subclause (II), the term 'applicable 
period' means the 12-month period beginning on the 
date the policy is issued (and each successive 12-month 
period thereafter) unless the taxpayer elects a number 
of months (not greater than 12) other than such 12-
month period to be its applicable period. Such an elec- Applicability. 
tion shall be made not later than the 90th day after 
the date of the enactment of this sentence and, if 
made, shall apply to the taxpayer's first taxable year 
ending on or after October 13, 1995, and all subsequent 
taxable years unless revoked with the consent of the 
Secretary.". 
(3) Subparagraph (B) of section 264(d)(4) is amended by 
striking "the employer" and inserting "the taxpayer". 
(4) Subsection (c) of section 501 of the Health Insurance 
Portability and Accountability Act of 1996 is amended by strik- 26 USC 264 note. 
ing paragraph (3). 
(5) Paragraph (2) of section 501(d) of such Act is amended 
by striking "no additional premiums" and all that follows and 
inserting the following: "a lapse occurring after October 13, 
1995, by reason of no additional premiums being received under 
the contract.". 
(g) AMENDMENTS RELATED TO SECTION 511.— 
(1) Subparagraph (B) of section 877(d)(2) is amended by 
striking "the 10-year period described in subsection (a)" and 
inserting "the 10-year period beginning on the date the individ-
ual loses United States citizenship". 
(2) Subparagraph (D) of section 877(d)(2) is amended by 
adding at the end the following new sentence: "In the case 
of any exchange occurring during such 5 years, any gain recog-
nized under this subparagraph shall be recognized immediately 
after such loss of citizenship.". 
(3) Paragraph (3) of section 877(d) is amended by inserting 
"and the period applicable under paragraph (2)" after "sub-
section (a)". 
(4) Subparagraph (A) of section 877(d)(4) is amended— 
(A) by inserting "during the 10-year period beginning 
on the date the individual loses United States citizenship 
after "contributes property" in clause (i), 
(B) by inserting "immediately before such contribution" 
after "from such property", and 
(C) by striking "during the 10-year period referred 
to in subsection (a),". 
(5) Subparagraph (C) of section 2501(a)(3) is amended by 
striking "decedent" and inserting "donor". 
(6)(A) Clause (i) of section 2107(c)(2)(B) is amended by 
striking "such foreign country in respect of property included 
in the gross estate as the value of the property" and inserting 
I l l STAT. 1096 
PUBLIC LAW 105-34—AUG. 5, 1997 
"such foreign country as the value of the property subjected 
to such taxes by such foreign country and". 
(B) Subparagraph (C) of section 2107(c)(2) is amended to 
read as follows: 
"(C) PROPORTIONATE SHARE.—In the case of property 
which is included in the gross estate solely by reason 
of subsection (b), such property's proportionate share is 
the percentage which the value of such property bears 
to the total value of all property included in the gross 
estate solely by reason of subsection (b).". 
(h) AMENDMENTS RELATED TO SECTION 512.— 
(1) Subpart A of part III of subchapter A of chapter 61 
is amended by redesignating the section 6039F added by section 
512 of the Health Insurance Portability and Accountability 
Act of 1996 as section 6039G and by moving such section 
6039G to immediately after the section 6039F added by section 
1905 of the Small Business Job Protection Act of 1996. 
(2) The table of sections for subpart A of part III of sub-
chapter A of chapter 61 is amended by striking the item relating 
to tne section 6039F related to information on individuals losing 
United States citizenship and inserting after the item relating 
to the section 6039F related to notice of large gifts received 
from foreign persons the following new item: 
"Sec. 6039G. Information on individuals losing United States citizenship.". 
(3) Paragraph (1) of section 877(e) is amended by striking 
"6039F" and inserting "6039G". 
26 use 26 note. 
(i) EFFECTIVE DATE.—The amendments made by this section 
shall take effect as if included in the provisions of the Health 
Insurance Portability and Accountability Act of 1996 to which such 
amendments relate. 
SEC. 1603. AMENDMENTS RELATED TO TAXPAYER BILL OF RIGHTS 
2. 
(a) AMENDMENT RELATED TO SECTION 1311.—Subsection (b) 
of section 4962 is amended by striking "subchapter A or C" and 
inserting "subchapter A, C, or D". 
