Small Business Job Protection Act of 1996
PL 104-188 (H.R.3448), enacted 08/20/1996

PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1755 
Public Law 104-188 
104th Congress 
An Act 
To provide tax relief for small businesses, to protect jobs, to create opportunities, 
to increase the take home pay of workers, to amend the Portal-to-Portal Act 
of 1947 relating to the payment of wages to employees who use employer owned 
Aug. 20, 1996 
vehicles, and to amend the Fair Labor Standards Act of 1938 to increase the 
[HR 3448] 
minimum wage rate and to prevent job loss by providing flexibility to employers 
in complying with minimum wage and overtime requirements under that Act. 
Be it enacted by the Senate and House of Representatives of 
the United States of America in Congress assembled, 
Small Business 
Job Protection 
SECTION 1. SHORT TITLE; TABLE OF CONTENTS. 
Act of 1996. 
(a) SHORT TITLE.—This Act may be cited as the "Small Business ^6 use i note. 
Job Protection Act of 1996". 
(b) TABLE OF CONTENTS.— 
Sec. 1. Short title; table of contents. 
T I T L E I—SMALL BUSINESS AND OTHER TAX PROVISIONS 
Sec. 1101. Amendment of 1986 Code. 
Sec. 1102. Underpayments of estimated tax. 
Subtitle A—Expensing; Etc. 
Sec. 1111. Increase in expense treatment for small businesses. 
Sec. 1112. Treatment of employee tips. 
Sec. 1113. Treatment of storage of product samples. 
Sec. 1114. Treatment of certain charitable risk pools-
Sec. 1115. Treatment of dues paid to agricultural or horticultural organizations. 
Sec. 1116. Clarification of employment tax status of certain fishermen. 
Sec. 1117. Modifications of tax-exempt bond rules for first-time farmers. 
Sec. 1118. Newspaper distributors treated as direct sellers. 
Sec. 1119. Application of involuntary conversion rules to presidentially declared 
disasters. 
Sec. 1120. Class life for gas station convenience stores and similar structures. 
Sec. 1121. Treatment of abandonment of lessor improvements at termination of 
lease. 
Sec. 1122. Special rules relating to determination whether individuals are employ-
ees for purposes of employment taxes. 
Sec. 1123. Treatment of housing provided to employees by academic health centers. 
Subtitle B—Extension of Certain Expiring Provisions 
Sec. 1201. Work opportunity tax credit. 
Sec. 1202. Employer-provided educational aissistance programs. 
Sec. 1203. FUTA exemption for alien agricultural workers. 
Sec. 1204. Research credit. 
Sec. 1205. Orphan drug tax credit. 
Sec. 1206. Contributions of stock to private foundations. 
Sec. 1207. Extension of binding contract date for biomass and coal facilities. 
Sec. 1208. Moratorium for excise tax on diesel fuel sold for use or used in diesel-
powered motorboats. 
Subtitle C—Provisions Relating to S Corporations 
Sec. 1301. S corporations permitted to have 75 shareholders. 
Sec. 1302. Electing small business trusts. 
Sec. 
Sec. 
Sec. 
Sec. 
Sec. 
Sec. 
Sec. 
Sec. 
Sec. 
Sec. 
Sec. 
Sec. 
Sec. 
Sec. 
Sec. 
1303. 
1304. 
1305. 
1306. 
1307. 
1308. 
1309. 
1310. 
1311. 
1312. 
1313. 
1314. 
1315. 
1316. 
1317. 
110 STAT. 1756 
PUBLIC LAW 104-188—AUG. 20, 1996 
Expansion of post-death qualification for certain trusts. 
Financial institutions permitted to hold safe harbor debt. 
Rules relating to inadvertent terminations and invalid elections. 
Agreement to terminate year. 
Expansion of post-termination transition period. 
S corporations permitted to hold subsidiaries. 
Treatment of distributions during loss years. 
Treatment of S corporations under subchapter C. 
Elimination of certain earnings and profits. 
Carryover of disallowed losses and deductions under at-risk rules al-
lowed. 
Adjustments to basis of inherited S stock to reflect certain items of in-
come. 
S corporations eligible for rules applicable to real property subdivided 
for sale by noncorporate taxpayers. 
Financial institutions. 
Certain exempt organizations allowed to be shareholders. 
Effective date. 
Subtitle D—Pension Simplification 
CHAPTER 1—SIMPLIFIED DISTRIBUTION RULES 
Sec. 1401. Repeal of 5-year income averaging for lump-sum distributions. 
Sec. 1402. Repeal of $5,000 exclusion of employees' death benefits. 
Sec. 1403. Simplified method for taxing annuity distributions under certain em-
ployer plans. 
Sec. 1404. Required distributions. 
CHAPTER 2—INCREASED ACCESS TO RETIREMENT PLANS 
SUBCHAPTER A—SIMPLE SAVINGS PLANS 
Sec. 1421. Establishment of savings incentive match plans for employees of small 
employers. 
Sec. 1422. Extension of simple plan to 401(k) arrangements. 
SUBCHAPTER B—OTHER PROVISIONS 
Sec. 1426. Tax-exempt organizations eligible under section 401(k). 
Sec. 1427. Homemakers eligible for full IRA deduction. 
CHAPTER 3—NONDISCRIMINATION PROVISIONS 
Sec. 1431. Definition of highly compensated employees; repeal of family aggrega-
tion. 
Sec. 1432. Modification of additional participation requirements. 
Sec. 1433. Nondiscrimination rules for qualified cash or deferred arrangements and 
matching contributions. 
Sec. 1434. Definition of compensation for section 415 purposes. 
CHAPTER 4—MISCELLANEOUS PROVISIONS 
Sec. 1441. Plans covering self-employed individuals. 
Sec. 1442. Elimination of special vesting rule for multiemployer plans. 
Sec. 1443. Distributions under rural cooperative plans. 
Sec. 1444. Treatment of governmental plans under section 415. 
Sec. 1445. Uniform retirement age. 
Sec. 1446. Contributions on behalf of disabled employees. 
Sec. 1447. Treatment of deferred compensation plans of State and local govern-
ments and tax-exempt organizations. 
Sec. 1448. Trust requirement for deferred compensation plans of State and local 
governments. 
Sec. 1449. Transition rule for computing maximum benefits under section 415 limi-
tations. 
Sec. 1450. Modifications of section 403(b). 
Sec. 1451. Special rules relating to joint and survivor annuity explanations. 
Sec. 1452. Repeal of limitation in case of defined benefit plan and defined contribu-
tion plan for same employee; excess distributions. 
Sec. 1453. Tax on prohibited transactions. 
Sec. 1454. Treatment of leased employees. 
Sec. 1455. Uniform penalty provisions to apply to certain pension reporting require-
ments. 
Sec. 1456. Retirement benefits of ministers not subject to tax on net earnings from 
self-employment. 
Sec. 1457. Sample language for spousal consent and qualified domestic relations 
forms. 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1757 
Sec. 1458. Treatment of length of service awards to volunteers performing fire 
fighting or prevention services, emergency medical services, or ambu-
lance services. 
Sec. 1459. Alternative nondiscrimination rules for certain plans that provide for 
early participation. 
Sec. 1460. Clarification of application of ERISA lo insurance company general ac-
counts. 
Sec. 1461. Special rules for chaplains and self-employed ministers. 
Sec. 1462. Definition of highly compensated employee for pre-ERISA rules for 
church plans. 
Sec. 1463. Rule relating to investment in contract not to apply to foreign mission-
aries. 
Sec. 1464. Waiver of excise tax on failure to pay liquidity shortfall. 
Sec. 1465. Date for adoption of plan amendments. 
Subtitle E—Foreign Simplification 
Sec. 1501. Repeal of inclusion of certain earnings invested in excess passive assets. 
Subtitle F—Revenue Offsets 
PART I—GENERAL PROVISIONS 
Sec. 1601. Modifications of Puerto Rico and possession tax credit. 
Sec. 1602. Repeal of exclusion for interest on loans used to acquire employer securi-
ties. 
Sec. 1603. Certain amounts derived from foreign corporations treated as unrelated 
business taxable income. 
Sec. 1604. Depreciation under income forecast method. 
Sec. 1605. Repeal of exclusion for punitive damages and for damages not attrib-
utable to physical injuries or sickness. 
Sec. 1606. Repeal of diesel fuel tax rebate to purchasers of diesel-powered auto-
mobiles and light trucks. 
Sec. 1607. Extension and phasedown of luxury passenger automobile tax. 
Sec. 1608. Termination o
f
^ future tax-exempt bond financing for local furnishers of 
electricity and gas. 
Sec. 1609. Extension of Airport and Airway Trust Fund excise taxes. 
Sec. 1610. Basis adjustment to property held by corporation where stock in corpora-
tion is replacement property under involuntary conversion rules. 
Sec. 1611. Treatment of certain insurance contracts on retired lives. 
Sec. 1612. Treatment of modified guaranteed contracts. 
Sec. 1613. Treatment of contributions in aid of construction. 
Sec. 1614. Election to cease status as qualified scholarship funding corporation. 
Sec. 1615. Certain tax benefits denied to individuals failing to provide taxpayer 
identification numbers. 
Sec. 1616. Repeal of bad debt reserve method for thrift savings associations. 
Sec. 1617. Exclusion for energy conservation subsidies limited to subsidies with re-
spect to dwelling units. 
PART II—FINANCIAL ASSET SECURITIZATION INVESTMENTS 
Sec. 1621. Financial Asset Securitization Investment Trusts. 
Subtitle G—Technical Corrections 
Sec. 1701. Coordination with other subtitles. 
Sec. 1702. Amendments related to Revenue Reconciliation Act of 1990. 
Sec. 1703. Amendments related to Revenue Reconciliation Act of 1993. 
Sec. 1704. Miscellaneous provisions. 
Subtitle H—Other Provisions 
Sec. 1801. Exemption from diesel fuel dyeing requirements with respect to certain 
States. 
Sec. 1802. Treatment of certain university accounts. 
Sec. 1803. Modifications to excise tax on ozone-depleting chemicals. 
Sec. 1804. Tax-exempt bonds for sale of Alaska Power Administration facility. 
Sec. 1805. Nonrecognition treatment for certain transfers by common trust funds to 
regulated investment companies. 
Sec. 1806. Qualified State tuition programs. 
Sec. 1807. Adoption assistance. 
Sec. 1808. Removal of barriers to interethnic adoption. 
Sec. 1809. 6-month delay of electronic fund transfer requirement. 
Subtitle I—Foreign Trust Tax Compliance 
Sec. 1901. Improved information reporting on foreign trusts. 
110 STAT. 1758 
PUBLIC LAW 104-188—AUG. 20, 1996 
Sec. 1902. Comparable penalties for failure to file return relating to transfers to 
foreign entities. 
Sec. 1903. Modifications of rules relating to foreign trusts having one or more 
United States beneficiaries. 
Sec. 1904. Foreign persons not to be treated as owners under grantor trust rules. 
Sec. 1905. Information reporting regarding foreign gifts. 
Sec. 1906. Modification of rules relating to foreign trusts which are not grantor 
trusts. 
Sec. 1907. Residence of trusts, etc. 
Subtitle J—Generalized System of Preferences 
Sec. 1951. Short title. 
Sec. 1952. Generalized System of Preferences. 
Sec. 1953. Effective date. 
Sec. 1954. Conforming amendments. 
TITLE II—PAYMENT OF WAGES 
Sec. 2101. Short title. 
Sec. 2102. Proper compensation for use of employer vehicles. 
Sec. 2103. Effective date. 
Sec. 2104. Minimum wage increase. 
Sec. 2105. Fair Labor Standards Act Amendments. 
TITLE I—SMALL BUSBVESS AND OTHER 
TAX PROVISIONS 
SEC. 1101. AMENDMENT OF 1986 CODE. 
Except as otherwise expressly provided, whenever in this title 
an amendment or repeal is expressed in terms of an amendment 
to, or repeal of, a section or other provision, the reference shall 
be considered to be made to a section or other provision of the 
Internal Revenue Code of 1986. 
26 u s e 6654 
SEC. 1102. UNDERPAYMENTS OF ESTIMATED TAX. 
No addition to the tax shall be made under section 6654 or 
6655 of the Internal Revenue Code of 1986 (relating to failure 
to pay estimated tax) with respect to any underpayment of an 
installment required to be paid before the date of the enactment 
of this Act to the extent such underpayment was created or 
increased by any provision of this title. 
Subtitle A—Expensing; Etc. 
SEC. 1111. INCREASE 
IN 
EXPENSE 
TREATMENT 
FOR 
SMALL 
BUSINESSES. 
26 use 179. 
(a) GENERAL RULE.—Paragraph (1) of section 179(b) (relating 
to dollar limitation) is amended to read as follows: 
"(1) DOLLAR LIMITATION.—The aggregate cost which may 
be taken into account under subsection (a) for any taxable 
year shall not exceed the following applicable amount: 
"If the taxable year 
The applicable 
begins in: 
amount is: 
1997 
18,000 
1998 
18,500 
1999 
19,000 
2000 
20,000 
2001 or 2002 
24,000 
2003 or thereafter 
25,000.". 
26 use 179 note. 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31, 1996. 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1759 
SEC. 1112. TREATMENT OF EMPLOYEE TIPS. 
(a) EMPLOYEE CASH TIPS.— 
^ 
(1) REPORTING REQUIREMENT NOT CONSIDERED.—Subpara-
graph (A) of section 45B(b)(l) (relating to excess employer social 
security tax) is amended by inserting "(without regard to 
whether such tips are reported under section 6053)" after "sec-
tion 3121(q)". 
(2) TAXES PAID.—Subsection (d) of section 13443 of the 
26 USC 38 note. 
Revenue Reconciliation Act of 1993 is amended by inserting 
", with respect to services performed before, on, or after such 
date" after "1993". 
(3) EFFECTIVE DATE.—The amendments made by this sub- 
26 USC 45B note, 
section shall take effect as if included in the amendments 
made by, and the provisions of, section 13443 of the Revenue 
Reconciliation Act of 1993. 
(b) TIPS FOR EMPLOYEES DELIVERING FOOD OR BEVERAGES.— 
(1) IN GENERAL.—Paragraph (2) of section 45B(b) is 
amended to read as follows: 
"(2) ONLY TIPS RECEIVED FOR FOOD OR BEVERAGES TAKEN 
INTO ACCOUNT.—In applying paragraph (1), there shall be taken 
into accoimt only tips received from customers in connection 
with the providing, delivering, or serving of food or beverages 
for consumption if the tipping of employees delivering or serving 
food or beverages by customers is customary.". 
(2) EFFECTIVE DATE.—The amendment made by paragraph 
26 USC 45B note. 
(1) shall apply to tips received for services performed after 
December 31, 1996. 
SEC. 1113. TREATMENT OF STORAGE OF PRODUCT SAMPLES. 
(a) IN GENERAL.—Paragraph (2) of section 280A(c) is amended 
by striking "inventory" and inserting "inventory or product sam-
ples". 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
26 use 280A 
shall apply to taxable years beginning after December 31, 1995. ^°^-
SEC. 1114. TREATMENT OF CERTAIN CHARITABLE RISK POOLS. 
(a) GENERAL RULE.—Section 501 (relating to exemption from 
tax on corporations, certain trusts, etc.) is amended by redesignating 
subsection (n) as subsection (o) and by inserting after subsection 
(m) the following new subsection: 
"(n) CHARITABLE RISK POOLS.— 
"(1) IN GENERAL.—For purposes of this title— 
"(A) a qualified charitable risk pool shall be treated 
as an organization organized and operated exclusively for 
charitable purposes, and 
"(B) subsection (m) shall not apply to a qualified chari-
table risk pool. 
"(2) QUALIFIED CHARITABLE RISK POOL.—For purposes of 
this subsection, the term 'qualified charitable risk pool' means 
any organization— 
"(A) which is organized and operated solely to pool 
insurable risks of its members (other than risks related 
to medical malpractice) and to provide information to its 
members with respect to loss control and risk management, 
"(B) which is comprised solely of members that are 
organizations described in subsection (c)(3) and exempt 
from tax under subsection (a), and 
110 STAT. 1760 
PUBLIC LAW 104-188—AUG. 20, 1996 
"(C) which meets the organizational requirements of 
paragraph (3). 
"(3) 
ORGANIZATIONAL REQUIREMENTS.—An 
organization 
(hereinafter in this subsection referred to as the 'risk pool') 
meets the organizational requirements of this paragraph if— 
"(A) such risk pool is organized as a nonprofit organiza-
tion under State law provisions authorizing risk pooling 
arrangements for charitable organizations, 
"(B) such risk pool is exempt from any income tax 
imposed by the State (or will be so exempt after such 
pool qualifies as an organization exempt from tax under 
this title), 
"(C) such risk pool has obtained at least $1,000,000 
in startup capital from nonmember charitable organiza-
tions, 
"(D) such risk pool is controlled by a board of directors 
elected by its members, and 
"(E) the organizational documents of such risk pool 
require that— 
"(i) each member of such pool shall at all times 
be an organization described in subsection (c)(3) and 
exempt from tax under subsection (a), 
"(ii) any member which receives a final determina-
tion that it no longer qualifies as an organization 
described in subsection (c)(3) shall immediately notify 
the pool of such determination and the effective date 
of such determination, and 
"(iii) each policy of insurance issued by the risk 
pool shall provide that such policy will not cover the 
insured with respect to events occurring after the date 
such final determination was issued to the insured. 
An organization shall not cease to qualify as a qualified chari-
table risk pool solely by reason of the failure of any of its 
members to continue to be an organization described in sub-
section (c)(3) if, within a reasonable period of time after such 
pool is notified as required under subparagraph (C)(ii), such 
pool takes such action as may be reasonably necessary to 
remove such member from such pool. 
"(4) OTHER DEFINITIONS.—For purposes of this subsection— 
"(A) STARTUP CAPITAL.—The term 'startup capital' 
means any capital contributed to, and any program-related 
investments (within the meaning of section 4944(c)) made 
in, the risk pool before such pool commences operations. 
"(B) 
NONMEMBER 
CHARITABLE 
ORGANIZATION.—The 
term 'nonmember charitable organization' means 
any 
organization which is described in subsection (c)(3) and 
exempt from tax under subsection (a) and which is not 
a member of the risk pool and does not benefit (directly 
or indirectly) from the insurance coverage provided by the 
pool to its members.". 
26 use 501 note. 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to taxable years beginning after the date of the enact-
ment of this Act. 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1761 
SEC. 1115. TREATMENT OF DUES PAID TO AGRICULTURAL OR HORTI-
CULTURAL ORGANIZATIONS. 
(a) GENERAL RULE.—Section 512 (defining unrelated business 
taxable income) is amended by adding at the end the following 
new subsection: 
"(d) TREATMENT OF DUES OF AGRICULTURAL OR HORTICULTURAL 
ORGANIZATIONS.— 
"(1) IN GENERAL.—If— 
"(A) an agricultural or horticultural 
organization 
described in section 501(c)(5) requires annual dues to be 
paid in order to be a member of such organization, and 
"(B) the amount of such required annual dues does 
not exceed $100, 
in no event shall any portion of such dues be treated as derived 
by such organization from an unrelated trade or business by 
reason of any benefits or privileges to which members of such 
organization are entitled. 
"(2) INDEXATION OF $IOO AMOUNT.—In the case of any tax-
able year beginning in a calendar year after 1995, the $100 
amount in paragraph (1) shall be increased by an amount 
equal to— 
"(A) $100, multipHed by 
"(B) the cost-of-living adjustment determined under 
section 1(f)(3) for the calendar year in which the taxable 
year begins, by substituting 'calendar year 1994' for 'cal-
endar year 1992' in subparagraph (B) thereof. 
"(3) DUES.—For purposes of this subsection, the term 'dues' 
means any pa5anent (whether or not designated as dues) which 
is required to be made in order to be recognized by the organiza-
tion as a member of the organization.". 
(b) EFFECTIVE DATES.— 
26 use 512 note. 
(1) IN GENERAL.—The amendment made by this section 
shall apply to taxable years beginning after December 31, 1986. 
(2) TRANSITIONAL RULE.—If— 
(A) for purposes of appl3dng part III of subchapter 
F of chapter 1 of the Internal Revenue Code of 1986 to 
any taxable year beginning before January 1, 1987, an 
agricultural or horticultural organization did not treat any 
portion of membership dues received by it as income 
derived in an unrelated trade or business, and 
(B) such organization had a reasonable basis for not 
treating such dues as income derived in an unrelated trade 
or business, 
then, for purposes of applying such part III to any such taxable 
year, in no event shall any portion of such dues be treated 
as derived in an unrelated trade or business. 
(3) REASONABLE BASIS.—For purposes of paragraph (2), an 
organization shall be treated as having a reasonable basis 
for not treating membership dues as income derived in an 
unrelated trade or business if the taxpayer's treatment of such 
dues was in reasonable reliance on any of the following: 
(A) Judicial precedent, published rulings, technical 
advice with respect to the organization, or a letter ruling 
to the organization. 
(B) A past Internal Revenue Service audit of the 
organization in which there was no assessment attributable 
110 STAT. 1762 
PUBLIC LAW 104-188—AUG. 20, 1996 
to the reclassification of membership dues for purposes 
of the tax on unrelated business income. 
(C) Long-standing recognized practice of agricultural 
or horticultural organizations. 
SEC. 1116. CLARIFICATION OF EMPLOYMENT TAX STATUS OF CER-
TAIN FISHERMEN. 
(a) CLARIFICATION OF EMPLOYMENT TAX STATUS.— 
(1) AMENDMENTS OF INTERNAL REVENUE CODE OF 1986.— 
(A) DETERMINATION OF SIZE OF CREW.—Subsection (b) 
of section 3121 (defining emplo)anent) is amended by add-
ing at the end the following new sentence: 
"For purposes of paragraph (20), the operating crew of a boat 
shall be treated as normally made up of fewer than 10 individuals 
if the average size of the operating crew on trips made during 
the preceding 4 calendar quarters consisted of fewer than 10 indi-
viduals.". 
(B) 
CERTAIN 
CASH 
REMUNERATION 
PERMITTED.— 
Subparagraph (A) of section 3121(b)(20) is amended to 
read as follows: 
"(A) such individual does not receive any cash remu-
neration other than as provided in subparagraph (B) and 
other than cash remuneration— 
"(i) which does not exceed $100 per trip; 
"(ii) which is contingent on a minimum catch; and 
"(iii) which is paid solely for additional duties (such 
as mate, engineer, or cook) for which additional cash 
remuneration is traditional in the industry,". 
(C) CONFORMING AMENDMENT.—Section 6050A(a) is 
amended by striking "and" at the end of paragraph (3), 
by striking the period at the end of parag^-aph (4) and 
inserting "; and", and by adding at the end the following 
new paragraph: 
"(5) 
any 
cash 
remuneration 
described 
in 
section 
3121(b)(20)(A).". 
(2) AMENDMENT OF SOCIAL SECURITY ACT.— 
(A) DETERMINATION OF SIZE OF CREW.—Subsection (a) 
42 use 410. 
of section 210 of the Social Security Act is amended by 
adding at the end the following new sentence: 
"For purposes of paragraph (20), the operating crew of a boat 
shall be treated as normally made up of fewer than 10 individuals 
if the average size of the operating crew on trips made during 
the preceding 4 calendar quarters consisted of fewer than 10 indi-
viduals.". 
(B) 
CERTAIN 
CASH 
REMUNERATION 
PERMITTED.— 
Subparagraph (A) of section 210(a)(20) of such Act is 
amended to read as follows: 
"(A) such individual does not receive any additional 
compensation other than as provided in subparagraph (B) 
and other than cash remuneration— 
"(i) which does not exceed $100 per trip; 
"(ii) which is contingent on a minimum catch; and 
"(iii) which is paid solely for additional duties (such 
as mate, engineer, or cook) for which additional cash 
remuneration is traditional in the industry,". 
26 use 3121 
(3) EFFECTIVE DATES.— 
note. 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1763 
(A) IN GENERAL.—The amendments made by this sub-
section shall apply to remuneration paid— 
(i) after December 31, 1994, and 
(ii) after December 31, 1984, and before January 
1, 1995, unless the payor treated such remuneration 
(when paid) as being subject to tax under chapter 
21 of the Internal Revenue Code of 1986. 
(B) REPORTING REQUIREMENT.—The amendment made 
by paragraph (1)(C) shall apply to remuneration paid after 
December 31, 1996. 
(b) INFORMATION REPORTING.— 
(1) IN GENERAL.—Subpart B of part III of subchapter A 
of chapter 68 (relating to information concerning transactions 
with other persons) is amended by inserting after section 6050Q 
the following new section: 
"SEC. 6050R. RETURNS RELATING TO CERTAIN PURCHASES OF FISH. 
"(a) REQUIREMENT OF REPORTING.—Every person— 
"(1) who is engaged in the trade or business of purchasing 
fish for resale from any person engaged in the trade or business 
of catching fish; and 
"(2) who makes payments in cash in the course of such 
trade or business to such a person of $600 or more during 
any calendar year for the purchase offish, 
shall make a return (at such times as the Secretary may prescribe) 
described in subsection (b) with respect to each person to whom 
such a payment was made during such calendar year. 
"(b) RETURN.—^A return is described in this subsection if such 
return— 
"(1) is in such form as the Secretary may prescribe, and 
"(2) contains— 
"(A) the name, address, and TIN of each person to 
whom a pajonent described in subsection (a)(2) was made 
during the calendar year; 
"(B) the aggregate amount of such payments made 
to such person during such calendar year and the date 
and amount of each such pajnnent, and 
"(C) such other information as the Secretary may 
require. 
"(c) STATEMENT TO BE FURNISHED WITH RESPECT TO WHOM 
INFORMATION IS REQUIRED.—Every person required to make a 
return under subsection (a) shaU furnish to each person whose 
name is required to be set forth in such return a written statement 
showing— 
"(1) the name and address of the person required to make 
such a return, and 
"(2) the aggregate amount of pa3anents to the person 
required to be shown on the return. 
The written statement required under the preceding sentence shall 
be furnished to the person on or before January 31 of the year 
following the calendar year for which the return under subsection 
(a) is required to be made. 
"(d) DEFINITIONS.—For purposes of this section: 
"(1) CASH.—The term 'cash' has the meaning given such 
term by section 60501(d). 
"(2) FISH.—The term 'fish' includes other forms of aquatic 
life.". 
29-194 O - 9 6 - 
2:QL3Part3 
110 STAT. 1764 
PUBLIC LAW 104-188—AUG. 20, 1996 
(2) TECHNICAL AMENDMENTS.— 
(A) Subparagraph (A) of section 6724(d)(1) is amended 
by striking "or" at the end of clause (vi), by striking "and" 
at the end of clause (vii) and inserting "or", and by adding 
at the end the following new clause: 
"(viii) section 6050R (relating to returns relating 
to certain purchases offish), and". 
(B) Paragraph (2) of section 6724(d) is amended by 
redesignating subparagraphs (R) through (U) as subpara-
graphs (S) through (V), respectively, and by inserting after 
subparagraph (Q) the following new subparagraph: 
"(R) section 6050R(c) (relating to returns relating to 
certain purchases of fish),". 
(C) The table of sections for subpart B of part III 
of subchapter A of chapter 68 is amended by inserting 
after the item relating to 6050Q the following new item: 
"Sec. 6050R. Returns relating to certain purchases of fish.". 
26 use 6050R 
(3) EFFECTIVE DATE.—The amendments made by this sub-
^°^- 
section shall apply to payments made after December 31, 1997. 
SEC. 1117. MODIFICATIONS OF TAX-EXEMPT BOND RULES FOR FIRST-
TIME FARMERS. 
(a) ACQUISITION FROM RELATED PERSON ALLOWED.—Section 
147(c)(2) (relating to exception for first-time farmers) is amended 
by adding at the end the following new subparagraph: 
"(G) ACQUISITION FROM RELATED PERSON.—For pur-
poses of this paragraph and section 144(a), the acquisition 
by a first-time farmer of land or personal property from 
a related person (within the meaning of section 144(a)(3)) 
shall not be treated as an acquisition from a related person, 
if— 
"(i) the acquisition price is for the fair market 
value of such land or property, and 
"(ii) subsequent to such acquisition, the related 
person does not have a financial interest in the farming 
operation with respect to which the bond proceeds are 
to be used.". 
(b) SUBSTANTIAL FARMLAND AMOUNT DOUBLED.—Clause (i) of 
section 147(c)(2)(E) (defining substantial farmland) is amended by 
striking "15 percent" and inserting "30 percent". 
26 use 147 note. 
(c) EFFECTIVE DATE.—The amendments made by this section 
shall apply to bonds issued after the date of the enactment of 
this Act. 
SEC. 1118. NEWSPAPER DISTRIBUTORS TREATED AS DIRECT SELLERS. 
(a) IN GENERAL.—Section 3508(b)(2)(A) is amended by striking 
"or" at the end of clause (i), by inserting "or" at the end of clause 
(ii), and by inserting after clause (ii) the following new clause: 
"(iii) is engaged in the trade or business of the 
delivering or distribution of newspapers or shopping 
news (including any services directly related to such 
trade or business),". 
26 use 3508 
(b) EFFECTIVE DATE.—The amendments made by this section 
note. 
shall apply to services performed after December 31, 1995. 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1765 
SEC. 1119. APPLICATION OF INVOLUNTARY CONVERSION RULES TO 
PRESIDENTIALLY DECLARED DISASTERS. 
(a) IN GENERAL.—Section 1033(h) 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) TRADE OR BUSINESS AND INVESTMENT PROPERTY.—If 
a tsixpayer's property held for productive use in a trade or 
business or for investment is compulsorily or involuntarily con-
verted as a result of a Presidentially declared disaster, tangible 
property of a type held for productive use in a trade or business 
shall be treated for purposes of subsection (a) as property 
similar or related in service or use to the property so con-
verted.". 
(b) CONFORMING AMENDMENTS.—Section 1033(h) is amended— 
(1) by striking "residence" in paragraph (3) (as redesignated 
by subsection (a)) and inserting "property", 
(2) by striking "PRINCIPAL RESIDENCES" in the heading 
and inserting "PROPERTY", and 
(3) by striking "(1) IN GENERAL.—" and inserting "(1) PRIN-
CIPAL RESIDENCES.—". 
(c) EXPANSION OF OKLAHOMA CITY ENTERPRISE COMMUNITY.— 
Notwithstanding sections 1391 and 1392(a)(3)(D) of the Internal 
Revenue Code of 1986, the boundaries of the enterprise community 
for Oklahoma City, Oklahoma, designated by the Secretary of Hous-
ing and Urban Development on December 21, 1994, may be 
extended with respect to census tracts located in the area damaged 
due to the bombing of the Alfred P. Murrah Federal Building 
in Oklahoma City on April 19, 1995, primarily in the area bounded 
on the south by Robert S. Kerr Avenue, on the north by North 
13th Street, on the east by Oklahoma Avenue, and on the west 
by Shartel Avenue. 
(d) EFFECTIVE D A T E . — 
26 u s e 1033 
(1) IN GENERAL.—The amendments made by this section note. 
shall apply to disasters declared after December 31, 1994, in 
taxable years ending after such date. 
(2) SUBSECTION (C).—Subsection (c) shall take effect on 
the date of the enactment of this Act. 
SEC. 1120. CLASS LIFE FOR GAS STATION CONVENIENCE STORES AND 
SIMILAR STRUCTURES. 
(a) IN GENERAL.—Section 168(e)(3)(E) (classifying certain prop-
erty as 15-year property) is amended by striking "and" at the 
end of clause (i), by striking the period at the end of clause (ii) 
and inserting ", and", and by adding at the end the following 
new clause: 
"(iii) any section 1250 property which is a retail 
motor fuels outlet (whether or not food or other conven-
ience items are sold at the outlet).". 
(b) CONFORMING AMENDMENT.—Subparagraph (B) of section 
168(g)(3) is amended by inserting after the item relating to subpara-
graph (E)(ii) in the table contained therein the following new item: 
"(EKiii) 
20". 
(c) EFFECTIVE DATE.—The amendments made by this section 
26 USC 168 note. 
shall apply to property which is placed in service on or after 
the date of the enactment of this Act and to which section 168 
of the Internal Revenue Code of 1986 applies after the amendment 
made by section 201 of the Tax Reform Act of 1986. A taxpayer 
110 STAT. 1766 
PUBLIC LAW 104-188—AUG. 20, 1996 
may elect (in such form and manner as the Secretary of the Treas-
ury may prescribe) to have such amendments apply with respect 
to any property placed in service before such date and to which 
such section so applies. 
SEC. 1121. TREATMENT OF ABANDONMENT OF LESSOR IMPROVE-
MENTS AT TERMINATION OF LEASE. 
(a) IN GENERAL.—Paragraph (8) of section 168(i) is amended 
to read as follows: 
"(8) TREATMENT OF LEASEHOLD IMPROVEMENTS.— 
"(A) IN GENERAL.—In the case of any building erected 
(or improvements made) on leased property, if such building 
or improvement is property to which this section applies, 
the depreciation deduction shall be determined under the 
provisions of this section. 
"(B) TREATMENT OF LESSOR IMPROVEMENTS WHICH ARE 
ABANDONED AT TERMINATION OF LEASE.—^An i m p r o v e m e n t — 
"(i) which is made by the lessor of leased property 
for the lessee of such property, and 
"(ii) which is irrevocably disposed of or abandoned 
by the lessor at the termination of the lease by such 
lessee, 
shall be treated for purposes of determining gain or loss 
under this title as disposed of by the lessor when so dis-
posed of or abandoned.'. 
26USCl68note. 
(b) EFFECTIVE DATE.—Subparagraph (B) of section 168(i)(8) 
of the Internal Revenue Code of 1986, as added by the amendment 
made by subsection (a), shall apply to improvements disposed of 
or abandoned after June 12, 1996. 
SEC. 1122. SPECIAL RULES RELATING TO DETERMINATION WHETHER 
INDIVIDUALS ARE EMPLOYEES FOR PURPOSES OF 
EMPLOYMENT TAXES. 
26 use 3401 
(a) IN GENERAL.—Section 530 of the Revenue Act of 1978 is 
note. 
amended by adding at the end the following new subsection: 
"(e) SPECIAL RULES FOR APPLICATION OF SECTION.— 
"(1) NOTICE OF AVAILABILITY OF SECTION.—An officer or 
employee of the Internal Revenue Service shall, before or at 
the commencement of any audit inquiry relating to the employ-
ment status of one or more individuals who perform services 
for the taxpayer, provide the taxpayer with a written notice 
of the provisions of this section. 
"(2) RULES RELATING TO STATUTORY STANDARDS.—For pur-
poses of subsection (a)(2)— 
"(A) a taxpayer may not rely on an audit commenced 
after December 31, 1996, for purposes of subparagraph 
(B) thereof unless such audit included an examination for 
employment tax purposes of whether the individual 
involved (or any individual holding a position substantially 
similar to the position held by the individual involved) 
should be treated as an employee of the taxpayer, 
"(B) in no event shall the significant segment require-
ment of subparagraph (C) thereof be construed to require 
a reasonable showing of the practice of more than 25 per-
cent of the industry (determined by not taking into account 
the taxpayer), and 
"(C) in appl)dng the long-standing recognized practice 
requirement of subparagraph (C) thereof— 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1767 
"(i) such requirement shall not be construed as 
requiring the practice to have continued for more than 
10 years, and 
"(ii) a practice shall not fail to be treated as long-
standing merely because such practice began after 
1978. 
"(3) AVAILABILITY OF SAFE HARBORS.—Nothing in this sec-
tion shall be construed to provide that subsection (a) only 
applies where the individual involved is otherwise an employee 
of the taxpayer. 
"(4) BURDEN OF PROOF.— 
"(A) IN GENERAL.—If— 
"(i) a taxpayer establishes a prima facie case that 
it was reasonable not to treat an individual as an 
employee for purposes of this section, and 
"(ii) the taxpayer has fully cooperated with reason-
able requests from the Secretary of the Treasury or 
his delegate, 
then the burden of proof with respect to such treatment 
shall be on the Secretary. 
"(B) EXCEPTION FOR OTHER REASONABLE BASIS.—In the 
case of £iny issue involving whether the taxpayer had a 
reasonable basis not to treat an individual as an employee 
for purposes of this section, subparagraph (A) shall only 
apply for purposes of determining whether the taxpayer 
meets the requirements of subparagraph (A), (B), or (C) 
of subsection (a)(2). 
"(5) PRESERVATION OF PRIOR PERIOD SAFE HARBOR.—If— 
"(A) an individual would (but for the treatment referred 
to in subparagraph (B)) be deemed not to be an employee 
of the taxpayer under subsection (a) for any prior period, 
and 
"(B) such individual is treated by the taxpayer as an 
employee for employment tax purposes for any subsequent 
period, 
then, for purposes of applying such taxes for such prior period 
with respect to the taxpayer, the individual shall be deemed 
not to be an employee. 
"(6) SUBSTANTIALLY SIMILAR POSITION.—For purposes of 
this section, the determination as to whether £in individual 
holds a position substantially similar to a position held by 
Einother individual shall include consideration of the relation-
ship between the taxpayer and such individuals.", 
(b) EFFECTIVE DATES.— 
26 use 3401 
(1) IN GENERAI^.—The amendment made by this section note. 
shall apply to periods after December 31,1996. 
(2) 
NOTICE 
BY INTERNAL 
REVENUE 
SERVICE.—Section 
530(e)(1) of the Revenue Act of 1978 (as added by subsection 
(a)) shall apply to audits which commence after December 
31, 1996. 
(3) BURDEN OF PROOF.— 
(A) IN GENERAL.—Section 530(e)(4) of the Revenue Act 
of 1978 (as added by subsection (a)) shall apply to disputes 
involving periods after December 31,1996. 
(B) No INFERENCE.—Nothing in the amendments made 
by this section shall be construed to infer the proper treat-
110 STAT. 1768 
PUBLIC LAW 104-188—AUG. 20, 1996 
ment of the burden of proof with respect to disputes involv-
ing periods before January 1, 1997. 
SEC. 1123. TREATMENT OF HOUSING PROVIDED TO EMPLOYEES BY 
ACADEMIC HEALTH CENTERS. 
(a) IN GENERAL.—Paragraph (4) of section 119(d) (relating to 
lodging furnished by certain educational institutions to employees) 
is amended to read as follows: 
"(4) EDUCATIONAL INSTITUTION, ETC.—For purposes of this 
subsection— 
"(A) IN GENERAL.—The term 'educational institution' 
means— 
"(i) 
an 
institution 
described 
in 
section 
170(b)(l)(A)(ii) (or an entity organized under State law 
and composed of public institutions so described), or 
"(ii) an academic health center. 
"(B) ACADEMIC 
HEALTH CENTER.—For purposes of 
subparagraph (A), the term 'academic health center' means 
an entity— 
"(i) which is described in section 170(b)(l)(A)(iii), 
"(ii) which receives (during the calendar year in 
which the taxable year of the taxpayer begins) pay-
ments under subsection (d)(5)(B) or (h) of section 1886 
of the Social Security Act (relating to graduate medical 
education), and 
"(iii) which has as one of its principal purposes 
or functions the providing and teaching of basic and 
clinical medical science and research with the entity's 
own faculty.". 
26 use 119 note. 
(b) EFFECTIVE DATE.—The amendment made by this section 
shall apply to taxable years beginning after December 31, 1995. 
Subtitle B—Extension of Certain Expiring 
Provisions 
SEC. 1201. WORK OPPORTUNITY TAX CREDIT. 
(a) AMOUNT OF CREDIT.—Subsection (a) of section 51 (relating 
to amount of credit) is amended by striking "40 percent" and insert-
ing "35 percent". 
(b) MEMBERS OF TARGETED GROUPS.—Subsection (d) of section 
51 is amended to read as follows: 
"(d) MEMBERS OF TARGETED GROUPS.—For purposes of this 
subpart— 
"(1) IN GENERAL.—^An individual is a member of a targeted 
group if such individual is— 
"(A) a qualified IV-A recipient, 
"(B) a qualified veteran, 
"(C) a qualified ex-felon, 
"(D) a high-risk youth, 
"(E) a vocational rehabilitation referral, 
"(F) a qualified summer youth employee, or 
"(G) a qualified food stamp recipient. 
"(2) QUALIFIED IV-A RECIPIENT.— 
"(A) IN GENERAL.—The term 'quahfied IV-A recipient' 
means any individual who is certified by the designated 
local agency as being a member of a family receiving assist-
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1769 
ance under a IV-A program for at least a 9-month period 
ending during the 9-month period ending on the hiring 
date. 
"(B) IV-A PROGRAM.—For purposes of this paragraph, 
the term *IV-A program' means any program providing 
assistance under a State plan approved under part A of 
title IV of the Social Security Act (relating to assistance 
for needy families with minor children) and any successor 
of such program. 
"(3) QUALIFIED VETERAN.— 
"(A) IN GENERAL.—The term 'qualified veteran' means 
any vetersm who is certified by the designated local agency 
as being— 
"(i) a member of a family receiving assistance 
under a IV-A program (as defined in paragraph (2)(B)) 
for at least a 9-month period ending during the 12-
month period ending on the hiring date, or 
"(ii) 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. 
"(B) VETERAN.—For purposes of subparagraph (A), the 
term 'veteran' means any individual who is certified by 
the designated local agency as— 
"(i)(I) having served on active duty (other than 
active duty for training) in the Armed Forces of the 
United States for a period of more than 180 days, 
or 
"(II) having been discharged or released fi'om 
active duty in the Armed Forces of the United States 
for a service-connected disability, and 
"(ii) not having any day during the 60-day period 
ending on the hiring date which was a day of extended 
active duty in the Armed Forces of the United States. 
For purposes of clause (ii), the term 'extended active duty' 
means a period of more than 90 days during which the 
individual was on active duty (other than active duty for 
training). 
"(4) QUALIFIED EX-FELON.—The term 'qualified ex-felon' 
means any individual who is certified by the designated local 
agency— 
"(A) as having been convicted of a felony under any 
statute of the United States or £iny State, 
"(B) as having a hiring date which is not more than 
1 year after the last date on which such individual was 
so convicted or was released fi-om prison, and 
"(C) as being a member of a family which had an 
income during the 6 months immediately preceding the 
earlier of the month in which such income determination 
occurs or the month in which the hiring date occurs, which, 
on an annual basis, would be 70 percent or less of the 
Bureau of Labor Statistics lower living standard. 
Any determination under subparagraph (C) shall be valid for 
the 45-day period beginning on the date such determination 
i^ made. 
"(5) HIGH-RISK YOUTH.— 
110 STAT. 1770 
PUBLIC LAW 104-188—AUG. 20, 1996 
"(A) IN GENERAL.—The term 'high-risk youth' means 
any individual who is certified by the designated local 
agency— 
"(i) as having attained age 18 but not age 25 
on the hiring date, and 
"(ii) as having his principal place of abode within 
an empowerment zone or enterprise community. 
"(B) YOUTH MUST CONTINUE TO RESIDE IN ZONE.—In 
the case of a high-risk youth, the term 'qualified wages' 
shall not include wages paid or incurred for services per-
formed while such youth's principal place of abode is out-
side an empowerment zone or enterprise community. 
"(6) VOCATIONAL REHABILITATION REFERRAL.—The term 
'vocational rehabilitation referral' means any individual who 
is certified by the designated local agency as— 
"(A) having a physical or mental disability which, for 
such individual, constitutes or results in a substantial 
handicap to employment, and 
"(B) having been referred to the employer upon comple-
tion of (or while receiving) rehabilitative services pursuant 
to— 
"(i) an individualized written rehabilitation plan 
under a State plan for vocational rehabilitation services 
approved under the Rehabilitation Act of 1973, or 
"(ii) a program of vocational rehabilitation carried 
out under chapter 31 of title 38, United States Code. 
"(7) QUALIFIED SUMMER YOUTH EMPLOYEE.— 
"(A) IN GENERAL.—The term 'qualified summer youth 
employee' means any individual— 
"(i) who performs 
services for the 
employer 
between May 1 and September 15, 
"(ii) who is certified by the designated local agency 
as having attained age 16 but not 18 on the hiring 
date (or if later, on May 1 of the calendar year 
involved), 
"(iii) who has not been an employee of the employer 
during any period prior to the 90-day period described 
in subparagraph (B)(i), and 
"(iv) who is certified by the designated local agency 
as having his principal place of abode within an 
empowerment zone or enterprise community. 
"(B) 
SPECIAL RULES FOR DETERMINING AMOUNT OF 
CREDIT.—For purposes of applying this subpart to wages 
paid or incurred to any qualified summer youth employee— 
"(i) subsection (b)(2) shall be applied by substitut-
ing '£iny 90-day period between May 1 and September 
15' for 'the 1-year period beginning with the day the 
individual begins work for the employer', and 
"(ii) subsection (b)(3) shall be applied by substitut-
ing '$3,000' for '$6,000'. 
The preceding sentence shall not apply to an individual 
who, with respect to the same employer, is certified as 
a member of another targeted group after such individual 
has been a qualified summer youth employee. 
"(C) YOUTH MUST CONTINUE TO RESIDE IN ZONE.—Para-
graph (5)(B) shall apply for purposes of subparagraph 
(A)(iv). 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1771 
"(8) QUALIFIED FOOD STAMP RECIPIENT.— 
"(A) IN GENERAL.—^The term 'qualified food stamp 
recipient' means any individual who is certified by the 
designated local agency— 
"(i) as having attained age 18 but not age 25 
on the hiring date, and 
"(ii) as being a member of a family— 
"(I) receiving assistance under a food stamp 
program under the Food Stamp Act of 1977 
for the 6-month period ending on the hiring date, 
or 
"(II) receiving such assistance for at least 3 
months of the 5-month period ending on the hiring 
date, in the case of a member of a family who 
ceases to be eligible for such assistance under sec-
tion 6(o) of the Food Stamp Act of 1977. 
"(B) 
PARTICIPATION 
INFORMATION.—^Notwithstanding Contracts, 
any other provision of law, the Secretary of the Treasury 
and the Secretary of Agriculture shall enter into an agree-
ment to provide information to designated local agencies 
with respect to participation in the food stamp program. 
"(9) HIRING DATE.—^The term 'hiring date' means the day 
the individual is hired by the employer. 
"(10) DESIGNATED LOCAL AGENCY.—The term 'designated 
local agency' means a State employment security agency estab-
lished in accordance with the Act of June 6, 1933, as amended 
(29 U.S.C. 49-49n). 
"(11) SPECIAL RULES FOR CERTIFICATIONS.— 
"(A) IN GENERAL.—^An individual shall not be treated 
as a member of a targeted group unless— 
"(i) on or before tne day on which such individual 
begins 
work 
for 
the 
employer, 
the 
employer 
has received a certificatian from a designated local 
agency that such individual is a member of a targeted 
group, or 
"(ii)(I) on or before the day the individual is offered 
emplojnnent with the employer, a pre-screening notice 
is completed by the employer with respect to such 
individual, and 
"(II) not later than the 21st day after the individual 
begins work for the employer, the employer submits 
such notice, signed by the employer and the individual 
under penalties of perjury, to the designated local 
agency as part of a written request for such a certifi-
cation from such agency. 
For purposes of this paragraph, the term *pre-screening 
notice' means a document (in such form as the Secretary 
shall prescribe) which contains information provided by 
the individual on the basis of which the employer believes 
that the individual is a member of a targeted group. 
"(B) INCORRECT CERTIFICATIONS.—If— 
"(i) an individual has been certified by a designated 
local agency as a member of a targeted group, and 
"(ii) such certification is incorrect because it was 
based on false information provided by such individual, 
the certification shall be revoked and wages paid by the 
employer after the date on which notice of revocation is 
110 STAT. 1772 
PUBLIC LAW 104-188—AUG. 20, 1996 
received by the employer shall not be treated as qualified 
wages. 
"(C) EXPLANATION OF DENIAL OF REQUEST.—If a des-
ignated local agency denies a request for certification of 
membership in a targeted group, such agency shall provide 
to the person making such request a written explanation 
of the reasons for such denial.". 
(c) MINIMUM EMPLOYMENT PERIOD.—Paragraph (3) of section 
51(i) (relating to certain individuals ineligible) is amended to read 
as follows: 
"(3) 
INDIVIDUALS NOT MEETING MINIMUM EMPLOYMENT 
PERIOD.—No wages shall be taken into account under sub-
section (a) with respect to any individual unless such individual 
either— 
"(A) is employed by the employer at least 180 days 
(20 days in the case of a qualified summer youth employee), 
or 
"(B) has completed at least 400 hours (120 hours in 
the case of a qualified summer youth employee) of services 
performed for the employer.". 