(b) AMENDMENTS RELATED TO SECTION 1312.— 
(1)(A) Paragraph (10) of section 6033(b) is amended by 
striking all that precedes subparagraph (A) and inserting the 
following: 
"(10) the respective amounts (if any) of the taxes imposed 
on the organization, or any organization manager of the 
organization, during the taxable year under any of the following 
provisions (and the respective amounts (if any) of reimburse-
ments paid by the organization during the taxable year with 
respect to taxes imposed on any such organization manager 
under any of such provisions):". 
(B) Subparagraph (C) of section 6033(b)(10) is amended 
by adding at the end the following: "except to the extent that, 
by reason of section 4962, the taxes imposed under such section 
are not required to be paid or are credited or refunded,". 
(2) Paragraph (11) of section 6033(b) is amended to read 
as follows: 
"(11) the respective amounts (if any) o
f
— 
"(A) the taxes imposed with respect to the organization 
on any organization manager, or any disqualified person, 
during the taxable year under section 4958 (relating to 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1097 
taxes on private excess benefit from certain charitable 
organizations), and 
"(B) reimbursements paid by the organization during 
the taxable year with respect to taxes imposed under such 
section, 
except to the extent that, by reason of section 4962, the taxes 
imposed under such section are not required to be paid or 
are credited or refunded,". 
(c) EFFECTIVE DATE.—The amendments made by this section 26USC4962 
shall take effect as if included in the provisions of the Taxpayer i^ote-
Bill of Rights 2 to which such amendments relate. 
SEC. 1604. MISCELLA^fEOUS PROVISIONS. 
(a) AMENDMENTS RELATED TO ENERGY POLICY ACT OF 1992.— 
(1) Paragraph (1) of section 263(a) is amended by striking 
"or" at the end of subparagraph (F), by striking the period 
at the end of subparagraph (G) and inserting "; or", and by 
adding at the end the following new subparagraph: 
"(H) expenditures for which a deduction is allowed 
under section 179A.". 
(2) Subparagraph (B) of section 312(k)(3) is amended— 
(A) by striking "179" in the heading and the first 
place it appears in the text and inserting "179 or 179A", 
and 
(B) by striking "179" the last place it appears and 
inserting "179 or 179A, as the case may be". 
(3) Paragraphs (2)(C) and (3)(C) of section 1245(a) are 
each amended by inserting "179A," after "179,". 
(4) The amendments made by this subsection shall take 26 USC 263 note. 
effect as if included in the amendments made by section 1913 
of the Energy PoHcy Act of 1992. 
(b) AMENDMENTS RELATED TO URUGUAY ROUND AGREEMENTS 
ACT.— 
(1) Paragraph (1) of section 6621(a) is amended in the 
last sentence by striking "subsection (c)(3))" and inserting "sub-
section (c)(3), applied by substituting 'overpayment' for 'under-
payment')". 
(2)(A) Subclause (II) of section 412(m)(5)(E)(ii) is amended 
by striking "clause (i)" and inserting "subclause (I)". 
(B) Subclause (II) of section 302(e)(5)(E)(ii) of the Employee 
Retirement Income Security Act of 1974 is amended by striking 29 USC 1082. 
"clause (i)" and inserting "subclause (I)". 
(3) Subparagraph (A) of section 767(d)(3) of the Uruguay 
Round Agreements Act is amended in the last sentence by 26 USC 411 note. 
striking "(except that" and all that follows through "into 
account)". 
(4) The amendments made by this subsection shall take 
26 USC 412 note, 
effect as if included in the sections of the Uruguay Round 
Agreements Act to which they relate. 
(c) AMENDMENT RELATED TO OMNIBUS BUDGET RECONCILIATION 
ACT OF 1993.— 
(1) Paragraph (6) of section 168(j) (defining Indian reserva-
tion) is amended by adding at the end the following new flush 
sentence: 
"For purposes of the preceding sentence, such section 3(d) shall 
be applied by treating the term 'former Indian reservations 
in Oklahoma' as including only lands which are within the 
I l l STAT. 1098 
PUBLIC LAW 105-34—AUG. 5, 1997 
Applicability. 
26 u s e 168 note. 
26 u s e 833 note. 