(d) TERMINATION.—Paragraph (4) of section 51(c) (relating to 
wages defined) is amended to read as follows: 
"(4) TERMINATION.—The term 'wages' shall not include any 
amount paid or incurred to an individual who begins work 
for the employer— 
"(A) after December 31, 1994, and before October 1, 
1996, or 
"(B) after September 30, 1997.". 
(e) REDESIGNATION OF CREDIT.— 
(1) Sections 38(b)(2), 41(b)(2)(D)(iii), 45A(b)(l)(B), 51 (a) 
and (g), and 196(c) are each amended in the text by striking 
"targeted jobs credit" each place it appears and inserting "work 
opportunity credit". 
(2) The subpart heading for subpart F of part IV of sub-
chapter A of chapter 1 is amended by striking "Targeted 
Jobs Credit" and inserting "Work Opportunity Credit". 
(3) The table of subparts for such part IV is amended 
by striking "targeted jobs credit" and inserting "work oppor-
tunity credit". 
(4) The headings for sections 41(b)(2)(DXiii) and 1396(c)(3) 
are each amended by striking "TARGETED JOBS CREDIT" and 
inserting "WORK OPPORTUNITY CREDIT". 
(5) The heading for subsection (j) of section 51 is amended 
by striking "TARGETED JOBS CREDIT" and inserting "WORK 
OPPORTUNITY CREDIT". 
if) TECHNICAL AMENDMENT.—Paragraph (1) of section 51(c) is 
amended by striking ", subsection (d)(8)(D), . 
26 use 38 note. 
(g) EFFECTIVE DATE.—The amendments made by this section 
shall apply to individuals who begin work for the employer after 
September 30, 1996. 
SEC. 1202. EMPLOYER-PROVIDED EDUCATIONAL ASSISTANCE PRO-
GRAMS. 
(a) EXTENSION.—Subsection (d) of section 127 (relating to edu-
cational assistance programs) is amended by striking "December 
31, 1994." and inserting "May 31, 1997. In the case of any taxable 
year beginning in 1997, only expenses paid with respect to courses 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1773 
beginning before July 1, 1997, shall be taken into account in deter-
mining the amount excluded under this section.". 
(b) LIMITATION TO EDUCATION BELOW GRADUATE LEVEL.—The 
last sentence of section 127(c)(1) is amended by inserting before 
the period the following: ", and such term also does not include 
any payment for, or the provision of any benefits with respect 
to, any graduate level course of a kind normally taken by an 
individual pursuing a program leading to a law, business, medical, 
or other advanced academic or professional degree". 
(c) EFFECTIVE DATES.— 
26 use 127 note. 
(1) EXTENSION.—The amendment made by subsection (a) 
shall apply to taxable years beginning after December 31, 1994. 
(2) GRADUATE EDUCATION.—^The amendment made by sub-
section (b) shall apply with respect to expenses relating to 
courses beginning after June 30, 1996. 
(3) EXPEDITED PROCEDURES.—The Secretary of the Treas-
ury shall establish expedited procedures for the refund of any 
overpayment of taxes imposed by the Internal Revenue Code 
of 1986 which is attributable to amounts excluded from gross 
income during 1995 or 1996 under section 127 of such Code, 
including procedures waiving the requirement that an employer 
obtain an employee's signature where the employer dem-
onstrates to the satisfaction of the Secretary that amy refund 
collected by the employer on behalf of the employee will be 
paid to the employee. 
SEC. 1203. FUTA EXEMPTION FOR ALIEN AGRICULTURAL WORKERS. 
(a) IN GENERAL.—Subparagraph (B) of section 3306(c)(1) (defin-
ing emplojrment) is amended by striking "before January 1, 1995,". 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to services performed after December 31,1994. 
SEC. 1204. RESEARCH CREDIT. 
(a) IN GENERAL.—Subsection (h) of section 41 (relating to credit 
for research activities) is amended to read as follows: 
"(h) TERMINATION.— 
"(1) IN GENERAL.—This section shall not apply to any 
amount paid or incurred— 
"(A) after 
June 
30, 
1995, and 
before 
July 
1, 
1996, or 
"(B) after May 31, 1997. 
Notwithstanding the preceding sentence, in the case of a tax-
payer making an election under subsection (c)(4) for its first 
taxable year beginning after June 30, 1996, and before July 
1, 1997, this section shall apply to amounts paid or incurred : 
during the first 11 months of such taxable year. 
"(2) COMPUTATION OF BASE AMOUNT.—In the case of any 
taxable year with respect to which this section applies to a 
number of days which is less than the total number of days 
in such taxable year, the base amount with respect to such 
taxable year shall be the amount which bears the same ratio 
' 
to the base amount for such year (determined without regard 
to this paragraph) as the number of days in such taxable 
year to which this section applies bears to the total number 
of days in such taxable year.". 
(b) BASE AMOUNT FOR START-UP COMPANIES.—Clause (i) of 
section 41(c)(3)(B) (relating to start-up companies) is amended to 
read as follows: 
110 STAT. 1774 
PUBLIC LAW 104-188—AUG. 20, 1996 
"(i) 
TAXPAYERS 
TO 
WHICH 
SUBPARAGRAPH 
APPLIES.—The fixed-base percentage shall be deter-
mined under this subparagraph if— 
"(I) the first taxable year in which a taxpayer 
had both gross receipts and qualified research 
expenses begins aft;er December 31, 1983, or 
"(II) there are fewer than 3 taxable years 
beginning after December 31, 1983, and before 
January 1, 1989, in which the taxpayer had both 
gross receipts and qualified research expenses.". 
(c) ELECTION OF ALTERNATIVE INCREMENTAL CREDIT.—Sub-
section (c) of section 41 is amended by redesignating paragraphs 
(4) and (5) as paragraphs (5) and (6), respectively, and by inserting 
after paragraph (3) the following new paragraph: 
"(4) ELECTION OF ALTERNATIVE INCREMENTAL CREDIT.— 
"(A) IN GENERAL.—^At the election of the taxpayer, the 
credit determined under subsection (a)(1) shall be equal 
to the sum o
f
— 
"(i) 1.65 percent of so much of the qualified 
research expenses for the taxable year as exceeds 1 
percent of the average described in subsection (c)(1)(B) 
but does not exceed 1.5 percent of such average, 
"(ii) 2.2 percent of so much of such expenses as 
exceeds 1.5 percent of such average but does not exceed 
2 percent of such average, and 
"(iii) 2.75 percent of so much of such expenses 
as exceeds 2 percent of such average. 
"(B) ELECTION.—An election under this paragraph may 
be made only for the first taxable year of the taxpayer 
beginning after June 30, 1996. Such an election shall apply 
to the taxable year for which made and all succeeding 
taxable years unless revoked with the consent of the Sec-
retary.". 
(d) INCREASED CREDIT FOR CONTRACT RESEARCH EXPENSES 
WITH RESPECT TO CERTAIN RESEARCH CONSORTIA.—Paragraph (3) 
of section 41(b) is amended by adding at the end the following 
new subparagraph: 
"(C) 
AMOUNTS 
PAID 
TO 
CERTAIN 
RESEARCH 
CONSORTIA.— 
"(i) IN GENERAL.—Subparagraph (A) shall be 
applied by substituting *75 percent' for *65 percent' 
with respect to amounts paid or incurred by the tax-
payer to a qualified research consortium for qualified 
research on behalf of the taxpayer and 1 or more 
unrelated taxpayers. For purposes of the preceding 
sentence, all persons treated as a single employer 
under subsection (a) or (b) of section 52 shall be treated 
as related taxpayers. 
"(ii) QUALIFIED RESEARCH CONSORTIUM.—The term 
'qualified research consortium' means any organization 
which— 
"(I) is described in section 501(c)(3) or 501(c)(6) 
and is exempt from tax under section 501(a), 
"(II) is organized and operated primarily to 
conduct scientific research, and 
"(III) is not a private foundation.". 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1775 
(e) CONFORMING AMENDMENT.—Subparagraph (D) of section 
28(b)(1) is amended by inserting ", and before July 1, 1996, euid 
periods after May 31, 1997" after "June 30,1995". 
(f) EFFECTIVE DATES.— 
26 use 4i note. 
(1) IN GENERAL.—Except as provided in paragraph (2), the 
amendments made by this section shall apply to taxable years 
ending after June 30,1996. 
(2) SUBSECTIONS (C) AND (d).—The amendments made by 
subsections (c) and (d) shall apply to taxable years beginning 
after June 30,1996. 
(3) ESTIMATED TAX.—The amendments made by this section 
shall not be taken into account under section 6654 or 6655 
of the Internal Revenue Code of 1986 (relating to failure to 
pay estimated tax) in determining the amount of any install-
ment required to be paid for a taxable year beginning in 1997. 
SEC. 1205. ORPHAN DRUG TAX CREDIT. 
(a) RECATEGORIZED AS A BUSINESS CREDIT.— 
(1) IN GENERAL,.—Section 28 (relating to clinical testing 
expenses for certain drugs for rare diseases or conditions) is 
transferred to subpart D of part IV of subchapter A of chapter 
1, inserted after section 45B, and redesignated as section 45C. 
(2) CONFORMING AMENDMENT.—Subsection (b) of section 
38 (relating to general business credit) is amended by striking 
"plus" at the end of paragraph (10), by striking the period 
at the end of paragraph (11) and inserting ", plus", and by 
adding at the end the following new paragraph: 
"(12) the orphan drug credit determined under section 
45C(a).". 
(3) CLERICAL AMENDMENTS.— 
(A) The table of sections for subpart B of such part 
IV is amended by striking the item relating to section 
28. 
(B) The table of sections for subpart D of such part 
rV is amended by adding at the end the following new 
item: 
"Sec. 45C. Clinical testing expenses for certain drugs for rare diseases or condi-
tions.". 
(b) CREDIT TERMINATION.—Subsection (e) of section 45C, as 
redesignated by subsection (a)(1), is amended to read as follows: 
"(e) TERMINATION.—^This section shall not apply to any amount 
paid or incurred— 
"(1) after 
December 31, 1994, and before July 1, 
1996, or 
"(2) after May 31,1997.". 
(c) No PRE-JULY 1,1996 CARRYBACKS.—Subsection (d) of section 
39 (relating to carryback and carryforward of unused credits) is 
amended by adding at the end the following new paragraph: 
"(7) No CARRYBACK OF SECTION 45C CREDIT BEFORE JULY 
1, 1996.—No portion of the unused business credit for any tax-
able year which is attributable to the orphan drug credit deter-
mined under section 45C may be carried back to a taxable 
year ending before eluly 1,1996.". 
(d) ADDITIONAL CONFORMING AMENDMENTS.— 
(1) Section 45C(a), as redesignated by subsection (a)(1), 
is amended by striking "There shall be allowed as a credit 
against the tax imposed by this chapter for the taxable year" 
110 STAT. 1776 
PUBLIC LAW 104-188—AUG. 20, 1996 
and inserting "For purposes of section 38, the credit determined 
under this section for the taxable year is". 
(2) Section 45C(d), as so redesignated, is amended bv strik-
ing paragraph (2) and by redesignating paragraphs (3), (4), 
and (5) as paragraphs (2), (3), and (4). 
(3) Section 29(b)(6)(A) is amended by striking "sections 
27 and 28" and inserting "section 27". 
(4) Section 30(b)(3)(A) is amended by striking "sections 
27, 28, and 29" and inserting "sections 27 and 29". 
(5) Section 53(d)(1)(B) is amended— 
(A) by striking "or not allowed under section 28 solely 
by reason of the application of section 28(d)(2)(B)," in clause 
(iii), and 
(B) by striking "or not allowed under section 28 solely 
by reason of the application of section 28(d)(2)(B)" in clause 
(iv)(II). 
(6) Section 55(c)(2) is amended by striking "28(d)(2),". 
(7) Section 280C(b) is amended— 
(A) by striking "section 28(b)" in paragraph (1) and 
inserting "section 45C(b)", 
(B) by striking "section 28" in paragraphs (1) and (2)(A) 
and inserting "section 45C", and 
(C) by striking "subsection (dX2) thereof in paragraphs 
(1) and (2)(A) and inserting "section 38(c)". 
26 use 29 note. 
(e) EFFECTIVE DATE.—The amendments made by this section 
shall apply to amounts paid or incurred in taxable years ending 
after June 30,1996. 
SEC. 1206. CONTRIBUTIONS OF STOCK TO PRIVATE FOUNDATIONS. 
(a) IN GENERAL.—Subparagraph (D) of section 170(e)(5) (relat-
ing to special rule for contributions of stock for which market 
quotations are readily available) is amended to read as follows: 
"(D) TERMINATION.—This paragraph shall not apply 
to contributions made— 
"(i) sifter December 31, 1994, and before July 1, 
1996, or 
"(ii) after May 31,1997.". 
26 use 170 note. 
(b) EFFECTIVE DATE.—The amendment made by this section 
shall apply to contributions made after June 30,1996. 
SEC. 1207. EXTENSION OF BINDING CONTRACT DATE FOR BIOMASS 
AND COAL FACILITIES. 
(a) IN GENERAL.—Subparagraph (A) of section 29(g)(1) (relating 
to extension of certain facilities) is amended by strilong "January 
1, 1997" and inserting "July 1, 1998" and by striking "January 
1,1996" and inserting "January 1,1997". 
26 use 29 note. 
(b) EFFECTIVE DATE.—The amendment made by this section 
shall take effect on the date of the enactment of this Act. 
SEC. 1208. MORATORIUM FOR EXCISE TAX ON DIESEL FUEL SOLD FOR 
USE OR USED IN DIESEL-POWERED MOTORBOATS. 
Subparagraph (D) of section 4041(a)(1) (relating to the imposi-
tion of tax on diesel fiiel and special motor fuels) is amended 
by redesignating clauses (i) and (ii) as clauses (ii) and (iii), respec-
tively, and by inserting before clause (ii) (as redesignated) the 
following new clause: 
"(i) no tax shall be imposed by subsection (a) or 
(d)(1) during the period beginning on the date which 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1777 
is 7 days after the date of the enactment of the Small 
Business Job Protection Act of 1996 and ending on 
December 31,1997,". 
Subtitle C—Provisions Relating to S 
Corporations 
SEC. 1301. S CORPORATIONS PERMITTED TO HAVE 75 SHAREHOLDERS. 
Subparagraph (A) of section 1361(b)(1) (defining small business 
corporation) is amended by striking "35 shareholders" and inserting 
"75 shareholders". 
SEC. 1302. ELECTING SMALL BUSINESS TRUSTS. 
(a) GENERAL RULE.—Subparagraph (A) of section 1361(c)(2) 
(relating to certain trusts permitted as shareholders) is amended 
by inserting after clause (iv) the following new clause: 
"(v) An electing small business trust.". 
(b) CURRENT BENEFICIARIES TREATED AS SHAREHOLDERS.— 
Subparagraph (B) of section 1361(c)(2) is amended by adding at 
the end the following new clause: 
"(v) In the case of a trust described in clause 
(v) of subparagraph (A), each potential current bene-
ficiary of such trust shall be treated as a shareholder; 
except that, if for any period there is no potential 
current beneficiary of such trust, such trust shall be 
treated as the shareholder during such period.". 
(c) ELECTING SMALL BUSINESS TRUST DEFINED.—Section 1361 
(defining S corporation) is amended by adding at the end the 
following new subsection: 
"(e) ELECTING SMALL BUSINESS TRUST DEFINED.— 
"(1) ELECTING SMALL BUSINESS TRUST.—For purposes of 
this section— 
"(A) IN GENERAL.—Except as provided in subparagraph 
(B), the term 'electing small business trust' means any 
trust if— 
"(i) such trust does not have as a beneficiary any 
person other than (I) an individual, (II) an estate, 
or (III) an organization described in paragraph (2), 
(3), (4), or (5) of section 170(c) which holds a contingent 
interest and is not a potential current beneficiary, 
"(ii) no interest in such trust was acquired by 
purchase, and 
"(iii) an election under this subsection applies to 
such trust. 
"(B) CERTAIN TRUSTS NOT ELIGIBLE.—The term 'electing 
small business trust' shall not include— 
"(i) any qualified subchapter S trust (as defined 
in subsection (d)(3)) if an election under subsection 
(d)(2) applies to any corporation the stock of which 
is held by such trust, and 
"(ii) any trust exempt fi*om tax under this subtitle. 
"(C) PURCHASE.—For purposes of subparagraph (A), 
the term 'purchase' means any acquisition if the basis 
of the property acquired is determined under section 1012. 
"(2) POTENTIAL CURRENT BENEFICIARY.—For purposes of 
this section, the term 'potential current beneficiary' means. 
110 STAT. 1778 
PUBLIC LAW 104-188—AUG. 20, 1996 
with respect to any period, any person who at any time during 
such period is entitled to, or at the discretion of any person 
may receive, a distribution from the principal or income of 
the trust. If a trust disposes of all of the stock which it holds 
in an S corporation, then, with respect to such corporation, 
the term 'potential current beneficiary' does not include any 
person who first met the requirements of the preceding sentence 
during the 60-day period ending on the date of such disposition. 
"(3) ELECTION.—An election under this subsection shall 
be made by the trustee. Any such election shall apply to the 
taxable year of the trust for which made and all subsequent 
taxable years of such trust unless revoked with the consent 
of the Secretary. 
"(4) CROSS REFERENCE.— 
"For special treatment of electing small business trusts, see sec-
tion 641^).". 
(d) TAXATION OF ELECTING SMALL BUSINESS TRUSTS.—Section 
641 (relating to imposition of tax on trusts) is amended by adding 
at the end the following new subsection: 
"(d) SPECLVL RULES FOR TAXATION OF ELECTING SMALL BUSI-
NESS TRUSTS.— 
"(1) IN GENERAL.—For purposes of this chapter— 
"(A) the portion of any electing small business trust 
which consists of stock in 1 or more S corporations shall 
be treated as a separate trust, and 
"(B) the amount of the tax imposed by this chapter 
on such separate trust shall be determined with the modi-
fications of paragraph (2). 
"(2) MODIFICATIONS.—For purposes of paragraph (1), the 
modifications of this paragraph are the following: 
"(A) Except as provided in section 1(h), the amount 
of the tax imposed by section 1(e) shall be determined 
by using the highest rate of tax set forth in section 1(e). 
"(B) The exemption amount under section 55(d) shall 
be zero. 
"(C) The only items of income, loss, deduction, or credit 
to be taken into account are the following: 
"(i) The items required to be taken into account 
under section 1366. 
"(ii) Any gain or loss from the disposition of stock 
in an S corporation. 
"(iii) To the extent provided in regulations, State 
or local income taxes or administrative expenses to 
the extent allocable to items described in clauses (i) 
and (ii). 
No deduction or credit shall be allowed for any amount 
not described in this paragraph, and no item described 
in this paragraph shall be apportioned to any beneficiary. 
"(D) No amount shall be allowed under paragraph (1) 
or (2) of section 1211(b). 
"(3) TREATMENT OF REMAINDER OF TRUST AND DISTRIBU-
TIONS.—For purposes of determining— 
"(A) the amount of the tax imposed by this chapter 
on the portion of any electing small business trust not 
treated as a separate trust under paragraph (1), and 
"(B) the distributable net income of the entire trust. 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1779 
the items referred to in paragraph (2)(C) shall be excluded. 
Except as provided in the preceding sentence, this subsection 
shall not affect the tsixation of any distribution from the trust. 
"(4) 
TREATMENT OF UNUSED DEDUCTIONS WHERE TERMI-
NATION OF SEPARATE TRUST.—If a portion of an electing small 
business trust ceases to be treated as a separate trust under 
paragraph (1), any carryover or excess deduction of the separate 
trust which is referred to in section 642(h) shall be taken 
into account by the entire trust. 
"(5) ELECTING SMALL BUSINESS TRUST.—For purposes of 
this subsection, the term 'electing small business trust' has 
the meaning given such term by section 1361(e)(1).". 
(e) TECHNICAL AMENDMENT.—Paragraph (1) of section 1366(a) 
is amended by inserting ", or of a trust or estate which terminates," 
after "who dies". 
SEC. 1303. EXPANSION OF POST-DEATH QUALIFICATION FOR CERTAIN 
TRUSTS. 
Subparagraph (A) of section 1361(c)(2) (relating to certain trusts 
permitted as shareholders) is amended— 
(1) by striking "60-day period" each place it appears in 
clauses (ii) and (iii) and inserting "2-year period", and 
(2) by striking the last sentence in clause (ii). 
SEC. 1304. FINANCIAL INSTITUTIONS PERMITTED TO HOLD SAFE 
HARBOR DEBT. 
Clause (iii) of section 1361(c)(5)(B) (defining straight debt) is 
amended by striking "or a trust described in paragraph (2)" and 
inserting "a trust described in paragraph (2), or a person which 
is actively and regularly engaged in the business of lending money". 
SEC. 1305. RULES RELATING TO INADVERTENT TERMINATIONS AND 
INVALID ELECTIONS. 
(a) GENERAL RULE.—Subsection (f) of section 1362 (relating 
to inadvertent terminations) is amended to read as follows: 
"(f) INADVERTENT INVALID ELECTIONS OR TERMINATIONS.—If—-
"(1) an election under subsection (a) by any corporation— 
"(A) was not effective for the taxable year for which 
made (determined without regard to subsection (b)(2)) by 
reason of a failure to meet the requirements of section 
1361(b) or to obtain shareholder consents, or 
"(B) was terminated under paragraph (2) or (3) of 
subsection (d), 
"(2) the Secretary determines that the circumstances result-
ing in such ineffectiveness or termination were inadvertent, 
"(3) no later than a reasonable period of time after discovery 
of the circumstances resulting in such ineffectiveness or termi-
nation, steps were taken— 
"(A) so that the corporation is a small business corpora-
- tion, or 
"(B) to acquire the required shareholder consents, and 
"(4) the corporation, and each person who was a share-
holder in the corporation at any time during the period specified 
pursuant to this subsection, agrees to make such adjustments 
(consistent with the treatment of the corporation as an S cor-
poration) as may be required by the Secretary with respect 
to such period. 
110 STAT. 1780 
PUBLIC LAW 104-188—AUG. 20, 1996 
then, notwithstanding the circumstances resulting in such ineffec-
tiveness or termination, such corporation shall be treated as an 
S corporation during the period specified by the Secretary.". 
(b) LATE ELECTIONS, ETC.—Subsection (b) of section 1362 is 
amended by adding at the end the following new paragraph: 
"(5) 
AUTHORITY TO TREAT 
LATE 
ELECTIONS, 
ETC., AS 
TIMELY.—If— 
"(A) an election under subsection (a) is made for any 
taxable year (determined without regard to paragraph (3)) 
after the date prescribed by this subsection for making 
such election for such taxable year or no such election 
is made for any taxable year, and 
"(B) the Secretary determines that there was reason-
able cause for the failure to timely make such election, 
the Secretary may treat such an election as timely made for 
such taxable year (and paragraph (3) shall not apply).". 
26 use 1362 
(c) EFFECTIVE DATE.—The amendments made by subsections 
note. 
(a) and (b) shall apply with respect to elections for taxable years 
beginning after December 31, 1982. 
SEC. 1306. AGREEMENT TO TERMINATE YEAR. 
Paragraph (2) of section 1377(a) (relating to pro rata share) 
is amended to read as follows: 
"(2) ELECTION TO TERMINATE YEAR.— 
"(A) IN GENERAL.—Under regulations prescribed by the 
Secretary, if any shareholder terminates the shareholder's 
interest in the corporation during the taxable year and 
all affected shareholders and the corporation agree to the 
application of this paragraph, paragraph (1) shall be 
applied to the affected shareholders as if the taxable year 
consisted of 2 taxable years the first of which ends on 
the date of the termination. 
"(B) 
AFFECTED 
SHAREHOLDERS.—For 
purposes 
of 
subparagraph (A), the term 'affected shareholders' means 
the shareholder whose interest is terminated and all share-
holders to whom such shareholder has transferred shares 
during the taxable year. If such shareholder has transferred 
shares to the corporation, the term 'affected shareholders' 
shall include all persons who are shareholders during the 
taxable year.". 
SEC. 1307. EXPANSION OF POST-TERMINATION TRANSITION PERIOD. 
(a) IN GENERAL.—Paragraph (1) of section 1377(b) (relating 
to post-termination transition period) is amended by striking "and" 
at the end of subparagraph (A), by redesignating subparagraph 
(B) as subparagraph (C), and by inserting after subparagraph (A) 
the following new subparagraph: 
"(B) the 120-day period beginning on the date of any 
determination pursuant to an audit of the taxpayer which 
follows the termination of the corporation's election and 
which adjusts a subchapter S item of income, loss, or 
deduction of the corporation arising during the S period 
(as defined in section 1368(e)(2)), and". 
(b) DETERMINATION DEFINED.—Paragraph (2) of section 1377(b) 
is amended by striking subparagraphs (A) and (B), by redesignating 
subparagraph (C) as subparagraph (B), and by inserting before 
subparagraph (B) (as so redesignated) the following new subpara-
graph: 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1781 
"(A) a determination as defined in section 1313(a), 
or". 
(c) 
REPEAL 
OF 
SPECIAL 
AUDIT 
PROVISIONS 
FOR 
SUB-
CHAPTER S ITEMS.— 
(1) GENERAL RULE.—Subchapter D of chapter 63 (relating 26USC624ict 
to tax treatment of subchapter S items) is hereby repealed, seg. 
(2) 
CONSISTENT 
TREATMENT 
REQUIRED.—Section 
6037 
(relating to return of S corporation) is amended by adding 
at the end the following new subsection: 
"(c) SHAREHOLDER'S RETURN MUST BE CONSISTENT WITH COR-
PORATE RETURN OR SECRETARY NOTIFIED OF INCONSISTENCY.— 
"(1) IN GENERAL.—^A shareholder of an S corporation shall, 
on such shareholder's return, treat a subchapter S item in 
a manner which is consistent with the treatment of such item 
on the corporate return. 
"(2) NOTIFICATION OF INCONSISTENT TREATMENT.— 
"(A) IN GENERAL.—In the case of any subchapter S 
item, if— 
"(i)(I) the corporation has filed a return but the 
shareholder's treatment on his return is (or may be) 
inconsistent with the treatment of the item on the 
corporate return, or 
"(II) the corporation has not filed a return, and 
"(ii) the shareholder files with the Secretary a 
statement identifying the inconsistency, 
paragraph (1) shall not apply to such item. 
"(B) 
SHAREHOLDER RECEIVING INCORRECT INFORMA-
TION.—A shareholder shall be treated as having complied 
with clause (ii) of subparagraph (A) with respect to a sub-
chapter S item if the shareholder— 
"(i) demonstrates to the satisfaction of the Sec-
retary that the treatment of the subchapter S item 
on the shareholder's return is consistent with the treat-
ment of the item on the schedule furnished to the 
shareholder by the corporation, and 
"(ii) elects to have this paragraph apply with 
respect to that item. 
"(3) EFFECT OF FAILURE TO NOTIFY.—In any case— 
"(A) described in subparagraph (A)(i)(I) of paragraph 
(2), and 
"(B) in which the shareholder does not comply with 
subparagraph (A)(ii) of paragraph (2), 
any adjustment required to msdie the treatment of the items 
by such shareholder consistent with the treatment of the items 
on the corporate return shall be treated as arising out of 
mathematical or clerical errors and assessed according to sec-
tion 6213(b)(1). Paragraph (2) of section 6213(b) shall not apply 
to any assessment referred to in the preceding sentence. 
"(4) SUBCHAPTER S ITEM.—For purposes of this subsection, 
the term 'subchapter S item' means any item of an S corporation 
to the extent that regulations prescribed by the Secretary pro-
vide that, for purposes of this subtitle, such item is more 
appropriately determined at the corporation level than at the 
shareholder level. 
110 STAT. 1782 
PUBLIC LAW 104-188—AUG. 20, 1996 
"(5) ADDITION TO TAX FOR FAILURE TO COMPLY WITH SEC-
TION.— 
'^or addition to tax in the case of a shareholder's negligence in 
connection with, or disregard of, the requirements of this section, 
see part II of subchapter A of chapter 68. . 
(3) CONFORMING AMENDMENTS.— 
(A) Section 
1366 is amended 
by striking 
sub-
section (g). 
(B) Subsection (b) of section 6233 is amended to read 
as follows: 
"(b) SIMILAR RULES IN CERTAIN CASES.—If a partnership return 
is filed for any taxable year but it is determined that there is 
no entity for such taxable year, to the extent provided in regulations, 
rules similar to the rules of subsection (a) shall apply.". 
(C) The table of subchapters for chapter 63 is amended 
by striking the item relating to subchapter D. 
SEC. 1308. S CORPORATIONS PERMITTED TO HOLD SUBSIDIARIES. 
(a) IN GENERAL.—Paragraph (2) of section 1361(b) (defining 
ineligible corporation) is amended by striking subparagraph (A) 
and by redesignating subparagraphs (B), (C), (D), and (E) as sub-
paragraphs (A), (B), (C), and (D), respectively. 
(b) TREATMENT OF CERTAIN WHOLLY OWNED S CORPORATION 
SUBSIDIARIES.—Section 1361(b) (defining small business corpora-
tion) is amended by adding at the end the following new paragraph: 
"(3) 
TREATMENT OF CERTAIN WHOLLY OWNED SUBSIDI-
ARIES.— 
"(A) IN GENERAL.—For purposes of this title— 
"(i) a corporation which is a qualified subchapter 
S subsidiary shall not be treated as a separate corpora-
tion, and 
"(ii) all assets, liabilities, and items of income, 
deduction, and credit of a qualified subchapter S 
subsidiary shall be treated as assets, liabilities, and 
such items (as the case may be) of the S corporation. 
"(B) QUALIFIED SUBCHAPTER S SUBSIDIARY.—For pur-
poses of this paragraph, the term 'qualified subchapter 
S subsidiary* means any domestic corporation which is 
not an ineligible corporation (as defined in paragraph (2)), 
if— 
"(i) 100 percent of the stock of such corporation 
is held by the S corporation, and 
"(ii) the S corporation elects to treat such corpora-
tion as a qualified subchapter S subsidiary. 
"(C) TREATMENT OF TERMINATIONS OF QUALIFIED SUB-
CHAPTER s SUBSIDIARY STATUS.—For purposes of this title, 
if any corporation which was a qualified subchapter S 
subsidiary ceases to meet the requirements of subpara-
graph (B), such corporation shall be treated as a new 
corporation acquiring all of its assets (and assuming all 
of its liabilities) immediately before such cessation from 
the S corporation in exchange for its stock. 
"(D) ELECTION AFTER TERMINATION.—If a corporation's 
status as a qualified subchapter S subsidiary terminates, 
such corporation (and any successor corporation) shall not 
be eligible to make— 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1783 
"(i) an election under subparagraph (B)(ii) to be 
treated as a qualified subchapter S subsidiary, or 
"(ii) an election under section 1362(a) to be treated 
as an S corporation, 
before its 5th taxable year which begins after the 1st 
taxable year for which such termination was effective, 
unless the Secretary consents to such election.". 
(c) CERTAIN DIVIDENDS NOT TREATED AS PASSIVE INVESTMENT 
INCOME.—Paragraph (3) of section 1362(d) is amended by adding 
at the end the following new subparagraph: 
"(F) TREATMENT OF CERTAIN DIVIDENDS.—If an S cor-
poration holds stock in a C corporation meeting the require-
ments of section 1504(a)(2), the term 'passive investment 
income' shall not include dividends from such C corporation 
to the extent such dividends are attributable to the earn-
ings and profits of such C corporation derived from the 
active conduct of a trade or business.". 
(d) CONFORMING AMENDMENTS.— 
(1) Subsection (c) of section 1361 is amended by striking 
paragraph (6). 
(2) Subsection (b) of section 1504 (defining includible cor-
poration) is amended by adding at the end the following new 
paragraph: 
"(8) An S corporation.". 
SEC. 1309. TREATMENT OF DISTRIBUTIONS DURING LOSS YEARS. 
(a) ADJUSTMENTS FOR DISTRIBUTIONS TAKEN INTO ACCOUNT 
BEFORE LOSSES.— 
(1) Subparagraph (A) of section 1366(d)(1) (relating to losses 
and deductions cannot exceed shareholder's basis in stock and 
debt) is amended by striking "paragraph (1)" and inserting 
"paragraphs (1) and (2)(A)". 
(2) Subsection (d) of section 1368 (relating to certain adjust-
ments taken into account) is amended by adding at the end 
the following new flush sentence: 
"In the case of any distribution made during any taxable year, 
the adjusted basis of the stock shall be determined with regard 
to the adjustments provided in paragraph (1) of section 1367(a) 
for the taxable year.". 
(b) ACCUMULATED ADJUSTMENTS ACCOUNT.—Paragraph (1) of 
section 1368(e) (relating to accumulated adjustments account) is 
amended by adding at the end the following new subparagraph: 
"(C) NET LOSS FOR YEAR DISREGARDED.— 
"(i) IN GENERAL.—In appljdng this section to distribu-
tions made during any taxable year, the amount in the 
accumulated adjustments account as of the close of such 
taxable year shall be determined without regard to any 
net negative adjustment for such taxable year. 
"(ii) NET NEGATIVE ADJUSTMENT.—For purposes of 
clause (i), the term 'net negative adjustment' means, with 
respect to any taxable year, the excess (if any) o
f
— 
"(I) the reductions in the account for the taxable 
year (other than for distributions), over 
"(II) the increases in such account for such taxable 
year.". 
(c) CONFORMING AMENDMENTS.—Subparagraph (A) of section 
1368(e)(1) is amended— 
110 STAT. 1784 
PUBLIC LAW 104-188—AUG. 20, 1996 
(1) by striking "as provided in subparagraph (B)" and 
inserting "as otherwise provided in this paragraph", and 
(2) by striking "section 1367(b)(2)(A)" and inserting "section 
1367(a)(2)". 
SEC. 
1
3
1
0
. TREATMENT 
OF 
S 
CORPORATIONS 
UNDER 
SUBCHAPTER 
C. 
Subsection (a) of section 1371 (relating to appHcation of sub-
chapter C rules) is amended to read as follows: 
"(a) APPLICATION OF SUBCHAPTER C RULES.—Except as other-
wise provided in this title, and except to the extent inconsistent 
with this subchapter, subchapter C shall apply to an S corporation 
and its shareholders.". 
26 u s e 1361 
SEC. 1311. ELIMD^ATION OF CERTAIN EARNINGS AND PROFITS. 
(a) IN GENERAL.—If— 
(1) a corporation was an electing small business corporation 
under subchapter S of chapter 1 of the Internal Revenue Code 
of 1986 for any taxable year beginning before January 1, 1983, 
and 
(2) such corporation is an S corporation under subchapter 
S of chapter 1 of such Code for its first taxable year beginning 
after December 31, 1996, 
the amount of such corporation's accumulated earnings and profits 
(as of the beginning of such first taxable year) shall be reduced 
by an amount equal to the portion (if any) of such accumulated 
earnings and profits which were accumulated in any taxable year 
beginning before January 1, 1983, for which such corporation was 
an electing small business corporation under such subchapter S. 
(b) CONFORMING AMENDMENTS.— 
(1) Paragraph (3) of section 1362(d), as amended by section 
1308, is amended— 
(A) by striking "SUBCHAPTER C" in the paragraph head-
ing and inserting "ACCUMULATED", 
(B) by striking "subchapter C" in subparagraph (A)(i)(I) 
and inserting "accumulated", and 
(C) by striking subparagraph (B) and redesignating 
the following subparagraphs accordingly. 
(2)(A) Subsection (a) of section 1375 is amended by striking 
"subchapter C" in paragraph (1) and inserting "accumulated". 
(B) Paragraph (3) of section 1375(b) is amended to read 
as follows: 
"(3) PASSIVE INVESTMENT INCOME, ETC.—The terms 'passive 
investment income' and 'gross receipts' have the same respec-
tive meamings as when used in paragraph (3) of section 
1362(d).". 
(C) The section heading for section 1375 is amended by 
striking "subchapter C" and inserting "accumulated". 
(D) The table of sections for part III of subchapter S of 
chapter 1 is amended by striking "subchapter C" in the item 
relating to section 1375 and inserting "accumulated". 
(3) Clause (i) of section 1042(c)(4)(A) is amended by striking 
"section 1362(d)(3)(D)" and inserting "section 1362(d)(3)(C)". 
SEC. 1312. CARRYOVER OF DISALLOWED LOSSES AND DEDUCTIONS 
UNDER AT-RISK RULES ALLOWED. 
Paragraph (3) of section 1366(d) (relating to carryover of dis-
allowed losses and deductions to post-termination transition period) 
is amended by adding at the end the following new subparagraph: 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1785 
"(D) AT-RISK LIMITATIONS.—To the extent that any 
increase in adjusted basis described in subparagraph (B) 
would have increased the shareholder's amount at risk 
under section 465 if such increase had occurred on the 
day preceding the commencement of the post-termination 
transition period, rules similar to the rules described in 
subparagraphs (A) through (C) shall apply to any losses 
disallowed by reason of section 465(a).". 
SEC. 1313. ADJUSTMENTS TO BASIS OF INHERITED S STOCK TO 
REFLECT CERTAIN ITEMS OF INCOME. 
(a) IN GENERAL.—Subsection (b) of section 1367 (relating to 
adjustments to basis of stock of shareholders, etc.) is amended 
by adding at the end the following new paragraph: 
"(4) ADJUSTMENTS IN CASE OF INHERITED STOCK.— 
"(A) IN GENERAL.—If any person acquires stock in an 
S corporation by reason of the death of a decedent or 
by bequest, devise, or inheritance, section 691 shall be 
applied with respect to £iny item of income of the S corpora-
tion in the same manner as if the decedent had held 
directly his pro rata share of such item. 
"(B) ADJUSTMENTS TO BASIS.—The basis determined 
under section 1014 of any stock in an S corporation shall 
be reduced by the portion of the value of the stock which 
is attributable to items constituting income in respect of 
the decedent.". 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
26 use 1367 
shall apply in the case of decedents d)dng after the date of the ^°^-
enactment of this Act. 
SEC. 1314. S CORPORATIONS ELIGIBLE FOR RULES APPLICABLE TO 
REAL PROPERTY SUBDIVIDED FOR SALE BY NONCOR-
PORATE TAXPAYERS. 
(a) IN GENERAL.—Subsection (a) of section 1237 (relating to 
real property subdivided for sale) is amended by striking "other 
than a corporation" in the material preceding paragraph (1) and 
inserting "other than a C corporation". 
(b) CONFORMING AMENDMENT.—Subparagraph (A) of section 
1237(a)(2) is amended by inserting "an S corporation which included 
the taxpayer as a shareholder," after "controlled by the taxpayer,". 
SEC. 1315. FINANCIAL INSTITUTIONS, 
Subparagraph (A) of section 1361(b)(2) (defining ineligible cor-
poration), as redesignated by section 1308(a), is amended to read 
as follows: 
"(A) a financial institution which uses the reserve 
method of accounting for bad debts described in section 
585,". 
SEC. 1316. CERTAIN 
EXEMPT 
ORGANIZATIONS 
ALLOWED TO B E 
SHAREHOLDERS. 
(a) ELIGIBILITY TO B E SHAREHOLDERS.— 
(1) IN GENERAL.—Subparagraph (B) of section 1361(b)(1) 
(defining small business corporation) is amended to read as 
follows: 
"(B) have as a shareholder a person (other than an 
estate, a trust described in subsection (c)(2), or an organiza-
110 STAT. 1786 
PUBLIC LAW 104-188—AUG. 20, 1996 
tion described in subsection (c)(7)) who is not an individ-
ual,". 
(2) 
ELIGIBLE 
EXEMPT ORGANIZATIONS.—Section 1361(c) 
(relating to special rules for appl3dng subsection (b)) is amended 
by adding at the end the following new paragraph: 
"(7) CERTAIN EXEMPT ORGANIZATIONS PERMITTED AS SHARE-
HOLDERS.—For purposes of subsection (b)(1)(B), an organization 
which is— 
"(A) described in section 401(a) or 501(c)(3), and 
"(B) exempt from taxation under section 501(a), 
may be a shareholder in an S corporation.". 
(b) 
CONTRIBUTIONS 
OF 
S 
CORPORATION 
STOCK.—Section 
170(e)(1) (relating to certain contributions of ordinary income and 
capital gain property) is amended by adding at the end the following 
new sentence: "For purposes of applying this paragraph in the 
case of a charitable contribution of stock in an S corporation, 
rules similar to the rules of section 751 shall apply in determining 
whether gain on such stock would have been long-term capital 
gain if such stock were sold by the taxpayer.". 
(c) TREATMENT OF INCOME.—Section 512 (relating to unrelated 
business taxable income), as amended by section 1113, is amended 
by adding at the end the following new subsection: 
"(e) SPECIAL RULES APPLICABLE TO S CORPORATIONS.— 
"(1) IN GENERAL.—If an organization described in section 
1361(c)(7) holds stock in an S corporation— 
"(A) such interest shall be treated as an interest in 
an unrelated trade or business, and 
"(B) notwithstanding any other provision of this part— 
"(i) all items of income, loss, or deduction taken 
into account under section 1366(a), and 
"(ii) any gain or loss on the disposition of the 
stock in the S corporation, 
shall be taken into account in computing the unrelated business 
taxable income of such organization. 
"(2) BASIS REDUCTION.—Except as provided in regulations, 
for purposes of paragraph (1), the basis of any stock acquired 
by purchase (within the meaning of section 1012) shall be 
reduced by the amount of any dividends received by the 
organization with respect to the stock.". 
(d) CERTAIN BENEFITS NOT APPLICABLE TO S CORPORATIONS.— 
(1) CONTRIBUTION TO ESOPS.—Paragraph (9) of section 
404(a) (relating to certain contributions to employee ownership 
plans) is amended by inserting at the end the following new 
subparagraph: 
"(C) S CORPORATIONS.—This paragraph shall not apply 
to an S corporation.". 
(2) DIVIDENDS ON EMPLOYER SECURITIES.—Paragraph (1) 
of section 404(k) (relating to deduction for dividends on certain 
employer securities) is amended by striking "a corporation" 
and inserting "a C corporation". 
(3) EXCHANGE TREATMENT.—Subparagraph (A) of section 
1042(c)(1) (defining qualified securities) is amended by striking 
"domestic corporation" and inserting "domestic C corporation". 
(e) 
CONFORMING 
AMENDMENT.—Clause 
(i) 
of 
section 
1361(e)(1)(A), as added by section 1302, is amended by striking 
"which holds a contingent interest and is not a potential current 
beneficiary". 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1787 
(f) EFFECTIVE DATE.—The amendments made by this section 
26 USC 170 note. 
shall apply to taxable years beginning after December 31, 1997. 
SEC. 1317. EFFECTIVE DATE. 
(a) IN GENERAL.—Except as otherwise provided in this subtitle, 
26 use 641 note. 
the amendments made by this subtitle shall apply to taxable years 
beginning after December 31, 1996. 
(b) TREATMENT OF CERTAIN ELECTIONS UNDER PRIOR LAW.— 
26 use i362 
For purposes of section 1362(g) of the Internal Revenue Code of note. 
1986 (relating to election after termination), any termination under 
section 1362(d) of such Code in a taxable year beginning before 
January 1,1997, shall not be taken into account. 
Subtitle D—Pension Simplification 
CHAPTER 1—SIMPLIFIED DISTRIBUTION RULES 
SEC. 1401. REPEAL OF 5-YEAR INCOME AVERAGING FOR LUMP-SUM 
DISTRIBUTIONS. 
(a) IN GENERAL.—Subsection (d) of section 402 (relating to 
taxability of beneficiary of employees' trust) is amended to read 
as follows: 
"(d) TAXABILITY OF BENEFICIARY OF CERTAIN FOREIGN SITUS 
TRUSTS.—For purposes of subsections (a), (b), and (c), a stock bonus, 
pension, or profit-sharing trust which would qualify for exemption 
from tax under section 501(a) except for the fact that it is a 
trust created or organized outside the United States shall be treated 
as if it were a trust exempt fi-om tax under section 501(a).". 
(b) CONFORMING AMENDMENTS.— 
(1) Subparagraph (D) of section 402(e)(4) (relating to other 
rules applicable to exempt trusts) is amended to read as follows: 
"(D) LUMP-SUM DISTRIBUTION.—For purposes of this 
paragraph— 
"(i) IN GENERAL.—The term lump-sum distribution' 
means the distribution or pajmaent within one taxable 
year of the recipient of the balance to the credit of 
an employee which becomes payable to the recipient— 
"(I) on account of the employee's death, 
"(II) after the employee attains age 59V2, 
"(III) on account of the employee's separation 
fi'om service, or 
"(IV) after the employee has become disabled 
(within the meaning of section 72(m)(7)), 
from a trust which forms a part of a plan described 
in section 401(a) and which is exempt from tax under 
section 501 or from a plan described in section 403(a). 
Subclause (III) of this clause shall be applied only 
with respect to an individual who is an employee with-
out regard to section 401(c)(1), and subclause (IV) shall 
be applied only with respect to an employee within 
the meaning of section 401(c)(1). For purposes of this 
clause, a distribution to two or more trusts shall be 
treated as a distribution to one recipient. For purposes 
of this paragraph, the balance to the credit of the 
employee does not include the accumulated deductible 
employee contributions under the plan (within the 
meaning of section 72(o)(5)). 
110 STAT. 1788 
PUBLIC LAW 104-188—AUG. 20, 1996 
"(ii) 
AGGREGATION 
OF 
CERTAIN 
TRUSTS 
AND 
PLANS.—For purposes of determining the balance to 
the credit of an employee under clause (i)— 
"(I) all trusts which are part of a plan shall 
be treated as a single trust, all pension plans 
maintained by the employer shall be treated as 
a single plan, all profit-sharing plans maintained 
by the employer shall be treated as a single plan, 
and all stock bonus plans maintained by the 
employer shall be treated as a single plan, and 
"(II) trusts which are not qualified trusts 
under section 401(a) and annuity contracts which 
do not satisfy the requirements of section 404(a)(2) 
shall not be taken into account. 
"(iii) COMMUNITY PROPERTY LAWS.—The provisions 
of this paragraph shall be applied without regard to 
community property laws. 
"(iv) AMOUNTS SUBJECT TO PENALTY.—This para-
graph shall not apply to amounts described in subpara-
graph (A) of section 72(m)(5) to the extent that section 
72(m)(5) applies to such amounts. 
"(v) 
BALANCE TO CREDIT OF EMPLOYEE NOT TO 
INCLUDE AMOUNTS PAYABLE UNDER QUALIFIED DOMES-
TIC RELATIONS ORDER.—For purposes of this paragraph, 
the balance to the credit of an employee shall not 
include any amount payable to an alternate payee 
under a qualified domestic relations order (within the 
meaning of section 414(p)). 
"(vi) TRANSFERS TO COST-OF-LIVING ARRANGEMENT 
NOT TREATED AS DISTRIBUTION.—For p u r p o s e s of t h i s 
paragraph, the balance to the credit of an employee 
under a defined contribution plan shall not include 
any amount transferred from such defined contribution 
plan to a qualified cost-of-living arrangement (within 
the meaning of section 415(k)(2)) under a defined bene-
fit plan. 
"(vii) LUMP-SUM DISTRIBUTIONS OF ALTERNATE PAY-
EES.—If any distribution or payment of the balance 
to the credit of an employee would be treated as a 
lump-sum distribution, then, for purposes of this para-
graph, the payment under a qualified domestic rela-
tions order (within the meaning of section 414(p)) of 
the balance to the credit of an alternate payee who 
is the spouse or former spouse of the employee shall 
be treated as a lump-sum distribution. For purposes 
of this clause, the balance to the credit of the alternate 
payee shall not include any amount payable to the 
employee.". 
(2) Section 402(c) (relating to rules applicable to rollovers 
from exempt trusts) is amended by striking paragraph (10). 
(3) Paragraph (1) of section 55(c) (defining regular tax) 
is amended by striking "shall not include any tax imposed 
by section 402(d) and". 
(4) Paragraph (8) of section 62(a) (relating to certain portion 
of lump-sum distributions from pension plans taxed under sec-
tion 402(d)) is hereby repealed. 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1789 
(5) Section 401(a)(28)(B) (relating to coordination with dis-
tribution rules) is amended by striking clause (v). 
(6) Subparagraph (B)(ii) of section 401(k)(10) (relating to 
distributions that must be lump-sum distributions) is amended 
to read as follows: 
"(ii) 
LUMP-SUM DISTRIBUTION.—For purposes 
of 
this subparagraph, the term lump-sum distribution' 
has 
the 
meaning 
given 
such 
term 
by 
section 
402(e)(4)(D) (without regard to subclauses (I), (II), (III), 
and (IV) of clause (i) thereof).". 
(7) Section 406(c) (relating to termination of status as 
deemed employee not to be treated as separation from service 
for purposes of limitation of tax) is hereby repealed. 
(8) Section 407(c) (relating to termination of status as 
deemed employee not to be treated as separation from service 
for purposes of limitation of tax) is hereby repealed. 
(9) Section 691(c) (relating to deduction for estate tax) 
is amended by striking paragraph (5). 
(10) Paragraph (1) of section 871(b) (relating to imposition 
of tax) is amended by striking "section 1, 55, or 402(d)(1)" 
and inserting "section 1 or 55". 
(11) Subsection (b) of section 877 (relating to alternative 
tax) is amended by striking "section 1, 55, or 402(d)(1)" and 
inserting "section 1 or 55". 
(12) Section 4980A(c)(4) is amended— 
(A) by striking "to which an election under section 
402(d)(4)(B) applies" and inserting "(as defined in section 
402(eX4)(D)) with respect to which the individual elects 
to have this paragraph apply", 
(B) by adding at the end the following new flush sen-
tence: 
"An individual may elect to have this paragraph apply to only 
one lump-sum distribution.", and 
(C) by striking the heading and inserting: 
"(4) SPECIAL ONE-TIME ELECTION.—". 
(13) Section 402(e) is amended by striking paragraph (5). 
(c) EFFECTIVE DATES.— 
26 use 402 note. 
(1) IN GENERAL.—The amendments made by this section 
shall apply to taxable years beginning after December 31, 1999. 
(2) RETENTION OF CERTAIN TRANSITION RULES.—The amend-
ments made by this section shall not apply to any distribution 
for which the taxpayer is eligible to elect the benefits of section 
1122(h) (3) or (5) of the Tax Reform Act of 1986. Notwithstand-
ing the preceding sentence, individuals who elect such benefits 
after 
December 
31, 
1999, 
shall 
not 
be 
eligible 
for 
5-year averaging under section 402(d) of the Internal Revenue 
Code 
of 
1986 
(as 
in 
effect 
immediately 
before 
such 
amendments). 
SEC. 1402. REPEAL OF $5,000 EXCLUSION OF EMPLOYEES' DEATH 
BENEFITS. 
(a) IN GENERAL.—Subsection (b) of section 101 is hereby 
repealed. 
(b) CONFORMING AMENDMENTS.— 
(1) Subsection (c) of section 101 is amended by striking 
"subsection (a) or (b)" and inserting "subsection (a)". 
110 STAT. 1790 
PUBLIC LAW 104-188—AUG. 20, 1996 
(2) Sections 406(e) and 407(e) are each amended by striking 
paragraph (2) and by redesignating paragraph (3) as paragraph 
(2). 
(3) Section 7701(a)(20) is amended by striking ", for the 
purpose of applying the provisions of section 101(b) with respect 
to employees' death benefits". 
26 use 101 note. 
(c) EFFECTIVE DATE.—The amendments made by this section 
shall apply with respect to decedents d3dng after the date of the 
enactment of this Act. 
SEC. 1403. SIMPLIFIED METHOD FOR TAXING ANNUITY DISTRIBU-
TIONS UNDER CERTAIN EMPLOYER PLANS. 
(a) GENERAL RULE.—Subsection (d) of section 72 (relating to 
annuities; certain proceeds of endowment and life insurance con-
tracts) is amended to read as follows: 
"(d) 
SPECIAL RULES FOR QUALIFIED EMPLOYER RETIREMENT 
PLANS.— 
"(1) SIMPLIFIED METHOD OF TAXING ANNUITY PAYMENTS.— 
"(A) IN GENERAL.—In the case of any amount received 
as an annuity under a qualified employer retirement plan— 
"(i) subsection (b) shall not apply, and 
"(ii) the investment in the contract shall be recov-
ered as provided in this paragraph. 
"(B) 
METHOD 
OF 
RECOVERING 
INVESTMENT 
IN 
CONTRACT.— 
"(i) IN GENERAL.—Gross income shall not include 
so much of any monthly einnuity pajmaent under a 
qualified employer retirement plan as does not exceed 
the amount obtained by dividing— 
"(I) the investment in the contract (as of the 
annuity starting date), by 
"(II) the number of anticipated 
payments 
determined under the table contained in clause 
(iii) (or, in the case of a contract to which sub-
section (c)(3)(B) applies, the number of monthly 
annuity payments under such contract), 
"(ii) 
CERTAIN 
RULES 
MADE 
APPLICABLE.—Rules 
similar to the rules of paragraphs (2) and (3) of sub-
section (b) shall apply for purposes of this paragraph. 
"(iii) NUMBER OF ANTICIPATED PAYMENTS.— 
"If the age of the 
primary annuitant on 
The number 
the annuity starting 
of anticipated 
date is: 
payments is: 
Not more than 55 
360 
More than 55 but not more than 60 
310 
More than 60 but not more than 65 
260 
More than 65 but not more than 70 
210 
More than 70 
160. 
"(C) 
ADJUSTMENT 
FOR 
REFUND 
FEATURE 
NOT 
APPLICABLE.—For purposes of this paragraph, investment 
in the contract shall be determined under subsection (c)(1) 
without regard to subsection (c)(2). 
"(D) SPECIAL RULE WHERE LUMP SUM PAID IN CONNEC-
TION WITH COMMENCEMENT OF ANNUITY PAYMENTS.—If, in 
connection with the commencement of annuity payments 
under any qualified employer retirement plan, the taxpayer 
receives a lump-sum payment— 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1791 
"(i) such payment shall be taxable under sub-
section (e) as if received before the annuity starting 
date, and 
"(ii) the investment in the contract for purposes 
of this paragraph shall be determined as if such pay-
ment had been so received. 
"(E) EXCEPTION.—This paragraph shall not apply in 
any case where the primary annuitant has attained age 
75 on the annuity starting date unless there are fewer 
than 5 years of guaranteed payments under the annuity. 
"(F) ADJUSTMENT WHERE ANNUITY PAYMENTS NOT ON 
MONTHLY BASIS.—In any case where the annuity payments 
are not made on a monthly basis, appropriate adjustments 
in the application of this paragraph shall be made to take 
into account the period on the basis of which such pajnnents 
are made. 
"(G) QUALIFIED EMPLOYER RETIREMENT PLAN.—For pur-
poses of this paragraph, the term 'qualified employer retire-
ment plan' means any plan or contract described in para-
graph (1), (2), or (3) of section 4974(c). 
"(2) 
TREATMENT OF EMPLOYEE CONTRIBUTIONS UNDER 
DEFINED CONTRIBUTION PLANS.—For purposes of this section, 
employee contributions (and any income allocable thereto) 
under a defined contribution plan may be treated as a separate 
contract.". 
(b) EFFECTIVE DATE.—The amendment made by this section 26 use 72 note. 
shall apply in cases where the annuity starting date is after the 
90th day after the date of the enactment of this Act. 
SEC. 1404. REQUIRED DISTRIBUTIONS. 
(a) IN GENERAL.—Section 401(a)(9)(C) (defining required begin-
ning date) is amended to read as follows: 
"(C) REQUIRED BEGINNING DATE.—For purposes of this 
paragraph— 
"(i) IN GENERAL.—The term 'required beginning 
date' means April 1 of the calendar year following 
the later of— 
"(I) the calendar year in which the employee 
attains age 70V2, or 
"(II) the calendar year in which the employee 
retires. 
"(ii) EXCEPTION.—Subclause (II) of clause (i) shall 
not apply— 
"(I) except as provided in section 409(d), in 
the case of an employee who is a 5-percent owner 
(as defined in section 416) with respect to the 
plan year ending in the calendar year in which 
the employee attains age 70V2, or 
"(II) for purposes of section 408 (a)(6) or (b)(3). 
"(iii) ACTUARIAL ADJUSTMENT.—In the case of an 
employee to whom clause (i)(II) applies who retires 
in a calendar year after the calendar year in which 
the employee attains age 7OV2, the employee's accrued 
benefit shall be actuarially increased to take into 
account the period after age 7OV2 in which the 
employee was not receiving any benefits under the 
plan. 
110 STAT. 1792 
PUBLIC LAW 104-188—AUG. 20, 1996 
"(iv) EXCEPTION FOR GOVERNMENTAL AND CHURCH 
PLANS.—Clauses (ii) and (iii) shall not apply in the 
case of a governmental plan or church plan. For pur-
poses of this clause, the term 'church plan' means 
a plan maintained by a church for church employees, 
and the term 'church' means any church (as defined 
in section 3121(w)(3)(A)) or qualified church-controlled 
organization (as defined in section 3121(w)(3)(B)).". 
26 use 401 note. 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
shall apply to years beginning after December 31, 1996. 
CHAPTER 2—INCREASED ACCESS TO RETIREMENT 
PLANS 
Subchapter A—Simple Savings Plans 
SEC. 1421. ESTABLISHMENT OF SAVINGS INCENTIVE MATCH PLANS 
FOR EMPLOYEES OF SMALL EMPLOYERS. 
(a) IN GENERAL.—Section 408 (relating to individual retirement 
accounts) is amended by redesignating subsection (p) as subsection 
(q) and by inserting after subsection (o) the following new sub-
section: 
"(p) SIMPLE RETIREMENT ACCOUNTS.— 
"(1) IN GENERAL.—For purposes of this title, the term 'sim-
ple retirement account' means an individual retirement plan 
(as defined in section 7701(a)(37))— 
"(A) with respect to which the requirements of para-
graphs (3), (4), and (5) are met; and 
"(B) with respect to which the only contributions 
allowed are contributions under a qualified salary reduction 
arrangement. 
"(2) QUALIFIED SALARY REDUCTION ARRANGEMENT.— 
"(A) IN GENERAL.—For purposes of this subsection, the 
term 'qualified salary reduction arrangement' means a writ-
ten arrangement of an eligible employer under which— 
"(i) an employee eligible to participate in the 
arrangement may elect to have the employer make 
payments— 
"(I) as elective employer contributions to a 
simple retirement 
account on behalf 
of the 
employee, or 
"(II) to the employee directly in cash, 
"(ii) the amount which an employee may elect 
under clause (i) for any year is required to be expressed 
as a percentage of compensation and may not exceed 
a total of $6,000 for any year, 
"(iii) the employer is required to make a matching 
contribution to the simple retirement account for any 
year in an amount equal to so much of the amount 
the employee elects under clause (i)(I) as does not 
exceed the applicable percentage of compensation for 
the year, and 
"(iv) no contributions may be made other than 
contributions described in clause (i) or (iii). 
"(B) 
EMPLOYER MAY ELECT 2-PERCENT NONELECTIVE 
CONTRIBUTION.— 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1793 
"(i) IN GENERAL.—^An employer shall be treated 
as meeting the requirements of subparagraph (A)(iii) 
for any year if, in lieu of the contributions described 
in such clause, the employer elects to make nonelective 
contributions of 2 percent of compensation for each 
employee who is eligible to participate in the arrange-
ment and who has at least $5,000 of compensation 
from the employer for the year. If an employer makes 
an election under this subparagraph for any year, the 
employer shall notify employees of such election within 
a reasonable period of time before the 60-day period 
for such year under paragraph (5)(C). 
"(ii) COMPENSATION LIMITATION.—The compensa-
tion taken into account under clause (i) for any year 
shall not exceed the limitation in effect for such year 
under section 401(a)(17). 
"(C) DEFINITIONS.—For purposes of this subsection— 
"(i) ELIGIBLE EMPLOYER.— 
"(I) IN GENERAL.—The term 'eligible employer' 
means, with respect to any year, an employer 
which had no more than 100 employees who 
received at least $5,000 of compensation from the 
employer for the preceding year. 
"(II) 
2-YEAR 
GRACE 
PERIOD.—An 
eUgible 
employer who establishes and maintains a plan 
under this subsection for 1 or more years and 
who fails to be an eligible employer for any subse-
quent year shall be treated as an eligible employer 
for the 2 years following the last year the employer 
was £in eligible employer. If such failure is due 
to any acquisition, disposition, or similar trans-
action involving an eligible employer, the preceding 
sentence shall apply only in accordance with rules 
similar to the rules of section 410(b)(6)(C)(i). 
"(ii) APPLICABLE PERCENTAGE.— 
"(I) 
IN GENERAL.—The 
term 
'applicable 
percentage' means 3 percent. 
"(II) ELECTION OF LOWER PERCENTAGE.—An 
employer may elect to apply a lower percentage 
(not less than 1 percent) for any year for all 
employees eligible to participate in the plan for 
such year if the employer notifies the employees 
of such lower percentage within a reasonable 
period of time before the 60-day election period 
for such year under paragraph (5)(C). An employer 
may not elect a lower percentage under this sub-
clause for any year if that election would result 
in the applicable percentage being lower than 3 
percent in more than 2 of the years in the 5-
year period ending with such year. 
"(Ill) SPECIAL RULE FOR YEARS ARRANGEMENT 
NOT IN EFFECT.—If any year in the 5-year period 
described in subclause (II) is a year prior to the 
first year for which any qualified salary reduction 
arrangement is in effect with respect to the 
employer (or any predecessor), the employer shall 
be treated as if the level of the employer matching 
110 STAT. 1794 
PUBLIC LAW 104-188—AUG. 20, 1996 
contribution was at 3 percent of compensation for 
such prior year. 
"(D) ARRANGEMENT MAY BE ONLY PLAN OF EMPLOYER.— 
"(i) IN GENERAL.—An arrangement shall not be 
treated as a qualified salary reduction arrangement 
for any year if the employer (or any predecessor 
employer) maintained a qualified plan with respect 
to which contributions were made, or benefits were 
accrued, for service in any year in the period beginning 
with the year such arrangement became effective and 
ending with the year for which the determination is 
being made. 
"(ii) 
QUALIFIED 
PLAN.—For 
purposes 
of 
this 
subparagraph, the term 'qualified plan' means a plan, 
contract, pension, or trust described in subparagraph 
(A) or (B) of section 219(g)(5). 
"(E) COST-OF-LIVING ADJUSTMENT.—The Secretary shall 
adjust the $6,000 amount under subparagraph (A)(ii) at 
the same time and in the same manner as under section 
415(d), except that the base period taken into account 
shall be the calendar quarter ending September 30, 1996, 
and any increase under this subparagraph which is not 
a multiple of $500 shall be rounded to the next lower 
multiple of $500. 
"(3) VESTING REQUIREMENTS.—The requirements of this 
paragraph are met with respect to a simple retirement account 
if the employee's rights to any contribution to the simple retire-
ment account are nonforfeitable. For purposes of this para-
graph, rules similar to the rules of subsection (k)(4) shall apply. 
"(4) PARTICIPATION REQUIREMENTS.— 
"(A) IN GENERAL.—The requirements of this paragraph 
are met with respect to any simple retirement account 
for a year only if, under the qualified salary reduction 
arrangement, all employees of the employer who— 
"(i) received at least $5,000 in compensation from 
the employer during any 2 preceding years, and 
"(ii) are reasonably expected to receive at least 
$5,000 in compensation during the year, 
are eligible to make the election under paragraph (2)(A)(i) 
or receive the nonelective contribution described in para-
graph (2)(B). 
"(B) EXCLUDABLE EMPLOYEES.—An employer may elect 
to exclude from the requirement under subparagraph (A) 
employees described in section 410(b)(3). 
"(5) ADMINISTRATIVE REQUIREMENTS.—The requirements 
of this paragraph are met with respect to any simplified retire-
ment account if, under the qualified salary reduction arrange-
ment— 
"(A) an employer must— 
"(i) make the elective employer contributions under 
paragraph (2)(A)(i) not later than the close of the 30-
day period following the last day of the month with 
respect to which the contributions are to be made, 
and 
"(ii) make the matching contributions under para-
graph (2)(A)(iii) or the nonelective contributions under 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1795 
paragraph (2)(B) not later than the date described 
in section 404(m)(2)(B), 
"(B) an employee may elect to terminate participation 
in such arrangement at any time during the year, except 
that if an employee so terminates, the arrangement may 
provide that the employee may not elect to resume partici-
pation until the beginning of the next year, and 
"(C) each employee eligible to participate may elect, 
during the 60-day period before the beginning of any year 
(and the 60-day period before the first day such employee 
is eligible to participate), to participate in the arrangement, 
or to modify the amounts subject to such arrangement, 
for such year. 
"(6) DEFINITIONS.—For purposes of this subsection— 
"(A) COMPENSATION.— 
"(i) IN GENERAL.—The term 'compensation' means 
amounts described in paragraphs (3) and (8) of section 
6051(a). 
"(ii) SELF-EMPLOYED.—In the case of an employee 
described in subparagraph (B), the term 'compensation' 
means net earnings from self-employment determined 
under section 1402(a) without regard to any contribu-
tion under this subsection. 
"(B) EMPLOYEE.—The term 'employee' includes an 
employee as defined in section 401(c)(1). 
"(C) YEAR.—The term 'year' means the calendar year. 
"(7) USE OF DESIGNATED FINANCIAL INSTITUTION.—A plan 
shall not be treated as failing to satisfy the requirements of 
this subsection or any other provision of this title merely 
because the employer makes all contributions to the individual 
retirement accounts or annuities of a designated trustee or 
issuer. The preceding sentence shall not apply unless each 
plan participant is notified in writing (either separately or 
as part of the notice under subsection (1)(2)(C)) that the partici-
pant's balance may be transferred without cost or penalty to 
another individual account or annuity in accordance with sub-
section (d)(3)(G).". 
(b) TAX TREATMENT OF SIMPLE RETIREMENT ACCOUNTS.— 
(1) DEDUCTIBILITY OF CONTRIBUTIONS BY EMPLOYEES.— 
(A) Section 219(b) (relating to maximum amount of 
deduction) is amended by adding at the end the following 
new paragraph: 
"(4) 
SPECIAL RULE FOR SIMPLE RETIREMENT ACCOUNTS.— 
This section shall not apply with respect to any amount contrib-
uted to a simple retirement account established under section 
408(p).". 
(B) Section 219(g)(5)(A) (defining active participant) 
is amended by striking "or" at the end of clause (iv) and 
by adding at the end the following new clause: 
"(vi) any simple retirement account (within the 
meaning of section 408(p)), or". 
(2) DEDUCTIBILITY OF EMPLOYER CONTRIBUTIONS.—Section 
404 (relating to deductions for contributions of an employer 
to pension, etc. plans) is amended by adding at the end the 
following new subsection: 
"(m) SPECIAL RULES FOR SIMPLE RETIREMENT ACCOUNTS.— 
29-194 O - 96 - 3 ; QL 3 Part 3 
110 STAT. 1796 
PUBLIC LAW 104-188—AUG. 20, 1996 
"(1) IN GENERAL.—Employer contributions to a simple 
retirement account shall be treated as if they are made to 
a plan subject to the requirements of this section. 
"(2) TIMING.— 
"(A) DEDUCTION.—Contributions described in para-
graph (1) shall be deductible in the taxable year of the 
employer with or within which the calendar year for which 
the contributions were made ends. 
"(B) CONTRIBUTIONS AFTER END OF YEAR.—For pur-
poses of this subsection, contributions shall be treated as 
made for a taxable year if they are made on account of 
the taxable year and are made not later than the time 
prescribed by law for filing the return for the taxable 
year (including extensions thereof).". 
(3) CONTRIBUTIONS AND DISTRIBUTIONS.— 
(A) Section 402 (relating to taxability of beneficiary 
of employees' trust) is amended by adding at the end the 
following new subsection: 
"(k) 
TREATMENT OF SIMPLE RETIREMENT ACCOUNTS.—Rules 
similar to the rules of paragraphs (1) and (3) of subsection (h) 
shall apply to contributions and distributions with respect to a 
simple retirement account under section 408(p).". 
(B) Section 408(d)(3) is amended by adding at the 
end the following new subparagraph: 
"(G) SIMPLE RETIREMENT ACCOUNTS.—This paragraph 
shall not apply to any amount paid or distributed out 
of a simple retirement account (as defined in subsection 
(p)) unless— 
"(i) it is paid into another simple retirement 
account, or 
"(ii) in the case of any payment or distribution 
to which section 72(t)(6) does not apply, it is paid 
into an individual retirement plan.". 
(C) Clause (i) of section 457(c)(2)(B) is amended by 
striking "section 402(h)(1)(B)" and inserting "section 402 
(h)(1)(B) or (k)". 
(4) PENALTIES.— 
(A) EARLY WITHDRAWALS.—Section 72(t) (relating to 
additional tax in early distributions) is amended by adding 
at the end the following new paragraph: 
"(6) SPECIAL RULES FOR SIMPLE RETIREMENT ACCOUNTS.— 
In the case of any amount received from a simple retirement 
account (within the meaning of section 408(p)) during the 2-
year period beginning on the date such individual first partici-
pated in any qualified salary reduction arrangement main-
tained by the individual's employer under section 408(p)(2), 
paragraph (1) shall be applied by substituting *25 percent' 
for 10 percent'.". 
(B) FAILURE TO REPORT.—Section 6693 is amended by 
redesignating subsection (c) as subsection (d) and by insert-
ing after subsection (b) the following new subsection: 
"(c) PENALTIES RELATING TO SIMPLE RETIREMENT ACCOUNTS.— 
"(1) EMPLOYER PENALTIES.—An employer who fails to pro-
vide 1 or more notices required by section 408(1)(2)(C) shall 
pay a penalty of $50 for each day on which such failures 
continue. 
"(2) TRUSTEE PENALTIES.—A trustee who fails— 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1797 
"(A) to provide 1 or more statements required by the 
last sentence of section 408(i) shall pay a penalty of $50 
for each day on which such failures continue, or 
"(B) to provide 1 or more summary descriptions 
required by section 408(1)(2)(B) shall pay a penalty of $50 
for each day on which such failures continue. 
"(3) REASONABLE CAUSE EXCEPTION.—No penalty shall be 
imposed under this subsection with respect to any failure which 
the taxpayer shows was due to reasonable cause.". 
(5) REPORTING REQUIREMENTS.— 
(A) Section 408(1) is amended by adding at the end 
the following new paragraph: 
"(2) SIMPLE RETIREMENT ACCOUNTS.— 
"(A) No EMPLOYER REPORTS.—Except as provided in 
this paragraph, no report shall be required under this 
section by an employer maintaining a qualified salary 
reduction arrangement under subsection (p). 
"(B) SUMMARY DESCRIPTION.—The trustee of any simple 
retirement account established pursuant to a qualified sal-
ary reduction arrangement under subsection (p) shall pro-
vide to the employer maintaining the arrangement, each 
year a description containing the following information: 
"(i) The name and address of the employer and 
the trustee. 
"(ii) The requirements for eligibility for participa-
tion. 
"(iii) The benefits provided with respect to the 
arrangement. 
"(iv) The time and method of making elections 
with respect to the arrangement. 
"(v) The procedures for, and effects of, withdrawals 
(including rollovers) from the arrangement. 
"(C) EMPLOYEE NOTIFICATION.—The employer shall 
notify each employee immediately before the period for 
which an election described in subsection (p)(5)(C) may 
be made of the employee's opportunity to make such elec-
tion. Such notice shall include a copy of the description 
described in subparagraph (B).". 
(B) Section 408(1) is amended by striking "An employer" 
and inserting the following: 
"(1) IN GENERAL,—An employer". 
(6) REPORTING REQUIREMENTS.—Section 408(i) is amended 
by adding at the end the following new flush sentence: 
"In the case of a simple retirement account under subsection (p), 
only one report under this subsection shall be required to be submit-
ted each calendar year to the Secretary (at the time provided 
under paragraph (2)) but, in addition to the report under this 
subsection, there shall be furnished, within 30 days after each 
calendar year, to the individual on whose behalf the account is 
maintained a statement with respect to the account balance as 
of the close of, and the account activity during, such calendar 
year.". 
(7) EXEMPTION FROM TOP-HEAVY PLAN RULES.—Section 
416(g)(4) (relating to special rules for top-heavy plans) is 
amended by adding at the end the following new subparagraph: 
110 STAT. 1798 
PUBLIC LAW 104-188—AUG. 20, 1996 
"(G) SIMPLE RETIREMENT ACCOUNTS.—The term 'top-
heavy plan' shall not include a simple retirement account 
under section 408(p).". 
(8) EMPLOYMENT TAXES.— 
(A) Paragraph (5) of section 3121(a) is amended by 
striking "or" at the end of subparagraph (F), by inserting 
"or" at the end of subparagraph (G), and by adding at 
the end the following new subparagraph: 
"(H) under an arrangement to which section 408(p) 
applies, other than any elective contributions under para-
graph (2)(A)(i) thereof,". 
26 use 409. 
(B) Section 209(a)(4) of the Social Security Act is 
amended by inserting "; or (J) under an arrangement to 
which section 408(p) of such Code applies, other than any 
elective contributions under paragraph (2)(A)(i) thereof' 
before the semicolon at the end thereof. 
(C) Paragraph (5) of section 3306(b) is amended by 
striking "or" at the end of subparagraph (F), by inserting 
"or" at the end of subparagraph (G), and by adding at 
the end the following new subparagraph: 
"(H) under an arrangement to which section 408(p) 
applies, other than any elective contributions under para-
graph (2)(A)(i) thereof,". 
(D) Paragraph (12) of section 3401(a) is amended by 
adding the following new subparagraph: 
"(D) under an arrangement to which section 408(p) 
applies; or". 
(9) CONFORMING AMENDMENTS.— 
(A) Section 280G(b)(6) is amended by striking "or" at 
the end of subparagraph (B), by striking the period at 
the end of subparagraph (C) and inserting ", or" and by 
adding after subparagraph (C) the following new subpara-
graph: 
"(D) a simple retirement account described in section 
408(p).". 
(B) Section 402(g)(3) 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 after subparagraph (C) the following new 
subparagraph: 
"(D) any elective employer contribution under section 
408(p)(2)(A)(i).". 
(C) Subsections (b), (c), (m)(4)(B), and (n)(3)(B) of sec-
tion 414 are each amended by inserting "408(p)," after 
"408(k),". 
(D) Section 4972(d)(1)(A) is amended by striking "and" 
at the end of clause (ii), by striking the period at the 
end of clause (iii) and inserting ", and", and by adding 
after clause (iii) the following new clause: 
"(iv) any simple retirement account (within the 
meaning of section 408(p)).". 
(c) REPEAL OF SALARY REDUCTION SIMPLIFIED EMPLOYEE PEN-
SIONS.—Section 408(k)(6) is amended by adding at the end the 
following new subparagraph: 
"(H) TERMINATION.—This paragraph shall not apply 
to years beginning after December 31, 1996. The preceding 
sentence shall not apply to a simplified employee pension 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1799 
if the terms of such pension, as in effect on December 
31, 1996, provide that an employee may make the election 
described in subparagraph (A).", 
(d) MODIFICATIONS OF ERISA.— 
(1) 
REPORTING 
REQUIREMENTS.—Section 
101 
of 
the 
Employee Retirement Income Security Act of 1974 (29 U.S.C. 
1021) is amended by redesignating subsection (g) as subsection 
(h) and by inserting after subsection (f) the following new 
subsection: 
"(g) SIMPLE RETIREMENT ACCOUNTS.— 
"(1) No EMPLOYER REPORTS.—Except as provided in this 
subsection, no report shall be required under this section by 
an employer maintaining a qualified salary reduction arrange-
ment under section 408(p) of the Internal Revenue Code of 
1986. 
"(2) SUMMARY DESCRIPTION.—The trustee of any simple 
retirement account established pursuant to a qualified salary 
reduction arrangement under section 408(p) of such Code shall 
provide to the employer maintaining the arrangement each 
year a description containing the following information: 
"(A) The name and address of the employer and the 
trustee. 
"(B) The requirements for eligibility for participation. 
"(C) The benefits provided with respect to the arrange-
ment. 
"(D) The time and method of making elections with 
respect to the arrangement. 
"(E) The procedures for, and effects of, withdrawals 
(including rollovers) from the arrangement. 
"(3) EMPLOYEE NOTIFICATION.—The employer shall notify 
each employee immediately before the period for which an 
election described in section 408(p)(5)(C) of such Code may 
be made of the employee's opportunity to make such election. 
Such notice shall include a copy of the description described 
in paragraph (2)." 
(2) FIDUCIARY DUTIES.—Section 404(c) of such Act (29 
U.S.C. 1104(c)) is amended by inserting "(1)" after "(c)", by 
redesignating paragraphs (1) and (2) as subparagraphs (A) 
and (B), respectively, and by adding at the end the following 
new paragraph: 
"(2) In the case of a simple retirement account established 
pursuant to a qualified salary reduction arrangement under 
section 408(p) of the Internal Revenue Code of 1986, a partici-
pant or beneficiary shall, for purposes of paragraph (1), be 
treated as exercising control over the assets in the account 
upon the earliest o
f
— 
"(A) an affirmative election among investment options 
with respect to the initial investment of any contribution, 
"(B) a rollover to any other simple retirement account 
or individual retirement plan, or 
"(C) one year after the simple retirement account is 
established. 
No reports, other than those required under section 101(g), 
shall be required with respect to a simple retirement account 
established pursuant to such a qualified salary reduction 
arrangement.". 
110 STAT. 1800 
PUBLIC LAW 104-188—AUG. 20, 1996 
26 use 72 note. 
(e) EFFECTIVE DATE.—The amendments made by this section 
shall apply to taxable years beginning after December 31, 1996. 
SEC. 1422. EXTENSION OF SIMPLE PLAN TO 401(k) ARRANGEMENTS. 
(a) ALTERNATIVE METHOD OF SATISFYING SECTION 401(k) NON-
DISCRIMINATION TESTS.—Section 401(k) (relating to cash or deferred 
arrangements) is amended by adding at the end the following 
new paragraph: 
"(11) ADOPTION OF SIMPLE PLAN TO MEET NONDISCRIMINA-
TION TESTS.— 
"(A) IN GENERAL.—A cash or deferred arrangement 
maintained by an eligible employer shall be treated as 
meeting the requirements of paragraph (3)(A)(ii) if such 
arrangement meets— 
"(i) the contribution requirements of subparagraph 
(B), 
"(ii) the exclusive plan requirements of subpara-
graph (C), and 
"(iii) the vesting requirements of section 408(p)(3). 
"(B) CONTRIBUTION REQUIREMENTS.— 
"(i) IN GENERAL.—The 
requirements 
of this 
subparagraph are met if, under the arrangement— 
"(I) an employee may elect to have the 
employer make elective contributions for the year 
on behalf of the employee to a trust under the 
plan in an amount which is expressed as a percent-
age of compensation of the employee but which 
in no event exceeds $6,000, 
"(II) the employer is required to make a match-
ing contribution to the trust for the year in an 
amount equal to so much of the amount the 
employee elects under subclause (I) as does not 
exceed 3 percent of compensation for the year, 
and 
"(III) no other contributions may be made 
other than contributions described in subclause 
(I) or (II). 
"(ii) EMPLOYER MAY ELECT 2-PERCENT NONELECTIVE 
CONTRIBUTION.—An employer shall be treated as meet-
ing the requirements of clause (i)(II) for any year if, 
in lieu of the contributions described in such clause, 
the employer elects (pursuant to the terms of the 
arrangement) to make nonelective contributions of 2 
percent of compensation for each employee who is 
eligible to participate in the arrangement and who 
has at least $5,000 of compensation from the employer 
for the year. If an employer makes an election under 
this subparagraph for any year, the employer shall 
notify employees of such election within a reasonable 
period of time before the 60th day before the beginning 
of such year, 
"(C) EXCLUSIVE PLAN REQUIREMENT.—The require-
ments of this subparagraph are met for any year to which 
this paragraph applies if no contributions were made, or 
benefits were accrued, for services during such year under 
any qualified plan of the employer on behalf of any 
employee eligible to participate in the cash or deferred 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1801 
arrangement, 
other 
than 
contributions 
described 
in 
subparagraph (B). 
"(D) DEFINITIONS AND SPECIAL RULE.— 
"(i) DEFINITIONS.—For purposes of this paragraph, 
any term used in this paragraph which is also used 
in section 408(p) shall have the meaning given such 
term by such section. 
"(ii) 
COORDINATION WITH TOP-HEAVY RULES.—A 
plan meeting the requirements of this paragraph for 
any year shall not be treated as a top-heavy plan 
under section 416 for such year.". 
(b) ALTERNATIVE METHODS OF SATISFYING SECTION 401(m) NON-
DISCRIMINATION TESTS.—Section 401(m) (relating to nondiscrimina-
tion test for matching contributions and employee contributions) 
is amended by redesignating paragraph (10) as paragraph (11) 
and by adding after paragraph (9) the following new paragraph: 
"(10) 
ALTERNATIVE 
METHOD 
OF 
SATISFYING 
TESTS.—^A 
defined contribution plan shall be treated as meeting the 
requirements of paragraph (2) with respect to matching con-
tributions if the plan— 
"(A) meets the contribution requirements of subpara-
graph (B) of subsection (k)(ll), 
"(B) meets the exclusive plan requirements of sub-
section (k)(ll)(C), and 
"(C) meets 
the 
vesting 
requirements 
of 
section 
408(p)(3).". 
(c) EFFECTIVE DATE.—The amendments made by this section 
26 use 40i note. 
shall apply to plan years beginning after December 31,1996. 
Subchapter B—Other Provisions 
SEC. 1426. TAX-EXEMPT ORGANIZATIONS ELIGIBLE UNDER SECTION 
401(k). 
(a) IN GENERAL.—Subparagraph (B) of section 401(k)(4) is 
amended to read as follows: 
"(B) ELIGIBILITY OF STATE AND LOCAL GOVERNMENTS 
AND TAX-EXEMPT ORGANIZATIONS.— 
"(i) TAX-EXEMPTS ELIGIBLE.—Except as provided in 
clause (ii), any organization exempt from tax under 
this subtitle may include a qualified cash or deferred 
arrangement as part of a plan maintained by it. 
"(ii) 
GOVERNMENTS 
INELIGIBLE.—A 
cash 
or 
deferred arrangement shall not be treated as a quali-
fied cash or deferred arrangement if it is part of a 
plan maintained by a State or local government or 
political 
subdivision 
thereof, 
or 
any 
agency 
or 
instrumentality thereof. This clause shall not apply 
to a rural cooperative plan or to a plan of an employer 
described in clause (iii). 
"(iii) 
TREATMENT 
OF 
INDIAN 
TRIBAL 
GOVERN-
MENTS.—An employer which is an Indian tribal govern-
ment (as defined in section 7701(a)(40)), a subdivision 
of an Indian tribal government (determined in accord-
ance with section 7871(d)), an agency or instrumental-
ity of an Indian tribal government or subdivision 
thereof, or a corporation chartered under Federal, 
State, or tribal law which is owned in whole or in 
110 STAT. 1802 
PUBLIC LAW 104-188—AUG. 20, 1996 
part by any of the foregoing may include a qualified 
cash or deferred arrangement as part of a plan main-
tained by the employer. . 
26 use 401 note. 
(b) EFFECTIVE DATE.—The amendment made by this section 
shall apply to plan years beginning after December 31, 1996, but 
shall not apply to any cash or deferred arrangement to which 
clause (i) of section 1116(f)(2)(B) of the Tax Reform Act of 1986 
applies. 
SEC. 1427. HOMEMAKERS ELIGIBLE FOR FULL IRA DEDUCTION. 
(a) SPOUSAL IRA COMPUTED ON BASIS OF COMPENSATION OF 
BOTH SPOUSES.—Subsection (c) of section 219 (relating to special 
rules for certain married individuals) is amended to read as follows: 
"(c) SPECIAL RULES FOR CERTAIN MARRIED INDIVIDUALS.— 
"(1) IN GENERAL.—In the case of an individual to whom 
this paragraph applies for the taxable year, the limitation of 
paragraph (1) of subsection (b) shall be equal to the lesser 
of— 
"(A) the dollar amount in effect under subsection 
(b)(1)(A) for the taxable year, or 
"(B) the sum of— 
"(i) the compensation includible in such individ-
ual's gross income for the taxable year, plus 
"(ii) the compensation includible in the gross 
income of such individual's spouse for the taxable year 
reduced by the amount allowed as a deduction under 
subsection (a) to such spouse for such taxable year. 
"(2) INDIVIDUALS TO WHOM PARAGRAPH CD APPLIES.—Para-
graph (1) shall apply to any individual if— 
"(A) such individual files a joint return for the taxable 
year, and 
"(B) the amount of compensation (if any) includible 
in such individual's gross income for the taxable year is 
less than the compensation includible in the gross income 
of such individual's spouse for the taxable year. . 
(b) CONFORMING AMENDMENTS.— 
(1) Paragraph (2) of section 219(f) (relating to other defini-
tions and special rules) is amended by strilang "subsections 
(b) and (c)" and inserting "subsection (b)". 
(2) Section 219(g)(1) is amended by striking "(c)(2)" and 
inserting "(c)(1)(A)". 
(3) Section 408(d)(5) is amended by striking "$2,250" and 
inserting 
"the 
dollar 
amount 
in 
effect 
under 
section 
219(b)(1)(A)". 
26 use 219 note. 
(c) EFFECTIVE DATE.—The amendments made by this section 
shall apply to teixable years beginning after December 31, 1996. 
CHAPTER 3—NONDISCRIMINATION PROVISIONS 
SEC. 1431. DEFINITION OF HIGHLY COMPENSATED EMPLOYEES; 
REPEAL OF FAMILY AGGREGATION. 
(a) IN GENERAL.—Paragraph (1) of section 414(q) (defining 
highly compensated employee) is amended to read as follows; 
"(1) IN GENERAL.—The term liighly compensated employee' 
means any employee who— 
"(A) was a 5-percent owner at smy time during the 
year or the preceding year, or 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1803 
"(B) for the preceding year— 
"(i) had compensation from the employer in excess 
of $80,000, and 
"(ii) if the employer elects the application of this 
clause for such preceding year, was in the top-paid 
group of employees for such preceding year. 
The Secretary shall adjust the $80,000 amount under subpara-
graph (B) at the same time and in the same manner as under 
section 415(d), except that the base period shall be the calendar 
quarter ending September 30, 1996.". 
(b) REPEAL OF FAMILY AGGREGATION RULES.— 
(1) IN GENERAL.—Paragraph (6) of section 414(q) is hereby 
repealed. 
(2) COMPENSATION LIMIT.—Paragraph (17)(A) of section 
401(a) is amended by striking the last sentence. 
(3) DEDUCTION.—Subsection (1) of section 404 is amended 
by striking the last sentence. 
(c) CONFORMING AMENDMENTS.— 
(1)(A) Subsection (q) of section 414 is amended by striking 
paragraphs (2), (5), and (12) and by redesignating paragraphs 
(3), (4), (7), (8), (9), (10), and (11) as paragraphs (2) through 
(8), respectively. 
(B) Sections 129(d)(8)(B), 401(a)(5)(D)(ii), 408(k)(2)(C), and 
416(i)(l)(D) are each amended by striking "section 414(q)(7)" 
and inserting "section 414(q)(4)". 
(C) Section 416(i)(l)(A) is amended by striking "section 
414(q)(8)" and inserting "section 414(q)(5)". 
(D) Subparagraph (A) of section 414(r)(2) is amended by 
striking "subsection (q)(8)" and inserting "subsection (q)(5)". 
(E) Section 414(q)(5), as redesignated by subparagraph (A), 
is amended by striking "under paragraph (4), or the number 
of officers taken into account under paragraph (5)". 
(2) Section 1114(c)(4) of the Tax Reform Act of 1986 is 26 USC 414 note. 
amended by adding at the end the following new sentence: 
"Any reference in this paragraph to section 414(q) shall be 
treated as a reference to such section as in effect on the day 
before the date of the enactment of the Small Business Job 
Protection Act of 1996.". 
(d) EFFECTIVE DATE.— 
26 use 414 note. 
(1) IN GENERAL.—The amendments made by this section 
shall apply to years beginning after December 31, 1996, except 
that in determining whether an employee is a highly com-
pensated employee for years beginning in 1997, such amend-
ments shall be treated as having been in effect for years begin-
ning in 1996. 
(2) FAMILY AGGREGATION.—The amendments made by sub-
section (b) shall apply to years beginning after December 31, 
1996. 
SEC. 1432. MODIFICATION OF ADDITIONAL PARTICIPATION REQUIRE-
MENTS. 
(a) GENERAL RULE.—Section 401(a)(26)(A) (relating to addi-
tional participation requirements) is amended to read as follows: 
"(A) IN GENERAL.—In the case of a trust which is 
a part of a defined benefit plan, such trust shall not con-
stitute a qualified trust under this subsection unless on 
110 STAT. 1804 
PUBLIC LAW 104-188—AUG. 20, 1996 
each day of the plan year such trust benefits at least 
the lesser of— 
"(i) 50 emploj'ees of the employer, or 
"(ii) the greater of— 
"(I) 40 percent of all employees of the 
employer, or 
"(II) 2 employees (or if there is only 1 
employee, such employee).", 
(b) SEPARATE LINE OF BUSINESS TEST.—Section 401(a)(26)(G) 
(relating to separate line of business) is amended by striking "para-
graph (7)" and inserting "paragraph (2)(A) or (7)". 
26 use 401 note. 
(c) EFFECTIVE DATE.—The amendments made by this section 
shall apply to years beginning after December 31,1996. 
SEC. 1433. NONDISCRIMINATION RULES FOR QUALIFIED CASH OR 
DEFERRED ARRANGEMENTS AND MATCHING CONTRIBU-
TIONS. 
(a) ALTERNATIVE METHODS OF SATISFYING SECTION 401(k) NON-
DISCRIMINATION TESTS.—Section 401(k) (relating to cash or deferred 
arrangements), as amended by section 1422, is amended by adding 
at the end the following new paragraph: 
"(12) ALTERNATIVE METHODS OF MEETING NONDISCRIMINA-
TION REQUIREMENTS.— 
"(A) IN GENERAL.—A cash or deferred arrangement 
shall be treated as meeting the requirements of paragraph 
(3)(A)(ii) if such arrangement— 
"(i) 
meets 
the 
contribution 
requirements 
of 
subparagraph (B) or (C), £ind 
"(ii) meets the notice requirements of subpara-
graph (D). 
"(B) MATCHING CONTRIBUTIONS.— 
"(i) IN GENERAL.—The 
requirements 
of 
this 
subparagraph are met if, under the arrangement, the 
employer makes matching contributions on behalf of 
each employee who is not a highly compensated 
employee in an amount equal to— 
"(I) 100 percent of the elective contributions 
of the employee to the extent such elective con-
tributions do not exceed 3 percent of the employee's 
compensation, and 
"(II) 50 percent of the elective contributions 
of the employee to the extent that such elective 
contributions exceed 3 percent but do not exceed 
5 percent of the employee's compensation, 
"(ii) RATE FOR HIGHLY COMPENSATED EMPLOYEES.— 
The requirements of this subparagraph are not met 
if, under the arrangement, the rate of matching con-
tribution with respect to any elective contribution of 
a highly compensated employee at any rate of elective 
contribution is greater than that with respect to an 
employee who is not a highly compensated employee, 
"(iii) ALTERNATIVE PLAN DESIGNS.—If the rate of 
any matching contribution with respect to any rate 
of elective contribution is not equal to the percentage 
required under clause (i), an arrangement shall not 
be treated as failing to meet the requirements of clause 
(i) if— 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1805 
"(I) the rate of an employer's matching con-
tribution does not increase as an employee's rate 
of elective contributions increase, and 
"(II) the aggregate amount of matching con-
tributions at such rate of elective contribution is 
at least equal to the aggregate amount of matching 
contributions which would be made if matching 
contributions were made on the basis of the 
percentages described in clause (i). 
"(C) NONELECTIVE CONTRIBUTIONS.—The requirements 
of this subparagraph are met if, under the arrangement, 
the employer is required, without regard to whether the 
employee makes an elective contribution or employee con-
tribution, to make a contribution to a defined contribution 
plan on behalf of each employee who is not a highly com-
pensated employee and who is eligible to participate in 
the arrangement in an amount equal to at least 3 percent 
of the employee's compensation. 
"(D) NOTICE REQUIREMENT.—An arrangement meets 
the requirements of this paragraph if, under the arrange-
ment, each employee eligible to participate is, within a 
reasonable period before any year, given written notice 
of the employee's rights and obligations under the arrange-
ment which— 
"(i) is sufficiently accurate and comprehensive to 
apprise the employee of such rights and obligations, 
and 
"(ii) is written in a manner calculated to be under-
stood by the average employee eligible to participate. 
"(E) OTHER REQUIREMENTS.— 
"(i) WITHDRAWAL AND VESTING RESTRICTIONS.—An 
arrangement shall not be treated as meeting the 
requirements of subparagraph (B) or (C) of this para-
graph unless the requirements of subparagraphs (B) 
and (C) of paragraph (2) are met with respect to all 
employer contributions (including matching contribu-
tions) taken into account in determining whether the 
requirements of subparagraphs (B) and (C) of this para-
graph are met. 
"(ii) SOCIAL SECURITY AND SIMILAR CONTRIBUTIONS 
NOT TAKEN INTO ACCOUNT.—An arrangement shall not 
be treated as meeting the requirements of subpara-
graph (B) or (C) unless such requirements are met 
without regard to subsection (1), and, for purposes of 
subsection (1), employer contributions under subpara-
graph (B) or (C) shall not be taken into account. 
"(F) OTHER PLANS.—An arrangement shall be treated 
as meeting the requirements under subparagraph (A)(i) 
if any other plan maintained by the employer meets such 
requirements with respect to employees eligible under the 
arrangement.". 
(b) ALTERNATIVE METHODS OF SATISFYING SECTION 401(m) NON-
DISCRIMINATION TESTS.—Section 401(m) (relating to nondiscrimina-
tion test for matching contributions and employee contributions), 
as amended by section 1422(b), is amended by redesignating para-
graph (11) as paragraph (12) and by adding after paragraph (10) 
the following new paragraph: 
110 STAT. 1806 
PUBLIC LAW 104-188—AUG. 20, 1996 
"(11) ALTERNATIVE METHOD OF SATISFYING TESTS.— 
"(A) IN GENERAL.—A defined contribution plan shall 
be treated as meeting the requirements of paragraph (2) 
with respect to matching contributions if the plan— 
"(i) meets 
the 
contribution 
requirements 
of 
subparagraph (B) or (C) of subsection (k)(12), 
"(ii) meets the notice requirements of subsection 
(k)(12)(D), and 
"(iii) meets the requirements of subparagraph (B). 
"(B) 
LIMITATION ON MATCHING CONTRIBUTIONS.—The 
requirements of this subparagraph are met if— 
"(i) matching contributions on behalf of any 
employee may not be made with respect to an employ-
ee's contributions or elective deferrals in excess of 6 
percent of the employee's compensation, 
"(ii) the rate of an employer's matching contribu-
tion does not increase as the rate of an employee's 
contributions or elective deferrals increase, and 
"(iii) the matching contribution with respect to 
any highly compensated employee at any rate of an 
employee contribution or rate of elective deferral is 
not greater than that with respect to an employee 
who is not a highly compensated employee.". 
(c) YEAR FOR COMPUTING NONHIGHLY COMPENSATED EMPLOYEE 
PERCENTAGE.— 
(1) 
CASH 
OR 
DEFERRED 
ARRANGEMENTS.—Section 
401(k)(3)(A) is amended— 
(A) by striking "such year" in clause (ii) and inserting 
"the plan year", 
(B) by striking "for such plan year" in clause (ii) and 
inserting "for the preceding plan year", and 
(C) by adding at the end the following new sentence: 
"An arrangement may apply clause (ii) by using the plan 
year rather than the preceding plan year if the employer 
so elects, except that if such an election is made, it may 
not be changed except as provided by the Secretary.". 
(2) 
MATCHING AND EMPLOYEE CONTRIBUTIONS.—Section 
401(m)(2)(A) is amended— 
(A) by inserting "for such plan year" after "highly 
compensated employees", 
(B) by inserting "for the preceding plan year" after 
"eligible employees" each place it appears in clause (i) 
and clause (ii), and 
(C) by adding at the end the following flush sentence: 
"This subparagraph may be applied by using the plan 
year rather than the preceding plan year if the employer 
so elects, except that if such an election is made, it may 
not be changed except as provided by the Secretary.". 
(d) 
SPECIAL RULE 
FOR DETERMINING AVERAGE DEFERRAL 
PERCENTAGE FOR FIRST PLAN YEAR, ETC.— 
(1) Paragraph (3) of section 401(k) is amended by adding 
at the end the following new subparagraph: 
"(E) For purposes of this paragraph, in the case of 
the first plan year of any plan (other than a successor 
plan), the amount taken into account as the actual deferral 
percentage of nonhighly compensated employees for the 
preceding plan year shall be— 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1807 
"(i) 3 percent, or 
"(ii) if the employer makes an election under this 
subclause, the actual deferral percentage of nonhighly 
compensated employees determined for such first plan 
year.". 