26 u s e 267 note. 
Ante. p. 275. 
Ante, p. 574. 
jurisdictional area of an Oklahoma Indian tribe (as determined 
by the Secretary of the Interior) and are recognized by such 
Secretary as eligible for trust land status under 25 CFR Part 
151 (as in effect on the date of the enactment of this sentence).". 
(2) The amendment made by paragraph (1) shall apply 
as if included in the amendments made by section 13321 of 
the Omnibus Budget Reconciliation Act of 1993, except that 
such amendment shall not apply— 
(A) with respect to property (with an applicable recov-
ery period under section 168(j) of the Internal Revenue 
Code of 1986 of 6 years or less) held by the taxpayer 
if the taxpayer claimed the benefits of section 168(j) of 
such Code with respect to such property on a return filed 
before March 18, 1997, but only if such return is the 
first return of tax filed for the taxable year in which such 
property was placed in service, or 
(B) with respect to wages for which the taxpayer 
claimed the benefits of section 45A of such Code for a 
taxable year on a return filed before March 18, 1997, 
but only if such return was the first return of tax filed 
for such taxable year. 
(d) AMENDMENTS RELATED TO TAX REFORM ACT OF 1986.— 
(1) Paragraph (3) of section 1059(d) is amended by striking 
"subsection (a)(2)" and inserting "subsection (a)". 
(2)(A) Subparagraph (A) of section 833(b)(1) is amended— 
(i) by inserting before the comma at the end of clause 
(i) "and liabilities incurred during the taxable year under 
cost-plus contracts", and 
(ii) by inserting before the comma at the end of clause 
(ii) "or in connection with the administration of cost-plus 
contracts". 
(B) The amendment made by subparagraph (A) shall take 
effect as if included in the amendments made by section 1012 
of the Tax Reform Act of 1986. 
(e) AMENDMENT RELATED TO TAX REFORM ACT OF 1984.— 
(1) Section 267(f) is amended by adding at the end the 
following new paragraph: 
"(4) DETERMINATION OF RELATIONSHIP RESULTING IN DIS-
ALLOWANCE OF LOSS, FOR PURPOSES OF OTHER PROVISIONS.— 
For purposes of any other section of this title which refers 
to a relationship which would result in a disallowsince of losses 
under this section, deferral under paragraph (2) shall be treated 
as disallowance.". 
(2) EFFECTIVE DATE.—The amendment made by paragraph 
(1) shall take effect as if included in section 174(b) of the 
Tax Reform Act of 1984. 
(f) AMENDMENTS RELATED TO BALANCED BUDGET ACT OF 1997.— 
(1) The Balanced Budget Act of 1997 is amended— 
(A) in the table of contents for title IV, in the item 
relating to section 4921, by striking "children with"; 
(B) in the heading for section 4921, by striking "CHIL-
DREN WITH"; and 
(C) in the section added by section 4921— 
(i) in the heading for such section, by striking 
"CHILDREN WITH"; and 
(ii) by amending subsection (a) to read as follows: 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1099 
Applicability. 
District of 
Columbia. 
"(a) IN GENERAL.—The Secretary, directly or through grants, 
shall provide for research into the prevention and cure of Type 
(2)(A) Section 11201(g)(2)(B)(iii) of the Balanced Budget 
Act of 1997 shall apply as if the reference in such section 
to "December 31, 2003" were a reference to "December 31, 
2001". 
(B) Notwithstanding section 11104(b)(3) of the Balanced 
Budget Act of 1997, in carrying out any of the management 
reform plans under such section, the head of a department 
of the government of the District of Columbia shall report 
solely to the District of Columbia Finsuicial Responsibility and 
Management Assistance Authority. 
(3) Section 9302 of the Balanced Budget Act of 1997 is Ante. p. 671 
amended by adding at the end the following new subsection: 
"(k) 
COORDINATION WITH TOBACCO INDUSTRY 
SETTLEMENT 
AGREEMENT.—The increase in excise taxes collected as a result 
of the amendments made by subsections (a), (e), and (g) of this 
section shall be credited against the total payments made by parties 
pursuant to Federal legislation implementing the tobacco industry 
settlement agreement of June 20, 1997. 