(2) Paragraph (3) of section 401(m) is amended by adding 
at the end the following: "Rules similar to the rules of sub-
section (k)(3)(E) shall apply for purposes of this subsection.", 
(e) 
DISTRIBUTION 
OF EXCESS 
CONTRIBUTIONS AND EXCESS 
AGGREGATE CONTRIBUTIONS.— 
(1) Subparagraph (C) of section 401(k)(8) (relating to 
arrangement not disqualified if excess contributions distributed) 
is amended by striking "on the basis of the respective portions 
of the excess contributions attributable to each of such employ-
ees" and inserting "on the basis of the amount of contributions 
by, or on behalf of, each of such employees". 
(2) Subparagraph (C) of section 401(m)(6) (relating to 
method of distributing excess aggregate contributions) is 
amended by striking "on the basis of the respective portions 
of such amounts attributable to each of such employees" and 
inserting "on the basis of the amount of contributions on behalf 
of, or by, each such employee". 
if) EFFECTIVE DATES.— 
26 use 40i note. 
(1) IN GENERAL.—The amendments made by this section 
shall apply to years beginning after December 31, 1998. 
(2) EXCEPTIONS.—The amendments made by subsections 
(c), (d), and (e) shall apply to years beginning after December 
31, 1996. 
SEC. 1434. DEFINITION OF COMPENSATION FOR SECTION 415 PUR-
POSES. 
(a) GENERAL RULE.—Section 415(c)(3) (defining participant's 
compensation) is amended by adding at the end the following new 
subparagraph: 
"(D) CERTAIN DEFERRALS INCLUDED.—The term 'partici-
pant's compensation' shall include— 
"(i) any elective deferral (as defined in section 
402(g)(3)), and 
"(ii) any amount which is contributed 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.". 
(b) CONFORMING AMENDMENTS.— 
(1) Section 414(q)(4), as redesignated by section 1431, is 
amended to read as follows: 
"(4) COMPENSATION.—For purposes of this subsection, the 
term 'compensation' has the meaning given such term by section 
415(c)(3).". 
(2) Section 414(s)(2) is amended by inserting "not" after 
"elect" in the text and heading thereof. 
(c) EFFECTIVE DATE.—The amendments made by this section 
26 use 414 note. 
shall apply to years beginning after December 31, 1997. 
110 STAT. 1808 
PUBLIC LAW 104-188—AUG. 20, 1996 
CHAPTER 4—MISCELLANEOUS PROVISIONS 
SEC. 1441. PLANS COVERING SELF-EMPLOYED INDIVIDUALS. 
(a) AGGREGATION RULES.—Section 401(d) (relating to additional 
requirements for qualification of trusts and plans benefiting owner-
employees) is amended to read as follows: 
"(d) CONTRIBUTION LIMIT ON OWNER-EMPLOYEES.—^A trust 
forming part of a pension or profit-sharing plan which provides 
contributions or benefits for employees some or all of whom are 
owner-employees shall constitute a qualified trust under this section 
only if, in addition to meeting the requirements of subsection (a), 
the plan provides that contributions on behalf of any owner-
employee may be made only with respect to the earned income 
of such owner-employee which is derived from the trade or business 
with respect to which such plan is established.". 
26 use 401 note. 
(b) EFFECTIVE DATE.—The amendments made by this section 
shall apply to years beginning after December 31, 1996. 
SEC. 1442. ELIMINATION OF SPECIAL VESTING RULE FOR MULTIEM-
PLOYER PLANS. 
(a) AMENDMENTS TO 1986 CODE.—Paragraph (2) of section 
411(a) (relating to minimum vesting standards) is amended— 
(1) by striking "subparagraph (A), (B), or (C)" and inserting 
"subparagraph (A) or (B)"; and 
(2) by striking subparagraph (C). 
(b) AMENDMENTS TO ERISA.—Paragraph (2) of section 203(a) 
of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 
1053(a)) is amended— 
(1) by striking "subparagraph (A), (B), or (C)" and inserting 
"subparagraph (A) or (B)"; and 
(2) by striking subparagraph (C). 
26 use 411 note. 
(c) EFFECTIVE DATE.—The amendments made by this section 
shall apply to plan years beginning on or after the earlier o
f
— 
(1) the later of— 
(A) January 1, 1997, or 
(B) the date on which the last of the collective bargain-
ing agreements pursuant to which the plan is maintained 
terminates (determined without regard to any extension 
thereof after the date of the enactment of this Act), or 
(2) January 1, 1999. 
Such amendments shall not apply to any individual who does not 
have more than 1 hour of service under the plan on or after 
the 1st day of the 1st plan year to which such amendments apply. 
SEC. 1443. DISTRIBUTIONS UNDER RURAL COOPERATIVE PLANS. 
(a) DISTRIBUTIONS FOR HARDSHIP OR AFTER A CERTAIN AGE.— 
Section 401(k)(7) is amended by adding at the end the following 
new subparagraph: 
"(C) 
SPECIAL RULE FOR CERTAIN DISTRIBUTIONS.—^A 
rural cooperative plan which includes a qualified cash or 
deferred arrangement shall not be treated as violating the 
requirements of section 401(a) or of paragraph (2) merely 
by reason of a hardship distribution or a distribution to 
a participant after attainment of age 59 V2. For purposes 
of this section, the term 'hardship distribution' means a 
distribution described in paragraph (2)(B)(i)(IV) (without 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1809 
regard to the limitation of its application to profit-sharing 
or stock bonus plans).". 
(b) PUBLIC UTILITY DISTRICTS.—Clause (i) of section 401(k)(7)(B) 
(defining rural cooperative) is amended to read as follows: 
"(i) any organization which— 
"(I) is engaged primarily in providing electric 
service on a mutual or cooperative basis, or 
"(11) is engaged primarily in providing electric 
service to the public in its area of service and 
which is exempt from tax under this subtitle or 
which is a State or local government (or an agency 
or instrumentality thereof), other than a munici-
pality (or an agency or instrumentality thereof),". 
(c) EFFECTIVE DATES.— 
26 use 40i note. 
(1) DISTRIBUTIONS.—The amendments made by subsection 
(a) shall apply to distributions after the date of the enactment 
of this Act. 
(2) PUBLIC UTILITY DISTRICTS.—The amendments made by 
subsection (b) shall apply to plan years beginning after Decem-
ber 31, 1996. 
SEC. 1444. TREATMENT 
OF 
GOVERNMENTAL 
PLANS 
UNDER 
SECTION 415. 
(a) COMPENSATION LIMIT.—Subsection (b) of section 415 is 
amended by adding immediately after paragraph (10) the following 
new paragraph: 
"(11) 
SPECIAL 
LIMITATION 
RULE 
FOR GOVERNMENTAL 
PLANS.—In the case of a governmental plan (as defined in 
section 414(d)), subparagraph (B) of paragraph (1) shall not 
apply.". 
(b) TREATMENT OF CERTAIN EXCESS BENEFIT PLANS.— 
(1) IN GENERAL.—Section 415 is amended by adding at 
the end the following new subsection: 
"(m) TREATMENT OF QUALIFIED GOVERNMENTAL EXCESS BENE-
FIT ARRANGEMENTS.— 
"(1) GOVERNMENTAL PLAN NOT AFFECTED.—In determining 
whether a governmental plan (as defined in section 414(d)) 
meets the requirements of this section, benefits provided under 
a qualified governmental excess benefit arrangement shall not 
be taken into account. Income accruing to a governmental plan 
(or to a trust that is maintained solely for the purpose of 
providing benefits under a qualified governmental excess bene-
fit arrangement) in respect of a qualified governmental excess 
benefit arrangement shall constitute income derived from the 
exercise of an essential governmental function upon which such 
governmental plan (or trust) shall be exempt from tax under 
section 115. 
"(2) TAXATION OF PARTICIPANT.—For purposes of this 
chapter— 
"(A) the taxable year or years for which amounts in 
respect of a qualified governmental excess benefit arrange-
ment are includible in gross income by a participant, and 
"(B) the treatment of such amounts when so includible 
by the participant, 
shall be determined as if such qualified governmental excess 
benefit arrangement were treated as a plan for the deferral 
of compensation which is maintained by a corporation not 
110 STAT. 1810 
PUBLIC LAW 104-188—AUG. 20, 1996 
exempt from tax under this chapter and which does not meet 
the requirements for quaHfication under section 401. 
"(3) QUALIFIED GOVERNMENTAL EXCESS BENEFIT ARRANGE-
MENT.—For purposes of this subsection, the term 'quaHfied 
governmental excess benefit arrangement' means a portion of 
a governmental plan i
f
— 
"(A) such portion is maintained solely for the purpose 
of providing to participants in the plan that part of the 
participant's annual benefit otherwise payable under the 
terms of the plan that exceeds the limitations on benefits 
imposed by this section, 
"(B) under such portion no election is provided at any 
time to the participant (directly or indirectly) to defer com-
pensation, and 
"(C) benefits described in subparagraph (A) are not 
paid from a trust forming a part of such governmental 
plan unless such trust is maintained solely for the purpose 
of providing such benefits.". 
(2) COORDINATION WITH SECTION 457.—Subsection (e) of sec-
tion 457 is amended by adding at the end the following new 
paragraph: 
"(14) 
TREATMENT OF QUALIFIED GOVERNMENTAL EXCESS 
BENEFIT ARRANGEMENTS.—Subsections (b)(2) and (c)(1) shall 
not apply to any qualified governmental excess benefit arrange-
ment (as defined in section 415(m)(3)), and benefits provided 
under such an arrangement shall not be taken into account 
in determining whether any other plan is an eligible deferred 
compensation plan.". 
(3) CONFORMING AMENDMENT.—Paragraph (2) of section 
457(f) is amended by striking "and" at the end of subparagraph 
(C), by striking the period at the end of subparagraph (D) 
and inserting ", and", and by inserting immediately thereafter 
the following new subparagraph: 
"(E) a qualified governmental excess benefit arrange-
ment described in section 415(m).". 
(c) EXEMPTION FOR SURVIVOR AND DISABILITY BENEFITS.—Para-
graph (2) of section 415(b) is amended by adding at the end the 
following new subparagraph: 
"(I) EXEMPTION FOR SURVIVOR AND DISABILITY BENEFITS 
PROVIDED UNDER GOVERNMENTAL PLANS.—Subparagraph 
(C) of this paragraph and paragraph (5) shall not apply 
to— 
"(i) income received from a governmental plan (as 
defined in section 414(d)) as a pension, annuity, or 
similar allowance as the result of the recipient becom-
ing disabled by reason of personal injuries or sickness, 
or 
"(ii) amounts received from a governmental plan 
by the beneficiaries, survivors, or the estate of an 
employee as the result of the death of the employee.". 
(d) REVOCATION OF GRANDFATHER ELECTION.— 
(1) IN GENERAL.—Subparagraph (C) of section 415(b)(10) 
is amended by adding at the end the following new clause: 
"(ii) REVOCATION OF ELECTION.—An election under 
clause (i) may be revoked not later than the last day 
of the third plan year beginning after the date 
of the enactment of this clause. The revocation shall 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1811 
apply to all plan years to which the election applied 
and to all subsequent plan years. Any amount paid 
by a plan in a taxable year ending after the revocation 
shall be includible in income in such taxable year 
under the rules of this chapter in effect for such taxable 
year, except that, for purposes of applying the limita-
tions imposed by this section, any portion of such 
amount which is attributable to any taxable year dur-
ing which the election was in effect shall be treated 
as received in such taxable year.". 
(2) CONFORMING AMENDMENT.—Subparagraph (C) of section 
415(b)(10) is amended by striking "This" and inserting: 
"(i) IN GENERAL.—This". 
(e) EFFECTIVE DATE.— 
26 use 4i5 note. 
(1) IN GENERAL.—The amendments made by subsections 
(a), (b), and (c) shall apply to years beginning after December 
31, 1994. The amendments made by subsection (d) shall apply 
with respect to revocations adopted after the date of the enact-
ment of this Act. 
(2) TREATMENT FOR YEARS BEGINNING BEFORE JANUARY i, 
1995.—Nothing in the amendments made by this section shall 
be construed to imply that a governmental plan (as defined 
in section 414(d) of the Internal Revenue Code of 1986) fails 
to satisfy the requirements of section 415 of such Code for 
any taxable year beginning before January 1, 1995. 
SEC. 1445. UNIFORM RETIREMENT AGE. 
(a) DISCRIMINATION TESTING.—Paragraph (5) of section 401(a) 
(relating to special rules relating to nondiscrimination require-
ments) is amended by adding at the end the following new subpara-
graph: 
"(F) S0CL\L SECURITY RETIREMENT AGE.—For purposes 
of testing for discrimination under paragraph (4)— 
"(i) the social security retirement age (as defined 
in section 415(b)(8)) shall be treated as a uniform 
retirement age, and 
"(ii) subsidized early retirement benefits and joint 
and survivor annuities shall not be treated as being 
unavailable to employees on the same terms merely 
because such benefits or annuities are based in whole 
or in part on an employee's social security retirement 
age (as so defined).". 
(b) EFFECTIVE DATE.—The amendment made by this section 
26 USC 40i note. 
shall apply to years beginning after December 31, 1996. 
SEC. 1446. CONTRIBUTIONS ON BEHALF OF DISABLED EMPLOYEES. 
(a) ALL DISABLED PARTICIPANTS RECEIVING CONTRIBUTIONS.— 
Section 415(c)(3)(C) is amended by adding at the end the following: 
"If a defined contribution plan provides for the continuation of 
contributions on behalf of all participants described in clause (i) 
for a fixed or determinable period, this subparagraph shall be 
applied without regard to clauses (ii) and (iii).". 
(b) EFFECTIVE DATE.—The amendm^ent made by this section 
26 use 415 note, 
shall apply to years beginning after December 31, 1996. 
110 STAT. 1812 
PUBLIC LAW 104-188—AUG. 20, 1996 
SEC. 1447. TREATMENT OF DEFERRED COMPENSATION PLANS OF 
STATE AND LOCAL GOVERNMENTS AND TAX-EXEMPT 
ORGANIZATIONS. 
(a) SPECIAL RULES FOR PLAN DISTRIBUTIONS.—Paragraph (9) 
of section 457(e) (relating to other definitions and special rules) 
is amended to read as follows: 
"(9) BENEFITS NOT TREATED AS MADE AVAILABLE BY REASON 
OF CERTAIN ELECTIONS, ETC.— 
"(A) TOTAL AMOUNT PAYABLE IS $3,500 OR LESS.—The 
total amount payable to a participant under the plan 
shall not be treated as made available merely because 
the participant may elect to receive such amount (or the 
plan may distribute such amount without the participant's 
consent) i
f
— 
"(i) such amount does not exceed $3,500, and 
"(ii) such amount may be distributed only if— 
"(I) no amount has been deferred under the 
plan with respect to such participant during the 
2-year period ending on the date of the distribu-
tion, and 
"(II) there has been no prior distribution under 
the plan to such participant to which this subpara-
graph applied. 
A plan shall not be treated as failing to meet the distribu-
tion requirements of subsection (d) by reason of a distribu-
tion to which this subparagraph applies. 
"(B) ELECTION TO DEFER COMMENCEMENT OF DISTRIBU-
TIONS.—The total amount payable to a participant under 
the plan shall not be treated as made available merely 
because the participant may elect to defer commencement 
of distributions under the plan if— 
"(i) such election is made after amounts may be 
available under the plan in accordance with subsection 
(d)(1)(A) and before commencement of such distribu-
tions, and 
"(ii) the participant may make only 1 such elec-
tion.". 
(b) 
COST-OF-LIVING 
ADJUSTMENT 
OF 
MAXIMUM 
DEFERRAL 
AMOUNT.—Subsection (e) of section 457, as amended by section 
1444(b)(2) (relating to governmental plans), is amended by adding 
at the end the following new paragraph: 
"(15) COST-OF-LIVING ADJUSTMENT OF MAXIMUM DEFERRAL 
AMOUNT.—The Secretary shall adjust the $7,500 amount speci-
fied in subsections (b)(2) and (c)(1) at the same time and in 
the same manner as under section 415(d), except that the 
base period shall be the calendar quarter ending September 
30, 1994, and any increase under this paragraph which is 
not a multiple of $500 shall be rounded to the next lowest 
multiple of $500.". 
26 use 457 note. 
(c) EFFECTIVE DATE.—The amendments made by this section 
shall apply to taxable years beginning after December 31, 1996. 
SEC. 1448. TRUST REQUIREMENT FOR DEFERRED COMPENSATION 
PLANS OF STATE AND LOCAL GOVERNMENTS. 
(a) IN GENERAL.—Section 457 is amended by adding at the 
end the following new subsection: 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1813 
"(g) GOVERNMENTAL PLANS MUST MAINTAIN SET-ASIDES FOR 
EXCLUSIVE BENEFIT OF PARTICIPANTS.— 
"(1) IN GENERAL.—A plan maintained by an eligible 
employer described in subsection (e)(1)(A) shall not be treated 
as an eligible deferred compensation plan unless all assets 
and income of the plan described in subsection (b)(6) are held 
in trust for the exclusive benefit of participants and their 
beneficiaries. 
"(2) TAXABILITY OF TRUSTS AND PARTICIPANTS.—For pur-
poses of this title— 
"(A) a trust described in paragraph (1) shall be treated 
as an organization exempt from taxation under section 
501(a), and 
"(B) notwithstanding any other provision of this title, 
amounts in the trust shall be includible in the gross income 
of participants and beneficiaries only to the extent, and 
at the time, provided in this section. 
"(3) CUSTODIAL ACCOUNTS AND CONTRACTS.—For purposes 
of this subsection, custodial accounts and contracts described 
in section 401(f) shall be treated as trusts under rules similar 
to the rules under section 401(f).". 
(b) CONFORMING AMENDMENT.—Paragraph (6) of section 457(b) 
is amended by inserting "except as provided in subsection (g)," 
before "which provides that". 
(c) EFFECTIVE DATES.— 
26 use 457 note. 
(1) IN GENERAL.—Except as provided in paragraph (2), the 
amendments made by this section shall apply to assets and 
income described in section 457(b)(6) of the Internal Revenue 
Code of 1986 held by a plan on and after the date of the 
enactment of this Act. 
(2) TRANSITION RULE.—In the case of a plan in existence 
on the date of the enactment of this Act, a trust need not 
be established by reason of the amendments made by this 
section before January 1, 1999. 
SEC. 1449. TRANSITION RULE FOR COMPUTING MAXIMUM BENEFITS 
UNDER SECTION 415 LIMITATIONS. 
(a) IN GENERAL.—Subparagraph (A) of section 767(d)(3) of the 26 use 4ii note. 
Uruguay Round Agreements Act is amended to read as follows: 
"(A) EXCEPTION.—A plan that was adopted and in effect 
before December 8, 1994, shall not be required to apply 
the amendments made by subsection (b) with respect to 
benefits accrued before the earlier o
f
— 
"(i) the later of the date a plan amendment apply-
ing the amendments made by subsection (b) is adopted 
or made effective, or 
"(ii) the first day of the first limitation year begin-
ning after December 31, 1999. 
Determinations under section 415(b)(2)(E) of the Internal 
Revenue Code of 1986 before such earlier date shall be 
made with respect to such benefits on the basis of such 
section as in effect on December 7, 1994 (except that the 
modification made by section 1449(b) of the Small Business 
Job Protection Act of 1996 shall be taken into account), 
and the provisions of the plan as in effect on December 
7, 1994, but only if such provisions of the plan meet the 
requirements of such section (as so in effect).". 
.10 STAT. 1814 
PUBLIC LAW 104-188—AUG. 20, 1996 
(b) MODIFICATION OF CERTAIN ASSUMPTIONS FOR ADJUSTING 
BENEFITS OF DEFINED BENEFIT PLANS FOR EARLY RETIREES.— 
Subparagraph (E) of section 415(b)(2) (relating to limitation on 
certain assumptions) is amended— 
(1) by striking "Except as provided in clause (ii), for pur-
poses of adjusting any benefit or limitation under subparagraph 
(B) or (C)," in clause (i) and inserting "For purposes of adjusting 
any limitation under subparagraph (C) and, except as provided 
in clause (ii), for purposes of adjusting any benefit under 
subparagraph (B),", and 
(2) by striking "For purposes of adjusting the benefit or 
limitation of any form of benefit subject to section 417(e)(3)," 
in clause (ii) and inserting "For purposes of adjusting any 
benefit under subparagraph (B) for any form of benefit subject 
to section 417(e)(3),". 
26 use 415 note. 
(c) EFFECTIVE DATE.—The amendments made by this section 
shall take effect as if included in the provisions of section 767 
of the Uruguay Round Agreements Act. 
26 use 411 note. 
(d) TRANSITIONAL RuLE.—In the case of a plan that was adopted 
and in effect before December 8, 1994, i
f
— 
(1) a plan amendment was adopted or made effective on 
or before the date of the enactment of this Act applying the 
amendments made by section 767 of the Uruguay Round Agree-
ments Act, and 
(2) within 1 year after the date of the enactment of this 
Act, a plan amendment is adopted which repeals the amend-
ment referred to in paragraph (1), 
the amendment referred to in paragraph (1) shall not be taken 
into account in appl3dng section 767(d)(3)(A) of the Uruguay Round 
Agreements Act, as amended by subsection (a). 
SEC. 1450. MODIFICATIONS OF SECTION 403(b). 
26 u s e 403 note. 
(a) MULTIPLE SALARY REDUCTION AGREEMENTS PERMITTED.— 
(1) GENERAL RULE.—For purposes of section 403(b) of the 
Internal Revenue Code of 1986, the frequency that an employee 
is permitted to enter into a salary reduction agreement, the 
salary to which such an agreement may apply, and the ability 
to revoke such an agreement shall be determined under the 
rules applicable to cash or deferred elections under section 
401(k) of such Code. 
(2) CONSTRUCTIVE RECEIPT.—Section 402(e)(3) is amended 
by inserting "or which is part of a salary reduction agreement 
under section 403(b)" after "section 401(k)(2))". 
(3) EFFECTIVE DATE.—This subsection shall apply to taxable 
years beginning after December 31, 1995. 
(b) TREATMENT OF INDIAN TRIBAL GOVERNMENTS.— 
(1) IN GENERAL.—In the case of any contract purchased 
in a plan year beginning before January 1, 1995, section 403(b) 
of the Internal Revenue Code of 1986 shall be applied as 
if any reference to an employer described in section 501(c)(3) 
of the Internal Revenue Code of 1986 which is exempt from 
tax under section 501 of such Code included a reference to 
an employer which is an Indian tribal government (as defined 
by section 7701(a)(40) of such Code), a subdivision of an Indian 
tribal government (determined in accordance with section 
7871(d) of such Code), an agency or instrumentality of an 
Indian tribal government or subdivision thereof, or a corpora-
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1815 
tion chartered under Federal, State, or tribal law which is 
owned in whole or in part by any of the foregoing. 
(2) ROLLOVERS.—Solely for purposes of applying section 
403(b)(8) of such Code to a contract to which paragraph (1) 
applies, a qualified cash or deferred arrangement under section 
401(k) of such Code shall be treated as if it were a plan 
or contract described in clause (ii) of section 403(b)(8)(A) of 
such Code. 
(c) ELECTIVE DEFERRALS.— 
(1) IN GENERAL.—Subparagraph (E) of section 403(b)(1) 
is amended to read as follows: 
"(E) in the case of a contract purchased under a salary 
reduction agreement, the contract meets the requirements 
of section 401(a)(30),". 
(2) EFFECTIVE DATE.—The amendment made by this sub- 26 use 403 note. 
section shall apply to years beginning after December 31, 1995, 
except a contract shall not be required to meet any change 
in any requirement by reason of such amendment before the 
90th day after the date of the enactment of this Act. 
SEC. 1451. SPECIAL RULES RELATING TO JOINT AND SURVIVOR 
ANNUITY EXPLANATIONS. 
(a) AMENDMENT TO INTERNAL REVENUE CODE.—Section 417(a) 
is amended by adding at the end the following new paragraph: 
"(7) SPECIAL RULES RELATING TO TIME FOR WRITTEN EX-
PLANATION.—Notwithstanding any other provision of this sub-
section— 
"(A) EXPLANATION MAY BE PROVIDED AFTER ANNUITY 
STARTING D A T E . — 
"(i) IN GENERAL.—^A plan may provide the written 
explanation described in paragraph (3)(A) after the 
annuity starting date. In any case to which this 
subparagraph applies, the applicable election period 
under paragraph (6) shall not end before the 30th 
day after the date on which such explanation is pro-
vided. 
"(ii) REGULATORY AUTHORITY.—The Secretary may 
by regulations limit the application of clause (i), except 
that such regulations may not limit the period of time 
by which the annuity starting date precedes the provi-
sion of the written explanation other than by providing 
that the annuity starting date may not be earlier than 
termination of employment. 
"(B) WAIVER OF 30-DAY PERIOD.—A plan may permit 
a participant to elect (with any applicable spousal consent) 
to waive any requirement that the written explanation 
be provided at least 30 days before the annuity starting 
date (or to waive the 30-day requirement under subpara-
graph (A)) if the distribution commences more than 7 days 
after such expleination is provided.". 
(b) AMENDMENT TO ERISA.—Section 205(c) of the Employee 
Retirement Income Security Act of 1974 (29 U.S.C. 1055(c)) is 
amended by adding at the end the following new paragraph: 
"(8) Notwithstanding any other provision of this sub-
section— 
"(A)(i) A plan may provide the written explanation 
described in paragraph (3)(A) after the annuity starting 
110 STAT. 1816 
PUBLIC LAW 104-188—AUG. 20, 1996 
date. In any case to which this subparagraph apphes, the 
applicable election period under paragraph (7) shall not 
end before the 30th day after the date on which such 
explanation is provided. 
"(ii) The Secretary may by regulations limit the 
application of clause (i), except that such regulations may 
not limit the period of time by which the annuity starting 
date precedes the provision of the written explanation other 
than by providing that the annuity starting date may not 
be earlier than termination of employment. 
"(B) A plan may permit a participant to elect (with 
any applicable spousal consent) to waive any requirement 
that the written explanation be provided at least 30 days 
before the annuity starting date (or to waive the 30-day 
requirement under subparagraph (A)) if the distribution 
commences more than 7 days after such explanation is 
provided.". 
26 use 417 note. 
(c) EFFECTIVE DATE.—The amendments made by this section 
shall apply to plan years beginning after December 31, 1996. 
SEC. 1452. REPEAL OF LIMITATION IN CASE OF DEFINED BENEFIT 
PLAN AND DEFINED CONTRIBUTION PLAN FOR SAME 
EMPLOYEE; EXCESS DISTRIBUTIONS. 
(a) IN GENERAL.—Section 415(e) is repealed. 
(b) EXCESS DISTRIBUTIONS.—Section 4980A is amended by add-
ing at the end the following new subsection: 
"(g) LIMITATION ON APPLICATION.—This section shall not apply 
to distributions during years beginning after December 31, 1996, 
and before January 1, 2000, and such distributions shall be treated 
as made first from amounts not described in subsection (f).". 
(c) CONFORMING AMENDMENTS.— 
(1) Paragraph (1) of section 415(a) is amended— 
(A) by adding "or" at the end of subparagraph (A), 
(B) by striking ", or" at the end of subparagraph (B) 
and inserting a period, and 
(C) by striking subparagraph (C). 
(2) Subparagraph (B) of section 415(b)(5) is amended by 
striking "and subsection (e)". 
(3) Paragraph (1) of section 415(f) is amended by striking 
"subsections (b), (c), and (e)" and inserting "subsections (b) 
and (c)". 
(4) Subsection (g) of section 415 is amended by striking 
"subsections (e) and (f)" in the last sentence and inserting 
"subsection (f)". 
(5) Clause (i) of section 415(k)(2)(A) is amended to read 
as follows: 
"(i) any contribution made directly by an employee 
under such an arrangement shall not be treated as 
an annual addition for purposes of subsection (c), and". 
(6) Clause (ii) of section 415(k)(2)(A) is amended by striking 
"subsections (c) and (e)" and inserting "subsection (c)". 
(7) Section 416 is amended by striking subsection (h). 
26 u s e 415 note. 
(d) EFFECTIVE DATE.— 
(1) IN GENERAL.—Except as provided in paragraph (2), the 
amendments made by this section shall apply to limitation 
years beginning after December 31, 1999. 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1817 
(2) EXCESS DISTRIBUTIONS.—The amendment made by sub-
section (b) shall apply to years beginning after December 31, 
1996. 
SEC. 1453. TAX ON PROHIBITED TRANSACTIONS. 
(a) IN GENERAL.—Section 4975(a) is amended by striking "5 
percent" and inserting "10 percent". 
(b) EFFECTIVE DATE.—The amendment made by this section 26USC4975 
shall apply to prohibited transactions occurring after the date of note. 
the enactment of this Act. 
SEC. 1454. TREATMENT OF LEASED EMPLOYEES. 
(a) GENERAL RULE.—Subparagraph (C) of section 414(n)(2) 
(defining leased employee) is amended to read as follows: 
"(C) such services are performed under primary direc-
tion or control by the recipient.". 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
26 USC 414 note. 
shall apply to years beginning after December 31, 1996, but shall 
not apply to any relationship determined under an Internal Revenue 
Service ruling issued before the date of the enactment of this 
Act pursuant to section 414(n)(2)(C) of the Internal Revenue Code 
of 1986 (as in effect on the day before such date) not to involve 
a leased employee. 
SEC. 1455. UNIFORM PENALTY PROVISIONS TO APPLY TO CERTAIN 
PENSION REPORTING REQUIREMENTS. 
(a) PENALTIES.— 
(1) STATEMENTS.—Paragraph (1) of section 6724(d) 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 inserting after subparagraph (B) the 
following new subparagraph: 
"(C) any statement of the amount of pa5mfients to 
another person required to be made to the Secretary 
under— 
"(i) section 408(i) (relating to reports with respect 
to individual retirement accounts or annuities), or 
"(ii) section 6047(d) (relating to reports by employ-
ers, plan administrators, etc.).". 
(2) REPORTS.—Paragraph (2) of section 6724(d) is amended 
by striking "or" at the end of subparagraph (U), by striking 
the period at the end of subparagraph (V) and inserting a 
comma, and by inserting after subparagraph (V) the following 
new subparagraphs: 
"(W) 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 
"(X) 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) 
MODIFICATION 
OF 
REPORTABLE 
DESIGNATED DISTRIBU-
TIONS.— 
(1) SECTION 408.—Subsection (i) of section 408 (relating 
to individual retirement account reports) is amended by insert-
ing "aggregating $10 or more in any calendar year" after "dis-
tributions". 
110 STAT. 1818 
PUBLIC LAW 104-188—AUG. 20, 1996 
(2) SECTION 6047.—Paragraph (1) of section 6047(d) (relat-
ing to reports by employers, plan administrators, etc.) is 
amended by adding at the end the following new sentence: 
"No return or report may be required under the preceding 
sentence with respect to distributions to any person during 
any year unless such distributions aggregate $10 or more.". 
(c) QUALIFYING ROLLOVER DISTRIBUTIONS.—Section 6652(i) is 
amended— 
(1) by striking "the $10" and inserting "$100", and 
(2) by striking "$5,000" and inserting "$50,000". 
(d) CONFORMING AMENDMENTS.— 
(1) Paragraph (1) of section 6047(f) is amended to read 
as follows: 
"(1) For provisions relating to penalties for failures to file returns 
and reports required under this section, see sections 6652(e), 6721, 
and 6722.". 
(2) Subsection (e) of section 6652 is amended by adding 
at the end the following new sentence: "This subsection shall 
not apply to any return or statement which is an information 
return described in section 6724(d)(l)(C)(ii) or a payee state-
ment described in section 6724(d)(2)(X).". 
(3) 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 information return described 
in section 6724(d)(l)(C)(i) or a payee statement described in 
section 6724(d)(2)(W).". 
26 use 408 note. 
(e) EFFECTIVE DATE.—The amendments made by this section 
shall apply to returns, reports, and other statements the due date 
for which (determined without regard to extensions) is after Decem-
ber 31, 1996. 
SEC. 1456. RETIREMENT BENEFITS OF MINISTERS NOT SUBJECT TO 
TAX ON NET EARNINGS FROM SELF-EMPLOYMENT. 
(a) IN GENERAL.—Section 1402(a)(8) (defining net earnings from 
self-employment) is amended by inserting ", but shall not include 
in such net earnings from self-employment the rental value of 
any parsonage or any parsonage allowance (whether or not exclud-
able under section 107) provided after the individual retires, or 
any other retirement benefit received by such individual from a 
church plan (as defined in section 414(e)) after the individual 
retires" before the semicolon at the end. 
26USC1402 
(b) EFFECTIVE DATE.—The amendments made by this section 
note. 
shall apply to years beginning before, on, or after December 31, 
1994. 
26 u s e 414 note. 
SEC. 1457. SAMPLE LANGUAGE FOR SPOUSAL CONSENT AND QUALI-
FIED DOMESTIC RELATIONS FORMS. 
(a) DEVELOPMENT OF SAMPLE LANGUAGE.—Not later than Janu-
ary 1, 1997, the Secretary of the Treasury shall develop— 
(1) sample language for inclusion in a form for the spousal 
consent required under section 417(a)(2) of the Internal Reve-
nue Code of 1986 and section 205(c)(2) of the Employee Retire-
ment Income Security Act of 1974 which— 
(A) is written in a manner calculated to be understood 
by the average person, and 
(B) discloses in plain form— 
(i) whether the waiver to which the spouse con-
sents is irrevocable, and 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1819 
(ii) whether such waiver may be revoked by a 
quahfied domestic relations order, and 
(2) sample language for inclusion in a form for a qualified 
domestic relations order described in section 414(p)(l)(A) of 
such Code and section 206(d)(3)(B)(i) of such Act which— 
(A) meets the requirements contained in such sections, 
and 
(B) the provisions of which focus attention on the need 
to consider the treatment of any lump sum pajonent, quali-
fied joint and survivor annuity, or qualified preretirement 
survivor annuity. 
(b) PUBLICITY.—The Secretary of the Treasury shall include 
publicity for the sample language developed under subsection (a) 
in the pension outreach efforts undertaken by the Secretary. 
SEC. 1458. TREATMENT OF LENGTH OF SERVICE AWARDS TO VOLUN-
TEERS PERFORMING FIRE FIGHTING OR PREVENTION 
SERVICES, EMERGENCY MEDICAL SERVICES, OR AMBU-
LANCE SERVICES. 
(a) IN GENERAL.—Paragraph (11) of section 457(e) (relating 
to deferred compensation plans of State and local governments 
and tax-exempt organizations) is amended to read as follows: 
"(11) CERTAIN PLANS EXCLUDED.— 
"(A) IN GENERAL.—The following plans shall be treated 
as not providing for the deferral of compensation: 
"(i) Any bona fide vacation leave, sick leave, 
compensatory time, severance pay, disability pay, or 
death benefit plan. 
"(ii) Any plan paying solely length of service 
awards to bona fide volunteers (or their beneficiaries) 
on account of qualified services performed by such 
volunteers. 
"(B) SPECIAL RULES APPLICABLE TO LENGTH OF SERVICE 
A
W
A
R
D PLANS.— 
"(i) BONA FIDE VOLUNTEER.—An individual shall 
be treated as a bona fide volunteer for purposes of 
subparagraph (A)(ii) if the only compensation received 
by such individual for performing qualified services 
is in the form o
f
— 
"(I) reimbursement for (or a reasonable allow-
ance for) reasonable expenses incurred in the 
performance of such services, or 
"(II) reasonable benefits (including length of 
service awards), and nominal fees for such services, 
customarily paid by eligible employers in connec-
tion with the performance of such services by 
volunteers. 
"(ii) LIMITATION ON ACCRUALS.—A plan shall not 
be treated as described in subparagraph (A)(ii) if the 
aggregate amount of length of service awards accruing 
with respect to any year of service for any bona fide 
volunteer exceeds $3,000. 
"(C) QU.\LIFIED SERVICES.—For purposes of this para-
graph, the term 'qualified services' means fire fighting and 
prevention services, emergency medical sei'vices, and ambu-
lance services.". 
(b) EXEMPTION FROM SOCIAL SECURITY TAXES.— 
110 STAT. 1820 
PUBLIC LAW 104-188—AUG. 20, 1996 
(1) Subsection (a)(5) of section 3121, as amended by section 
1421, is amended by striking "(or)" at the end of subparagraph 
(G), by inserting "or" at the end of subparagraph (H), and 
by adding at the end the following new subparagraph: 
"(I) under a plan described in section 457(e)(ll)(A)(ii) 
and maintained by an eligible employer (as defined in 
section 457(e)(1)).". 
42 use 409. 
(2) Section 209(a)(4) of the Social Security Act is amended 
by inserting "; or (K) under a plan described in section 
457(e)(ll)(A)(ii) of the Internal Revenue Code of 1986 and 
maintained by an eligible employer (as defined in section 
457(e)(1) of such Code)" before the semicolon at the end thereof, 
(c) EFFECTIVE DATE.— 
26 use 457 note. 
(1) SUBSECTION (a).—The amendment made by subsection 
(a) shall apply to accruals of length of service awards after 
December 31,1996. 
26 use 3121 
(2) SUBSECTION (b).—The amendments made by subsection 
note. 
(b) shall apply to remuneration paid after December 31, 1996. 
SEC. 1459. ALTERNATIVE NONDISCRIMINATION RULES FOR CERTAIN 
PLANS THAT PROVIDE FOR EARLY PARTICIPATION. 
(a) CASH OR DEFERRED ARRANGEMENTS.—Paragraph (3) of sec-
tion 401(k) (relating to application of participation and discrimina-
tion standards), as amended by section 1433(d)(1) of this Act, is 
amended by adding at the end the following new subparagraph: 
"(F) SPECIAL RULE FOR EARLY PARTICIPATION.—If an 
employer elects to apply section 410(b)(4)(B) in determining 
whether a cash or deferred arrangement meets the require-
ments of subparagraph (A)(i), the employer may, in deter-
mining whether the arrangement meets the requirements 
of subparagraph (A)(ii), exclude from consideration all 
eligible employees (other than highly compensated employ-
ees) who have not met the minimum age and service 
requirements of section 410(a)(1)(A).". 
(b) MATCHING CONTRIBUTIONS.—Paragraph (5) of section 401(m) 
(relating to employees taken into consideration) is amended by 
adding at the end the following new subparagraph: 
"(C) 
SPECIAL RULE FOR EARLY PARTICIPATION.—If an 
employer elects to apply section 410(b)(4)(B) in determining 
whether a plan meets the requirements of section 410(b), 
the employer may, in determining whether the plan meets 
the requirements of paragraph (2), exclude fi-om consider-
ation all eligible employees (other than highly compensated 
employees) who have not met the minimum age and service 
requirements of section 410(a)(1)(A).". 
26 use 401 note. 
(c) EFFECTIVE DATE.—The amendments made by this section 
shall apply to plan years beginning after December 31,1998. 
SEC. 1460. CLARIFICATION OF APPLICATION OF ERISA TO INSURANCE 
COMPANY GENERAL ACCOUNTS. 
(a) IN GENERAL.—Section 401 of the Employee Retirement 
Income Security Act of 1974 (29 U.S.C. 1101) is amended by adding 
at the end the following new subsection: 
Proposed 
"(c)(1)(A) Not later than June 30, 1997, the Secretary shall 
regulations. 
issue proposed regulations to provide guidance for the purpose 
of determining, in cases where an insurer issues 1 or more policies 
to or for the benefit of an employee benefit plan (and such policies 
are supported by assets of such insurer's general account), which 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1821 
assets held by the insurer (other than plan assets held in its 
separate accounts) constitute assets of the plan for purposes of 
this part and section 4975 of the Internal Revenue Code of 1986 
and to provide guidance with respect to the application of this 
title to the general account assets of insurers. 
"(B) The proposed regulations under subparagraph (A) shall 
be subject to public notice and comment until September 30, 1997. 
"(C) The Secretary shall issue final regulations providing the Regulations, 
guidance described in subparagraph (A) not later than December 
31, 1997. 
"(D) Such regulations shall only apply with respect to policies 
which are issued by an insurer on or before December 31, 1998, 
to or for the benefit of an employee benefit plan which is supported 
by assets of such insurer's general account. With respect to policies 
issued on or before December 31, 1998, such regulations shall 
take effect at the end of the 18-month period following the date 
on which such regulations become final. 
"(2) The Secretary shall ensure that the regulations issued 
under paragraph (1)— 
"(A) are administratively feasible, and 
"(B) protect the interests and rights of the plan and of 
its participants and beneficiaries 
(including meeting the 
requirements of paragraph (3)). 
"(3) The regulations prescribed by the Secretary pursuant to 
paragraph (1) shall require, in connection with any policy issued 
by an insurer to or for the benefit of an employee benefit plan 
to the extent that the policy is not a guaranteed benefit policy 
(as defined in subsection (b)(2)(B))— 
"(A) that a plan fiduciary totally independent of the insurer 
authorize the purchase of such policy (unless such purchase 
is a transaction exempt under section 408(b)(5)), 
"(B) that the insurer describe (in such form and manner 
as shall be prescribed in such regulations), in annual reports 
and in policies issued to the policyholder after the date on 
which such regulations are issued in final form pursuant to 
paragraph (1)(C)— 
"(i) a description of the method by which any income 
and expenses of the insurer's general account are allocated 
to the policy during the term of the policy and upon the 
termination of the policy, and 
"(ii) for each report, the actual return to the plan 
under the policy and such other financial information as 
the Secretary may deem appropriate for the period covered 
by each such annual report, 
"(C) that the insurer disclose to the plan fiduciary the 
extent to which alternative arrangements supported by assets 
of separate accounts of the insurer (which generally hold plan 
assets) are available, whether there is a right under the policy 
to transfer funds to a separate account and the terms governing 
any such right, and the extent to which support by assets 
of the insurer's general account and support by assets of sepa-
rate accounts of the insurer might pose differing risks to the 
plan, and 
"(D) that the insurer manage those assets of the insurer 
which are assets of such insurer's general account (irrespective 
of whether any such assets are plan assets) with the care, 
skill, prudence, and diligence under the circumstances then 
110 STAT. 1822 
PUBLIC LAW 104-188—AUG. 20, 1996 
prevailing that a prudent man acting in a like capacity and 
familiar with such matters would use in the conduct of an 
enterprise of a like character and with like aims, taking into 
account all obligations supported by such enterprise. 
"(4) Compliance by the insurer with all requirements of the 
regulations issued by the Secretary pursuant to paragraph (1) shall 
be deemed compliance by such insurer with sections 404, 406, 
and 407 with respect to those assets of the insurer's general account 
which support a policy described in paragraph (3). 
"(5)(A) Subject to subparagraph (B), any regulations issued 
under paragraph (1) shall not take effect before the date on which 
such regulations become final. 
"(B) No person shall be subject to liability under this part 
or section 4975 of the Internal Revenue Code of 1986 for conduct 
which occurred before the date which is 18 months following the 
date described in subparagraph (A) on the basis of a claim that 
the assets of an insurer (other than plan assets held in a separate 
account) constitute assets of the plan, except— 
"(i) as otherwise provided by the Secretary in regulations 
intended to prevent avoidance of the regulations issued under 
paragraph (1), or 
"(ii) as provided in an action brought by the Secretary 
pursuant to paragraph (2) or (5) of section 502(a) for a breach 
of fiduciary responsibilities which would also constitute a viola-
tion of Federal or State criminal law. 
The Secretary shall bring a cause of action described in clause 
(ii) if a participant, beneficiary, or fiduciary demonstrates to the 
satisfaction of the Secretary that a breach described in clause 
(ii) has occurred. 
"(6) Nothing in this subsection shall preclude the application 
of any Federal criminal law. 
"(7) For purposes of this subsection, the term 'polic/ includes 
a contract.". 
29 use 1101 
(b) EFFECTIVE DATE.— 
note. 
(1) IN GENERAL.—Except as provided in paragraph (2), the 
amendment made by this section shall take effect on January 
1, 1975. 
(2) CIVIL ACTIONS.—The amendment made by this section 
shall not apply to any civil action commenced before November 
7, 1995. 
SEC. 1461. SPECIAL RULES FOR CHAPLAINS AND SELF-EMPLOYED 
MINISTERS. 
(a) IN GENERAL.—Section 414(e) (defining church plan) is 
amended by adding at the end the following new paragraph: 
"(5) SPECIAL RULES FOR CHAPLAINS AND SELF-EMPLOYED 
MINISTERS.— 
"(A) CERTAIN MINISTERS MAY PARTICIPATE.—For pur-
poses of this part— 
"(i) IN GENERAL.—^An employee of a church or a 
convention or association of churches shall include a 
duly ordained, commissioned, or licensed minister of 
a church who, in connection with the exercise of his 
or her ministry— 
"(I) is a self-employed individual (within the 
meaning of section 401(c)(1)(B)), or 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1823 
"(ID is employed by an organization other than 
an organization described in section 501(c)(3). 
"(ii) 
TREATMENT AS EMPLOYER AND EMPLOYEE.— 
"(I) SELF-EMPLOYED.—A minister described in 
clause (i)(I) shall be treated as his or her own 
employer which is an organization described in 
section 501(c)(3) and which is exempt from tax 
under section 501(a). 
"(II) OTHERS.—A minister described in clause 
(i)(II) shall be treated as employed by an organiza-
tion described in section 501(c)(3) and exempt from 
tax under section 501(a). 
"(B) SPECIAL RULES FOR APPLYING SECTION 403(b) TO 
SELF-EMPLOYED MINISTERS.—In the case of a minister 
described in subparagraph (A)(i)(I)— 
"(i) the minister's includible compensation under 
section 403(b)(3) shall be determined by reference to 
the minister's earned income (within the meaning of 
\ 
section 401(c)(2)) from such ministry rather than the 
^ 
amount of compensation which is received from an 
employer, and 
"(ii) the years (and portions of years) in which 
such minister was a self-employed individual (within 
the meaning of section 401(c)(1)(B)) with respect to 
such ministry shall be included for purposes of section 
403(b)(4). 
"(C) 
EFFECT ON NON-DENOMINATIONAL PLANS.—If 
a 
duly ordained, commissioned, or licensed minister of a 
church in the exercise of his or her ministry participates 
in a church plan (within the meaning of this section) and 
in the exercise of such ministry is employed by an employer 
not eligible to participate in such church plan, then such 
employer may exclude such minister from being treated 
as an employee of such employer for purposes of applying 
sections 401(a)(3), 401(a)(4), and 401(a)(5), as in effect on 
September 1, 1974, and sections 401(a)(4), 401(a)(5), 
401(a)(26), 401(k)(3), 401(m), 403(b)(1)(D) (including section 
403(b)(12)), and 410 to any stock bonus, pension, profit-
sharing, or annuity plan (including an annuity described 
in section 403(b) or a retirement income account described 
in section 403(b)(9)). The Secretary shall prescribe such Regulations. 
regulations as may be necessary or appropriate to carry 
out the purpose of, and prevent the abuse of, this 
subparagraph. 
"(D) 
COMPENSATION 
TAKEN 
INTO 
ACCOUNT 
ONLY 
ONCE.—If any compensation is taken into account in deter-
mining the amount of any contributions made to, or benefits 
to be provided under, any church plan, such compensation 
shall not also be taken into account in determining the 
amount of any contributions made to, or benefits to be 
provided under, any other stock bonus, pension, profit-
sharing, or annuity plan which is not a church plan.". 
(b) 
CONTRIBUTIONS BY CERTAIN MINISTERS TO RETIREMENT 
INCOME ACCOUNTS.—Section 404(a) (relating to deduction for con-
tributions of an employer to an employees' trust or annuity plan 
and compensation under a deferred-payment plan) is amended by 
adding at the end the following new paragraph: 
110 STAT. 1824 
PUBLIC LAW 104-188—AUG. 20, 1996 
"(10) CONTRIBUTIONS BY CERTAIN MINISTERS TO RETIREMENT 
INCOME ACCOUNTS.—In the case of contributions made by a 
minister described in section 414(e)(5) to a retirement income 
account described in section 403(bX9) and not by a person 
other than such minister, such contributions— 
"(A) shall be treated as made to a trust which is 
exempt from tax under section 501(a) and which is part 
of a plan which is described in section 401(a), and 
"(B) shall be deductible under this subsection to the 
extent such contributions do not exceed the limit on elective 
deferrals under section 402(g), the exclusion allowance 
under section 403(b)(2), or the limit on annual additions 
under section 415. 
For purposes of this paragraph, all plans in which the minister 
is a participant shall be treated as one plan.". 
26 use 404 note. 
(c) EFFECTIVE DATE.—The amendments made by this section 
shall apply to years beginning after December 31, 1996. 
SEC. 1462. DEFINITION OF HIGHLY COMPENSATED EMPLOYEE FOR 
PRE-ERISA RULES FOR CHURCH PLANS. 
(a) IN GENERAL.—Section 414(q) (defining highly compensated 
employee), as amended by section 1431(c)(1)(A) of this Act, is 
amended by adding at the end the following new paragraph: 
"(7) 
CERTAIN EMPLOYEES NOT CONSIDERED HIGHLY COM-
PENSATED AND EXCLUDED EMPLOYEES UNDER PRE-ERISA RULES 
FOR CHURCH PLANS.—In the case of a church plan (as defined 
in subsection (e)), no employee shall be considered an officer, 
a person whose principal duties consist of supervising the work 
of other employees, or a highly compensated employee for any 
year unless such employee is a highly compensated employee 
under paragraph (1) for such year.". 
26 use 414 note. 
(b) SAFEHARBOR AUTHORITY.—The Secretary of the Treasury 
may design nondiscrimination and coverage safe harbors for church 
plans. 
26 use 414 note. 
(c) EFFECTIVE DATE.—The amendments made by subsection 
(a) shall apply to years beginning after December 31, 1996. 
SEC. 1463. RULE RELATING TO INVESTMENT IN CONTRACT NOT TO 
APPLY TO FOREIGN MISSIONARIES. 
(a) IN GENERAL.—The last sentence of section 72(f) is amended 
by inserting ", or to the extent such credits are attributable to 
services performed as a foreign missionary (within the meaning 
of section 403(b)(2)(D)(iii))" before the last period. 
26 use 72 note. 
(b) EFFECTIVE DATE.—The amendment made by this section 
shall apply to taxable years beginning after December 31, 1996. 
SEC. 1464. WAIVER OF EXCISE TAX ON FAILURE TO PAY LIQUIDITY 
SHORTFALL. 
(a) IN GENERAL.—Section 4971(f) (relating to failure to pay 
liquidity shortfall) is amended by adding at the end the following 
new paragraph: 
"(4) WAIVER BY SECRETARY.—If the taxpayer establishes 
to the satisfaction of the Secretary that— 
"(A) the liquidity shortfall described in paragraph (1) 
was due to reasonable cause and not willful neglect, and 
"(B) reasonable steps have been taken to remedy such 
liquidity shortfall. 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1825 
the Secretary may waive all or part of the tax imposed by 
this subsection.". 
(b) EFFECTIVE DATE.—The amendment made by this section 26 use 4971 
shall take effect as if included in the amendment made by clause note, 
(ii) of section 751(a)(9)(B) of the Retirement Protection Act of 1994 
(108 Stat. 5020). 
SEC. 1465. DATE FOR ADOPTION OF PLAN AMENDMENTS. 
26 USC 401 note 
If any amendment made by this subtitle requires an amend-
ment to any plan or annuity contract, such amendment shall not 
be required to be made before the first day of the first plan year 
beginning on or after January 1, 1998, if— 
(1) during the period after such amendment takes effect 
and before such first plan year, the plan or contract is operated 
in accordance with the requirements of such amendment, and 
(2) such amendment applies retroactively to such period. 
In the case of a governmental plan (as defined in section 414(d) 
of the Internal Revenue Code of 1986), this section shall be applied 
by substituting "2000" for "1998". 
Subtitle E—Foreign Simplification 
SEC. 1501. REPEAL OF INCLUSION OF CERTAIN EARNINGS INVESTED 
IN EXCESS PASSIVE ASSETS. 
(a) IN GENERAL.— 
(1) REPEAL OF INCLUSION.—Paragraph (1) of section 951(a) 
(relating to amounts included in gross income of United States 
shareholders) is amended by striking subparagraph (C), by 
striking "; and" at the end of subparagraph (B) and inserting 
a period, and by adding "and" at the end of subparagraph 
(A). 
(2) REPEAL OF INCLUSION AMOUNT.—Section 956A (relating 
to earnings invested in excess passive assets) is repealed. 
(b) CONFORMING AMENDMENTS.— 
(1) Subparagraph (G) of section 904(d)(3), as amended by 
section 1703(i)(l), is amended by striking "subparagraph (B) 
or (C) of section 951(a)(1)" and inserting "section 951(a)(1)(B)". 
(2) Paragraph (1) of section 956(b) is amended to read 
as follows: 
"(1) APPLICABLE EARNINGS.—For purposes of this section, 
the term 'applicable earnings' means, with respect to any con-
trolled foreign corporation, the sum o
f
— 
"(A) the amount (not including a deficit) referred to 
in section 316(a)(1), and 
"(B) the amount referred to in section 316(a)(2), 
but reduced by distributions made during the taxable year 
and by earnings and profits described in section 959(c)(1).". 
(3) Paragraph (3) of section 956(b) is amended to read 
as follows: 
"(3) SPECIAL RULE WHERE CORPORATION CEASES TO BE CON-
TROLLED FOREIGN CORPORATION.—If any foreign corporation 
ceases to be a controlled foreign corporation during any taxable 
year— 
"(A) the determination of any United States sharehold-
er's pro rata share shall be made on the basis of stock 
owned (within the meaning of section 958(a)) by such share-
110 STAT. 1826 
PUBLIC LAW 104-188—AUG. 20, 1996 
holder on the last day during the taxable year on which 
the foreign corporation is a controlled foreign corporation, 
"(B) the average referred to in subsection (a)(1)(A) for 
such taxable year shall be determined by only taking into 
account quarters ending on or before such last day, and 
"(C) in determining applicable earnings, the amount 
taken into account by reason of being described in para-
graph (2) of section 316(a) shall be the portion of the 
amount so described which is allocable (on a pro rata 
basis) to the part of such year during which the corporation 
is a controlled foreign corporation.". 
(4) Subsection (a) of section 959 (relating to exclusion from 
gross income of previously taxed earnings and profits) is 
amended by adding "or" at the end of paragraph (1), by striking 
"or" at the end of paragraph (2), and by striking paragraph 
(3). 
(5) Subsection (a) of section 959 is amended by striking 
"paragraphs (2) and (3)" in the last sentence and inserting 
"paragraph (2)". 
(6) Subsection (c) of section 959 is amended by adding 
at the end the following flush sentence: 
"References in this subsection to section 951(a)(1)(C) and subsection 
(a)(3) shall be treated as references to such provisions as in effect 
on the day before the date of the enactment of the Small Business 
Job Protection Act of 1996.". 
(7) Paragraph (1) of section 959(f) is amended to read 
as follows: 
"(1) IN GENERAL.—For purposes of this section, amounts 
that would be included under subparagraph (B) of section 
951(a)(1) (determined without regard to this section) shall be 
treated as attributable first to earnings described in subsection 
(c)(2), and then to earnings described in subsection (c)(3).". 
(8) Paragraph (2) of section 959(f) is amended by striking 
"subparagraphs (B) and (C) of section 951(a)(1)" and inserting 
"section 951(a)(1)(B)". 
(9) Subsection (b) of section 989 is amended by striking 
"subparagraph (B) or (C) of section 951(a)(1)" and inserting 
"section 951(a)(1)(B)". 
(10) Paragraph (9) of section 1297(b) is amended by striking 
"subparagraph (B) or (C) of section 951(a)(1)" and inserting 
"section 951(a)(1)(B)". 
(11) Subsections (d)(3)(B) and (e)(2)(B)(ii) of section 1297 
are each amended by striking "or section 956A". 
(12) Subparagraph (G) of section 904(d)(3) is amended by 
striking "subparagraph (B) or (C) of section 951(a)(1)" and 
inserting "section 951(a)(1)(B)". 
(c) CLERICAL AMENDMENT.—The table of sections for subpart 
F of part III of subchapter N of chapter 1 is amended by striking 
the item relating to section 956A. 
26 use 904 note. 
(d) EFFECTIVE DATE.—The amendments made by this section 
shall apply to taxable years of foreign corporations beginning after 
December 31, 1996, and to taxable years of United States sharehold-
ers within which or with which such taxable years of foreign cor-
porations end. 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1827 
Subtitle F—Revenue Offsets 
PART I—GENERAL PROVISIONS 
SEC. 1601. TERMINATION OF PUERTO RICO AND POSSESSION TAX 
CREDIT. 
(a) IN GENERAL.—Section 936 is amended by adding at the 
end the following new subsection: 
"(j) TERMINATION.— 
"(1) IN GENERAL.—Except as otherwise provided in this 
subsection, this section shall not apply to any taxable year 
beginning after December 31, 1995. 
"(2) 
TRANSITION RULES FOR ACTIVE BUSINESS INCOME 
CREDIT.—Except as provided in paragraph (3)— 
"(A) ECONOMIC ACTIVITY CREDIT.—In the case of an 
existing credit claimant— 
"(i) with respect to a possession other than Puerto 
Rico, and 
"(ii) to which subsection (a)(4)(B) does not apply, 
the credit determined under subsection (a)(1)(A) shall be 
allowed for taxable years beginning after December 31, 
1995, and before January 1, 2002. 
"(B) SPECIAL RULE FOR REDUCED CREDIT.— 
"(i) IN GENERAL.—In the case of an existing credit 
claimant to which subsection (a)(4)(B) applies, the 
credit determined under subsection (a)(1)(A) shall be 
allowed for taxable years beginning after December 
31, 1995, and before January 1, 1998. 
"(ii) ELECTION IRREVOCABLE AFTER 1997.—An elec-
tion under subsection (a)(4)(B)(iii) which is in effect 
for the taxpayer's last taxable year beginning before 
1997 may not be revoked unless it is revoked for the 
taxpayer's first taxable year beginning in 1997 and 
all subsequent taxable years. 
"(C) ECONOMIC ACTIVITY CREDIT FOR PUERTO RICO.— 
"For economic activity credit for Puerto Rico, see section 30A. 
"(3) ADDITIONAL RESTRICTED CREDIT.— 
"(A) IN GENERAL.—In the case of an existing credit 
claimant— 
"(i) the credit under subsection (a)(1)(A) shall be 
allowed for the period beginning with the first taxable 
year after the last taxable year to which subparagraph 
(A) or (B) of paragraph (2), whichever is appropriate, 
applied and ending with the last taxable year begin-
ning before January 1, 2006, except that 
"(ii) the aggregate amount of taxable income taken 
into account under subsection (a)(1)(A) for any such 
taxable year shall not exceed the adjusted base period 
income of such claimant. 
"(B) 
COORDINATION 
WITH 
SUBSECTION (a)(4).—The 
amount of income described in subsection (a)(1)(A) which 
is taken into account in applying subsection (a)(4) shall 
be such income as reduced under this paragraph. 
"(4) ADJUSTED BASE PERIOD INCOME.—For purposes of para-
graph (3)— 
29-194 O - 96 - 4 : QL 3 Part 3 
110 STAT. 1828 
PUBLIC LAW 104-188—AUG. 20, 1996 
"(A) IN GENERAL.—The term 'adjusted base period 
income' means the average of the inflation-adjusted posses-
sion incomes of the corporation for each base period year. 
"(B) 
INFLATION-ADJUSTED POSSESSION INCOME.—For 
purposes of subparagraph (A), the inflation-adjusted posses-
sion income of any corporation for any base period year 
shall be an amount equal to the sum o
f
— 
"(i) the possession income of such corporation for 
such base period year, plus 
"(ii) such possession income multiplied by the infla-
tion adjustment percentage for such base period year. 
"(C) INFLATION ADJUSTMENT PERCENTAGE.—For pur-
poses of subparagraph 
(B), the inflation 
adjustment 
percentage for any base period year means the percentage 
(if any) by which— 
"(i) the CPI for 1995, exceeds 
"(ii) the CPI for the calendar year in which the 
base period year for which the determination is being 
made ends. 
For purposes of the preceding sentence, the CPI for any 
calendar year is the CPI (as defined in section 1(f)(5)) 
for such year under section 1(f)(4). 
"(D) INCREASE IN INFLATION ADJUSTMENT PERCENTAGE 
FOR GROWTH DURING BASE YEARS.—The inflation adjust-
ment percentage (determined under subparagraph (C) with-
out regard to this subparagraph) for each of the 5 taxable 
years referred to in paragraph (5)(A) shall be increased 
b y -
"(i) 5 percentage points in the case of a taxable 
year ending during the 1-year period ending on October 
13, 1995; 
"(ii) 10.25 percentage points in the case of a taxable 
year ending during the 1-year period ending on October 
13, 1994; 
"(iii) 15.76 percentage points in the case of a tax-
able year ending during the 1-year period ending on 
October 13, 1993; 
"(iv) 21.55 percentage points in the case of a tax-
able year ending during the 1-year period ending on 
October 13, 1992; and 
"(v) 27.63 percentage points in the case of a taxable 
year ending during the 1-year period ending on October 
13, 1991. 
"(5) BASE PERIOD YEAR.—For purposes of this subsection— 
"(A) IN GENERAL.—The term 'base period year' means 
each of 3 taxable years which are among the 5 most recent 
taxable years of the corporation ending before October 14, 
1995, determined by disregarding— 
"(i) one taxable year for which the corporation 
had the largest inflation-adjusted possession income, 
and 
"(ii) one taxable year for which the corporation 
had the smallest inflation-adjusted possession income. 
"(B) CORPORATIONS NOT HAVING SIGNIFICANT POSSES-
SION INCOME THROUGHOUT 5-YEAR PERIOD.— 
"(i) IN GENERAL.—If a corporation does not have 
significant possession income for each of the most 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1829 
recent 5 taxable years ending before October 14, 1995, 
then, in lieu of applying subparagraph (A), the term 
'base period year' means only those taxable years (of 
such 5 taxable years) for which the corporation has 
significant possession income; except that, if such cor-
poration has significant possession income for 4 of 
such 5 taxable years, the rule of subparagraph (A)(ii) 
shall apply. 
"(ii) SPECIAL RULE.—If there is no year (of such 
5 tsixable years) for which a corporation has significant 
possession income— 
"(I) the term 'base period year' means the first 
taxable year ending on or after October 14, 1995, 
but 
"(II) the amount of possession income for such 
year which is taken into account under paragraph 
(4) shall be the amount which would be determined 
if such year were a short taxable year ending 
on September 30, 1995. 
"(iii) SIGNIFICANT POSSESSION INCOME.—For pur-
poses of this subparagraph, the term 
'significant 
possession income' means possession income which 
exceeds 2 percent of the possession income of the tax-
payer for the taxable year (of the period of 6 taxable 
years ending with the first taxable year ending on 
or after October 14, 1995) having the greatest posses-
sion income. 
"(C) ELECTION TO USE ONE BASE PERIOD YEAR.— 
"(i) IN GENERAL.—At the election of the taxpayer, 
the term 'base period year' means— 
"(I) only the last taxable year of the corpora-
tion ending in calendar year 1992, or 
"(II) a deemed taxable year which includes 
the first ten months of calendar year 1995. 
"(ii) BASE PERIOD INCOME FOR 1995.—In determin-
ing the adjusted base period income of the corporation 
for the deemed taxable year under clause (i)(II), the 
possession income shall be annualized and shall be 
determined without regard to any extraordinary item, 
"(iii) ELECTION.—An election under this subpara-
graph by any possession corporation may be made 
only for the corporation's first taxable year beginning 
after December 31, 1995, for which it is a possession 
corporation. The rules of subclauses (II) and (III) of 
subsection (a)(4)(B)(iii) shall apply to the election under 
this subparagraph. 
"(D) ACQUISITIONS AND DISPOSITIONS.—Rules similar 
to the rules of subparagraphs (A) and (B) of section 41(f)(3) 
shall apply for purposes of this subsection. 
"(6) POSSESSION INCOME.—For purposes of this subsection, 
the term 'possession income' means, with respect to any posses-
sion, the income referred to in subsection (a)(1)(A) determined 
with respect to that possession. In no event shall possession 
income be treated as being less than zero. 
"(7) SHORT YEARS.—If the current year or a base period 
year is a short taxable year, the application of this subsection 
110 STAT. 1830 
PUBLIC LAW 104-188—AUG. 20, 1996 
shall be made with such annualizations as the Secretary shall 
prescribe. 
"(8) SPECIAL RULES FOR CERTAIN POSSESSIONS.— 
"(A) IN GENERAL.—In the case of an existing credit 
claimant with respect to an applicable possession, this sec-
tion (other than the preceding paragraphs of this sub-
section) shall apply to such claimant with respect to such 
applicable possession for taxable years beginning after 
December 31, 1995, and before January 1, 2006. 
"(B) APPLICABLE POSSESSION.—For purposes of this 
paragraph, the term 'applicable possession' means Guam, 
American Samoa, and the Commonwealth of the Northern 
Mariana Islands. 
"(9) EXISTING CREDIT CLAIMANT.—For purposes of this sub-
section— 
"(A) IN GENERAL.—The term 'existing credit claimant' 
means a corporation— 
"(i)(I) which was actively conducting a trade or 
business in a possession on October 13, 1995, and 
"(II) with respect to which an election under this 
section is in effect for the corporation's taxable year 
which includes October 13, 1995, or 
"(ii) which acquired all of the assets of a trade 
or business of a corporation which— 
"(I) satisfied the requirements of subclause (I) 
of clause (i) with respect to such trade or busi-
ness, and 
"(II) satisfied the requirements of subclause 
(II) of clause (i). 
"(B) NEW LINES OF BUSINESS PROHIBITED.—If, after 
October 13, 1995, a corporation which would (but for this 
subparagraph) be an existing credit claimant adds a 
substantial new line of business (other than in an acquisi-
tion described in subparagraph (A)(ii)), such corporation 
shall cease to be treated as an existing credit claimant 
as of the close of the taxable year ending before the date 
of such addition. 
"(C) BINDING CONTRACT EXCEPTION.—If, on October 13, 
1995, and at all times thereafter, there is in effect with 
respect to a corporation a binding contract for the acquisi-
tion of assets to be used in, or for the sale of assets 
to be produced from, a trade or business, the corporation 
shall be treated for purposes of this paragraph as actively 
conducting such trade or business on October 13, 1995. 
The preceding sentence shall not apply if such trade or 
business is not actively conducted before January 1, 1996. 
"(10) 
SEPARATE APPLICATION TO EACH POSSESSION.—For 
purposes of determining— 
"(A) whether a taxpayer is an existing credit claim-
ant, and 
"(B) the amount of the credit allowed under this 
section, 
this subsection (and so much of this section as relates to this 
subsection) shall be applied separately with respect to each 
possession.", 
(b) ECONOMIC ACTIVITY CREDIT FOR PUERTO RICO.— 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1831 
(1) IN GENERAL.—Subpart B of part IV of subchapter A 
of chapter 1 is amended by adding at the end the following 
new section: 
"SEC. 30A. PUERTO RICAN ECONOMIC ACTIVITY CREDIT. 
"(a) ALLOWANCE OF CREDIT.— 
"(1) IN GENERAL.—Except as otherwise provided in this 
section, if the conditions of both paragraph (1) and paragraph 
(2) of subsection (b) are satisfied with respect to a qualified 
domestic corporation, there shall be allowed as a credit against 
the tax imposed by this chapter an amount equal to the portion 
of the tax which is attributable to the taxable income, from 
sources without the United States, from— 
"(A) the active conduct of a trade or business within 
Puerto Rico, or 
"(B) the sale or exchange of substantially all of the 
assets used by the taxpayer in the active conduct of such 
trade or business. 
In the case of any taxable year beginning after December 
31, 2001, the aggregate amount of taxable income taken into 
account under the preceding sentence (and in applying sub-
section (d)) shall not exceed the adjusted base period income 
of such corporation, as determined in the same manner as 
under section 936(j). 
"(2) QUALIFIED DOMESTIC CORPORATION.—For purposes of 
paragraph (1), the term 'qualified domestic corporation' means 
a domestic corporation— 
"(A) which is an existing credit claimant with respect 
to Puerto Rico, and 
"(B) with respect to which section 936(a)(4)(B) does 
not apply for the taxable year. 
"(3) 
SEPARATE 
APPLICATION.—For purposes 
of 
deter-
mining— 
"(A) whether a taxpayer is an existing credit claimant 
with respect to Puerto Rico, and 
"(B) the amount of the credit allowed under this 
section, 
this section (and so much of section 936 as relates to this 
section) shall be applied separately with respect to Puerto Rico. 
"(b) CONDITIONS WHICH MUST BE SATISFIED.—The conditions 
referred to in subsection (a) are— 
"(1) 3-YEAR PERIOD.—If 80 percent or more of the gross 
income of the qualified domestic corporation for the 3-year 
period immediately preceding the close of the taxable year 
(or for such part of such period immediately preceding the 
close of such taxable year as may be applicable) was derived 
from sources within a possession (determined without regard 
to section 904(f)). 
"(2) TRADE OR BUSINESS.—If 75 percent or more of the 
gross income of the qualified domestic corporation for such 
period or such part thereof was derived from the active conduct 
of a trade or business within a possession. 
"(c) CREDIT NOT ALLOWED AGAINST CERTAIN TAXES.—The credit 
provided by subsection (a) shall not be allowed against the tax 
imposed by— 
"(1) section 59A (relating to environmental tax), 
110 STAT. 1832 
PUBLIC LAW 104-188—AUG. 20, 1996 
"(2) section 531 (relating to the tax on accumulated 
earnings), 
"(3) section 541 (relating to personal holding company 
tax), or 
"(4) section 1351 (relating to recoveries of foreign expropria-
tion losses). 
"(d) LIMITATIONS ON CREDIT FOR ACTIVE BUSINESS INCOME.— 
The amount of the credit determined under subsection (a) for any 
taxable year shall not exceed the sum of the following amounts: 
"(1) 60 percent of the sum o
f
— 
"(A) the aggregate amount of the qualified domestic 
corporation's qualified possession wages for such taxable 
year, plus 
"(B) the allocable employee fringe benefit expenses of 
the qualified domestic corporation for such taxable year. 
"(2) The sum of— 
"(A) 15 percent of the depreciation allowances for the 
taxable year with respect to short-life qualified tangible 
property, 
"(B) 40 percent of the depreciation allowances for the 
taxable year with respect to medium-life qualified tangible 
property, and 
"(C) 65 percent of the depreciation allowances for the 
taxable year with respect to long-life qualified tangible 
property. 
"(3) If the qualified domestic corporation does not have 
an 
election 
to 
use 
the 
method 
described 
in 
section 
936(h)(5)(C)(ii) (relating to profit split) in effect for the taxable 
year, the amount of the qualified possession income taxes for 
the taxable year allocable to nonsheltered income. 
"(e) ADMINISTRATIVE PROVISIONS.—For purposes of this title— 
"(1) the provisions of section 936 (including any applicable 
election thereunder) shall apply in the same manner as if 
the credit under this section were a credit under section 
936(a)(1)(A) for a domestic corporation to which section 
936(a)(4)(A) applies, 
"(2) the credit under this section shall be treated in the 
same manner as the credit under section 936, and 
"(3) a corporation to which this section applies shall be 
treated in the same manner as if it were a corporation electing 
the application of section 936. 
"(f) DEFINITIONS.—For purposes of this section, any term used 
in this section which is also used in section 936 shall have the 
same meaning given such term by section 936. 
"(g) APPLICATION OF SECTION.—This section shall apply to tax-
able years beginning after December 31, 1995, and before January 
1, 2006.". 
(2) CONFORMING AMENDMENTS.— 
(A) Paragraph (1) of section 55(c) is amended by strik-
ing "and the section 936 credit allowable under section 
27(b)" and inserting ", the section 936 credit allowable 
under section 27(b), and the Puerto Rican economic activity 
credit under section 30A". 
(B) Subclause (I) of section 56(g)(4)(C)(ii) is amended— 
(i) by inserting "30A," before "936", and 
(ii) by striking "and (i)" and inserting ", (i), 
and (jr. 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1833 
(C) Clause (iii) of section 56(g)(4)(C) is amended by 
adding at the end the following new subclause: 
"(VI) 
APPLICATION TO SECTION SOA CORPORA-
TIONS.—References in this clause to section 936 
shall be treated as including references to section 
30A.". 
(D) Subsection (b) of section 59 is amended by striking 
"section 936," and all that follows and inserting "section 
30A or 936, alternative minimum taxable income shall 
not include any income with respect to which a credit 
is determined under section SOA or 936.". 
(E) The table of sections for subpart B of part IV 
of subchapter A of chapter 1 is amended by adding at 
the end the following new item: 
"Sec. 30A. Puerto Rican economic activity credit.". 
(F)(i) The heading for subpart B of part IV of sub-
chapter A of chapter 1 is amended to read as follows: 
"Subpart B—Other Credits". 
(ii) The table of subparts for part IV of subchapter 
A of chapter 1 is amended by striking the item relating 
to subpart B and inserting the following new item: 
"Subpart B. Other credits.". 
(c) EFFECTIVE DATE.— 
26 use 30A note. 
(1) IN GENERAL.—Except as provided in paragraph (2), the 
amendments made by this section shall apply to taxable years 
beginning after December 31, 1995. 
(2) 
SPECIAL 
RULE 
FOR QUALIFIED POSSESSION 
SOURCE 
INVESTMENT INCOME.—The amendments made by this section 
shall not apply to qualified possession source investment income 
received or accrued before July 1, 1996, without regard to 
the taxable year in which received or accrued. 
(3) SPECIAL TRANSITION RULE FOR PAYMENT OF ESTIMATED 
T
A
X INSTALLMENT.—In determining the amount of any install-
ment due under section 6655 of the Internal Revenue Code 
of 1986 after the date of the enactment of this Act and before 
October 1, 1996, only V
2 of any increase in tax (for the taxable 
year for which such installment is made) by reason of the 
amendments made by subsections (a) and (b) shall be taken 
into account. Any reduction in such installment by reason of 
the preceding sentence shall be recaptured by increasing the 
next required installment for such year by the amount of such 
reduction. 
SEC. 1602. REPEAL OF EXCLUSION FOR INTEREST ON LOANS USED 
TO ACQUIRE EMPLOYER SECURITIES. 
(a) IN GENERAL.—Section 133 (relating to interest on certain 
loans used to acquire employer securities) is hereby repealed. 
(b) CONFORMING AMENDMENTS.— 
(1) Subparagraph (B) of section 291(e)(1) is amended 
by striking clause (iv) and by redesignating clause (v) as clause 
(iv). 
(2) Section 812 is amended by striking subsection (g). 
(3) Paragraph (5) of section 852(b) is amended by striking 
subparagraph (C). 
110 STAT. 1834 
PUBLIC LAW 104-188—AUG. 20, 1996 
(4) Paragraph (2) of section 4978(b) is amended by striking 
subparagraph (A) and all that follows and inserting the 
following: 
"(A) first from qualified securities to which section 
1042 applied acquired during the 3-year period ending 
on the date of the disposition, beginning with the securities 
first so acquired, and 
"(B) then from any other employer securities. 
If subsection (d) applies to a disposition, the disposition shall 
be treated as made from employer securities in the opposite 
order of the preceding sentence.". 
(5)(A) Section 4978B (relating to tax on disposition of 
employer securities to which section 133 applied) is hereby 
repealed. 
(B) The table of sections for chapter 43 is amended by 
striking the item relating to section 4978B. 
(6) Subsection (e) of section 6047 is amended by striking 
paragraphs (1), (2), and (3) and inserting the following new 
paragraphs: 
"(1) any employer maintaining, or the plan administrator 
(within the meaning of section 414(g)) of, an employee stock 
ownership plan which holds stock with respect to which section 
404(k) applies to dividends paid on such stock, or 
"(2) both such employer or plan administrator,". 
(7) Subsection (f) of section 7872 is amended by striking 
paragraph (12). 
(8) The table of sections for part III of subchapter B of 
chapter 1 is amended by striking the item relating to section 
133. 
26 u s e 133 note. 
(c) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendments made by this section 
shall apply to loans made after the date of the enactment 
of this Act. 
(2) REFINANCINGS.—The amendments made by this section 
shall not apply to loans made after the date of the enactment 
of this Act to refinance securities acquisition loans (determined 
without regard to section 133(b)(1)(B) of the Internal Revenue 
Code of 1986, as in effect on the day before the date of the 
enactment of this Act) made on or before such date or to 
refinance loans described in this paragraph if— 
(A) the refinancing loans meet the requirements of 
section 133 of such Code (as so in effect), 
(B) immediately after the refinancing the principal 
amount of the loan resulting from the refinancing does 
not exceed the principal amount of the refinanced loan 
(immediately before the refinancing), and 
(C) the term of such refinancing loan does not extend 
beyond the last day of the term of the original securities 
acquisition loan. 
For purposes of this paragraph, the term "securities acquisition 
loan" includes a loan from a corporation to an employee stock 
ownership plan described in section 133(b)(3) of such Code 
(as so in effect). 
(3) EXCEPTION.—^Any loan made pursuant to a binding 
written contract in effect before June 10, 1996, and at all 
times thereafter before such loan is made, shall be treated 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1835 
for purposes of paragraphs (1) and (2) as a loan made on 
or before the date of the enactment of this Act. 
SEC. 1603. CERTAIN AMOUNTS DERIVED FROM FOREIGN CORPORA-
TIONS TREATED AS UNRELATED BUSINESS TAXABLE 
INCOME. 
(a) GENERAL RULE.—Subsection (b) of section 512 (relating 
to modifications) is amended by adding at the end the following 
new paragraph: 
"(17) 
TREATMENT OF CERTAIN AMOUNTS DERIVED FROM 
FOREIGN CORPORATIONS.— 
"(A) IN GENERAL.—Notwithstanding paragraph (1), any 
amount included in gross income under section 951(a)(1)(A) 
shall be included as an item of gross income derived from 
an unrelated trade or business to the extent the amount 
so included is attributable to insurance income (as defined 
in section 953) which, if derived directly by the organiza-
tion, would be treated as gross income fi-om an unrelated 
trade or business. There shall be allowed all deductions 
directly connected with amounts included in gross income 
under the preceding sentence. 
"(B) EXCEPTION.— 
"(i) IN GENERAL.—Subparagraph (A) shall not 
apply to income attributable to a policy of insurance 
or reinsurance with respect to which the person 
(directly or indirectly) insured is— 
"(I) such organization, 
"(II) an affiliate of such organization which 
is exempt 
fi*om 
tax under section 501(a), or 
"(III) a director or officer of, or an individual 
who (directly or indirectly) performs services for, 
such organization or affiliate but only if the insur-
ance covers primarily risks associated with the 
performance of services in connection with such 
organization or affiliate. 
"(ii) AFFILIATE.—For purposes of this subpara-
graph— 
"(I) IN GENERAL.—The determination as to 
whether an entity is an affiliate of an organization 
shall be made under rules similar to the rules 
of section 168(h)(4)(B). 
"(II) SPECIAL RULE.—TWO or more organiza-
tions (and any affiliates of such organizations) 
shall be treated as affiliates if such organizations 
are colleges or universities described in section 
170(b)(l)(A)(ii) or organizations described in sec-
tion 170(b)(l)(A)(iii) and participate in an insur-
ance arremgement that provides for any profits 
from such arrangement to be returned to the 
policyholders in their capacity as such. 
"(C) REGULATIONS.—The Secretary shall prescribe such 
regulations as may be necessary or appropriate to carry 
out the purposes of this paragraph, including regulations 
for the application of this paragraph in the case of income 
paid through 1 or more entities or between 2 or more 
chains of entities.". 
110 STAT. 1836 
PUBLIC LAW 104-188—AUG. 20, 1996 
26 use 512 note. 
(b) EFFECTIVE DATE.—The amendment made by this section 
shall apply to amounts included in gross income in any taxable 
year beginning after December 31, 1995. 
SEC. 1604. DEPRECIATION UNDER INCOME FORECAST METHOD. 
(a) GENERAL RULE.—Section 167 (relating to depreciation) is 
amended by redesignating subsection (g) as subsection (h) and 
by inserting after subsection (f) the following new subsection: 
"(g) DEPRECIATION UNDER INCOME FORECAST METHOD.— 
"(1) IN GENERAL.—If the depreciation deduction allowable 
under this section to any taxpayer with respect to any property 
is determined under the income forecast method or any similar 
method— 
"(A) the income from the property to be taken into 
account in determining the depreciation deduction under 
such method shall be equal to the amount of income earned 
in connection with the property before the close of the 
10th taxable year following the taxable year in which the 
property was placed in service, 
"(B) the adjusted basis of the property shall only 
include amounts with respect to which the requirements 
of section 461(h) are satisfied, 
"(C) the depreciation deduction under such method 
for the 10th taxable year beginning after the taxable year 
in which the property was placed in service shall be equal 
to the adjusted basis of such property as of the beginning 
of such 10th taxable year, and 
"(D) such taxpayer shall pay (or be entitled to receive) 
interest computed under the look-back method of paragraph 
(2) for any recomputation year. 
"(2) LOOK-BACK METHOD.—The interest computed under 
the look-back method of this paragraph for any recomputation 
year shall be determined by— 
"(A) first determining the depreciation 
deductions 
under this section with respect to such property which 
would have been allowable for prior taxable years if the 
determination of the amounts so allowable had been made 
on the basis of the sum of the following (instead of the 
estimated income from such property)— 
"(i) the actual income earned in connection with 
such property for periods before the close of the recom-
putation year, and 
"(ii) an estimate of the future income to be earned 
in connection with such property for periods after the 
recomputation year and before the close of the 10th 
taxable year following the taxable year in which the 
property was placed in service, 
"(B) second, determining (solely for purposes of comput-
ing such interest) the overpayment or underpayment of 
tax for each such prior taxable year which would result 
solely from the application of subparagraph (A), and 
"(C) then using the adjusted overpayment rate (as 
defined in section 460(b)(7)), compounded daily, on the 
overpayment or underpayment determined under subpara-
graph (B). 
For purposes of the preceding sentence, any cost incurred after 
the property is placed in service (which is not treated as a 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1837 
separate property under paragraph (5)) shall be taken into 
account by discounting (using the Federal mid-term rate deter-
mined under section 1274(d) as of the time such cost is incurred) 
such cost to its value as of the date the property is placed 
in service. The taxpayer may elect with respect to any property 
to have the preceding sentence not apply to such property. 
"(3) 
EXCEPTION 
FROM 
LOOK-BACK 
METHOD.—Paragraph 
(1)(D) shall not apply with respect to any property which had 
a cost basis of $100,000 or less. 
"(4) RECOMPUTATION YEAR.—For purposes of this sub-
section, except as provided in regulations, the term 'recomputa-
tion year' means, with respect to any property, the 3d and 
the 10th taxable years beginning after the taxable year in 
which the property was placed in service, unless the actual 
income earned in connection with the property for the period 
before the close of such 3d or 10th taxable year is within 
10 percent of the income earned in connection with the property 
for such period which was taken into account under paragraph 
(1)(A). 
"(5) SPECIAL RULES.— 
"(A) CERTAIN COSTS TREATED AS SEPARATE PROPERTY.— 
For purposes of this subsection, the following costs shall 
be treated as separate properties: 
"(i) Any costs incurred with respect to any property 
after the 10th taxable year beginning after the taxable 
year in which the property was placed in service. 
"(ii) Any costs incurred after the property is placed 
in service and before the close of such 10th taxable 
year if such costs are significant and give rise to a 
significant increase in the income from the property 
which was not included in the estimated income from 
the property. 
"(B) SYNDICATION INCOME FROM TELEVISION SERIES.— 
In the case of property which is 1 or more episodes in 
a television series, income from syndicating such series 
shall not be required to be taken into account under this 
subsection before the earlier o
f
— 
"(i) the 4th taxable year beginning after the date 
the first episode in such series is placed in service, 
or 
"(ii) the earliest taxable year in which the taxpayer 
has an arrangement relating to the future syndication 
of such series. 
"(C) SPECIAL RULES FOR FINANCIAL EXPLOITATION OF 
CHARACTERS, ETC.—For purposes of this subsection, in the 
case of television and motion picture films, the income 
from the property shall include income from the exploi-
tation of characters, designs, scripts, scores, and other inci-
dental income associated with such films, but only to the 
extent that such income is earned in connection with the 
ultimate use of such items by, or the ultimate sale of 
merchandise to, persons who are not related persons 
(within the meaning of section 267(b)) to the taxpayer. 
"(D) COLLECTION OF INTEREST.—For purposes of sub-
title F (other than sections 6654 and 6655), any interest 
required to be paid by the taxpayer under paragraph (1) 
110 STAT. 1838 
PUBLIC LAW 104-188—AUG. 20, 1996 
for any recomputation year shall be treated as an increase 
in the tax imposed by this chapter for such year. 
"(E) DETERMINATIONS.—For purposes of paragraph (2), 
determinations of the amount of income earned in connec-
tion with any property shall be made in the same manner 
as for purposes of applying the income forecast method; 
except that any income from the disposition of such prop-
erty shall be taken into account. 
"(F) TREATMENT OF PASS-THRU ENTITIES.—Rules simi-
lar to the rules of section 460(b)(4) shall apply for purposes 
of this subsection." 
26 use 167 note. 
(b) EFFECTIVE DATE.— 
(1) IN GENERAL.—The amendment made by subsection (a) 
shall apply to property placed in service after September 13, 
1995. 
(2) BINDING CONTRACTS.—The amendment made by sub-
section (a) shall not apply to any property produced or acquired 
by the taxpayer pursuant to a written contract which was 
binding on September 13, 1995, and at all times thereafter 
before such production or acquisition. 
(3) UNDERPAYMENTS OF INCOME TAX.—NO addition to tax 
shall be made under section 6662 of such Code as a result 
of the application of subsection (d) of that section (relating 
to substantial understatements of income tax) with respect 
to any underpa3anent of income tax for any taxable year ending 
before such date of enactment, to the extent such underpayment 
was created or increased by the amendments made by sub-
section (a). 
SEC. 1605. REPEAL OF EXCLUSION FOR PUNITIVE DAMAGES AND FOR 
DAMAGES N O T ATTRIBUTABLE T O PHYSICAL INJURIES 
OR SICKNESS, 
(a) IN GENERAL.—Paragraph (2) of section 104(a) (relating to 
compensation for injuries or sickness) is amended to read as follows: 
"(2) the amount of any damages (other than punitive dam-
ages) received (whether by suit or agreement and whether 
as lump sums or as periodic payments) on account of personal 
physical injuries or physical sickness;". 
(b) EMOTIONAL DISTRESS AS SUCH TREATED AS NOT PHYSICAL 
INJURY OR PHYSICAL SICKNESS.—Section 104(a) is amended by strik-
ing the last sentence and inserting the following new sentence: 
"For purposes of paragraph (2), emotional distress shall not be 
treated as a physical injury or physical sickness. The preceding 
sentence shall not apply to an amount of damages not in excess 
of the amount paid for medical care (described in subparagraph 
(A) or (B) of section 213(d)(1)) attributable to emotional distress.". 
(c) APPLICATION OF PRIOR LAW FOR STATES IN WHICH ONLY 
PUNITIVE 
DAMAGES MAY BE AWARDED IN WRONGFUL DEATH 
ACTIONS.—Section 104 is amended by redesignating subsection (c) 
as subsection (d) and by inserting after subsection (b) the following 
new subsection: 
"(c) APPLICATION OF PRIOR LAW IN CERTAIN CASES.—The phrase 
'(other than punitive damages)' shall not apply to punitive damages 
awarded in a civil action— 
"(1) which is a wrongful death action, and 
"(2) with respect to which applicable State law (as in effect 
on September 13, 1995 and without regard to any modification 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1839 
after such date) provides, or has been construed to provide 
by a court of competent jurisdiction pursuant to a decision 
issued on or before September 13, 1995, that only punitive 
damages may be awarded in such an action. 
This subsection shall cease to apply to any civil action filed on 
or after the first date on which the applicable State law ceases 
to provide (or is no longer construed to provide) the treatment 
described in psiragraph (2).". 
(d) EFFECTIVE DATE.— 
26 use io4 note. 
(1) IN GENERAL.—Except as provided in paragraph (2), the 
amendments made by this section shall apply to amounts 
received after the date of the enactment of this Act, in taxable 
years ending after such date. 
(2) EXCEPTION.—The amendments made by this section 
shall not apply to £iny amount received under a written binding 
agreement, court decree, or mediation award in effect on (or 
issued on or before) September 13,1995. 
SEC. 1606. REPEAL OF DIESEL FUEL TAX REBATE TO PURCHASERS 
OF DIESEL-POWERED AUTOMOBILES AND LIGHT TRUCKS. 
(a) IN GENERAL.—Section 6427 (relating to fuels not used for 
taxable purposes) is amended by striking subsection (g). 
(b) CONFORMING AMENDMENTS.— 
(1) Paragraph (3) of section 34(a) is amended to read as 
follows: 
"(3) under section 6427 with respect to fuels used for non-
taxable purposes or resold during the taxable year (determined 
without regard to section 6427(k)).". 
(2) Paragraphs (1) and (2)(A) of section 6427(i) are each 
amended— 
(A) by striking "(g),", and 
(B) by striking "(or a qualified diesel powered highway 
vehicle purchased)" each place it appears. 
(c) EFFECTIVE DATE.—The amendments made by this section 26 use 34 note. 
shall apply to vehicles purchased after the date of the enactment 
of this Act. 
SEC. 1607. EXTENSION AND PHASEDOWN OF LUXURY 
PASSENGER 
AUTOMOBILE TAX. 
(a) EXTENSION.—Subsection (f) of section 4001 is amended by 
striking "1999" and inserting "2002". 
(b) PHASEDOWN.—Section 4001 is amended by redesignating 
subsection (f) (as amended by subsection (a) of this section) as 
subsection (g) and by inserting after subsection (e) the following 
new subsection: 
"(f) PHASEDOWN.—For sales occurring in calendar years after 
1995 and before 2003, subsection (a) shall be applied by substituting 
for '10 percent' the percentage determined in accordance with the 
following table: 
"If the ccdendar year is: 
The percentage is: 
1996 
9 percent 
1997 
8 percent 
1998 
7 percent 
1999 
6 percent 
2000 
5 percent 
2001 
4 percent 
2002 
3 percent 
110 STAT. 1840 
PUBLIC LAW 104-188—AUG. 20, 1996 
26 use 4001 
(c) EFFECTIVE DATE.—The amendments made by this section 
"ote. 
shall apply with respect to sales occurring after the date which 
is 7 days after the date of the enactment of this Act. 
SEC. 1608. TERMINATION OF FUTURE TAX-EXEMPT BOND FINANCING 
FOR LOCAL FURNISHERS OF ELECTRICITY AND GAS. 
(a) IN GENERAL.—Section 142(f) (relating to local furnishing 
of electric energy or gas) is amended by adding at the end the 
following new paragraphs: 
"(3) 
TERMINATION OF FUTURE FINANCING.—For purposes 
of this section, no bond may be issued as part of an issue 
described in subsection (a)(8) with respect to a facility for 
the local furnishing of electric energy or gas on or after the 
date of the enactment of this paragraph unless— 
"(A) the facility will— 
"(i) be used by a person who is engaged in the 
local furnishing of that energy source on January 1, 
1997, and 
"(ii) be used to provide service within the area 
served by such person on January 1, 1997, (or within 
a county or city any portion of which is within such 
area), or 
"(B) the facility will be used by a successor in interest 
to such person for the same use and within the same 
service area as described in subparagraph (A). 
"(4) ELECTION TO TERMINATE TAX-EXEMPT BOND FINANCING 
BY CERTAIN FURNISHERS.— 
"(A) IN GENERAL.—In the case of a facility financed 
with bonds issued before the date of the enactment of 
this paragraph which would cease to be tax-exempt by 
reason of the failure to meet the local furnishing require-
ment of subsection (a)(8) as a result of a service area 
expansion, such bonds shall not cease to be tax-exempt 
bonds (and section 150(b)(4) shall not apply) if the person 
engaged in such local furnishing by such facility makes 
an election described in subparagraph (B). 
"(B) ELECTION.—An election is described in this 
subparagraph if it is an election made in such manner 
as the Secretary prescribes, and such person (or its prede-
cessor in interest) agrees that— 
"(i) such election is made with respect to all facili-
ties for the local furnishing of electric energy or gas, 
or both, by such person, 
"(ii) no bond exempt from tax under section 103 
and described in subsection (a)(8) may be issued on 
or after the date of the enactment of this paragraph 
with respect to all such facilities of such person, 
"(iii) any expansion of the service area— 
"(I) is not financed with the proceeds of any 
exempt facility bond described in subsection (a)(8), 
and 
"(II) is not treated as a nonqualifying use 
under the rules of paragraph (2), and 
"(iv) all outstanding bonds used to finance the 
facilities for such person are redeemed not later than 
6 months after the later o
f
— 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1841 
"(I) the earliest date on which such bonds 
may be redeemed, or 
"(11) the date of the election. 
"(C) RELATED PERSONS.—For purposes of this para-
graph, the term 'person' includes a group of related persons 
(within the meaning of section 144(a)(3)) which includes 
such person.". 
(b) No INFERENCE W I T H RESPECT T O OUTSTANDING B O N D S . — 
26 use 142 note. 
The use of the term "person" in section 142(f)(3) of the Internal 
Revenue Code of 1986, as added by subsection (a), shall not be 
construed to affect the tax-exempt status of interest on any bonds 
issued before the date of the enactment of this Act. 
SEC. 1609. EXTENSION OF AIRPORT AND AIRWAY TRUST FUND EXCISE 
TAXES. 
(a) FUEL TAX.— 
(1) Subparagraph (A) of section 4091(b)(3) is amended to 
read as follows: 
"(A) The rate of tax specified in paragraph (1) shall 
be 4.3 cents per gallon— 
"(i) after December 31, 1995, and before the date 
which is 7 calendar days after the date of the enact-
ment of the Small Business Job Protection Act of 1996, 
and 
"(ii) after December 31, 1996.". 
(2) Section 4081(d) is amended— 
(A) by adding at the end the following new paragraph: 
"(3) AVIATION GASOLINE.—After December 31, 1996, the 
rate of tax specified in subsection (a)(2)(A)(i) on aviation gaso-
line shall be 4.3 cents per gallon.", and 
(B) by inserting "(other than the tax on aviation gaso-
line)" after "subsection (a)(2)(A)". 
(3) Section 4041(c)(5) is amended by inserting ", and during 
the period beginning on the date which is 7 calendar days 
after the date of the enactment of the Small Business Job 
Protection Act of 1996 and ending on December 31, 1996" 
after "December 31, 1995". 
(b) TICKET TAXES.—Sections 4261(g) and 4271(d) are each 
amended by striking "January 1, 1996" and inserting "January 
1, 1996, and to transportation beginning on or after the date which 
is 7 calendar days after the date of the enactment of the Small 
Business Job Protection Act of 1996 and before January 1, 1997". 
(c) TRANSFERS TO AIRPORT AND AIRWAY TRUST FUND.— 
(1) Subsection (b) of section 9502 is amended by striking 
"January 1, 1996" each place it appears and inserting "January 
1, 1997". 
(2) Paragraph (3) of section 9502(f) is amended to read 
as follows: 
"(3) TERMINATION.—Notwithstanding the preceding provi-
sions of this subsection, the Airport and Airway Trust Fund 
financing rate shall be zero with respect to— 
"(A) taxes imposed after December 31, 1995, and before 
the date which is 7 calendar days after the date of the 
enactment of the Small Business Job Protection Act of 
1996, and 
"(B) taxes imposed after December 31, 1996.". 
110 STAT. 1842 
PUBLIC LAW 104-188—AUG. 20, 1996 
(3) Subsection (d) of section 9502 is amended by adding 
at the end the following new paragraph: 
"(5) TRANSFERS FROM AIRPORT AND AIRWAY TRUST FUND 
ON ACCOUNT OF REFUNDS OF TAXES ON TRANSPORTATION BY 
AIR.—The Secretary of the Treasury shall pay from time to 
time from the Airport and Airway Trust Fund into the general 
fund of the Treasury amounts equivalent to the amounts paid 
after December 31, 1995, under section 6402 (relating to author-
ity to make credits or refunds) or section 6415 (relating to 
credits or refunds to persons who collected certain taxes) in 
respect of taxes under sections 4261 and 4271.". 
(d) EXCISE TAX EXEMPTION FOR CERTAIN EMERGENCY MEDICAL 
TRANSPORTATION BY AIR AMBULANCE.—Subsection (f) of section 
4261 (relating to imposition of tax on transportation by air) is 
amended to read as follows: 
"(f) 
EXEMPTION FOR AIR AMBULANCES PROVIDING 
CERTAIN 
EMERGENCY MEDICAL TRANSPORTATION.—NO tax shall be imposed 
under this section or section 4271 on any air transportation for 
the purpose of providing emergency medical services— 
"(1) by helicopter, or 
"(2) by a fixed-wing aircraft equipped for and exclusively 
dedicated to acute care emergency medical services.". 
(e) EXEMPTION FOR CERTAIN HELICOPTER USES.—Subsection 
(e) of section 4261 is amended by adding at the end the following 
new sentence: "In the case of helicopter transportation described 
in paragraph (1), this subsection shall be applied by treating each 
flight segment as a distinct flight.". 