(4) The provisions of, and amendments made by, this subsection 
shall take effect immediately after the sections referred to in this 
subsection take effect. 
(g) CLERICAL AMENDMENTS.— 
(1) Clause (iii) of section 163(j)(2)(B) is amended by striking 
"clause (i)" and inserting "clause (ii)". 
(2) Paragraph (1) of section 665(d) is amended in the last 
sentence by striking "or 669(d) and (e)". 
(3) Subsection (g) of section 1441 (relating to cross ref-
erence) is amended by striking "one-half and inserting "85 
percent". 
(4) Paragraph (1) of section 2523(g) is amended by striking 
"qualified remainder trust" and inserting "qualified charitable 
remainder trust". 
(5) Subsection (d) of section 9502 is amended by redesignat-
ing the paragraph added by section 806 of the Federal Aviation 
Reauthorization Act of 1996 as paragraph (6). 
42 use 254C-2 
note. 
TITLE XVII—IDENTIFICATION OF LIM-
ITED TAX BENEFITS 
SUBJECT TO 
LINE ITEM VETO 
SEC. 1701. IDENTIFICATION OF LIMITED TAX BENEFITS SUBJECT TO 
LINE ITEM VETO. 
Section 1021(a)(3) of the Congressional Budget and Impound-
ment Control Act of 1974 shall only apply to— 
(1) section 101(c) (relating to high risk pools permitted 
to cover dependents of high risk individuals); 
(2) section 222 (relating to limitation on qualified 501(c)(3) 
bonds other than hospital bonds); 
(3) section 224 (relating to contributions of computer tech-
nology and equipment for elementary or secondary school pur-
poses); 
I l l STAT. 1100 
PUBLIC LAW 105-34—AUG. 5, 1997 
(4) section 312(a) (relating to treatment of remainder 
interests for purposes of provision relating to gain on sale 
of principal residence); 
(5) section 501(b) (relating to indexing of alternative valu-
ation of certain farm, etc., real property); 
(6) section 504 (relating to extension of treatment of certain 
rents under section 2032A to lineal descendants); 
(7) section 505 (relating to clarification of judicial review 
of eligibility for extension of time for pajnnent of estate tax); 
(8) section 508 (relating to treatment of land subject to 
qualified conservation easement); 
(9) section 511 (relating to expansion of exception from 
generation-skipping transfer tax for transfers to individuals 
with deceased parents); 
(10) section 601 (relating to the research tax credit); 
(11) section 602 (relating to contributions of stock to private 
foundations); 
(12) section 603 (relating to the work opportunity tax 
credit); 
(13) section 604 (relating to orphan drug tax credit); 
(14) section 701 (relating to incentives for revitalization 
of the District of Columbia) to the extent it amends the Internal 
Revenue Code of 1986 to create sections 1400 and 1400A (relat-
ing to tax-exempt economic development bonds); 
(15) section 701 (relating to incentives for revitalization 
of the District of Columbia) to the extent it amends the Internal 
Revenue Code of 1986 to create section 1400C (relating to 
first-time homebuyer credit for District of Columbia); 
(16) section 801 (relating to incentives for employing long-
term family assistance recipients); 
(17) section 904(b) (relating to uniform rate of tax on vac-
cines) as it relates to any vaccine containing pertussis bacteria, 
extracted or partial cell bacteria, or specific pertussis antigens; 
(18) section 904(b) (relating to uniform rate of tax on vac-
cines) as it relates to any vaccine against measles; 
(19) section 904(b) (relating to uniform rate of tax on vac-
cines) as it relates to any vaccine against mumps; 
(20) section 904(b) (relating to uniform rate of tax on vac-
cines) as it relates to any vaccine against rubella; 
(21) section 905 (relating to operators of multiple retail 
gasoline outlets treated as wholesale distributors for refund 
purposes); 
(22) section 906 (relating to exemption of electric and other 
clean-fuel motor vehicles from luxury automobile classification); 
(23) section 907(a) (relating to rate of tax on liquefied 
natural gas determined on basis of BTU equivalency with gaso-
line); 
(24) section 907(b) (relating to rate of tax on methanol 
fi-om natural gas determined on basis of BTU equivalency with 
gasoline); 
(25) section 908 (relating to modification of tax treatment 
of hard cider); 
(26) section 914 (relating to mortgage financing for resi-
dences located in disaster areas); 