(f) FLIGHT-BY-FLIGHT DETERMINATION OF AVAILABILITY FOR 
HIRE FOR AFFILIATED GROUPS.—Section 4282 is amended by 
redesignating subsection (b) as subsection (c) and by inserting after 
subsection (a) the following new subsection: 
"(b) AVAILABILITY FOR HIRE.—For purposes of subsection (a), 
the determination of whether an aircraft is available for hire by 
persons who are not members of an affiliated group shall be made 
on a flight-by-flight basis." 
(g) CONSOLIDATION OF TAXES ON AVIATION GASOLINE.— 
(1) IN GENERAL.—Subparagraph (A) of section 4081(a)(2) 
(relating to imposition of tax on gasoline and diesel fiiel) is 
amended by redesignating clause (ii) as clause (iii) and by 
striking clause (i) and inserting the following: 
"(i) in the case of gasoline other than aviation 
gasoline, 18.3 cents per gallon, 
"(ii) in the case of aviation gasoline, 19.3 cents 
per gallon, and", 
(2) TERMINATION.—Subsection (d) of section 4081 is 
amended by redesignating paragraph (2) as paragraph (3) and 
by inserting after paragraph (1) the following new paragraph: 
"(2) AVIATION GASOLINE.—On and after January 1, 1997, 
the rate specified in subsection (a)(2)(A)(ii) shall be 4.3 cents 
per gallon." 
(3) REPEAL OF RETAIL LEVEL TAX.— 
(A) Subsection (c) of section 4041 is amended by strik-
ing paragraphs (2) and (3) and by redesignating paragraphs 
(4) and (5) as paragraphs (2) and (3), respectively. 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1843 
(B) Paragraph (3) of section 4041(c), as redesignated 
by paragraph (1), is amended by striking "paragraphs (1) 
and (2)" and inserting "paragraph (1)". 
(4) CONFORMING AMENDMENTS.— 
(A) Paragraph (1) of section 4041(k) is amended by 
adding "and" at the end of subparagraph (A), by striking 
", and" at the end of subparagraph (B) and inserting a 
period, and by striking subparagraph (C). 
(B) Paragraph (1) of section 4081(d) is amended by 
striking "each rate of tax specified in subsection (a)(2)(A)" 
and inserting "the rates of tax specified in clauses (i) and 
(iii) of subsection (a)(2)(A)". 
(C) Sections 6421(f)(2)(A) and 9502(f)(1)(A) are each 
amended by striking "section 4041(c)(4)" and inserting "sec-
tion 4041(c)(2)". 
(D) Paragraph (2) of section 9502(b) is amended by 
striking "14 cents" and inserting "15 cents". 
(h) FLOOR STOCKS TAXES ON AVIATION FUEL.— 
26 use 409i 
(1) IMPOSITION OF TAX.—In the case of aviation fuel on note. 
which tax was imposed under section 4091 of the Internal 
Revenue Code of 1986 before the teix-increase date described 
in paragraph (3)(A)(i) and which is held on such date by any 
person, there is hereby imposed a floor stocks tax of 17.5 
cents per gallon. 
(2) LIABILITY FOR TAX AND METHOD OF PAYMENT.— 
(A) LIABILITY FOR TAX.—A person holding aviation fuel 
on a tax-increase date to which the tax imposed by para-
graph (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) with respect to any taix-increase date shall be 
paid on or before the first day of the 7th month beginning 
after such tax-increase date. 
(3) DEFINITIONS.—For purposes of this subsection— 
(A) TAX INCREASE DATE.—The term "tax-increase date" 
means the date which is 7 calendar days after the date 
of the enactment of this Act. 
(B) AVIATION FUEL.—The term "aviation fuel" has the 
meaning given such term by section 4093 of such Code. 
(C) HELD BY A PERSON.—Aviation fuel shall be consid-
ered as "held by a person" if title thereto has passed 
to such person (whether or not delivery to the person 
. has been made). 
(D) 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 aviation fuel held by any 
person on any tax-increase date exclusively for any use for 
which a credit or refund of the entire tax imposed by section 
4091 of such Code is allowable for aviation fuel purchased 
on or after such tax-increase date for such use. 
(5) EXCEPTION FOR CERTAIN AMOUNTS OF FUEL.— 
(A) IN GENERAL.—No tax shall be imposed by para-
graph (1) on aviation fuel held on any tax-increase date 
by any person if the aggregate amount of aviation fuel 
n o STAT. 1844 
PUBLIC LAW 104-188—AUG. 20, 1996 
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). 
(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 
control where 1 or more of such persons is not a 
corporation. 
(6) OTHER LAW APPLICABLE.—^AU provisions of law, includ-
ing penalties, applicable with respect to the taxes imposed 
by section 4091 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 4091. 
26 use 4041 
(i) EFFECTIVE DATE.—The amendments made by this section 
note. 
shall take effect on the 7th calendar day after the date of the 
enactment of this Act, except that the amendments made by sub-
section (b) shall not apply to any amount paid before such date. 
SEC. 1610. BASIS ADJUSTMENT TO PROPERTY HELD BY CORPORA-
TION WHERE STOCK IN CORPORATION IS REPLACEMENT 
PROPERTY UNDER INVOLUNTARY CONVERSION RULES. 
(a) IN GENERAL.—Subsection (b) of section 1033 is amended 
to read as follows: 
"(b) 
BASIS OF PROPERTY ACQUIRED THROUGH INVOLUNTARY 
CONVERSION.— 
"(1) CONVERSIONS DESCRIBED IN SUBSECTION (a)(1).—If the 
property was acquired as the result of a compulsory or involun-
tary conversion described in subsection (a)(1), the basis shall 
be the same as in the case of the property so converted— 
"(A) decreased in the amount of any money received 
by the taxpayer which was not expended in accordance 
with the provisions of law (applicable to the year in which 
such conversion was made) determining the taxable status 
of the gain or loss upon such conversion, and 
"(B) increased in the amount of gain or decreased 
in the amount of loss to the taxpayer recognized upon 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1845 
such conversion under the law appHcable to the year in 
which such conversion was made. 
"(2) CONVERSIONS DESCRIBED IN SUBSECTION (a)(2).—In the 
case of property purchased by the taxpayer in a transaction 
described in subsection (a)(2) which resulted in the nonrecogni-
tion of any part of the gain realized as the result of a compul-
sory or involuntary conversion, the basis shall be the cost 
of such property decreased in the amount of the gain not 
so recognized; and if the property purchased consists of more 
than 1 piece of property, the basis determined under this sen-
tence shall be allocated to the purchased properties in propor-
tion to their respective costs. 
"(3) PROPERTY HELD BY CORPORATION THE STOCK OF WHICH 
IS REPLACEMENT PROPERTY.— 
"(A) IN GENERAL.—If the basis of stock in a corporation 
is decreased under paragraph (2), an amount equal to 
such decrease shall also be applied to reduce the basis 
of property held by the corporation at the time the taxpayer 
acquired control (as defined in subsection (a)(2)(E)) of such 
corporation. 
"(B) LIMITATION.—Subparagraph (A) shall not apply 
to the extent that it would (but for this subparagraph) 
require a reduction in the aggregate adjusted bases of 
the property of the corporation below the taxpayer's 
adjusted basis of the stock in the corporation (determined 
immediately after such basis is decreased under paragraph 
(2)). 
"(C) ALLOCATION OF BASIS REDUCTION.—The decrease 
required under subparagraph (A) shall be allocated— 
"(i) first to property which is similar or related 
in service or use to the converted property, 
"(ii) second to depreciable property (as defined in 
section 1017(b)(3)(B)) not described in clause (i), and 
"(iii) then to other property. 
"(D) SPECIAL RULES.— 
"(i) REDUCTION NOT TO EXCEED ADJUSTED BASIS 
OF PROPERTY.—No reduction in the basis of any prop-
erty under this paragraph shall exceed the adjusted 
basis of such property (determined without regard to 
such reduction). 
"(ii) 
ALLOCATION OF REDUCTION AMONG PROP-
ERTIES.—If more than 1 property is described in a 
clause of subparagraph (C), the reduction under this 
paragraph shall be allocated among such property in 
proportion to the adjusted bases of such property (as 
so determined).", 
(b) EFFECTIVE DATE.—The amendment made by this section 26USC1033 
shall apply to involuntary conversions occurring after the date note. 
of the enactment of this Act. 
SEC. 1611. TREATMENT OF CERTAIN INSURANCE CONTRACTS ON 
RETIRED LIVES. 
(a) GENERAL RULE.— 
(1) Paragraph (2) of section 817(d) (defining variable con-
tract) is amended by striking "or" at the end of subparagraph 
(A), by striking "and" at the end of subparagraph (B) and 
110 STAT. 1846 
PUBLIC LAW 104-188—AUG. 20, 1996 
inserting "or", and by inserting after subparagraph (B) the 
following new subparagraph: 
"(C) provides for funding of insurance on retired lives 
as described in section 807(c)(6), and". 
(2) Paragraph (3) of section 817(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 
inserting after subparagraph (B) the following new subpara-
graph: 
"(C) in the case of funds held under a contract described 
in paragraph (2)(C), the amounts paid in, or the amounts 
paid out, reflect the investment return and the market 
value of the segregated asset account.". 
26 use 817 note. 
(b) EFFECTIVE DATE.—The amendments made by this section 
shall apply to taxable years beginning after December 31, 1995. 
SEC. 1612. TREATMENT OF MODIFIED GUARANTEED CONTRACTS. 
(a) GENERAL RULE.—Subpart E of part I of subchapter L of 
chapter 1 (relating to definitions and special rules) is amended 
by inserting after section 817 the following new section: 
"SEC. 817A. SPECIAL RULES FOR MODIFIED GUARANTEED CONTRACTS, 
"(a) COMPUTATION OF RESERVES.—In the case of a modified 
guaranteed contract, clause (ii) of section 807(e)(1)(A) shall not 
apply. 
"(b) SEGREGATED ASSETS UNDER MODIFIED GUARANTEED CON-
TRACTS MARKED TO MARKET.— 
"(1) IN GENERAL.—In the case of any life insurance com-
pany, for purposes of this subtitle— 
"(A) Any gain or loss with respect to a segregated 
asset shall be treated as ordinary income or loss, as the 
case may be. 
"(B) If any segregated asset is held by such company 
as of the close of any taxable year— 
"(i) such company shall recognize gain or loss as 
if such asset were sold for its fair market value on 
the last business day of such taixable year, and 
"(ii) any such gain or loss shall be taken into 
account for such taxable year. 
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. 
"(2) SEGREGATED ASSET.—For purposes of paragraph (1), 
the term 'segregated asset' means any asset held as part of 
a segregated account referred to in subsection (d)(1) under 
a modified guaranteed contract. 
"(c) SPECIAL RULE IN COMPUTING LIFE INSURANCE RESERVES.— 
For purposes of appl3dng section 816(b)(1)(A) to any modified 
guaranteed contract, an assumed rate of interest shall include a 
rate of interest determined, from time to time, with reference to 
a market rate of interest. 
"(d) MODIFIED GUARANTEED CONTRACT DEFINED.—For purposes 
of this section, the term 'modified guaranteed contract' means a 
contract not described in section 817— 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1847 
"(1) all or part of the amounts received under which are 
allocated to an account which, pursuant to State law or regula-
tion, is segregated from the general asset accounts of the com-
pany and is valued from time to time with reference to market 
values, 
"(2) which— 
"(A) provides for the payment of annuities, 
"(B) is a life insurance contract, or 
"(C) is a pension plan contract which is not a life, 
accident, or health, property, casualty, or liability contract, 
"(3) for which reserves are valued at market for annual 
statement purposes, and 
"(4) which provides for a net surrender value or a policy-
holder's fund (as defined in section 807(e)(1)). 
If only a portion of a contract is not described in section 817, 
such portion shall be treated for purposes of this section as a 
separate contract. 
"(e) REGULATIONS.—The Secretary may prescribe regulations— 
"(1) to provide for the treatment of market value adjust-
ments under sections 72, 7702, 7702A, and 807(e)(1)(B), 
"(2) to determine the interest rates applicalDle under sec-
tions 807(c)(3), 807(d)(2)(B), and 812 with respect to a modified 
guaranteed contract annually, in a manner appropriate for 
modified guaranteed contracts and, to the extent appropriate 
for such a contract, to modify or waive the applicability of 
section 811(d), 
"(3) to provide rules to limit ordinary gain or loss treatment 
to assets constituting reserves for modified guaranteed con-
tracts (and not other assets) of the company, 
"(4) to provide appropriate treatment of transfers of assets 
to and from the segregated account, and 
"(5) as may be necessary or appropriate to carry out the 
purposes of this section.". 
(b) CLERICAL AMENDMENT.—The table of sections for subpart 
E of part I of subchapter L of chapter 1 is amended by inserting 
after the item relating to section 817 the following new item: 
"Sec. 817A. Special rules for modified guaranteed contracts.". 
(c) EFFECTIVE DATE.— 
26 use 817A 
(1) IN GENERAL.—The amendments made by this section note. 
shall apply to taxable years beginning after December 31, 1995. 
(2) TREATMENT OF NET ADJUSTMENTS.—Except as provided 
in paragraph (3), in the case of any taxpayer required by 
the amendments made by this section to change its calculation 
of reserves to take into account market value adjustments 
and to mark segregated assets to market for any taxable year— 
(A) such changes shall be treated as a change in 
method of accounting initiated by the taxpayer, 
(B) such changes shall be treated as made with the 
consent of the Secretary, and 
(C) the adjustments required by reason of section 481 
of the Internal Revenue Code of 1986, shall be taken into 
account as ordinary income by the taxpayer for the tax-
payer's first taxable year beginning after December 31, 
1995. 
(3) LIMITATION ON LOSS RECOGNITION AND ON DEDUCTION 
FOR RESERVE INCREASES.— 
(A) LIMITATION ON LOSS RECOGNITION.— 
110 STAT. 1848 
PUBLIC LAW 104-188—AUG. 20, 1996 
(i) IN GENERAL.—The aggregate loss recognized by 
reason of the appHcation of section 481 of the Internal 
Revenue Code of 1986 with respect to section 817A(b) 
of such Code (as added by this section) for the first 
taxable year of the taxpayer beginning after December 
31, 1995, shall not exceed the amount included in 
the taxpayer's gross income for such year by reason 
of the excess (if any) of— 
(I) the amount of life insurance reserves as 
of the close of the prior taxable year, over 
(II) the amount of such reserves as of the 
beginning of such first taxable year, 
to the extent such excess is attributable to subsection 
(a) of such section 817A. Notwithstanding the preced-
ing sentence, the adjusted basis of each segregated 
asset shall be determined as if all such losses were 
recognized. 
(ii) DISALLOWED LOSS ALLOWED OVER PERIOD.—The 
amount of the loss which is not allowed under clause 
(i) shall be allowed ratably over the period of 7 taxable 
years beginning with the taxpayer's first taxable year 
beginning after December 31, 1995. 
(B) 
LIMITATION ON DEDUCTION FOR INCREASE 
IN 
RESERVES.— 
(i) IN GENERAL.—The deduction allowed for the 
first taxable year of the taxpayer beginning after 
December 31, 1995, by reason of the application of 
section 481 of such Code with respect to section 817A(a) 
of such Code (as added by this section) shall not exceed 
the aggregate built-in gain recognized by reason of 
the application of such section 481 with respect to 
section 817A(b) of such Code (as added by this section) 
for such first taxable year. 
(ii) 
DISALLOWED 
DEDUCTION 
ALLOWED 
OVER 
PERIOD.—The amount of the deduction which is dis-
allowed under clause (i) shall be allowed ratably over 
the period of 7 taxable years beginning with the tax-
payer's first taxable year beginning after December 
31, 1995. 
(iii) BUILT-IN GAIN.—For purposes of this subpara-
graph, the built-in gain on an asset is the amount 
equal to the excess o
f
— 
(I) the fair market value of the asset as of 
the beginning of the first taxable year of the tax-
payer beginning after December 31, 1995, over 
(II) the adjusted basis of such asset as of 
such time. 
SEC. 1613. TREATMENT OF CONTRIBUTIONS IN AID OF CONSTRUCTION. 
(a) TREATMENT OF CONTRIBUTIONS IN AID OF CONSTRUCTION.— 
(1) IN GENERAL.—Section 118 (relating to contributions to 
the capital of a corporation) is amended— 
(A) by redesignating subsection (c) as subsection (e), 
and 
(B) by inserting after subsection (b) the following new 
subsections: 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1849 
"(c) 
SPECIAL RULES FOR WATER AND SEWERAGE DISPOSAL 
UTILITIES.— 
"(1) GENERAL RULE.—For purposes of this section, the term 
'contribution to the capital of the taxpayer' includes any amount 
of money or other property received from any person (whether 
or not a shareholder) by a regulated public utility which pro-
vides water or sewerage disposal services if— 
"(A) such amount is a contribution in aid of con-
struction, 
"(B) in the case of contribution of property other than 
water or sewerage disposal facilities, such amount meets 
the requirements of the expenditure rule of paragraph (2), 
and 
"(C) such amount (or any property acquired or con-
structed with such amount) is not included in the taxpayer's 
rate base for ratemaking purposes. 
"(2) EXPENDITURE RULE.—An amount meets the require-
ments of this paragraph if— 
"(A) an amount equal to such amount is expended 
for the acquisition or construction of tangible property 
described in section 1231(b)— 
"(i) which is the property for which the contribu-
tion was made or is of the same type as such property, 
and 
"(ii) which is used predominantly in the trade or 
business of furnishing water or sewerage disposal 
services, 
"(B) the expenditure referred to in subparagraph (A) 
occurs before the end of the second taxable year after 
the year in which such amount was received, and 
"(C) accurate records are kept of the amounts contrib-
uted and expenditures made, the expenditures to which 
contributions are allocated, and the year in which the 
contributions and expenditures are received and made. 
"(3) DEFINITIONS.—For purposes of this subsection— 
"(A) 
CONTRIBUTION IN AID OF CONSTRUCTION.—The 
term 'contribution in aid of construction' shall be defined 
by regulations prescribed by the Secretary, except that 
such term shall not include amounts paid as service charges 
for starting or stopping services. 
"(B) 
PREDOMINANTLY.—The 
term 
'predominantly' 
means 80 percent or more. 
"(C) REGULATED PUBLIC UTILITY.—The term 'regulated 
public utility has the meaning given such term by section 
7701(a)(33), except that such term shall not include any 
utility which is not required to provide water or sewerage 
disposal services to members of the general public in its 
service area. 
"(4) DISALLOWANCE OF DEDUCTIONS AND CREDITS; ADJUSTED 
BASIS.—Notwithstanding any other provision of this subtitle, 
no deduction or credit shall be allowed for, or by reason of, 
any expenditure which constitutes a contribution in aid of 
construction to which this subsection applies. The adjusted 
basis of any property acquired with contributions in aid of 
construction to which this subsection applies shall be zero. 
110 STAT. 1850 
PUBLIC LAW 104-188—AUG. 20, 1996 
"(d) STATUTE OF LIMITATIONS.—If the taxpayer for any taxable 
year treats an amount as a contribution to the capital of the 
taxpayer described in subsection (c), then— 
"(1) the statutory period for the assessment of any defi-
ciency attributable to any part of such amount shall not expire 
before the expiration of 3 years from the date the Secretary 
is notified by the taxpayer (in such manner as the Secretary 
may prescribe) o
f
— 
"(A) the amount of the expenditure referred to in 
subparagraph (A) of subsection (c)(2), 
"(B) the taxpayer's intention not to make the expendi-
tures referred to in such subparagraph, or 
"(C) a failure to make such expenditure within the 
period described in subparagraph (B) of subsection (c)(2), 
and 
"(2) such deficiency may be assessed before the expiration 
of such 3-year period notwithstanding the provisions of any 
other law or rule of law which would otherwise prevent such 
assessment.". 
(2) CONFORMING AMENDMENT.—Section 118(b) is amended 
by inserting "except as provided in subsection (c)," before "the 
term". 
26 use 118 note. 
(3) EFFECTIVE DATE.—The amendments made by this sub-
section shall apply to amounts received after June 12, 1996. 
(b) RECOVERY METHOD AND PERIOD FOR WATER UTILITY 
PROPERTY.— 
(1) REQUIREMENT TO USE STRAIGHT LINE METHOD.—Section 
168(b)(3) is amended by adding at the end the following new 
subparagraph: 
"(F) Water utility property described in subsection 
(e)(5).". 
(2) 25-YEAR RECOVERY PERIOD.—The table contained in sec-
tion 168(c)(1) is amended by inserting the following item after 
the item relating to 20-year property: 
"Water utility property 
25 years". 
(3) WATER UTILITY PROPERTY.— 
(A) IN GENERAL.—Section 168(e) is amended by adding 
at the end the following new paragraph: 
"(5) WATER UTILITY PROPERTY.—The term 'water utility 
property' means property— 
"(A) which is an integral part of the gathering, treat-
ment, or commercial distribution of water, and which, with-
out regard to this paragraph, would be 20-year property, 
and 
"(B) any municipal sewer.". 
(B) 
CONFORMING 
AMENDMENTS.—Section 
168 
is 
amended— 
(i) by striking subparagraph (F) of subsection 
(e)(3), and 
(ii) by striking the item relating to subparagraph 
(F) in the table in subsection (g)(3). 
(4) 
ALTERNATIVE 
SYSTEM.—Clause 
(iv) 
of 
section 
168(g)(2)(C) is amended by inserting "or water utility property" 
after "tunnel bore". 
26 use 168 note. 
(5) EFFECTIVE DATE.—The amendments made by this sub-
section shall apply to property placed in service after June 
12, 1996, other than property placed in service pursuant to 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1851 
a binding contract in effect before June 10, 1996, and at all 
times thereafter before the property is placed in service. 
SEC. 1614. ELECTION TO CEASE STATUS AS QUALIFIED SCHOLARSHIP 
FUNDING CORPORATION. 
(a) IN GENERAL.—Subsection (d) of section 150 (relating to 
definitions and special rules) is amended by adding at the end 
the following new paragraph: 
"(3) ELECTION TO CEASE STATUS AS QUALIFIED SCHOLARSHIP 
FUNDING CORPORATION.— 
"(A) IN GENERAL.—^Any qualified scholarship funding 
bond, and qualified student loan bond, outstanding on the 
date of the issuer's election under this paragraph (and 
any bond (or series of bonds) issued to refund such a 
bond) shall not fail to be a tax-exempt bond solely because 
the issuer ceases to be described in subparagraphs (A) 
and (B) of paragraph (2) if the issuer meets the require-
ments of subparagraphs (B) and (C) of this paragraph. 
"(B) ASSETS AND LIABILITIES OF ISSUER TRANSFERRED 
TO 
TAXABLE 
SUBSIDIARY.—The 
requirements 
of 
this 
subparagraph are met by an issuer i
f
— 
"(i) all of the student loan notes of the issuer 
and other assets pledged to secure the repajonent of 
qualified scholarship funding bond indebtedness of the 
issuer are transferred to another corporation within 
a reasonable period after the election is made under 
this paragraph; 
"(ii) such transferee corporation assumes or other-
wise provides for the payment of all of the qualified 
scholarship funding bond indebtedness of the issuer 
within a reasonable period after the election is made 
under this paragraph; 
"(iii) to the extent permitted by law, such trans-
feree corporation assumes all of the responsibilities, 
and succeeds to all of the rights, of the issuer under 
the issuer's agreements with the Secretary of Edu-
cation in respect of student loans; 
"(iv) immediately after such transfer, the issuer, 
together with any other issuer which has made an 
election under this paragraph in respect of such trans-
feree, hold all of the senior stock in such transferee 
corporation; and 
"(v) such transferee corporation is not exempt from 
tax under this chapter. 
"(C) ISSUER TO OPERATE AS INDEPENDENT ORGANIZA-
TION DESCRIBED IN SECTION 501(C)(3).—The requirements 
of this subparagi-aph are met by an issuer if, within a 
reasonable period after the transfer referred to in subpara-
graph (B)— 
"(i) the issuer is described in section 501(c)(3) and 
exempt from tax under section 501(a); 
"(ii) the issuer no longer is described in subpara-
graphs (A) and (B) of paragraph (2); and 
"(iii) at least 80 percent of the members of the 
board of directors of the issuer are independent mem-
bers. 
110 STAT. 1852 
PUBLIC LAW 104-188—AUG. 20, 1996 
"(D) SENIOR STOCK.—For purposes of this paragraph, 
the term 'senior stock' means stock— 
"(i) which participates pro rata and fully in the 
equity value of the corporation with all other common 
stock of the corporation but which has the right to 
payment of liquidation proceeds prior to payment of 
liquidation proceeds in respect of other common stock 
of the corporation; 
"(ii) which has a fixed right upon liquidation and 
upon 
redemption 
to 
an 
amount 
equal 
to 
the 
greater o
f
— 
"(I) the fair market value of such stock on 
the date of liquidation or redemption (whichever 
is applicable); or 
"(II) the fair market value of all assets trans-
ferred in exchange for such stock and reduced 
by the amount of all liabilities of the corporation 
which has made an election under this paragraph 
assumed by the transferee corporation in such 
transfer; 
"(iii) the holder of which has the right to require 
the transferee corporation to redeem on a date that 
is not later than 10 years after the date on which 
an election under this paragraph was made and pursu-
ant to such election such stock was issued; and 
"(iv) in respect of which, during the time such 
stock is outstanding, there is not outstanding any 
equity interest in the corporation having any liquida-
tion, redemption or dividend rights in the corporation 
which are superior to those of such stock. 
"(E) INDEPENDENT MEMBER.—The term 'independent 
member' means a member of the board of directors of 
the issuer who (except for services as a member of such 
board) receives no compensation directly or indirectly— 
"(i) for services performed in connection with such 
transferee corporation, or 
"(ii) for services as a member of the board of direc-
tors or as an officer of such transferee corporation. 
For purposes of clause (ii), the term 'officer' includes any 
individual having powers or responsibilities similar to those 
of officers. 
"(F) COORDINATION WITH CERTAIN PRIVATE FOUNDATION 
TAXES.—For purposes of sections 4942 (relating to the 
excise tax on a failure to distribute income) and 4943 
(relating to the excise tax on excess business holdings), 
the transferee corporation referred to in subparagraph (B) 
shall be treated as a functionally related business (within 
the meaning of section 4942(j)(4)) with respect to the issuer 
during the period commencing with the date on which 
an election is made under this paragraph and ending on 
the date that is the earlier o
f
— 
"(i) the last day of the last taxable year for which 
more than 50 percent of the gross income of such 
transferee corporation is derived from, or more than 
50 percent of the assets (by value) of such transferee 
corporation consists of, student loan notes incurred 
under the Higher Education Act of 1965; or 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1853 
"(ii) the last day of the taxable year of the issuer 
during which occurs the date which is 10 years after 
the date on which the election under this paragraph 
is made. 
"(G) ELECTION.—An election under this paragraph may 
be revoked only with the consent of the Secretary.", 
(b) EFFECTIVE DATE.—The amendment made by this section 
26 use 150 note. 
shall take effect on the date of the enactment of this Act. 
SEC. 1615. CERTAIN TAX BENEFITS DENIED TO INDIVIDUALS FAILING 
TO PROVIDE TAXPAYER IDENTIFICATION NUMBERS. 
(a) PERSONAL EXEMPTION.— 
(1) IN GENERAL.—Section 151 (relating to allowance of 
deductions for personal exemptions) is amended by adding at 
the end the following new subsection: 
"(e) IDENTIFYING INFORMATION REQUIRED.—No exemption shall 
be allowed under this section with respect to any individual unless 
the TIN of such individual is included on the return claiming 
the exemption.". 
(2) CONFORMING AMENDMENTS.— 
(A) Subsection (e) of section 6109 is repealed. 
(B) Section 6724(d)(3) is amended by adding "and" 
at the end of subparagraph (C), by striking subparagraph 
(D), and by redesignating subparagraph (E) as subpara-
graph (D). 
(b) DEPENDENT CARE CREDIT.—Subsection (e) of section 21 
(relating to expenses for household and dependent care services 
necessary for gainful emplo3nnent) is amended by adding at the 
end the following new paragraph: 
"(10) 
IDENTIFYING INFORMATION REQUIRED WITH RESPECT 
TO QUALIFYING INDIVIDUALS.—No credit shall be allowed under 
this section with respect to any qualifying individual unless 
the TIN of such individual is included on the return claiming 
the credit.". 
(c) EXTENSION OF PROCEDURES APPLICABLE TO MATHEMATICAL 
OR CLERICAL ERRORS.—Section 6213(g)(2) (relating to the definition 
of mathematical or clerical errors), as amended by the Personal 
Responsibility and Work Opportunity Reconciliation Act of 1996, 
is amended by striking "and" at the end of subparagraph (F), 
by striking the period at the end of subparagraph (G) and inserting 
", and", and by inserting at the end the following new subparagraph: 
"(H) an omission of a correct TIN required under sec-
tion 21 (relating to expenses for household and dependent 
care services necessary for gainful emplo5nment) or section 
151 (relating to allowance of deductions for personal exemp-
tions).". 
(d) EFFECTIVE DATE.— 
26 use 21 note. 
(1) IN GENERAL.—The amendments made by this section 
shall apply with respect to returns the due date for which 
(without regard to extensions) is on or after the 30th day 
after the date of the enactment of this Act. 
(2) SPECIAL RULE FOR 1995 AND 1996.—In the case of returns 
for taxable years beginning in 1995 or 1996, a taxpayer shall 
not be required by the amendments made by this section to 
provide a taxpayer identification number for a child who is 
born after October 31, 1995, in the case of a taxable year 
110 STAT. 1854 
PUBLIC LAW 104-188—AUG. 20, 1996 
beginning in 1995 or November 30, 1996, in the case of a 
taxable year beginning in 1996. 
SEC. 1616. REPEAL OF BAD DEBT RESERVE METHOD FOR THRIFT SAV-
INGS ASSOCIATIONS. 
(a) IN GENERAL.—Section 593 (relating to reserves for losses 
on loans) is amended by adding at the end the following new 
subsections: 
"(f) TERMINATION OF RESERVE METHOD.—Subsections (a), (b), 
(c), and (d) shall not apply to any taxable year beginning after 
December 31, 1995. 
"(g) 6-YEAR SPREAD OF ADJUSTMENTS.— 
"(1) IN GENERAL.—In the case of any taxpayer who is 
required by reason of subsection (f) to change its method of 
computing reserves for bad debts— 
"(A) such change shall be treated as a change in a 
method of accounting, 
"(B) such change shall be treated as initiated by the 
taxpayer and as having been made with the consent of 
the Secretary, and 
"(C) the net amount of the adjustments required to 
be taken into account by the taxpayer under section 
481(a)— 
"(i) shall be determined by taking into account 
only applicable excess reserves, and 
"(ii) as so determined, shall be taken into account 
ratably over the 6-taxable year period beginning with 
the first taxable year beginning after December 31, 
1995. 
"(2) APPLICABLE EXCESS RESERVES.— 
"(A) IN GENERAL.—For purposes of paragraph (1), the 
term 'applicable excess reserves' means the excess (if any) 
of— 
"(i) the balance of the reserves described in sub-
section (c)(1) (other than the supplemental reserve) 
as of the close of the taxpayer's last taxable year begin-
ning before January 1, 1996, over 
"(ii) the lesser o
f
— 
"(I) the balance of such reserves as of the 
close of the taxpayer's last taxable year beginning 
before January 1, 1988, or 
"(II) the balance of the reserves described in 
subclause (I), reduced in the same manner as 
under section 585(b)(2)(B)(ii) on the basis of the 
taxable years described in clause (i) and this 
clause. 
"(B) SPECLfVL RULE FOR THRIFTS WHICH BECOME SMALL 
BANKS.—In the case of a bank (as defined in section 581) 
which was not a large bank (as defined in section 585(c)(2)) 
for its first taxable year beginning after December 31, 
1995— 
"(i) the balance taken into account under subpara-
graph (A)(ii) shall not be less than the amount which 
would l3e the balance of such reserves as of the close 
of its last taxable year beginning before such date 
if the additions to such reserves for all taxable years 
had been determined under section 585(b)(2)(A), and 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1855 
"(ii) the opening balance of the reserve for bad 
debts as of the beginning of such first taxable year 
shall be the balance taken into account under subpara-
graph (A)(ii) (determined after the application of clause 
(i) of this subparagraph). 
The preceding sentence shall not apply for purposes of 
paragraphs (5) and (6) or subsection (e)(1). 
"(3) RECAPTURE OF PRE-I988 RESERVES WHERE TAXPAYER 
CEASES TO BE BANK.—If, during any taxable year beginning 
after December 31, 1995, a taxpayer to which paragraph (1) 
applied is not a bank (as defined in section 581), paragraph 
(1) shall apply to the reserves described in paragraph (2)(A)(ii) 
and the supplemental reserve; except that such reserves shall 
be taken into account ratably over the 6-taxable year period 
beginning with such taxable year. 
"(4) 
SUSPENSION OF RECAPTURE IF RESIDENTIAL LOAN 
REQUIREMENT MET.— 
"(A) IN GENERAL.—In the case of a bank which meets 
the residential loan requirement of subparagraph (B) for 
the first taxable year beginning after December 31, 1995, 
or for the following taxable year— 
"(i) no adjustment shall be taken into account 
under paragraph (1) for such taxable year, and 
"(ii) such taxable year shall be disregarded in 
determining— 
"(I) whether any other taxable year is a tax-
able year for which an adjustment is required to 
be taken into account under paragraph (1), and 
"(II) the amount of such adjustment. 
"(B) 
RESIDENTIAL LOAN REQUIREMENT.—A taxpayer 
meets the residential loan requirement of this subpara-
graph for any taxable year if the principal amount of the 
residential loans made by the taxpayer during such year 
is not less than the base amount for such year. 
"(C) RESIDENTIAL LOAN.—For purposes of this para-
graph, the term 'residential loan' means any loan described 
in clause (v) of section 7701(a)(19)(C) but only if such 
loan is incurred in acquiring, constructing, or improving 
the property described in such clause. 
"(D) BASE AMOUNT.—For purposes of subparagraph (B), 
the base amount is the average of the principal amounts 
of the residential loans made by the taxpayer during the 
6 most recent taxable years beginning on or before Decem-
ber 31, 1995. At the election of the taxpayer who made 
such loans during each of such 6 taxable years, the preced-
ing sentence shall be applied without regard to the taxable 
year in which such principal amount was the highest and 
the taxable year in such principal amount was the lowest. 
Such an election may be made only for the first taxable 
year beginning after such date, and, if made for such 
taxable year, shall apply to the succeeding taxable year 
unless revoked with the consent of the Secretary. 
"(E) CONTROLLED GROUPS.—In the case of a taxpayer 
which is a member of any controlled group of corporations 
described in section 1563(a)(1), subparagraph (B) shall be 
applied with respect to such group. 
110 STAT. 1856 
PUBLIC LAW 104-188—AUG. 20, 1996 
"(5) CONTINUED APPLICATION OF FRESH START UNDER SEC-
TION 585 TRANSITIONAL RULES.—In the case of a taxpayer to 
which paragraph (1) appHed and which was not a large bank 
(as defined in section 585(c)(2)) for its first taxable year begin-
ning after December 31, 1995: 
"(A) IN GENERAL.—For purposes of determining the 
net 
amount 
of adjustments 
referred 
to 
in 
section 
585(c)(3)(A)(iii), there shall be taken into account only the 
excess (if any) of the reserve for bad debts as of the close 
of the last taxable year before the disqualification year 
over the balance taken into account by such taxpayer under 
paragraph (2)(A)(ii) of this subsection. 
"(B) TREATMENT UNDER ELECTIVE CUT-OFF METHOD.— 
For purposes of applying section 585(c)(4)— 
"(i) the balance of the reserve taken into account 
under subparagraph (B) thereof shall be reduced by 
the balance taken into account by such taxpayer under 
paragraph (2)(A)(ii) of this subsection, and 
"(ii) no amount shall be includible in gross income 
by reason of such reduction. 
"(6) SUSPENDED RESERVE INCLUDED AS SECTION 38i(c) 
ITEMS.—The balance taken into account by a taxpayer under 
paragraph (2)(A)(ii) of this subsection and the supplemental 
reserve shall be treated as items described in section 381(c). 
"(7) CONVERSIONS TO CREDIT UNIONS.—In the case of a 
taxpayer to which paragraph (1) applied which becomes a credit 
union described in section 501(c) and exempt from taxation 
under section 501(a)— 
"(A) any amount required to be included in the gross 
income of the credit union by reason of this subsection 
shall be treated as derived from an unrelated trade or 
business (as defined in section 513), and 
"(B) for purposes of paragraph (3), the credit union 
shall not be treated as if it were a bank. 
"(8) REGULATIONS.—The Secretary shall prescribe such 
regulations as may be necessary to carry out this subsection 
and subsection (e), including regulations providing for the 
application of such subsections in the case of acquisitions, 
mergers, spin-offs, and other reorganizations.", 
(b) CONFORMING AMENDMENTS.— 
(1) Subsection (d) of section 50 is amended by adding 
at the end the following new sentence: 
"Paragraphs (1)(A), (2)(A), and (4) of the section 46(e) referred 
to in paragraph (1) of this subsection shall not apply to any taxable 
year beginning after December 31, 1995." 
(2) Subsection (e) of section 52 is amended by striking 
paragraph (1) and by redesignating paragraphs (2) and (3) 
as paragraphs (1) and (2), respectively. 
(3) Subsection (a) of section 57 is amended by striking 
paragraph (4). 
(4) Section 246 is amended by striking subsection (f). 
(5) Clause (i) of section 291(e)(1)(B) is amended by striking 
"or to which section 593 applies". 
(6) Subparagraph (A) of section 585(a)(2) is amended by 
striking "other than an organization to which section 593 
applies". 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1857 
(7)(A) The material preceding subparagraph (A) of section 
593(e)(1) is amended by striking "by a domestic building and 
loan association or an institution that is treated as a mutual 
savings bank under section 591(b)" and inserting "by a taxpayer 
having a balance described in subsection (g)(2)(A)(ii)". 
(B) Subparagraph (B) of section 593(e)(1) is amended to 
read as follows: 
"(B) then out of the balance taken into account under 
subsection (g)(2)(A)(ii) (properly adjusted for amounts 
charged against such reserves for taxable years beginning 
after December 31, 1987),". 
(C) The second sentence of section 593(e)(1) is amended 
by striking "the association or an institution that is treated 
as a mutual savings bank under section 591(b)" and inserting 
"a taxpayer 
having 
a 
balance 
described 
in 
subsection 
(g)(2)(A)(ii)". 
(D) The third sentence of section 593(e)(1) is amended 
by striking "an association" and inserting "a taxpayer having 
a balance described in subsection (g)(2)(A)(ii)". 
(E) Paragraph (1) of section 593(e) is amended by adding 
at the end the following new sentence: "This paragraph shall 
not apply to any distribution of all of the stock of a bank 
(as defined in section 581) to another corporation if, imme-
diately after the distribution, such bank and such other corpora-
tion are members of the same affiliated group (as defined 
in section 1504) and the provisions of section 5(e) of the Federal 
Deposit Insurance Act (as in effect on December 31, 1995) 
or similar provisions are in effect.". 
(8) Section 595 is hereby repealed. 
(9) Section 596 is hereby repealed. 
(10) Subsection (a) of section 860E is amended— 
(A) by striking "Except as provided in paragraph (2), 
the" in paragraph (1) and inserting "The", 
(B) by striking paragraphs (2) and (4) and redesignat-
ing paragraphs (3), (5), and (6) as paragraphs (2), (3), 
and (4), respectively, 
(C) by striking in paragraph (2) (as so redesignated) 
all that follows "subsection" and inserting a period, and 
(D) by striking the last sentence of paragraph (4) (as 
so redesignated). 
(11) Paragraph (3) of section 992(d) is amended by striking 
"or 593". 
(12) Section 1038 is amended by striking subsection (f). 
(13) Clause (ii) of section 1042(c)(4)(B) is amended by 
striking "or 593". 
(14) Subsection (c) of section 1277 is amended by striking 
"or to which section 593 applies". 
(15) Subparagraph (B) of section 1361(b)(2) is amended 
by striking "or to which section 593 applies". 
(16) The table of sections for part II of subchapter H 
of chapter 1 is amended by striking the items relating to 
sections 595 and 596. 
(c) EFFECTIVE DATES.— 
26 use 593 note. 
(1) IN GENERAL.—Except as otherwise provided in this sub-
section, the amendments made by this section shall apply to 
taxable years beginning after December 31, 1995. 
110 STAT. 1858 
PUBLIC LAW 104-188—AUG. 20, 1996 
(2) SUBSECTION (b)(7)(B).—The amendments made by sub-
section (b)(7)(B) shall not apply to any distribution with respect 
to preferred stock if— 
(A) such stock is outstanding at all times after October 
31, 1995, and before the distribution, and 
(B) such distribution is made before the date which 
is 1 year after the date of the enactment of this Act (or, 
in the case of stock which may be redeemed, if later, 
the date which is 30 days after the earliest date that 
such stock may be redeemed). 
(3) SUBSECTION (b)(8).—The amendment made by sub-
section (b)(8) shall apply to property acquired in taxable years 
beginning after December 31, 1995. 
(4) SUBSECTION (b)(10).—The amendments made by sub-
section (b)(10) shall not apply to any residual interest held 
by a taxpayer if such interest has been held by such taxpayer 
at all times after October 31, 1995. 
SEC. 1617. EXCLUSION FOR ENERGY CONSERVATION SUBSIDIES LIM-
ITED TO SUBSIDIES WITH RESPECT TO DWELLING UNITS. 
(a) IN GENERAL.—Paragraph (1) of section 136(c) (defining 
energy conservation measure) is amended by striking "energy 
demand—" and all that follows and inserting "energy demand with 
respect to a dwelling unit.". 
(b) CONFORMING AMENDMENTS.— 
(1) Subsection (a) of section 136 is amended to read as 
follows: 
"(a) EXCLUSION.—Gross income shall not include the value of 
any subsidy provided (directly or indirectly) by a public utility 
to a customer for the purchase or installation of any energy con-
servation measure.". 
(2) Paragraph (2) of section 136(c) is amended— 
(A) by striking subparagraph (A) and by redesignating 
subparagraphs (B) and (C) as subparagraphs (A) and (B), 
respectively, and 
(B) by striking "AND SPECIAL RULES" in the paragraph 
heading. 
26 use 136 note. 
(c) EFFECTIVE DATE.—The amendments made by this section 
shall apply to amounts received after December 31, 1996, unless 
received pursuant to a written binding contract in effect on Septem-
ber 13, 1995, and at all times thereafter. 
PART II—FINANCIAL ASSET SECURITIZATION 
INVESTMENTS 
SEC, 1621. FINANCIAL ASSET SECURITIZATION INVESTMENT TRUSTS. 
(a) IN GENERAL.—Subchapter M of chapter 1 is amended by 
adding at the end the following new part: 
"PART V—FINANCIAL ASSET SECURITIZATION 
INVESTMENT TRUSTS 
"Sec. 860H. Taxation of a FASIT; other general rules. 
"Sec. 8601. Gain recognition on contributions to a FASIT and in other 
cases. 
"Sec. 860J. Non-FASIT losses not to offset certain FASIT inclusions. 
"Sec. 860K. Treatment of transfers of high-yield interests to disqualified 
holders. 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1859 
"Sec. 860L. Definitions and other special rules. 
"SEC. 860H. TAXATION OF A FASIT; OTHER GENERAL RULES. 
"(a) TAXATION OF FASIT.—A FASIT as such shall not be subject 
to taxation under this subtitle (and shall not be treated as a 
trust, partnership, corporation, or taxable mortgage pool). 
"(b) TAXATION OF HOLDER OF OWNERSHIP INTEREST.—In deter-
mining the taxable income of the holder of the ownership interest 
in a FASIT— 
"(1) all assets, liabilities, and items of income, gain, deduc-
tion, loss, and credit of a FASIT shall be treated as assets, 
liabilities, and such items (as the case may be) of such holder, 
"(2) the constant yield method (including the rules of sec-
tion 1272(a)(6)) shall be applied under an accrual method of 
accounting in determining all interest, acquisition discount, 
original issue discount, and market discount and all premium 
deductions or adjustments with respect to each debt instrument 
of the FASIT, 
"(3) there shall not be taken into account any item of 
income, gain, or deduction allocable to a prohibited transaction, 
and 
"(4) interest accrued by the FASIT which is exempt from 
tax imposed by this subtitle shall, when taken into account 
by such holder, be treated as ordinary income. 
"(c) TREATMENT OF REGULAR INTERESTS.—For purposes of this 
title— 
"(1) a regular interest in a FASIT, if not otherwise a 
debt instrument, shall be treated as a debt instrument, 
"(2) section 163(e)(5) shall not apply to such an interest, 
and 
"(3) amounts includible in gross income with respect to 
such an interest shall be determined under an accrual method 
of accounting. 
"SEC. 8601. GAIN RECOGNITION ON CONTRIBUTIONS TO A FASIT AND 
IN OTHER CASES. 
"(a) TREATMENT OF PROPERTY ACQUIRED BY FASIT.— 
"(1) 
PROPERTY ACQUIRED FROM HOLDER OF OWNERSHIP 
INTEREST OR RELATED PERSON.—If property is sold or contrib-
uted to a FASIT by the holder of the ownership interest in 
such FASIT (or by a related person) gain (if any) shall be 
recognized to such holder (or person) in an amount equal to 
the excess (if any) of such propert^s value under subsection 
(d) on the date of such sale or contribution over its adjusted 
basis on such date. 
"(2) 
PROPERTY ACQUIRED OTHER THAN FROM HOLDER OF 
OWNERSHIP INTEREST OR RELATED PERSON.—Property which is 
acquired by a FASIT other than in a transaction to which 
paragraph (1) applies shall be treated— 
"(A) as having been acquired by the holder of the 
ownership interest in the FASIT for an amount equal to 
the FASIT's cost of acquiring such property, and 
"(B) as having been sold by such holder to the FASIT 
at its value under subsection (d) on such date. 
"(b) GAIN RECOGNITION ON PROPERTY OUTSIDE FASIT WHICH 
SUPPORTS REGULAR INTERESTS.—If property held by the holder 
of the ownership interest in a FASIT (or by any person related 
to such holder) supports any regular interest in such FASIT— 
29-194 0-96-5:QL3Part3 
110 STAT. 1860 
PUBLIC LAW 104-188—AUG. 20, 1996 
"(1) gain shall be recognized to such holder (or person) 
in the same manner as if such holder (or person) had sold 
such property at its value under subsection (d) on the earliest 
date such property supports such an interest, and 
"(2) such property shall be treated as held by such FASIT 
for purposes of this part. 
"(c) DEFERRAL OF GAIN RECOGNITION.—The Secretary may pre-
scribe regulations which— 
"(1) provide that gain otherwise recognized under sub-
section (a) or (b) shall not be recognized before the earliest 
date on which such property supports any regular interest 
in such FASIT or any indebtedness of the holder of the owner-
ship interest (or of any person related to such holder), and 
"(2) provide such adjustments to the other provisions of 
this part to the extent appropriate in the context of the treat-
ment provided under paragraph (1). 
"(d) VALUATION.—For purposes of this section— 
"(1) IN GENERAL.—The value of any property under this 
subsection shall be— 
"(A) in the case of a debt instrument which is not 
traded on an established securities market, the sum of 
the present values of the reasonably expected pa5anents 
under such instrument determined (in the manner provided 
by regulations prescribed by the Secretary)— 
"(i) as of the date of the event resulting in the 
gain recognition under this section, and 
"(ii) by using a discount rate equal to 120 percent 
of the applicable Federal rate (as defined in section 
1274(d)), or such other discount rate specified in such 
regulations, compounded semiannually, and 
"(B) in the case of any other property, its fair market 
value. 
"(2) SPECIAL RULE FOR REVOLVING LOAN ACCOUNTS.—For 
purposes of paragraph (1)— 
"(A) each extension of credit (other than the accrual 
of interest) on a revolving loan account shall be treated 
as a separate debt instrument, and 
"(B) payments on such extensions of credit having 
substantially the same terms shall be applied to such exten-
sions beginning with the earliest such extension. 
"(e) SPECIAL RULES.— 
"(1) NONRECOGNITION RULES NOT TO APPLY.—Gain required 
to be recognized under this section shall be recognized notwith-
standing any other provision of this subtitle. 
"(2) BASIS ADJUSTMENTS.—The basis of any property on 
which gain is recognized under this section shall be increased 
by the amount of gain so recognized. 
"SEC. 860J. NON-FASIT LOSSES NOT TO OFFSET CERTAIN FASIT 
INCLUSIONS. 
"(a) IN GENERAL.—The taxable income of the holder of the 
ownership interest or any high-yield interest in a FASIT for any 
taxable year shall in no event be less than the sum o
f
— 
"(1) such holder's taxable income determined solely with 
respect to such interests (including gains and losses from sales 
and exchanges of such interests), and 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1861 
"(2) the excess inclusion (if any) under section 860E(a)(l) 
for such taxable year. 
"(b) COORDINATION WITH SECTION 172.—Any increase in the 
taxable income of any holder of the ownership interest or a high-
yield interest in a FASIT for any taxable year by reason of sub-
section (a) shall be disregarded— 
"(1) in determining under section 172 the amount of any 
net operating loss for such taxable year, and 
"(2) in determining taxable income for such taxable year 
for purposes of the second sentence of section 172(b)(2). 
"(c) COORDINATION WITH MINIMUM TAX.—For purposes of part 
VI of subchapter A of this chapter— 
"(1) the reference in section 55(b)(2) to taxable income 
shall be treated as a reference to taxable income determined 
without regard to this section, 
"(2) the alternative minimum taxable income of any holder 
of the ownership interest or a high-yield interest in a FASIT 
for any taxable year shall in no event be less than such holder's 
taxable income determined solely with respect to such interests, 
and 
"(3) any increase in taxable income under this section shall 
be disregarded for purposes of computing the alternative tax 
net operating loss deduction. 
"(d) AFFILIATED GROUPS.—All members of an affiliated group 
filing a consolidated return shall be treated as one taxpayer for 
purposes of this section. 
"SEC. 860K. TREATMENT OF TRANSFERS OF HIGH-YIELD INTERESTS 
TO DISQUALIFIED HOLDERS. 
"(a) GENERAL RULE.—In the case of any high-yield interest 
which is held by a disqualified holder— 
"(1) the gross income of such holder shall not include any 
income (other than gain) attributable to such interest, and 
"(2) amounts not includible in the gross income of such 
holder by reason of paragraph (1) shall be included (at the 
time otherwise includible under paragraph (1)) in the gross 
income of the most recent holder of such interest which is 
not a disqualified holder. 
"(b) EXCEPTIONS.—Rules similar to the rules of paragraphs 
(4) and (7) of section 860E(e) shall apply to the tax imposed by 
reason of the inclusion in gross income under subsection (a). 
"(c) DISQUALIFIED HOLDER.—For purposes of this section, the 
term 'disqualified holder' means any holder other than— 
"(1) 
an 
eligible 
corporation 
(as 
defined 
in 
section 
860L(a)(2)), or 
"(2) a FASIT. 
"(d) TREATMENT OF INTERESTS HELD BY SECURITIES DEALERS.— 
"(1) IN GENERAL.—Subsection (a) shall not apply to any 
high-jdeld interest held by a disqualified holder if such holder 
is a dealer in securities who acquired such interest exclusively 
for sale to customers in the ordinary course of business (and 
not for investment). 
"(2) CHANGE IN DEALER STATUS.— 
"(A) IN GENERAL.—In the case of a dealer in securities 
which is not an eligible corporation (as defined in section 
860L(a)(2)), if— 
110 STAT. 1862 
PUBLIC LAW 104-188—AUG. 20, 1996 
"(i) such 
dealer 
ceases to be a dealer in 
securities, or 
"(ii) such dealer commences holding the high-yield 
interest for investment, 
there is hereby imposed (in addition to other taxes) an 
excise tax equal to the product of the highest rate of tax 
specified in section 11(b)(1) and the income of such dealer 
attributable to such interest for periods after the date 
of such cessation or commencement. 
"(B) HOLDING FOR 31 DAYS OR LESS.—For purposes 
of subparagraph (A)(ii), a dealer shall not be treated as 
holding an interest for investment before the thirty-second 
day after the date such dealer acquired such interest unless 
such interest is so held as part of a plan to avoid the 
purposes of this paragraph. 
"(C) 
ADMINISTRATIVE 
PROVISIONS.—The 
deficiency 
procedures of subtitle F shall apply to the tax imposed 
by this paragraph. 
"(e) 
TREATMENT OF HIGH-YIELD 
INTERESTS IN PASS-THRU 
ENTITIES.— 
"(1) IN GENERAL.—If a pass-thru entity (as defined in sec-
tion 860E(e)(6)) issues a debt or equity interest— 
"(A) which is supported by any regular interest in 
a FASIT, and 
"(B) which has an original yield to maturity which 
is greater than each o
f
— 
"(i) the sum determined under clauses (i) and (ii) 
of section 163(i)(l)(B) with respect to such debt or 
equity interest, and 
"(ii) the 3rield to maturity to such entity on such 
regular interest (determined as of the date such entity 
acquired such interest), 
there is hereby imposed on the pass-thru entity a tax (in 
addition to other taxes) equal to the product of the highest 
rate of tax specified in section 11(b)(1) and the income of 
the holder of such debt or equity interest which is properly 
Regulations. 
attributable to such regular interest. For purposes of the preced-
ing sentence, the yield to maturity of any equity interest shall 
be determined under regulations prescribed by the Secretary. 
"(2) EXCEPTION.—Paragraph (1) shall not apply to arrange-
ments not having as a principal purpose the avoidance of the 
purposes of this subsection. 
"SEC. 860L. DEFINITIONS AND OTHER SPECIAL RULES. 
"(a) FASIT.— 
"(1) IN GENERAL.—For purposes of this title, the terms 
'financial asset securitization investment trust' and 'FASIT' 
mean any entity— 
"(A) for which an election to be treated as a FASIT 
applies for the taxable year, 
"(B) all of the interests in which are regular interests 
or the ownership interest, 
"(C) which has only one ownership interest and such 
ownership interest is held directly by an eligible corpora-
tion, 
"(D) as of the close of the third month beginning after 
the day of its formation and at all times thereafter, substan-
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1863 
tially all of the assets of which (including assets treated 
as held by the entity under section 8601(b)(2)) consist of 
permitted assets, and 
"(E) which is not described in section 851(a). 
A rule similar to the rule of the last sentence of section 860D(a) 
shall apply for purposes of this paragraph. 
"(2) ELIGIBLE CORPORATION.—For purposes of paragraph 
(1)(C), the term 'eligible corporation' means any domestic C 
corporation other than— 
"(A) a corporation which is exempt from, or is not 
subject to, tax under this chapter, 
"(B) an entity described in section 851(a) or 856(a), 
"(C) a REMIC, and 
"(D) an organization to which part I of subchapter 
T applies. 
"(3) ELECTION.—An entity (otherwise meeting the require-
ments of paragraph (1)) may elect to be treated as a FASIT. 
Except as provided in paragraph (5), such an election shall 
apply to the taxable year for which made and all subsequent 
taxable years unless revoked with the consent of the Secretary. 
"(4) TERMINATION.—If any entity ceases to be a FASIT 
at any time during the taxable year, such entity shall not 
be treated as a FASIT after the date of such cessation. 
"(5) INADVERTENT TERMINATIONS, ETC.—Rules similar to 
the rules of section 860D(b)(2)(B) shall apply to inadvertent 
failures to qualify or remain qualified as a FASIT. 
"(6) PERMITTED ASSETS NOT TREATED AS INTEREST IN 
FASIT.—Except as provided in regulations prescribed by the 
Secretary, any asset which is a permitted asset at the time 
acquired by a FASIT shall not be treated at any time as 
an interest in such FASIT. 
"(b) INTERESTS IN FASIT.—For purposes of this part— 
"(1) REGULAR INTEREST.— 
"(A) IN GENERAL.—The term 'regular interest' means 
any interest which is issued by a FASIT after the startup 
date with fixed terms and which is designated as a regular 
interest if— 
"(i) such interest unconditionally entitles the 
holder to receive a specified principal amount (or other 
similar amount), 
"(ii) interest payments (or other similar amounts), 
if any, with respect to such interest are determined 
based on a fixed rate, or, except as otherwise provided 
by the Secretary, at a variable rate permitted under 
section 860G(a)(l)(B)(i), 
"(iii) such interest does not have a stated maturity 
(including options to renew) greater than 30 years 
(or such longer period as may be permitted by regula-
tions), 
"(iv) the issue price of such interest does not exceed 
125 percent of its stated principal amount, and 
"(v) the yield to maturity on such interest is less 
than the sum determined under section 163(i)(l)(B) 
with respect to such interest. 
An interest shall not fail to meet the requirements of 
clause (i) merely because the timing (but not the amount) 
of the principal payments (or other similar amounts) may 
110 STAT. 1864 
PUBLIC LAW 104-188—AUG. 20, 1996 
be contingent on the extent that payments on debt 
instruments held by the FASIT are made in advance of 
anticipated payments and on the amount of income from 
permitted assets. 
"(B) HIGH-YIELD INTERESTS.— 
"(i) IN GENERAL.—The term 'regular interest' 
includes any high-5deld interest. 
"(ii) HIGH-YIELD INTEREST.—The term 'high-yield 
interest' means any interest which would be described 
in subparagraph (A) but for— 
"(I) failing to meet the requirements of one 
or more of clauses (i), (iv), or (v) thereof, or 
"(II) failing to meet the requirement of clause 
(ii) thereof but only if interest payments (or other 
similar amounts), if any, with respect to such 
interest consist of a specified portion of the interest 
payments on permitted assets and such portion 
does not vary during the period such interest is 
outstanding. 
"(2) OWNERSHIP INTEREST.—The term 'ownership interest' 
means the interest issued by a FASIT after the startup day 
which is designated as an ownership interest and which is 
not a regular interest. 
"(c) PERMITTED ASSETS.—For purposes of this part— 
"(1) IN GENERAL.—The term 'permitted asset' means— 
"(A) cash or cash equivalents, 
"(B) any debt instrument (as defined in section 
1275(a)(1)) under which interest payments (or other similar 
amounts), if any, at or before maturity meet the require-
ments applicable under clause (i) or (ii) of section 
860G(a)(l)(B), 
"(C) foreclosure property, 
"(D) any asset— 
"(i) which is an interest rate or foreign currency 
notional principal contract, letter of credit, insurance, 
guarantee against payment defaults, or other similar 
instrument permitted by the Secretary, and 
"(ii) which is reasonably required to guarantee or 
hedge against the FASIT's risks associated with being 
the obligor on interests issued by the FASIT, 
"(E) contract rights to acquire debt 
instruments 
described in subparagraph (B) or assets described in 
subparagraph (D), 
"(F) any regular interest in another FASIT, and 
"(G) any regular interest in a REMIC. 
"(2) DEBT ISSUED BY HOLDER OF OWNERSHIP INTEREST NOT 
PERMITTED ASSET.—The term 'permitted asset' shall not include 
any debt instrument issued by the holder of the ownership 
interest in the FASIT or by any person related to such holder 
or any direct or indirect interest in such a debt instrument. 
The preceding sentence shall not apply to cash equivalents 
and to any other investment specified in regulations prescribed 
by the Secretary. 
"(3) FORECLOSURE PROPERTY.— 
"(A) IN GENERAL.—The term 'foreclosure property' 
means property— 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1865 
"(i) which would be foreclosure property under sec-
tion 856(e) (determined without regard to paragraph 
(5) thereof) if such property were real property acquired 
by a real estate investment trust, and 
"(ii) which is acquired in connection with the 
default or imminent default of a debt instrument held 
by the FASIT unless the security interest in such prop-
erty was created for the principal purpose of permitting 
the FASIT to invest in such property. 
Solely for purposes of subsection (a)(1), the determination 
of whether any property is foreclosure property shall be 
made without regard to section 856(e)(4). 
"(B) AUTHORITY TO REDUCE GRACE PERIOD.—In the case 
of property other than real property and other than per-
sonal property incident to real property, the Secretary may 
by regulation reduce for purposes of subparagraph (A) the 
periods otherwise applicable under paragraphs (2) and (3) 
of section 856(e). 
"(d) STARTUP DAY.—For purposes of this part— 
"(1) IN GENERAL.—The term 'startup day' means the date 
designated in the election under subsection (a)(3) as the startup 
day of the FASIT. Such day shall be the beginning of the 
first taxable year of the FASIT. 
"(2) 
TREATMENT OF PROPERTY HELD ON STARTUP DAY.— 
All property held (or treated as held under section 8601(c)(2)) 
by an entity as of the startup day shall be treated as contributed 
to such entity on such day by the holder of the ownership 
interest in such entity. 
"(e) TAX ON PROHIBITED TRANSACTIONS.— 
"(1) IN GENERAL.—There is hereby imposed for each taxable 
year of a FASIT a tax equal to 100 percent of the net income 
derived from prohibited transactions. Such tax shall be paid 
by the holder of the ownership interest in the FASIT. 
"(2) PROHIBITED TRANSACTIONS.—For purposes of this part, 
the term 'prohibited transaction' means— 
"(A) the receipt of any income derived from any asset 
that is not a permitted asset, 
"(B) except as provided in paragraph (3), the disposition 
of any permitted asset, 
"(C) the receipt of any income derived from any loan 
originated by the FASIT, and 
"(D) the receipt of any income representing a fee or 
other compensation for services (other than any fee received 
as compensation for a waiver, amendment, or consent under 
permitted assets (other than foreclosure property) held by 
the FASIT). 
"(3) EXCEPTION FOR INCOME FROM CERTAIN DISPOSITIONS.— 
"(A) IN GENERAL.—Paragraph (2)(B) shall not apply 
to a disposition which would not be a prohibited transaction 
(as defined in section 860F(a)(2)) by reason o
f
— 
"(i) clause (ii), (iii), or (iv) of section 860F(a)(2)(A), 
or 
"(ii) section 860F(a)(5), if the FASIT were treated 
as a REMIC and debt instruments described in sub-
section (c)(1)(B) were treated as qualified mortgages. 
110 STAT. 1866 
PUBLIC LAW 104-188—AUG. 20, 1996 
"(B) SUBSTITUTION OF DEBT INSTRUMENTS; REDUCTION 
OF OVER-COLLATERALIZATION.—Paragraph (2)(B) shall not 
apply to— 
"(i) the substitution of a debt instrument described 
in subsection (c)(1)(B) for another debt instrument 
which is a permitted asset, or 
"(ii) the distribution of a debt instrument con-
tributed by the holder of the ownership interest to 
such holder in order to reduce over-collateralization 
oftheFASIT, 
but only if a principal purpose of acquiring the debt 
instrument which is disposed of was not the recognition 
of gain (or the reduction of a loss) as a result of an increase 
in the market value of the debt instrument after its acquisi-
tion by the FASIT. 
"(C) LIQUIDATION OF CLASS OF REGULAR INTERESTS.— 
Paragraph (2)(B) shall not apply to the complete liquidation 
of any class of regular interests. 
"(4) NET INCOME.—For purposes of this subsection, net 
income shall be determined in accordance with 
section 
860F(a)(3). 
"(f) COORDINATION WITH OTHER PROVISIONS.— 
"(1) WASH SALES RULES.—Rules similar to the rules of 
section 860F(d) shall apply to the ownership interest in a 
FASIT. 
"(2) SECTION 475.—Except as provided by the Secretary 
by regulations, if any security which is sold or contributed 
to a FASIT by the holder of the ownership interest in such 
FASIT was required to be marked-to-market under section 
475 by such holder, section 475 shall continue to apply to 
such security; except that in appl5dng section 475 while such 
security is held by the FASIT, the fair market value of such 
security for purposes of section 475 shall not be less than 
its value under section 8601(d). 
"(g) RELATED PERSON.—For purposes of this part, a person 
(hereinafter in this subsection referred to as the 'related person') 
is related to any person if— 
"(1) the related person bears a relationship to such person 
specified in section 267(b) or section 707(b)(1), or 
"(2) the related person and such person are engaged in 
trades or businesses under common control (within the meaning 
of subsections (a) and (b) of section 52). 
For purposes of paragraph (1), in applying section 267(b) or 
707(b)(1), '20 percent' shall be substituted for *50 percent'. 
"(h) REGULATIONS.—The Secretary shall prescribe such regula-
tions as may be necessary or appropriate to carry out the purposes 
of this part, including regulations to prevent the abuse of the 
purposes of this part through transactions which are not primarily 
related to securitization of debt instruments by a FASIT.". 
(b) TECHNICAL AMENDMENTS.— 
(1) Paragraph (2) of section 26(b) is amended by striking 
"and" at the end of subparagraph (M), by striking the period 
at the end of subparagraph (N) and inserting ", and", and 
by adding at the end the following new subparagraph: 
"(O) section 860K (relating to treatment of transfers 
of high-yield interests to disqualified holders).". 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1867 
(2) Paragraph (6) of section 56(g) is amended by striking 
"or REMIC" and inserting "REMIC, or FASIT". 
(3) Clause (ii) of section 382(1)(4)(B) is amended by striking 
"or a REMIC to which part IV of subchapter M appHes" and 
inserting "a REMIC to which part IV of subchapter M apphes, 
or a FASIT to which part V of subchapter M appHes". 
(4) Paragraph (1) of section 582(c) is amended by inserting 
", and any regular interest in a FASIT," after "REMIC". 
(5) Subparagraph (E) of section 856(c)(6) is amended by 
adding at the end the following new sentence: "The principles 
of the preceding provisions of this subparagraph shall apply 
to regular interests in a FASIT.". 
(6) Paragraph (3) of section 860G(a) 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 inserting after subparagraph (C) the following new subpara-
graph: 
"(D) any regular interest in a FASIT which is trans-
ferred to, or purchased by, the REMIC as described in 
clauses (i) and (ii) of subparagraph (A) but only if 95 
percent or more of the value of the assets of such FASIT 
is at all times attributable to obligations described in 
subparagraph (A) (without regard to such clauses).". 
(7) Subparagraph (C) of section 1202(e)(4) is amended by 
striking "or REMIC" and inserting "REMIC, or FASIT". 
(8) Clause (xi) of section 7701(a)(19)(C) is amended to read 
as follows: 
"(xi) any regular or residual interest in a REMIC, 
and any regular interest in a FASIT, but only in the 
proportion which the assets of such REMIC or FASIT 
consist of property described in any of the preceding 
clauses of this subparagraph; except that if 95 percent 
or more of the assets of such REMIC or FASIT are 
assets described in clauses (i) through (x), the entire 
interest in the REMIC or FASIT shall quahfy.". 
(9) Subparagraph (A) of section 7701(i)(2) is amended by 
inserting "or a FASIT" after "a REMIC". 
(c) CLERICAL AMENDMENT.—The table of parts for subchapter 
M of chapter 1 is amended by adding at the end the following 
new item: 
"Part V. Financial asset securitization investment trusts.". 
(d) EFFECTIVE DATE.—The amendments made by this section 26 use 26 note, 
shall take effect on September 1, 1997. 
(e) TREATMENT OF EXISTING SECURITIZATION ENTITIES.— 
26 use 860i 
(1) IN GENERAL.—In the case of the holder of the ownership note. 
interest in a pre-effective date FASIT— 
(A) gain shall not be recognized under 
section 
860L(d)(2) of the Internal Revenue Code of 1986 on prop-
erty deemed contributed to the FASIT, and 
(B) gain shall not be recognized under section 8601 
of such Code on property contributed to such FASIT, 
until such property (or portion thereof) ceases to be properly 
allocable to a pre-FASIT interest. 
(2) ALLOCATION OF PROPERTY TO PRE-FASIT INTEREST.—For 
purposes of paragraph (1), property shall be allocated to a 
pre-FASIT interest in such manner as the Secretary of the 
Treasury may prescribe, except that all property in a FASIT 
110 STAT. 1868 
PUBLIC LAW 104-188—AUG. 20, 1996 
shall be treated as properly allocable to pre-FASIT interests 
if the fair market value of all such property does not exceed 
107 percent of the aggregate principal amount of all outstanding 
pre-FASIT interests. 
(3) DEFINITIONS.—For purposes of this subsection— 
(A) PRE-EFFECTIVE DATE FASIT.—^The term "pre-effec-
tive date FASIT" means any FASIT if the entity (with 
respect to which the election under section 860L(a)(3) of 
such Code was made) is in existence on August 31, 1997. 
(B) 
PRE-FASIT 
INTEREST.—The 
term 
"pre-FASIT 
interest" means any interest in the entity referred to in 
subparagraph (A) which was issued before the startup day 
(other than any interest held by the holder of the ownership 
interest in the FASIT). 
Subtitle G—^Technical Corrections 
SEC. 1701. COORDINATION WITH OTHER SUBTITLES. 
For purposes of applying the amendments made by any subtitle 
of this title other than this subtitle, the provisions of this subtitle 
shall be treated as having been enacted immediately before the 
provisions of such other subtitles. 
26 u s e 1 note. 
SEC. 1702. AMENDMENTS RELATED TO REVENUE RECONCILIATION 
ACT OF 1990. 
(a) AMENDMENTS RELATED TO SUBTITLE A.— 
(1) Subparagraph (B) of section 59(j)(3) is amended by 
striking "section l(i)(3)(B)" and inserting "section 1(g)(3)(B)". 
(2) Clause (i) of section 151(d)(3)(C) is amended by striking 
"joint of a return" and inserting "joint return". 
(b) AMENDMENTS RELATED TO SUBTITLE B.— 
(1) Paragraph (1) of section 11212(e) of the Revenue 
26 use 6724. 
Reconciliation Act of 1990 is amended by striking "Paragraph 
(1) of section 6724(d)" and inserting "Subparagraph (B) of sec-
tion 6724(d)(1)". 
(2)(A) Subparagraph (B) of section 4093(c)(2), as in effect 
before the amendments made by the Revenue Reconciliation 
Act of 1993, is amended by inserting before the period "unless 
such fuel is sold for exclusive use by a State or any political 
subdivision thereof. 
(B) Paragraph (4) of section 6427(1), as in effect before 
the amendments made by the Revenue Reconciliation Act of 
1993, is amended by inserting before the period "unless such 
fuel was used by a State or any political subdivision thereof. 
(3) Paragraph (1) of section 6416(b) is amended by striking 
"chapter 32 or by section 4051" and inserting "chapter 31 
or 32". 
(4) Section 7012 is amended— 
(A) by striking "production or importation of gasoline" 
in paragraph (3) and inserting "taxes on gasoline and diesel 
fuel", and 
(B) by striking paragraph (4) and redesignating para-
graphs (5) and (6) as paragraphs (4) and (5), respectively. 
(5) Subsection (c) of section 5041 is amended by striking 
paragraph (6) and by inserting the following new paragraphs: 
"(6) CREDIT FOR TRANSFEREE IN BOND.—If— 
PUBLIC LAW 104-188—AUG. 20, 1996 
^110 STAT. 1869 
"(A) wine produced by any person would be eligible 
for any credit under paragraph (1) if removed by such 
person during the calendar year, 
"(B) wine produced by such person is removed during 
such calendar year by any other person (hereafter in this 
paragraph referred to as the 'transferee') to whom such 
wine was transferred in bond and who is liable for the 
tax imposed by this section with respect to such wine, 
and 
"(C) such producer holds title to such wine at the 
time of its removal and provides to the transferee such 
information as is necessary to properly determine the 
transferee's credit under this paragraph, 
then, the transferee (and not the producer) shall be allowed 
the credit under paragraph (1) which would be allowed to 
the producer if the wine removed by the transferee had been 
removed by the producer on that date. 
"(7) REGULATIONS.—The Secretary may prescribe such 
regulations as may be necessary to carry out the purposes 
of this subsection, including regulations— 
"(A) to prevent the credit provided in this subsection 
from benefiting any person who produces more than 
250,000 wine gallons of wine during a calendar year, and 
"(B) to assure proper reduction of such credit for per-
sons producing more than 150,000 wine gallons of wine 
during a calendar year.". 
(6) Paragraph (3) of section 5061(b) is amended to read 
as follows: 
"(3) section 5041(f),". 
(7) Section 5354 is amended by inserting "(taking into 
account the appropriate amount of credit with respect to such 
wine under section 5041(c))" after "any one time". 
(c) AMENDMENTS RELATED TO SUBTITLE C.— 
(1) Paragraph (4) of section 56(g) is amended by redesignat-
ing subparagraphs (I) and (J) as subparagraphs (H) and (I), 
respectively. 
(2) Subparagraph (B) of section 6724(d)(1) is amended— 
(A) by striking "or" at the end of clause (xii), and 
(B) by striking the period at the end of clause (xiii) 
and inserting ", or". 
(3) Subsection (g) of section 6302 is amended by in-
serting ", 22," after "chapters 21". 
(4) The earnings and profits of any insurance company 
26 USC 832 note, 
to which section 11305(c)(3) of the Revenue Reconciliation Act 
of 1990 applies shall be determined without regard to any 
deduction allowed under such section; except that, for pur-
poses of applying sections 56 and 902, and subpart F of part 
III of subchapter N of chapter 1 of the Internal Revenue Code 
of 1986, such deduction shall be taken into account. 
(5) Subparagraph (D) of section 6038A(e)(4) is amended— 
(A) by «trilang "any transaction to which the summons 
relates" and inserting "any affected taxable year", and 
(B) by adding at the end thereof the following new 
sentence: "For purposes of this subparagraph, the term 
'affected taxable year' means any taxable year if the deter-
mination of the amount of tax imposed for such taxable 
110 STAT. 1870 
PUBLIC LAW 104-188—AUG. 20, 1996 
year is affected by the treatment of the transaction to 
which the summons relates.". 
(6) Subparagraph (A) of section 6621(c)(2) is amended by 
adding at the end thereof the following new flush sentence: 
"The preceding sentence shall be applied without regard 
to any such letter or notice which is withdrawn by the 
Secretary.". 
(7) Clause (i) of section 6621(c)(2)(B) is amended by striking 
"this subtitle" and inserting "this title". 
(d) AMENDMENTS RELATED TO SUBTITLE D.— 
26 use 41 note. 
(1) Notwithstanding section 11402(c) of the Revenue 
Reconciliation Act of 1990, the amendment made by section 
11402(b)(1) of such Act shall apply to taxable years ending 
after December 31, 1989. 
(2) Clause (ii) of section 143(m)(4)(C) is amended— 
(A) by striking "any month of the 10-year period" and 
inserting "any year of the 4-year period", 
(B) by striking "succeeding months" and inserting 
"succeeding years", and 
(C) by striking "over the remainder of such period 
(or, if lesser, 5 years)" and inserting "to zero over the 
succeeding 5 years". 
(e) AMENDMENTS RELATED TO SUBTITLE E.— 
(1)(A) Clause (ii) of section 56(d)(1)(B) is amended to read 
as follows: 
"(ii) appropriate adjustments in the application of 
section 172(b)(2) shall be made to take into account 
the limitation of subparagraph (A).". 
26 use 56 note. 
(B) For purposes of applying sections 56(g)(1) and 56(g)(3) 
of the Internal Revenue Code of 1986 with respect to taxable 
years beginning in 1991 and 1992, the reference in such sections 
to the alternative tax net operating loss deduction shall be 
treated as including a reference to the deduction under section 
56(h) of such Code as in effect before the amendments made 
by section 1915 of the Energy Policy Act of 1992. 
(2) Clause (i) of section 613A(c)(3)(A) is amended by striking 
"the table contained in". 
(3) Section 6501 is amended— 
(A) by striking subsection (m) (relating to deficiency 
attributable 
to election under 
section 44B) and 
by 
redesignating subsections (n) and (o) as subsections (m) 
and (n), respectively, and 
(B) by striking "section 40(f) or 51(j)" in subsection 
(m) (as redesignated by subparagraph (A)) and inserting 
"section 40(f), 43, or 51(j)". 
(4) Subparagraph (C) of section 38(c)(2) (as in effect on 
the day before the date of the enactment of the Revenue Rec-
onciliation Act of 1990) is amended by inserting before the 
period at the end of the first sentence the following: "and 
without regard to the deduction under section 56(h)". 
26 use 53 note. 
(5) The amendment made by section 1913(b)(2)(C)(i) of 
the Energy Policy Act of 1992 shall apply to taxable years 
beginning after December 31, 1990. 
(f) AMENDMENTS RELATED TO SUBTITLE F.— 
(1)(A) Section 2701(a)(3) is amended by adding at the end 
thereof the following new subparagraph: 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1871 
"(C) 
VALUATION OF QUALIFIED PAYMENTS WHERE NO 
LIQUIDATION, ETC. RIGHTS.—In the case of an applicable 
retained interest which is described in subparagraph (B)(i) 
but not subparagraph (B)(ii), the value of the distribution 
right shall be determined without regard to this section.". 
(B) Section 2701(a)(3)(B) is amended by inserting "CERTAIN" 
before "QUALIFIED" in the heading thereof. 
(C) Sections 2701 (d)(1) and (d)(4) are each amended by 
striking "subsection (a)(3)(B)" and inserting "subsection (a)(3) 
(B) or (C)". 
(2) Clause (i) of section 2701(a)(4)(B) is amended by insert-
ing "(or, to the extent provided in regulations, the rights as 
to either income or capital)" after "income and capital". 
(3)(A) Section 2701(b)(2) is amended by adding at the end 
thereof the following new subparagraph: 
"(C) APPLICABLE FAMILY MEMBER.—For purposes of this 
subsection, the term 'applicable family member' includes 
any lineal descendant of any parent of the tremsferor or 
the transferor's spouse.". 
(B) Section 2701(e)(3) is amended— 
(i) by striking subparagraph (B), and 
(ii) by striking so much of paragraph (3) as precedes 
"shall be treated as holding" and inserting: 
"(3) ATTRIBUTION OF INDIRECT HOLDINGS AND TRANSFERS.— 
An individual". 
(C) Section 2704(c)(3) is amended by striking "section 
2701(e)(3)(A)" and inserting "section 2701(e)(3)". 
(4) Clause (i) of section 2701(c)(1)(B) is amended to read 
as follows: 
"(i) a 
right 
to distributions with respect to 
any interest which is junior to the rights of the trans-
(5)(A) Clause (i) of section 2701(c)(3)(C) is amended to 
read as follows: 
"(i) IN GENERAL.—Pajonents under any interest 
held by a transferor which (without regard to this 
subparagraph) are qualified payments shall be treated 
as qualified payments unless the transferor elects not 
to treat such payments as qualified payments. Pay-
ments described in the preceding sentence which are 
held by an applicable family member shall be treated 
as qualified payments only if such member elects to 
treat such payments as qualified pajnnents.". 
(B) The first sentence of section 2701(c)(3)(C)(ii) is amended 
to read as follows: "A transferor or applicable family member 
holding any distribution right which (without regard to this 
subparagraph) is not a qualified payment may elect to treat 
such right as a qualified payment, to be paid in the amounts 
and at the times specified in such election.". 
(C) The time for making an election under the second 26USC2701 
sentence of section 2701(c)(3)(C)(i) of the Internal Revenue Code note. 
of 1986 (as amended by subparagraph (A)) shall not expire 
before the due date (including extensions) for filing the transfer-
or's return of the tax imposed by section 2501 of such Code 
for the first calendar year ending after the date of enactment. 
(6) Section 2701(d)(3)(A)(iii) is amended by striking "the 
period ending on the date of. 
110 STAT. 1872 
PUBLIC LAW 104-188—AUG. 20, 1996 
(7) Subclause (I) of section 2701(d)(3)(B)(ii) is amended 
by inserting "or the exclusion under section 2503(b)," after 
"section 2523,". 
(8) Section 2701(e)(5) is amended— 
(A) by striking "such contribution to capital or such 
redemption, recapitalization, or other change" in subpara-
graph (A) and inserting "such transaction", and 
(B) by striking "the transfer" in subparagraph (B) and 
inserting "such transaction". 
(9) Section 2701(d)(4) is amended by adding at the end 
thereof the following new subparagraph: 
"(C) TRANSFER TO TRANSFERORS.—In the case of a tax-
able event described in paragraph (3)(A)(ii) involving a 
transfer 
of an applicable retained interest from 
an 
applicable family member to a transferor, this subsection 
shall continue to apply to the transferor during any period 
the transferor holds such interest.". 
(10) Section 2701(e)(6) is amended by inserting "or to reflect 
the application of subsection (d)" before the period at the end 
thereof. 
(11)(A) Section 2702(a)(3)(A) is amended— 
(i) by striking "to the extent" and inserting "if in 
clause (i), 
(ii) by striking "or" at the end of clause (i), 
(iii) by striking the period at the end of clause (ii) 
and inserting ", or", and 
(iv) by adding at the end thereof the following new 
clause: 
"(iii) to the extent that regulations provide that 
such transfer is not inconsistent with the purposes 
of this section.". 
(B)(i) Section 2702(a)(3) is amended by striking "incomplete 
transfer" each place it appears and inserting "incomplete gift", 
(ii) The heading for section 2702(a)(3)(B) is amended by 
striking "INCOMPLETE TRANSFER" and inserting "INCOMPLETE 
GIFT". 
(g) AMENDMENTS RELATED TO SUBTITLE G.— 
(1)(A) Subsection (a) of section 1248 is amended— 
(i) by striking ", or if a United States person receives 
a distribution from a foreign corporation which, under sec-
tion 302 or 331, is treated as an exchange of stock" in 
paragraph (1), and 
(ii) by adding at the end thereof the following new 
sentence: "For purposes of this section, a United States 
person shall be treated as having sold or exchanged any 
stock if, under any provision of this subtitle, such person 
is treated as realizing gain from the sale or exchange 
of such stock.". 
(B) Paragraph (1) of section 1248(e) is amended by 
striking ", or receives a distribution from a domestic corporation 
which, under section 302 or 331, is treated as an exchange 
of stock". 
(C) Subparagraph (B) of section 1248(f)(1) is amended by 
striking "or 361(c)(1)" and inserting "355(c)(1), or 361(c)(1)". 
(D) Paragraph (1) of section 1248(i) is amended to read 
as follows: 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1873 
"(1) IN GENERAL.—If any shareholder of a 10-percent cor-
porate shareholder of a foreign corporation exchanges stock 
of the 10-percent corporate shareholder for stock of the foreign 
corporation, such 10-percent corporate shareholder shall recog-
nize gain in the same manner as if the stock of the foreign 
corporation received in such exchange had been— 
"(A) issued 
to 
the 
10-percent 
corporate 
share-
holder, and 
"(B) then distributed by the 10-percent corporate share-
holder to such shareholder in redemption or liquidation 
(whichever is appropriate). 
The amount of gain recognized by such 10-percent corporate 
shareholder under the preceding sentence shall not exceed the 
amount treated as a dividend under this section.". 
(2) Section 897 is amended by striking subsection (f). 
(3) Paragraph (13) of section 4975(d) is amended by striking 
"section 408(b)" and inserting "section 408(b)(12)". 
(4) Clause (iii) of section 56(g)(4)(I)) is amended by 
inserting ", but only with respect to taxable years beginning 
after December 31, 1989" before the period at the end thereof. 
(5)(A) Paragraph (11) of section 11701(a) of the Revenue 26USC42note. 
Reconciliation Act of 1990 (and the amendment made by such 
paragraph) are hereby repealed, and section 7108(r)(2) of the 
Revenue Reconciliation Act of 1989 shall be applied as if such 
paragraph (and amendment) had never been enacted. 
(B) Subparagraph (A) shall not apply to any building if 
the owner of such building establishes to the satisfaction of 
the Secretary of the Treasury or his delegate that such owner 
reasonably relied on the amendment made by such paragraph 
(11). 
(h) AMENDMENTS RELATED TO SUBTITLE H.— 
(1)(A) Clause (vi) of section 168(e)(3)(B) is amended by 
striking "or" at the end of subclause (I), by striking the period 
at the end of subclause (II) and inserting ", or", and by adding 
at the end thereof the following new subclause: 
"(III) is described in section 48(l)(3)(A)(ix) (as 
in effect on the day before the date of the enact-
ment of the Revenue Reconciliation Act of 1990).". 
(B) Subparagraph (B) of section 168(e)(3) (relating to 
5-year property) is amended by adding at the end the following 
flush sentence: 
"Nothing in any provision of law shall be construed to 
treat property as not being described in clause (vi)(I) (or 
the corresponding provisions of prior law) by reason of 
being public utility property (within the meaning of section 
48(a)(3)).". 
(C) Subparagraph (K) of section 168(g)(4) is amended by 
striking 
"section 
48(a)(3)(A)(iii)" 
and 
inserting 
"section 
48(l)(3)(A)(ix) (as in effect on the day before the date of the 
enactment of the Revenue Reconciliation Act of 1990)". 
(2) Clause (ii) of section 172(b)(1)(E) is amended by striking 
"subsection (m)" and inserting "subsection (h)". 
(3) 
Sections 
805(a)(4)(E), 
832(b)(5)(C)(ii)(II), 
and 
832(b)(5)(D)(ii)(II) are each amended by striking "243(b)(5)" and 
inserting "243(b)(2)". 
(4) Subparagraph (A) of section 243(b)(3) is amended by 
inserting "of' after "In the case". 
110 STAT. 1874 
PUBLIC LAW 104-188—AUG. 20, 1996 
(5) The subsection heading for subsection (a) of section 
280F is amended by striking "INVESTMENT TAX CREDIT AND". 
(6) Clause (i) of section 1504(c)(2)(B) is amended by insert-
ing "section" before "243(b)(2)". 
(7) Paragraph (3) of section 341(f) is amended by striking 
"351, 361, 371(a), or 374(a)" and inserting "351, or 361". 
(8) Paragraph (2) of section 243(b) is amended to read 
as follows: 
"(2) AFFILIATED GROUP.—For purposes of this subsection: 
"(A) IN GENERAL.—The term 'affiliated group' has the 
meaning given such term by section 1504(a), except that 
for such purposes sections 1504(b)(2), 15()4(b)(4), and 
1504(c) shall not apply. 
"(B) 
GROUP MUST BE CONSISTENT IN FOREIGN TAX 
TREATMENT.—The requirements of paragraph (1)(A) shall 
not be treated as being met with respect to any dividend 
received by a corporation if, for any taxable year which 
includes the day on which such dividend is received— 
"(i) 1 or more members of the affiliated group 
referred to in paragraph (1)(A) choose to any extent 
to take the benefits of section 901, and 
"(ii) 1 or more other members of such group claim 
to any extent a deduction for taxes otherwise creditable 
under section 901.". 
26 use 861. 
(9) The amendment made by section 11813(b)(17) of the 
Revenue Reconciliation Act of 1990 shall be applied as if the 
material stricken by such amendment included the closing 
parenthesis after "section 48(a)(5)". 
(10) Paragraph (1) of section 179(d) is amended by striking 
"in a trade or business" and inserting "a trade or business". 
(11) Subparagraph (E) of section 50(a)(2) is amended by 
striking "section 48(a)(5)(A)" and inserting "section 48(a)(5)". 
26 use 56. 
(12) The amendment made by section 11801(c)(9)(G)(ii) of 
the Revenue Reconciliation Act of 1990 shall be applied as 
if it struck "Section 422A(c)(2)" and inserted "Section 422(c)(2)". 
(13) Subparagraph (B) of section 424(c)(3) is amended by 
striking "a qualified stock option, an incentive stock option, 
an option granted under an employee stock purchase plan, 
or a restricted stock option" and inserting "an incentive stock 
option or an option granted under an employee stock purchase 
plan". 
(14) Subparagraph (E) of section 1367(a)(2) is amended 
by striking "section 613A(c)(13)(B)" and inserting "section 
613A(c)(ll)(B)". 
(15) Subparagraph (B) of section 460(e)(6) is amended by 
striking "section 167(k)" and inserting "section 168(e)(2)(A)(ii)". 
(16) Subparagraph (C) of section 172(h)(4) is amended by 
striking 
"subsection 
(b)(l)(M)" and 
inserting 
"subsection 
(b)(1)(E)". 
(17) Section 6503 is amended— 
(A) by redesignating the subsection relating to exten-
sion in case of certain summonses as subsection (j), and 
(B) by redesignating the subsection relating to cross 
references as subsection (k). 
(18) Paragraph (4) of section 1250(e) is hereby repealed. 
(19) Paragraph (1) of section 179(d) is amended by adding 
at the end the following new sentence: "Such term shall not 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1875 
include any property described in section 50(b) and shall not 
include air conditioning or heating units.". 
"(i) EFFECTIVE DATE.—Except as otherwise expressly provided, 26 use 38 note, 
any amendment made by this section shall take effect as if included 
in the provision of the Revenue Reconciliation Act of 1990 to which 
such amendment relates.". 
SEC. 1703. AMENDMENTS RELATED TO REVENUE RECONCILIATION 
ACT OF 1993. 
(a) AMENDMENT RELATED TO SECTION 13114.—Paragraph (2) 
of section 1044(c) is amended to read as follows: 
26 USC 1044. 
"(2) PURCHASE.—The taxpayer shall be considered to have 
purchased any property if, but for subsection (d), the unadjusted 
basis of such property would be its cost within the meaning 
of section 1012.". 
(b) AMENDMENTS RELATED TO SECTION 13142.— 
(1) Subparagraph (B) of section 13142(b)(6) of the Revenue 
Reconciliation Act of 1993 is amended to read as follows: 
26 USC 42 note. 
"(B) 
FULL-TIME STUDENTS, WAIVER AUTHORITY, AND 
PROHIBITED DISCRIMINATION.—^The amendments made by 
paragraphs (2), (3), and (4) shall take effect on the date 
of the enactment of this Act.". 
(2) Subparagraph (C) of section 13142(b)(6) of such Act 
is amended by striking "paragraph (2)" and inserting "para-
graph (5)". 
(c) AMENDMENT RELATED TO SECTION 13161.— 
(1) IN GENERAL,.—Subsection (e) of section 4001 (relating 26USC400i. 
to inflation adjustment) is amended to read as follows: 
"(e) INFLATION ADJUSTMENT.— 
"(1) IN GENERAL.—^The $30,000 amount in subsection (a) 
and section 4003(a) shgdl be increased by an amount equal 
to— 
"(A) $30,000, multipUed by 
"(B) the cost-of-living adjustment under section 1(f)(3) 
for the calendar year in which the vehicle is sold, deter-
mined by substituting 'calendar year 1990' for 'calendar 
year 1992' in subparagraph (B) thereof. 
"(2) ROUNDING.—If any amount as adjusted under para-
graph (1) is not a multiple of $2,000, such amount shall be 
rounded to the next lowest multiple of $2,000.". 
(2) EFFECTIVE DATE.—^The amendment made by paragraph 
26 use 400i 
(1) shall take effect on the date of the enactment of this Act. note. 
(d) AMENDMENT RELATED TO SECTION 13201.—Clause (ii) of 
section 135(b)(2)(B) is amended by inserting before the period at 
26 USC 135. 
the end thereof the following: ", determined by substituting 'cal-
endar year 1989' for 'calendar year 1992' in subparagraph (B) 
thereof. 
(e) AMENDMENTS RELATED TO SECTION 13203.—Subsection (a) 
of section 59 is amended— 
26 USC 59. 
(1) by striking "the amount determined under section 
55(b)(1)(A)" in paragraph (1)(A) and (2)(A)(i) and inserting "the 
pre-credit tentative minimum tax", 
(2) by striking "specified in section 55(b)(1)(A)" in para-
graph (1)(C) and inserting "specified in subparagraph (A)(i) 
or (B)(i) of section 55(b)(1) (whichever applies)". 
110 STAT. 1876 
PUBLIC LAW 104-188—AUG. 20, 1996 
(3) by striking "which would be determined under section 
55(bXl)(A)" in paragraph (2)(A)(ii) and inserting "which would 
be the pre-credit tentative minimum tax", and 
(4) by adding at the end thereof the following new para-
graph: 
"(3) PRE-CREDIT TENTATIVE MINIMUM TAX.—For purposes 
of this subsection, the term 'pre-credit tentative minimum tax' 
means— 
"(A) in the case of a taxpayer other than a corporation, 
the amount determined under the first sentence of section 
55(b)(l)(A)(i), or 
"(B) in the case of a corporation, the amount deter-
mined under section 55(b)(l)(B)(i).". 
(f) AMENDMENT RELATED TO SECTION 13221.—Sections 1201(a) 
and 1561(a) are each amended by striking "last sentence" each 
place it appears and inserting "last 2 sentences". 
(g) AMENDMENTS RELATED TO SECTION 13222.— 
(1) Subparagraph (B) of section 6033(e)(1) is amended by 
adding at the end thereof the following new clause: 
"(iii) COORDINATION WITH SECTION 527(f).—This 
subsection shall not apply to any amount on which 
tax is imposed by reason of section 527(f).". 
(2) Clause (i) of section 6033(e)(1)(B) is amended by striking 
"this subtitle" and inserting "section 501". 
(h) AMENDMENT RELATED TO SECTION 13225.—Paragraph (3) 
of section 6655(g) is amended by striking all that follows "'3rd 
month'" in the sentence following subparagraph (C) and inserting 
", subsection (e)(2)(A) shall be applied by substituting '2 months' 
for '3 months' in clause (i)(I), the election under clause (i) of sub-
section (e)(2)(C) may be made separately for each installment, and 
clause (ii) of subsection (e)(2)(C) shall not apply.". 
(i) AMENDMENTS RELATED TO SECTION 13231.— 
(1) Subparagraph (G) of section 904(d)(3) is amended by 
striking "section 951(a)(1)(B)" and inserting "subparagraph (B) 
or (C) of section 951(a)(1)". 
(2) Paragraph (1) of section 956A(b) is amended to read 
as follows: 
"(1) the amount (not including a deficit) referred to in 
section 316(a)(1) to the extent such amount was accumulated 
in prior taxable years beginning after September 30, 1993, 
and". 
(3) Subsection (f) of section 956A is amended by inserting 
before the period at the end thereof: "and regulations coordinat-
ing the provisions of subsections (c)(3)(A) and (d)". 
(4) Subsection (b) of section 958 is amended by striking 
"956(b)(2)" each place it appears and inserting "956(c)(2)". 
(5)(A) Subparagraph (A) of section 1297(d)(2) is amended 
by striking "The adjusted basis of any asset" and inserting 
"The amount taken into account under section 1296(a)(2) with 
respect to any asset". 
(B) The paragraph heading of paragraph (2) of section 
1297(d) is amended to read as follows: 
"(2) AMOUNT TAKEN INTO ACCOUNT.—". 
(6) Subsection (e) of section 1297 is amended by inserting 
"For purposes of this part—" after the subsection heading. 
(j) AMENDMENT RELATED TO SECTION 13241.—Subparagraph 
(B) of section 40(e)(1) is amended to read as follows: 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1877 
"(B) for any period before January 1, 2001, during 
which the rates of tax under section 4081(a)(2)(A) are 4.3 
cents per gallon.". 
(k) AMENDMENT RELATED TO SECTION 13242.—Paragraph (4) 
of section 6427(f) is amended by striking "1995" and inserting 
"1999". 
(1) AMENDMENT RELATED TO SECTION 13261.—Clause (iii) of 
section 13261(g)(2)(A) of the Revenue Reconciliation Act of 1993 26USCl97note. 
is amended by striking "by the taxpayer" and inserting "by the 
taxpayer or a related person". 
(m) AMENDMENT RELATED TO SECTION 13301.—Subparagraph 
(B) of section 1397B(d)(5) is amended by striking "preceding", 
(n) CLERICAL AMENDMENTS.— 
(1) Subsection (d) of section 39 is amended— 
(A) by striking "45" in the heading of paragraph (5) 
and inserting "45A", and 
(B) by striking "45" in the heading of paragraph (6) 
and inserting "45B". 
(2) Subparagraph (A) of section 108(d)(9) is amended by 
striking "paragraph (3)(B)" and inserting "paragraph (3)(C)". 
(3) Subparagraph (C) of section 143(d)(2) is amended by 
striking the period at the end thereof and inserting a comma. 
(4) Clause (ii) of section 163(j)(6)(E) is amended by striking 
"which is a" and inserting "which is". 
(5) Subparagraph (A) of section 1017(b)(4) is amended by 
striking 
"subsection 
(b)(2)(D)" and 
inserting 
"subsection 
(b)(2)(E)". 
(6) So much of section 1245(a)(3) as precedes subparagraph 
(A) thereof is amended to read as follows: 
"(3) SECTION 1245 PROPERTY.—For purposes of this section, 
the term 'section 1245 property' means any property which 
is or has been property of a character subject to the allowance 
for depreciation provided in section 167 and is either—". 
(7) Paragraph (2) of section 1394(e) is amended— 
(A) by striking "(i)" and inserting "(A)", and 
(B) by striking "(ii)" and inserting "(B)". 
(8) Subsection (m) of section 6501 (as redesignated by sec-
tion 1602) is amended by striking "or 51(j)" and inserting 
"45B, or 5ia)". 
(9)(A) The section 6714 added by section 13242(b)(1) of 
the Revenue Reconciliation Act of 1993 is hereby redesignated 
as section 6715. 
(B) The table of sections for part I of subchapter B of 
chapter 68 is amended by striking "6714" in the item added 
by such section 13242(b)(2) of such Act and inserting "6715". 