(27) section 962 (relating to assignment of workmen's com-
pensation liability eligible for exclusion relating to personal 
injury liability assignments); 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1101 
(28) section 963 (relating to tax-exempt status for certain 
State worker's compensation act companies); 
(29) section 967 (relating to additional advance refunding 
of certain Virgin Island bonds); 
(30) section 968 (relating to nonrecognition of gain on sale 
of stock to certain farmers' cooperatives); 
(31) section 971 (relating to exemption of the incremental 
cost of a clean fuel vehicle from the limits on depreciation 
for vehicles); 
(32) section 974 (relating to clarification of treatment of 
certain receivables purchased by cooperative hospital service 
organizations); 
(33) section 975 (relating to deduction in computing 
adjusted gross income for expenses in connection with service 
performed by certain officials) with respect to taxable years 
beginning before 1991; 
(34) section 977 (relating to elective carryback of existing 
carryovers of National Railroad Passenger Corporation); 
(35) section 1005(b)(2)(B) (relating to transition rule for 
instruments described in a ruling request submitted to the 
Internal Revenue Service on or before June 8, 1997); 
(36) section 1005(b)(2)(C) (relating to transition rule for 
' 
instruments described on or before June 8, 1997, in a public 
announcement or in a filing with the Securities and Exchange 
Commission) as it relates to a public announcement; 
(37) section 1005(b)(2)(C) (relating to transition rule for 
instruments described on or before June 8, 1997, in a public 
announcement or in a filing with the Securities and Exchange 
Commission) as it relates to a filing with the Securities and 
Exchange Commission; 
(38) section 1011(d)(2)(B) (relating to transition rule for 
distributions made pursuant to the terms of a tender offer 
outstanding on May 3,1995); 
(39) section 1011(d)(3) (relating to transition rule for dis-
tributions made pursuant to the terms of a tender offer 
outstanding on September 13, 1995); 
(40) section 1012(d)(3)(B) (relating to transition rule for 
distributions pursuant to an acquisition described in section 
355(e)(2)(A)(ii) of the Internal Revenue Code of 1986 described 
in a ruling request submitted to the Internal Revenue Service 
on or before April 16,1997); 
(41) section 1012(d)(3)(C) (relating to transition rule for 
distributions pursuant to £in acquisition described in section 
355(e)(2)(A)(ii) of the Internal Revenue Code of 1986 described 
in a public announcement or filing with the Securities and 
Exchange Commission) as it relates to a public announcement; 
(42) section 1012(d)(3)(C) (relating to transition rule for 
distributions pursuant to an acquisition described in section 
355(e)(2)(A)(ii) of the Internal Revenue Code of 1986 described 
in a public announcement or filing with the Securities and 
Exchange Commission) as it relates to a filing with the Securi-
ties and Exchange Commission; 
(43) section 1013(d)(2)(B) (relating to transition rule for 
distributions or acquisitions after June 8, 1997, described in 
a ruling request submitted to the Internal Revenue Service 
submitted on or before June 8, 1997); 
39-194 O - 97 - 37 : QL 3 Part 1 
I l l STAT. 1102 
PUBLIC LAW 105-34—AUG. 5, 1997 
(44) section 1013(d)(2)(C) (relating to transition rule for 
distributions or acquisitions after June 8, 1997, described in 
a public announcement or filing with the Securities and 
Exchange Commission on or before June 8, 1997) as it relates 
to a public announcement; 
(45) section 1013(d)(2)(C) (relating to transition rule for 
distributions or acquisitions after June 8, 1997, described in 
a public announcement or filing with the Securities and 
Exchange Commission on or before June 8, 1997) as it relates 
to a filing with the Securities and Exchange Commission; 
(46) section 1014(f)(2)(B) (relating to transition rule for 
any transaction after June 8, 1997, if such transaction is 
described in a ruling request submitted to the Internal Revenue 
Service on or before June 8, 1997); 
(47) section 1014(f)(2)(C) (relating to transition rule for 
any transaction after June 8, 1997, if such transaction is 
described in a public announcement or filing with the Securities 
£ind Exchange Commission on or before June 8, 1997) as it 
relates to a public announcement; 
(48) section 1014(f)(2)(C) (relating to transition rule for 
any transaction after June 8, 1997, if such transaction is 
described in a public announcement or filing with the Securities 
and Exchange Commission on or before June 8, 1997) as it 
relates to a filing with the Securities and Exchange Commis-
sion; 
(49) section 1042(b) (relating to special rules for provision 
terminating certain exceptions from rules relating to exempt 
organizations which provide commercial-type insurance); 
(50) section 1081(a) (relating to termination of suspense 
accounts for family corporations required to use accrual method 
of accounting) as it relates to the repeal of Internal Revenue 
Code section 447(i)(3); 
(51) section 1089(b)(3) (relating to reformations); 
(52) section 1089(b)(5XB)(i) (relating to persons under a 
mental disability; 
(53) section 1171 (relating to treatment of computer soft-
ware as FSC export property); 
(54) section 1175 (relating to exemption for active financing 
income); 
(55) section 1204 (relating to travel expenses of certain 
Federal employees engaged in criminal investigations); 
(56) section 1236 (relating to extension of time for filing 
a request for administrative adjustment); 
(57) section 1243 (relating to special rules for administra-
tive adjustment request with respect to bad debts or worthless 
securities); 
(58) section 1251 (relating to clarification of limitation on 
maximum number of shareholders); 
(59) section 1253 (relating to attribution rules applicable 
to stock ownership); 
(60) section 1256 (relating to modification of earnings and 
profits rules for determining whether REIT has earnings and 
profits from non-REIT year); 
(61) section 1257 (relating to treatment of foreclosure prop-
erty); 
(62) section 1261 (relating to shared appreciation mort-
gages); 
PUBLIC LAW 105-34—AUG. 5, 1997 
111 STAT. 1103 
(63) section 1302 (relating to clarification of waiver of cer-
tain rights of recovery); 
(64) section 1303 (relating to transitional rule under section 
2056A); 
(65) section 1304 (relating to treatment for estate tax pur-
poses of short-term obligations held by nonresident aliens); 
(66) section 1311 (relating to clarification of treatment of 
survivor annuities under qualified terminable interest rules); 
(67) section 1312 (relating to treatment of qualified domes-
tic trust rules of forms of ownership which are not trusts); 
(68) section 1313 (relating to opportunity to correct failures 
under section 2032A); 
(69) section 1414 (relating to fermented material from any 
brewery may be received at a distilled spirits plant); 
(70) section 1417 (relating to use of additional ameliorating 
material in certain wines); 
(71) section 1418 (relating to domestically produced beer 
may be withdrawn free of tax for use of foreign embassies, 
legations, etc.); 
(72) section 1421 (relating to transfer to brewery of beer 
imported in bulk without payment of tax); 
(73) section 1422 (relating to transfer to bonded wine cellars 
of wine imported in bulk without payment of tax); 
(74) section 1506 (relating to clarification of certain rules 
relating to employee stock ownership plans of S corporations); 
(75) section 1507 (relating to modification of 10-percent 
tax for nondeductible contributions); 
(76) section 1523 (relating to repeal of application of unre-
lated business income tax to ESOPs); 
(77) section 1530 (relating to gratuitous transfers for the 
benefit of employees); 
(78) section 1532 (relating to special rules relating to church 
plans); and 
(79) section 1604(c)(2) (relating to amendment related to 
Omnibus Budget Reconciliation Act of 1993). 
Approved August 5, 1997. 
LEGISLATIVE HISTORY—H.R. 2014 (S. 949): 
HOUSE REPORTS: Nos. 105-148 (Comm. on the Budget) and 105-220 (Comm. of 
Conference). 
CONGRESSIONAL RECORD, Vol. 143 (1997): 
June 26, considered and passed House. 
June 27, considered and passed Senate, amended, in lieu of S. 949. 
July 31, House and Senate agreed to conference report. 
WEEKLY COMPILATION OF PRESIDENTIAL DOCUMENTS, Vol. 33 (1997): 
Aug. 5, Presidential remarks and statement. 
Aug. 11, Presidential remarks and special message on line item veto. 
FEDERAL REGISTER, Vol. 62 (1997): 
Aug. 12, Cancellation of items pursuant to Line Item Veto Act.