(10) Paragraph (2) of section 9502(b) is amended by insert-
ing "and before" after "1982,". 
(11) Subsection (a)(3) of section 13206 of the Revenue 
Reconciliation Act of 1993 is amended by striking "this section" 26 USC 1258 
and inserting "this subsection". 
note. 
(12) Paragraph (1) of section 13215(c) of the Revenue 
Reconciliation Act of 1993 is amended by striking "Public Law 42 USC 401 note. 
92-21" and inserting "Public Law 98-21". 
(13) Paragraph (2) of section 13311(e) of the Revenue 
Reconciliation Act of 1993 is amended by striking "section 26 USC 38 note. 
1393(a)(3)" and inserting "section 1393(a)(2)". 
110 STAT. 1878 
PUBLIC LAW 104-188—AUG. 20, 1996 
(14) Subparagraph (B) of section 117(d)(2) is amended by 
striking "section 132(f)" and inserting "section 132(h)". 
26 use 39 note. 
(o) EFFECTIVE DATE.—Any amendment made by this section 
shall take effect as if included in the provision of the Revenue 
Reconciliation Act of 1993 to which such amendment relates. 
SEC. 1704. MISCELLANEOUS PROVISIONS. 
26 use 401, 420, 
(a) APPLICATION OF AMENDMENTS MADE BY TITLE XII OF OMNI-
4980. 
BUS BUDGET RECONCILIATION ACT OF 1990.—Except as otherwise 
expressly provided, whenever in title XII of the Omnibus Budget 
Reconciliation Act of 1990 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. 
(b) TREATMENT OF CERTAIN AMOUNTS UNDER HEDGE BOND 
RULES.— 
(1) IN GENERAL.—Clause (iii) of section 149(g)(3)(B) is 
amended to read as follows: 
"(iii) AMOUNTS HELD PENDING REINVESTMENT OR 
REDEMPTION.—Amounts held for not more than 30 days 
pending reinvestment or bond redemption shall be 
treated as invested in bonds described in clause (i).". 
26 use 149 note. 
(2) EFFECTIVE DATE.—The amendment made by paragraph 
(1) shall take effect as if included in the amendments made 
by section 7651 of the Omnibus Budget Reconciliation Act of 
1989. 
(c) TREATMENT OF CERTAIN DISTRIBUTIONS UNDER SECTION 
1445.— 
(1) IN GENERAL.—Paragraph (3) of section 1445(e) is 
amended by adding at the end thereof the following new sen-
tence: "Rules similar to the rules of the preceding provisions 
of this paragraph shall apply in the case of any distribution 
to which section 301 applies and which is not made out of 
the earnings and profits of such a domestic corporation.". 
26 use 1445 
(2) EFFECTIVE DATE.—The amendment made by paragraph 
note. 
(1) shall apply to distributions after the date of the enactment 
of this Act. 
(d) TREATMENT OF CERTAIN CREDITS UNDER SECTION 469.— 
(1) IN GENERAL.—Subparagraph (B) of section 469(c)(3) is 
amended by adding at the end thereof the following new sen-
tence: "If the preceding sentence applies to the net income 
from any property for any taxable year, any credits allowable 
under subpart B (other than section 27(a)) or D of part IV 
of subchapter A for such taxable year which are attributable 
to such property shall be treated as credits not from a passive 
activity to the extent the amount of such credits does not 
exceed the regular tax liability of the taxpayer for the taxable 
year which is allocable to such net income.". 
26 use 469 note. 
(2) EFFECTIVE DATE.—The amendment made by paragraph 
(1) shall apply to taxable years beginning after December 31, 
1986. 
(e) TREATMENT OF DISPOSITIONS UNDER PASSIVE LOSS RULES.— 
(1) IN GENERAL.—Subparagraph (A) of section 469(g)(1) 
is amended to read as follows: 
"(A) IN GENERAL.—If all gain or loss realized on such 
disposition is recognized, the excess of— 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1879 
"(i) any loss from such activity for such taxable 
year (determined after the application of subsection 
(b)), over 
"(ii) any net income or gain for such taxable year 
from all other passive activities (determined after the 
application of subsection (b)), 
shall be treated as a loss which is not from a passive 
activity.". 
(2) EFFECTIVE DATE.—The amendment made by paragraph 
26 use 469 note. 
^(1) shall apply to taxable years beginning after December 31, 
1986. 
(f) MISCELLANEOUS AMENDMENTS TO FOREIGN PROVISIONS.— 
(1) COORDINATION OF UNIFIED ESTATE TAX CREDIT WITH 
TREATIES.—Subparagraph (A) of section 2102(c)(3) is amended 
by adding at the end thereof the following new sentence: "For 
purposes of the preceding sentence, property shall not be 
treated as situated in the United States if such property is 
exempt from the tax imposed by this subchapter under any 
treaty obligation of the United States.". 
(2) TREATMENT OF CERTAIN INTEREST PAID TO RELATED 
PERSON.— 
(A) Subparagraph (B) of section 163(j)(l) is amended 
by inserting before the period at the end thereof the follow-
ing: "(and clause (ii) of paragraph (2)(A) shall not apply 
for purposes of applying this subsection to the amount 
so treated)". 
(B) Subsection (j) of section 163 is amended by 
redesignating paragraph (7) as paragraph (8) and by insert-
ing after paragraph (6) the following new paragraph: 
"(7) COORDINATION WITH PASSIVE LOSS RULES, ETC.—This 
subsection shall be applied before sections 465 and 469.". 
(C) The amendments made by this paragraph shall 26 USC 163 note. 
apply as if included in the amendments made by section 
7210(a) of the Revenue Reconciliation Act of 1989. 
(3) TREATMENT OF INTEREST ALLOCABLE TO EFFECTIVELY 
CONNECTED INCOME.— 
(A) IN GENERAL.— 
(i) Subparagraph 
(B) of section 884(f)(1) 
is 
amended by striking "to the extent" and all that follows 
down through "subparagraph (A)" and inserting "to 
the extent that the allocable interest exceeds the 
interest described in subparagraph (A)". 
(ii) The second sentence of section 884(f)(1) is 
amended by striking "reasonably expected" and all that 
follows down through the period at the end thereof 
and inserting "reasonably expected to be allocable 
interest.". 
(iii) Paragraph (2) of section 884(f) is amended 
to read as follows: 
"(2) ALLOCABLE INTEREST.—For purposes of this subsection, 
the term 'allocable interest' means any interest which is alloca-
ble to income which is effectively connected (or treated as 
effectively connected) with the conduct of a trade or business 
in the United States.". 
(B) 
EFFECTIVE DATE.—The amendments made by 26 use 884 note. 
subparagraph (A) shall take effect as if included in the 
>
>
. 
110 STAT. 1880 
PUBLIC LAW 104-188—AUG. 20, 1996 
amendments made by section 1241(a) of the Tax Reform 
Act of 1986. 
(4) CLARIFICATION OF SOURCE RULE.— 
(A) IN GENERAL.—Paragraph (2) of section 865(b) is 
amended by striking "863(b)" and inserting "863". 
26 use 865 note. 
(B) EFFECTIVE DATE.—The amendment 
made 
by 
subparagraph (A) shall take effect as if included in the 
amendments made by section 1211 of the Tax Reform Act 
of 1986. 
(5) REPEAL OF OBSOLETE PROVISIONS.— 
(A) Paragraph (1) of section 6038(a) is amended by 
striking ", and" at the end of subparagraph (E) and insert-
ing a period, and by striking subparagraph (F). 
(B) Subsection (b) of section 6038A is amended by 
adding "and" at the end of paragraph (2), by striking 
", and" at the end of paragraph (3) and inserting a period, 
and by striking paragraph (4). 
(g) CLARIFICATION OF TREATMENT OF MEDICARE ENTITLEMENT 
UNDER COBRA PROVISIONS.— 
(1) IN GENERAL.— 
(A) Subclause 
(V) of section 
4980B(f)(2)(B)(i) 
is 
amended to read as follows: 
"(V) 
MEDICARE ENTITLEMENT FOLLOWED BY 
QUALIFYING EVENT.—In the case of a qualifying 
event described in paragraph (3)(B) that occurs 
less than 18 months after the date the covered 
employee became entitled to benefits under title 
XVIII of the Social Security Act, the period of 
coverage for qualified beneficiaries other than the 
covered employee shall not terminate under this 
clause before the close of the 36-month period 
beginning on the date the covered employee 
became so entitled.". 
(B) Clause (v) of section 602(2)(A) of the Employee 
29 use 1162. 
Retirement Income Security Act of 1974 is amended to 
read as follows: 
"(v) 
MEDICARE 
ENTITLEMENT 
FOLLOWED 
BY 
QUALIFYING EVENT.—In the case of a qualifying event 
described in section 603(2) that occurs less than 18 
months after the date the covered employee became 
entitled to benefits under title XVIII of the Social 
Security Act, the period of coverage for qualified bene-
ficiaries other than the covered employee shall not 
terminate under this subparagraph before the close 
of the 36-month period beginning on the date the cov-
ered employee became so entitled.". 
(C) Clause (iv) of section 2202(2)(A) of the Pubhc 
42 use 300bb-2. 
Health Service Act is amended to read as follows: 
"(iv) 
MEDICARE 
ENTITLEMENT 
FOLLOWED 
BY 
QUALIFYING EVENT.—In the case of a qualifying event 
described in section 2203(2) that occurs less than 18 
months after the date the covered employee became 
entitled to benefits under title XVIII of the Social 
Security Act, the period of coverage for qualified bene-
ficiaries other than the covered employee shall not 
terminate under this subparagraph before the close 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1881 
of the 36-month period beginning on the date the cov-
ered employee became so entitled.". 
(2) EFFECTIVE DATE.—The amendments made by this sub-
section shall apply to plan years beginning after December 
31, 1989. 
(h) TREATMENT OF CERTAIN R E M I C INCLUSIONS.— 
(1) IN GENERAL.—Subsection (a) of section 860E is amended 
by adding at the end thereof the following new paragraph: 
"(6) COORDINATION WITH MINIMUM TAX.—For purposes of 
part VI of subchapter A of this chapter— 
"(A) the reference in section 55(b)(2) to taxable income 
shall be treated as a reference to taxable income deter-
mined without regard to this subsection, 
"(B) the alternative minimum taxable income of any 
holder of a residual interest in a REMIC for any taxable 
year shall in no event be less than the excess inclusion 
for such taxable year, and 
"(C) any excess inclusion shall be disregarded for pur-
poses of computing the alternative tax net operating loss 
deduction. 
The preceding sentence shall not apply to any organization 
to which section 593 applies, except to the extent provided 
in regulations prescribed by the Secretary under paragraph 
(2).". 
(2) EFFECTIVE DATE.—The amendment made by paragraph 
(1) shall take effect as if included in the amendments made 
by section 671 of the Tax Reform Act of 1986 unless the tax-
payer elects to apply such amendment only to taxable years 
beginning after the date of the enactment of this Act. 
(i) EXEMPTION FROM HARBOR MAINTENANCE TAX FOR CERTAIN 
PASSENGERS.— 
(1) IN GENERAL.—Subparagraph (D) of section 4462(b)(1) 
(relating to special rule for Alaska, Hawaii, and possessions) 
is amended by inserting before the period the following: 
", or passengers transported on United States flag vessels 
operating solely within the State waters of Alaska or Hawaii 
and adjacent international waters". 
(2) EFFECTIVE DATE.—The amendment made by paragraph 
(1) shall take effect as if included in the amendments made 
by section 1402(a) of the Harbor Maintenance Revenue Act 
of 1986. 
(j) AMENDMENTS RELATED TO REVENUE PROVISIONS OF ENERGY 
POLICY ACT OF 1992.— 
(1) Effective with respect to taxable years beginning after 
December 31, 1990, subclause (II) of section 53(d)(l)(B)(iv) is 
amended to read as follows: 
"(II) the adjusted net minimum tax for any 
taxable year is the amount of the net minimum 
tax for such year increased in the manner provided 
in clause (iii).". 
(2) Subsection (g) of section 179A is redesignated as sub-
section (f). 
(3) Subparagraph (E) of section 6724(d)(3) is amended by 
striking "section 6109(f)" and inserting "section 6109(h)". 
(4)(A) Subsection (d) of section 30 is amended— 
26 use 4980B 
note. 
26 use 860E 
note. 
26 use 4462 
note. 
110 STAT. 1882 
PUBLIC LAW 104-188—AUG. 20, 1996 
(i) by inserting "(determined without regard to sub-
section (b)(3))" before the period at the end of paragraph 
(1) thereof, and 
(ii) by adding at the end thereof the following new 
paragraph: 
"(4) ELECTION TO NOT TAKE CREDIT.—NO credit shall be 
allowed under subsection (a) for any vehicle if the taxpayer 
elects to not have this section apply to such vehicle.". 
(B) Subsection (m) of section 6501 (as redesignated by 
section 1602) is amended by striking "section 40(f)" and insert-
ing "sections 30(d)(4), 40(D". 
(5) Subclause (III) of section 501(c)(21)(D)(ii) is amended 
by striking "section 101(6)" and inserting "section 101(7)" 
and by striking "1752(6)" and inserting "1752(7)". 
26USC468A. 
(6) Paragraph (1) of section 1917(b) of the Energy PoHcy 
Act of 1992 shall be applied as if "at a rate" appeared instead 
of "at the rate" in the material proposed to be stricken. 
26USC142. 
(7) Paragraph (2) of section 1921(b) of the Energy Policy 
Act of 1992 shall be applied as if a comma appeared after 
"(2)" in the material proposed to be stricken. 
26 use 737. 
(8) Subsection (a) of section 1937 of the Energy Policy 
Act of 1992 shall be applied as if "Subpart B" appeared instead 
of "Subpart C". 
26 u s e 401 note. 
(k) TREATMENT OF QUALIFIED FOOTBALL COACHES PLAN.— 
(1) IN GENERAL.—For purposes of the Internal Revenue 
Code of 1986, a qualified football coaches plan— 
(A) shall be treated as a multiemployer collectively 
bargained plan, and 
(B) notwithstanding section 401(k)(4)(B) of such Code, 
may include a qualified cash and deferred arrangement 
under section 401(k) of such Code. 
(2) QUALIFIED FOOTBALL COACHES PLAN.—For purposes of 
this subsection, the term "qualified football coaches plan" means 
any defined contribution plan which is established and main-
tained by an organization— 
(A) which is described in section 501(c) of such Code, 
(B) the membership of which consists entirely of 
individuals who primarily coach football as 
full-time 
employees of 4-year colleges or universities described in 
section 170(b)(l)(A)(ii) of such Code, and 
(C) which was in existence on September 18, 1986. 
(3) EFFECTIVE DATE.—This subsection shall apply to years 
beginning after December 22, 1987. 
(1) DETERMINATION OF UNRECOVERED INVESTMENT IN ANNUITY 
CONTRACT.— 
(1) IN GENERAL.—Subparagraph (A) of section 72(b)(4) is 
amended by inserting "(determined without regard to sub-
section (c)(2))" after "contract". 
26 use 72 note. 
(2) EFFECTIVE DATE.—The amendment made by paragraph 
(1) shall take effect as if included in the amendments made 
by section 1122(c) of the Tax Reform Act of 1986. 
(m) MODIFICATIONS TO ELECTION TO INCLUDE CHILD'S INCOME 
ON PARENT'S RETURN.— 
(1) 
ELIGIBILITY FOR ELECTION.—Clause (ii) 
of section 
1(g)(7)(A) (relating to election to include certain unearned 
income of child on parent's return) is amended to read as 
follows: 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1883 
"(ii) such gross income is more than the amount 
described in paragraph (4)(A)(ii)(I) and less than 10 
times the amount so described,". 
(2) COMPUTATION OF TAX.—Subparagraph (B) of section 
1(g)(7) (relating to income included on parent's return) is 
amended— 
(A) by striking "$1,000" in clause (i) and inserting 
"twice the amount described in paragraph (4)(A)(ii)(I)", and 
(B) by amending subclause (II) of clause (ii) to read 
as follows: 
"(II) for each such child, 15 percent of the 
lesser of the amount described in paragraph 
(4)(A)(ii)(I) or the excess of the gross income of 
such child over the amount so described, and". 
(3) MINIMUM T^OC.—Subparagraph (B) of section 59(j)(l) 
is amended by striking "$1,000" and inserting "twice the 
amount in effect for the taxable year under section 63(c)(5)(A)". 
(4) EFFECTIVE DATE.—The amendments made by this sub- 
26 use i note, 
section shall apply to taxable years beginning after December 
31, 1995. 
(n) 
TREATMENT 
OF 
CERTAIN 
VETERANS' 
REEMPLOYMENT 
RIGHTS.— 
(1) IN GENERAL.—Section 414 is amended by adding at 
the end the following new subsection: 
"(u) SPECIAL RULES RELATING TO VETERANS' REEMPLOYMENT 
RIGHTS UNDER U S E R R A . — 
"(1) TREATMENT OF CERTAIN CONTRIBUTIONS MADE PURSU-
ANT TO VETERANS' REEMPLOYMENT RIGHTS.—If any contribution 
is made by an employer or an employee under an individual 
account plan with respect to an employee, or by an employee 
to a defined benefit plan that provides for employee contribu-
tions, and such contribution is required by reason of such 
employee's rights under chapter 43 of title 38, United States 
Code, resulting from qualified military service, then— 
"(A) such contribution shall not be subject to any other-
wise applicable limitation contained in section 402(g), 
402(h), 403(b), 404(a), 404(h), 408, 415, or 457, and shall 
not be taken into account in appl5dng such limitations 
to other contributions or benefits under such plan or any 
other plan, with respect to the year in which the contribu-
tion is made, 
"(B) such contribution shall be subject to the limita-
tions referred to in subparagraph (A) with respect to the 
year to which the contribution relates (in accordance with 
rules prescribed by the Secretary), and 
"(C) such plan shall not be treated as failing to meet 
the requirements of section 401(a)(4), 401(a)(26), 401(k)(3), 
401(k)(ll), 
401(k)(12), 
401(m), 
403(b)(12), 
408(k)(3), 
408(k)(6), 408(p), 410(b), or 416 by reason of the making 
of (or the right to make) such contribution. 
For purposes of the preceding sentence, any elective deferral 
or employee contribution made under paragraph (2) shall be 
treated as required by reason of the employee's rights under 
such chapter 43. 
"(2) REEMPLOYMENT RIGHTS UNDER USERRA WITH RESPECT 
TO ELECTIVE DEFERRALS.— 
110 STAT. 1884 
PUBLIC LAW 104-188—AUG. 20, 1996 
"(A) IN GENERAL.—For purposes of this subchapter and 
section 457, if an employee is entitled to the benefits of 
chapter 43 of title 38, United States Code, with respect 
to any plan which provides for elective deferrals, the 
employer sponsoring the plan shall be treated as meeting 
the requirements of such chapter 43 with respect to such 
elective deferrals only if such employer— 
"(i) permits such employee to make additional elec-
tive deferrals under such plan (in the amount deter-
mined under subparagraph (B) or such lesser amount 
as is elected by the employee) during the period which 
begins on the date of the reemployment of such 
employee with such employer and has the same length 
as the lesser o
f
— 
"(I) the product of 3 and the period of qualified 
military service which resulted in such rights, and 
"(II) 5 years, and 
"(ii) makes a matching contribution with respect 
to any additional elective deferral made pursuant to 
clause (i) which would have been required had such 
deferral actually been made during the period of such 
qualified military service. 
"(B) 
AMOUNT OF MAKEUP REQUIRED.—The amount 
determined under this subparagraph with respect to any 
plan is the maximum amount of the elective deferrals 
that the individual would have been permitted to make 
under the plan in accordance with the limitations referred 
to in paragraph (1)(A) during the period of qualified mili-
tary service if the individual had continued to be employed 
by the employer during such period and received compensa-
tion as determined under paragraph (7). Proper adjustment 
shall be made to the amount determined under the preced-
ing sentence for any elective deferrals actually made during 
the period of such qualified military service. 
"(C) ELECTIVE DEFERRAL.—For purposes of this para-
graph, the term 'elective deferral' has the meaning given 
such term by section 402(g)(3); except that such term shall 
include any deferral of compensation under an eligible 
deferred compensation plan (as defined in section 457(b)). 
"(D) 
AFTER-TAX 
EMPLOYEE 
CONTRIBUTIONS.—Ref-
erences in subparagraphs (A) and (B) to elective deferrals 
shall be treated as including references to employee con-
tributions. 
"(3) CERTAIN RETROACTIVE ADJUSTMENTS NOT REQUIRED.— 
For purposes of this subchapter and subchapter E, no provision 
of chapter 43 of title 38, United States Code, shall be construed 
as requiring— 
"(A) any crediting of earnings to an employee with 
respect to any contribution before such contribution is actu-
ally made, or 
"(B) any allocation of any forfeiture with respect to 
the period of qualified military service. 
"(4) 
LOAN REPAYMENT SUSPENSIONS PERMITTED.—If 
any 
plan suspends the obligation to repay any loan made to an 
employee from such plan for any part of any period during 
which such employee is performing service in the uniformed 
services (as defined in chapter 43 of title 38, United States 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1885 
Code), whether or not quahfied mihtary service, such suspen-
sion shall not be taken into account for purposes of section 
72(p), 401(a), or 4975(d)(1). 
"(5) QUALIFIED MILITARY SERVICE.—For purposes of this 
subsection, the term 'qualified military service' means any serv-
ice in the uniformed services (as defined in chapter 43 of 
title 38, United States Code) by any individual if such individ-
ual is entitled to reemployment rights under such chapter 
with respect to such service. 
"(6) INDIVIDUAL ACCOUNT PLAN.—For purposes of this sub-
section, the term 'individual account plan' means any defined 
contribution plan (including any tax-sheltered annuity plan 
under section 403(b), any simplified employee pension under 
section 408(k), any qualified salary reduction arrangement 
under section 408(p), and any eligible deferred compensation 
plan (as defined in section 457(b)). 
"(7) COMPENSATION.—For purposes of sections 403(b)(3), 
415(c)(3), and 457(e)(5), an employee who is in qualified military 
service shall be treated as receiving compensation from the 
employer during such period of qualified military service 
equal to— 
"(A) the compensation the employee would have 
received during such period if the employee were not in 
qualified military service, determined based on the rate 
of pay the employee would have received from the employer 
but for absence during the period of qualified military 
service, or 
"(B) if the compensation the employee would have 
received during such period was not reasonably certain, 
the employee's average compensation from the employer 
during the 12-month period immediately preceding the 
qualified military service (or, if shorter, the period of 
employment immediately preceding the qualified military 
service). 
"(8) USERRA REQUIREMENTS FOR QUALIFIED RETIREMENT 
PLANS.—For purposes of this subchapter and section 457, an 
employer sponsoring a retirement plan shall be treated as 
meeting the requirements of chapter 43 of title 38, United 
States Code, only if each of the following requirements is met: 
"(A) An individual reemployed under such chapter is 
treated with respect to such plan as not having incurred 
a break in service with the employer maintaining the plan 
by reason of such individual's period of qualified military 
service. 
"(B) Each period of qualified military service served 
by an individual is, upon reemployment under such chap-
ter, deemed with respect to such plan to constitute service 
with the employer maintaining the plan for the purpose 
of determining the nonforfeitability of the individual's 
accrued benefits under such plan and for the purpose of 
determining the accrual of benefits under such plan. 
"(C) An individual reemployed under such chapter is 
entitled to accrued benefits that are contingent on the 
making of, or derived from, employee contributions or elec-
tive deferrals only to the extent the individual makes pay-
ment to the plan with respect to such contributions or 
deferrals. No such payment may exceed the amount the 
110 STAT. 1886 
PUBLIC LAW 104-188—AUG. 20, 1996 
individual would have been permitted or required to 
contribute had the individual remained 
continuously 
employed by the employer throughout the period of quali-
fied military service. Any payment to such plan shall be 
made during the period beginning with the date of 
reemployment and whose duration is 3 times the period 
of the qualified military service (but not greater than 5 
years). 
"(9) PLANS NOT SUBJECT TO TITLE 38.—This subsection shall 
not apply to any retirement plan to which chapter 43 of title 
38, United States Code, does not apply. 
"(10) REFERENCES.—For purposes of this section, any ref-
erence to chapter 43 of title 38, United States Code, shall 
be treated as a reference to such chapter as in effect on Decem-
ber 12, 1994 (without regard to any subsequent amendment).". 
(2) 
AMENDMENT TO ERISA.—Section 408(b)(1) of 
the 
Employee Retirement Income Security Act of 1974 (29 U.S.C. 
29 use 1108. 
1148(b)) is amended by adding at the end the following new 
sentence: "A loan made by a plan shall not fail to meet the 
requirements of the preceding sentence by reason of a loan 
repajrment suspension described under section 414(u)(4) of the 
Internal Revenue Code of 1986.". 
26 use 414 note. 
(3) EFFECTIVE DATE.—^The amendments made by this sub-
section shall be effective as of December 12, 1994. 
(o) REPORTING OF REAL ESTATE TIIANSACTIONS.— 
(1) IN GENERAL.—Paragraph (3) of section 6045(e) (relating 
to prohibition of separate charge for filing return) is amended 
by adding at the end the following new sentence: "Nothing 
in this paragraph shall be construed to prohibit the real estate 
reporting person from taking into account its cost of complying 
with such requirement in establishing its charge (other than 
a separate charge for complying with such requirement) to 
any customer for performing services in the case of a real 
estate transaction.". 
26 use 6045 
(2) EFFECTIVE DATE.—^The amendment made by paragraph 
note. 
(1) shall take effect as if included in section 1015(e)(2)(A) of 
the Technical and Miscellaneous Revenue Act of 1988. 
(p) 
CLARIFICATION OF DENIAL OF DEDUCTION FOR STOCK 
REDEMPTION EXPENSES. 
(1) IN GENERAL.—Paragraph (1) of section 162(k) is 
amended by striking "the redemption of its stock" and inserting 
"the reacquisition of its stock or of the stock of any related 
person (as defined in section 465(b)(3)(C))". 
(2) CERTAIN DEDUCTIONS PERMITTED.—Subparagraph (A) 
of section 162(k)(2) is amended by striking "or" at the end 
of clause (i), by redesignating clause (ii) as clause (iii), and 
by inserting after clause (i) the following new clause: 
"(ii) deduction for amounts which are properly 
allocable to indebtedness and amortized over the term 
of such indebtedness, or". 
(3) CLERICAL AMENDMENT.—The subsection heading for 
subsection (k) of section 162 is amended by striking "REDEMP-
TION" and inserting "REACQUISITION". 
26 u s e 162 note. 
(4) EFFECTIVE DATE.— 
(A) IN GENERAL.—Except as provided in subparagraph 
(B), the amendments made by this subsection shall apply 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1887 
to amounts paid or incurred after September 13, 1995, 
in taxable years ending after such date. 
(B) PARAGRAPH (2).—The amendment made by para-
graph (2) shall take effect as if included in the amendment 
made by section 613 of the Tax Reform Act of 1986. 
(q) CLERICAL AMENDMENT TO SECTION 404.— 
(1) IN GENERAL.—Paragraph (1) of section 404(j) is amended 
by striking "(10)" and inserting "(9)". 
(2) EFFECTIVE DATE.—The amendment made by paragraph 
26 usc 404 note. 
(1) shall take effect as if included in the amendments made 
by section 713(d)(4)(A) of the Deficit Reduction Act of 1984. 
(r) PASSIVE INCOME NOT TO INCLUDE F S C INCOME, ETC.— 
(1) IN GENERAL.—Paragraph (2) of section 1296(b) is 
amended by striking "or" at the end of subparagraph (B), by 
striking the period at the end of subparagraph (C) and inserting 
", or", and by inserting after subparagraph (C) the following 
new subparagraph: 
"(D) which is foreign trade income of an FSC or export 
trade income of an export trade corporation (as defined 
in section 971).". 
(2) EFFECTIVE DATE.—The amendments made by paragraph 
26 USC 1296 
(1) shall take effect as if included in the amendments made note. 
by section 1235 of the Tax Reform Act of 1986. 
(s) 
TECHNICAL 
CORRECTION 
OF 
INTERMEDIATE SANCTIONS 
PROVISIONS.— 
(1) Subparagraph (C) of section 6652(c)(1) is amended by 
striking "$10" and inserting "$20", and by striking "$5,000" 
and inserting "$10,000". 
(2) Subparagraph (D) of section 6652(c)(1) is amended by 
striking "$10" and inserting "$20". 
(t) MISCELLANEOUS CLERICAL AMENDMENTS.— 
(1) Subclause (II) of section 56(g)(4)(C)(ii) is amended by 
striking "of the subclause" and inserting "of subclause". 
(2) Paragraph (2) of section 72(m) is amended by inserting 
"and" at the end of subparagraph (A), by striking subparagraph 
(B), and by redesignating subparagraph (C) as subpara-
graph (B). 
(3) Paragraph (2) of section 86(b) is amended by striking 
"adusted" and inserting "adjusted". 
(4)(A) The heading for section 112 is amended by striking 
"COMBAT PAY" and inserting "COMBAT ZONE COMPENSATION". 
(B) The item relating to section 112 in the table of sections 
for part III of subchapter B of chapter 1 is amended by striking 
"combat pay" and inserting "combat zone compensation". 
(C) Paragraph (1) of section 3401(a) is amended by striking 
"combat pay" and inserting "combat zone compensation". 
(5) Clause (i) of section 172(h)(3)(B) is amended by striking 
the comma at the end thereof and inserting a period. 
(6) Clause (ii) of section 543(a)(2)(B) is amended by striking 
"section 563(c)" and inserting "section 563(d)". 
(7) Paragraph (1) of section 958(a) is amended by striking 
"sections 955(b)(1) (A) and (B), 955(c)(2)(A)(ii), and 960(a)(1)" 
and inserting "section 960(a)(1)". 
(8) Subsection (g) of section 642 is amended by striking 
"under 2621(a)(2)" and inserting "under section 2621(a)(2)". 
(9) Section 1463 is amended by striking "this subsection" 
and inserting "this section". 
110 STAT. 1888 
PUBLIC LAW 104-188—AUG. 20, 1996 
26 use 4980B. 
26 use 4979A. 
26 use 6050H. 
26 use 461. 
26 use 954. 
26 use 381. 
26 use 401 note. 
(10) Subsection (k) of section 3306 is amended by inserting 
a period at the end thereof. 
(11) The item relating to section 4472 in the table of 
sections for subchapter B of chapter 36 is amended by striking 
"and special rules". 
(12) Paragraph (3) of section 5134(c) is amended by striking 
"section 6662(a)" and inserting "section 6665(a)". 
(13) Paragraph (2) of section 5206(f) is amended by striking 
"section 5(e)" and inserting "section 105(e)". 
(14) Paragraph (1) of section 6050B(c) is amended by strik-
ing "section 85(c)" and inserting "section 85(b)". 
(15) Subsection (k) of section 6166 is amended by striking 
paragraph (6). 
(16) Subsection (e) of section 6214 is amended to read 
as follows: 
"(e) CROSS REFERENCE.— 
"For provision giving Tax Court jurisdiction to order a refund of 
an overpayment and to award sanctions, see section 6512(b)(2).''. 
(17) The section heading for section 6043 is amended by 
striking the semicolon and inserting a comma. 
(18) The item relating to section 6043 in the table of 
sections for subpart B of part III of subchapter A of chapter 
61 is amended by striking the semicolon and inserting a comma. 
(19) The table of sections for part I of subchapter A of 
chapter 68 is amended by striking the item relating to section 
6662. 
(20)(A) Section 7232 is amended— 
(i) 
by 
striking 
"LUBRICATING 
OIL," 
in 
the 
heading, and 
(ii) by striking "lubricating oil," in the text. 
(B) The table of sections for part II of subchapter A of 
chapter 75 is amended by striking "lubricating oil," in the 
item relating to section 7232. 
(21) Paragraph (1) of section 6701(a) of the Omnibus Budget 
Reconciliation Act of 1989 is amended by striking "subclause 
(IV)" and inserting "subclause (V)". 
(22) Clause (ii) of section 7304(a)(2)(D) of such Act is 
amended by striking "subsection (c)(2)" and inserting "sub-
section (c)". 
(23) Paragraph (1) of section 7646(b) of such Act is amended 
by striking "section 
6050H(b)(l)" and 
inserting 
"section 
6050H(b)(2)". 
(24) Paragraph (10) of section 7721(c) of such Act is 
amended by striking "section 6662(b)(2)(C)(ii)" and inserting 
"section 6661(b)(2)(C)(ii)". 
(25) Subparagraph (A) of section 7811(i)(3) of such Act 
is amended by inserting "the first place it appears" before 
"in clause (i)". 
(26) Paragraph (10) of section 7841(d) of such Act is 
amended by striking "section 381(a)" and inserting "section 
381(c)". 
(27) Paragraph (2) of section 7861(c) of such Act is amended 
by inserting "the second place it appears" before "and inserting". 
(28) Paragraph (1) of section 460(b) is amended by striking 
"the look-back method of paragraph (3)" and inserting "the 
look-back method of paragraph (2)". 
PUBLIC LAW 104-18a—AUG. 20, 1996 
110 STAT. 1889 
(29) Subparagraph (C) of section 50(a)(2) is amended by 
striking "subsection (c)(4)" and inserting "subsection (d)(5)". 
(30) Subparagraph (B) of section 172(h)(4) is amended by 
striking the material following the heading and preceding 
clause 
(i) 
and 
inserting 
"For 
purposes 
of 
subsection 
(b)(2)-". 
(31) Subparagraph (A) of section 355(d)(7) is amended by 
inserting "section" before "267(b)". 
(32) Subparagraph (C) of section 420(e)(1) is amended by 
striking "mean" £ind inserting "means". 
(33) Paragraph (4) of section 537(b) is amended by striking 
"section 172(i)" and inserting "section 172(f)". 
(34) Subparagraph (B) of section 613(e)(1) is amended by 
striking the comma at the end thereof and inserting a period. 
(35) Paragraph (4) of section 856(a) is amended by striking 
"section 582(c)(5)" and inserting "section 582(c)(2)". 
(36) Sections 904(f)(2)(B)(i) and 907(c)(4)(B)(iii) are each 
amended by inserting "(as in effect on the day before the 
date of the enactment of the Revenue Reconciliation Act of 
1990)" after "section 172(h)". 
(37) Subsection (b) of section 936 is amended by striking 
"subparagraphs (D)(ii)(I)" and inserting "subparagraphs (D)(ii)". 
(38) Subsection (c) of section 2104 is amended by striking 
"subparagraph (A), (C), or (D) of section 861(a)(1)" and inserting 
"section 861(a)(1)(A)". 
(39) Subparagraph (A) of section 280A(c)(l) is amended 
to read as follows: 
"(A) as the principal place of business for any trade 
or business of the taxpayer,". 
(40) Section 6038 is amended by redesignating the sub-
section relating to cross references as subsection (f). 
(41) Clause (iv) of section 6103(e)(1)(A) is amended by 
striking all that follows "provisions of and inserting "section 
Kg) or 590);". 
(42) The subsection (f) of section 6109 of the Internal 
Revenue Code of 1986 which was added by section 2201(d) 
of Public Law 101-624 is redesignated as subsection (g). 
(43) Subsection (b) of section 7454 is amended by striking 
"section 4955(e)(2)" and inserting "section 4955(f)(2)". 
(44) 
Subsection 
(d) 
of 
section 
11231 
of 
the 26USC9507 
Revenue Reconciliation Act of 1990 shall be applied as if note. 
"comma" appeared instead of "period" and as if the paragraph 
(9) proposed to be added ended with a comma. 
(45) 
Paragraph 
(1) 
of 
section 
11303(b) 
of 
the 26USC832. 
Revenue Reconciliation Act of 1990 shall be applied as if "para-
graph" appeared instead of "subparagraph" in the material 
proposed to be stricken. 
(46) 
Subsection 
(f) 
of 
section 
11701 
of 
the 
Revenue Reconciliation Act of 1990 is amended by inserting 26USC6038. 
"(relating to definitions)" after "section 6038(e)". 
(47) 
Subsection 
(i) 
of 
section 
11701 
of 
the 26USC1253. 
Revenue Reconciliation Act of 1990 shall be applied as if "sub-
section" appeared instead of "section" in the material proposed 
to be stricken. 
(48) Subparagraph (B) of section 11801(c)(2) of the Revenue 26 USC 56. 
Reconciliation Act of 1990 shall be applied as if "section 56(g)" 
appeared instead of "section 59(g)". 
110 STAT. 1890 
PUBLIC LAW 104-188—AUG. 20, 1996 
26 use 247. 
(49) Subparagraph (C) of section 11801(c)(8) of the Revenue 
Reconciliation Act of 1990 shall be applied as if "reorganiza-
tions" appeared instead of "reorganization" in the material pro-
posed to be stricken. 
26 use 1042. 
(50) Subparagraph (H) of section 11801(c)(9) of the Revenue 
Reconciliation Act of 1990 shall be applied as if "section 
1042(c)(1)(B)" appeared instead of "section 1042(c)(2)(B)". 
26 use 593. 
(51) Subparagraph (F) of section 11801(c)(12) of the 
Revenue Reconciliation Act of 1990 shall be applied as if "and 
(3)" appeared instead of "and (E)". 
26 use 6302. 
(52) Subparagraph (A) of section 11801(c)(22) of the 
Revenue Reconciliation Act of 1990 shall be applied as if "chap-
ters 21" appeared instead of "chapter 21" in the material pro-
posed to be stricken. 
26 use 42. 
(53) 
Paragraph 
(3) 
of 
section 
11812(b) 
of 
the 
Revenue Reconciliation Act of 1990 shall be applied by not 
executing the amendment therein to the heading of section 
42(d)(5)(B). 
26 use 168. 
(54) Clause (i) of section 11813(b)(9)(A) of the Revenue 
Reconciliation Act of 1990 shall be applied as if a comma 
appeared after "(3)(A)(ix)" in the material proposed to be 
stricken. 
26USeprec. 
(55) Subparagraph (F) of section 11813(b)(13) of the 
261. 
Revenue Reconciliation Act of 1990 shall be applied as if "tax" 
appeared after "investment" in the material proposed to be 
stricken. 
26 use 1016. 
(56) Paragraph (19) of section 11813(b) of the Revenue 
Reconciliation Act of 1990 shall be applied as if "Paragraph 
(20) of section 1016(a), as redesignated by section 11801," 
appeared instead of "Paragraph (21) of section 1016(a)". 
26 use 4481. 
(57) Paragraph (5) section 8002(a) of the Surface Transpor-
tation Revenue Act of 1991 shall be applied as if "4481(e)" 
appeared instead of "4481(c)". 
(58) Section 7872 is amended— 
(A) by striking "foregone" each place it appears in 
subsections (a) and (e)(2) and inserting "forgone", and 
(B) by striking "FOREGONE" in the heading for sub-
section (e) and the heading for paragraph (2) of subsection 
(e) and inserting "FORGONE". 
(59) Paragraph (7) of section 7611(h) is amended by striking 
"approporiate" and inserting "appropriate". 
(60) The heading of paragraph (3) of section 419A(c) is 
amended by striking "SEVERENCE" and inserting "SEVERANCE". 
(61) Clause (ii) of section 807(d)(3)(B) is amended by 
striking "Commissoners'" and inserting "Commissioners' ". 
(62) Subparagraph (B) of section 1274A(c)(l) is amended 
by striking "instument" and inserting "instrument". 
(63) Subparagraph (B) of section 724(d)(3) by striking 
"Subparagaph" and inserting "Subparagraph". 
(64) The last sentence of paragraph (2) of section 42(c) 
is amended by striking "of 1988". 
(65) Paragraph (1) of section 9707(d) is amended by striking 
"diligence," and inserting "diligence". 
(66) Subsection (c) of section 4977 is amended by striking 
"section 132(i)(2)" and inserting "section 132(h)". 
(67) The last sentence of section 401(a)(20) is amended 
by striking "section 211" and inserting "section 521". 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1891 
(68) Subparagraph (A) of section 402(g)(3) is amended by 
striking "subsection {a)(8)" and inserting "subsection (e)(3)". 
(69) The last sentence of section 403(b)(10) is amended 
by striking "an direct" and inserting "a direct". 
(70) Subparagraph (A) of section 4973(b)(1) is amended 
by striking "sections 402(c)" and inserting "section 402(c)". 
(71) Paragraph (12) of section 3405(e) is amended by strik-
ing "(b)(3)" and inserting "(b)(2)". 
(72) Paragraph (41) of section 521(b) of the Unemployment 
26 USC 4973. 
Compensation Amendments of 1992 shall be applied as if "sec-
tion" appeared instead of "sections" in the material proposed 
to be stricken. 
(73) Paragraph (27) of section 521(b) of the Unemployment 
26 USC 691. 
Compensation Amendments of 1992 shall be applied as if "Sec-
tion 691(c)(o)" appeared instead of "Section 691(c)". 
(74) Paragraph (5) of section 860F(a) is amended by striking 
"paragraph (1)" and inserting "paragraph (2)". 
(75) Paragraph (1) of section 415(k) is amended by adding 
"or" at the end of subparagraph (C), by striking subparagraphs 
(D) and (E), and by redesignating subparagraph (F) as subpara-
graph (D). 
(76) Paragraph (2) of section 404(a) is amended by striking 
"(18),". 
(77) Clause (ii) of section 72(p)(4)(A) is amended to read 
as follows: 
"(ii) SPECIAL RULE.—The term 'qualified employer 
plan' shall include any plan which was (or was deter-
mined to be) a qualified employer plan or a government 
plan.". 
(78) Sections 461(i)(3)(C) and 1274(b)(3)(B)(i) are each 
amended by striking "section 6662(d)(2)(C)(ii)" and inserting 
"section 6662(d)(2)(C)(iii)". 
(79) Subsection (a) of section 164 is amended by striking 
the 
paragraphs 
relating to the generation-skipping tax 
and the environmental tax imposed by section 59A and by 
inserting after paragraph (3) the following new paragraphs: 
"(4) The GST tax imposed on income distributions. 
"(5) The environmental tax imposed by section 59A.". 
(80) Subclause (I) of section 936(a)(4)(A)(ii) is amended 
by striking "deprecation" and inserting "depreciation". 
Subtitle H—Other Provisions 
SEC. 1801. EXEMPTION FROM DIESEL FUEL DYEING REQUIREMENTS 
WITH RESPECT TO CERTAIN STATES. 
(a) IN GENERAL.—Section 4082 (relating to exemptions for diesel 
fuel) is amended by redesignating subsections (c) and (d) as sub-
sections (d) and (e), respectively, and by inserting after subsection 
(b) the following new subsection: 
"(c) EXCEPTION TO DYEING REQUIREMENTS.—Paragraph (2) of 
subsection (a) shall not apply with respect to any diesel fuel— 
"(1) removed, entered, or sold in a State for ultimate sale 
or use in an area of such State during the period such area 
is exempted from the fuel dyeing requirements under subsection 
(i) of section 211 of the Clean Air Act (as in effect on the 
date of the enactment of this subsection) by the Administrator 
29-194 0-96-6;QL3Part3 
110 STAT. 1892 
PUBLIC LAW 104-188—AUG. 20, 1996 
of the Environmental Protection Agency under paragraph (4) 
of such subsection (i) (as so in effect), and 
"(2) the use of which is certified pursuant to regulations 
issued by the Secretary.". 
26 use 4082 
(b) EFFECTIVE DATE.—The amendments made by this section 
'^ote. 
shall apply with respect to fuel removed, entered, or sold on or 
after the first day of the first calendar quarter beginning after 
the date of the enactment of this Act. 
26 use 3121 
SEC. 1802. TREATMENT OF CERTAIN UNIVERSITY ACCOUNTS. 
(a) IN GENERAL.—For purposes of subsection (s) of section 3121 
of the Internal Revenue Code of 1986 (relating to concurrent employ-
ment by 2 or more employers)— 
(1) the following entities shall be deemed to be related 
corporations that concurrently employ the same individual: 
(A) a State university which employs health profes-
sionals as faculty members at a medical school, and 
(B) an agency account of a State university which 
is described 
in 
subparagraph 
(A) and 
from 
which 
there is distributed to such faculty members payments 
forming a part of the compensation that the State, or 
such State university, as the case may be, agrees to pay 
to such faculty members, but only if— 
(i) such agency account is authorized by State law 
and receives the funds for such pa3anents from a 
faculty practice plan described in section 501(c)(3) of 
such Code and exempt from tax under section 501(a) 
of such Code, 
(ii) such payments are distributed by such agency 
account to such faculty members who render patient 
care at such medical school, and 
(iii) such faculty members comprise at least 30 
percent of the membership of such faculty practice 
plan, and 
(2) remuneration which is disbursed by such agency account 
to any such faculty member of the medical school described 
in paragraph (1)(A) shall be deemed to have been actually 
disbursed by the State, or such State university, as the case 
may be, as a common paymaster and not to have been actually 
disbursed by such agency account. 
(b) EFFECTIVE DATE.—The provisions of subsection (a) shall 
apply to remuneration paid after December 31, 1996. 
SEC. 1803. MODIFICATIONS TO Ep{:CISE TAX ON OZONE-DEPLETING 
CHEMICALS. 
(a) RECYCLED HALON.— 
(1) IN GENERAL.—Section 4682(d)(1) (relating to recycling) 
is amended by inserting ", or on any recycled halon imported 
from any country which is a signatory to the Montreal Protocol 
on Substances that Deplete the Ozone Layer" before the period 
at the end. 
26 use 4682 
(2) CERTIFICATION SYSTEM.—The Secretary of the Treasury, 
'lote. 
after consultation with the Administrator of the Environmental 
Protection Agency, shall develop a certification system to ensure 
compliance with the recycling requirement for imported halon 
under section 4682(d)(1) of the Internal Revenue Code of 1986, 
as amended by paragraph (1). 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1893 
(b) 
CHEMICALS USED AS PROPELLANTS IN METERED-DOSE 
INHALERS TAX-EXEMPT.—Paragraph (4) of section 4682(g) (relating 
to phase-in of t£ix on certain substances) is amended to read as 
follows: 
"(4) 
CHEMICALS USED AS PROPELLANTS IN METERED-DOSE 
INHALERS.— 
"(A) TAX-EXEMPT.— 
"(i) IN GENERAL.—No tax shall be imposed by sec-
tion 4681 on— 
"(I) any use of any substance as a propellant 
in metered-dose inhalers, or 
"(11) any qualified sale by the manufacturer, 
producer, or importer of any substance, 
"(ii) QUALIFIED SALE.—For purposes of clause (i), 
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 pur-
chaser for such use by the 2d purchaser. 
The preceding sentence shall apply only if the manufac-
turer, producer, and importer, and the 1st and 2d 
purchasers (if any) meet such registration require-
ments as may be prescribed by the Secretary. 
"(B) OVERPAYMENTS.—If any substance on which tax 
was paid under this subchapter is used by any person 
as a propellant 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 subparagraph.". 
(c) EFFECTIVE DATES.— 
26 use 4682 
(1) RECYCLED HALON.— 
note. 
(A) IN GENERAL.—Except as provided in subparagraph 
(B), the amendment made by subsection (a)(1) shall take 
effect on January 1, 1997. 
(B) HALON-1211.—In the case of Halon-1211, the 
amendment made by subsection (a)(1) shall take effect 
on January 1, 1998. 
(2) METERED-DOSE INHALERS.—The amendment made by 
subsection (b) shall take effect on the 7th day after the date 
of the enactment of this Act. 
SEC. 1804. TAX-EXEMPT BONDS 
FOR 
SALE 
OF ALASKA POWER 
26 USC142 note. 
ADMINISTRATION FACILITY. 
Sections 142(f)(3) (as added by section 1608) and 147(d) of 
the Internal Revenue Code of 1986 shall not apply in determining 
whether any private activity bond issued after the date of the 
enactment of this Act and used to finance the acquisition of the 
Snettisham hydroelectric project from the Alaska Power Administra-
tion is a qualified bond for purposes of such Code. 
110 STAT. 1894 
PUBLIC LAW 104-188—AUG. 20, 1996 
SEC. 1805. NONRECOGNITION TREATMENT FOR CERTAIN TRANSFERS 
BY COMMON TRUST FUNDS TO REGULATED INVESTMENT 
COMPANIES. 
(a) GENERAL RULE.—Section 584 (relating to common trust 
funds) is amended by redesignating subsection (h) as subsection 
(i) and by inserting after subsection (g) the following new subsection: 
"(H) NONRECOGNITION TREATMENT FOR CERTAIN TRANSFERS TO 
REGULATED INVESTMENT COMPANIES.— 
"(1) IN GENERAL.—If— 
"(A) a common trust fund transfers substantially all 
of its assets to one or more regulated investment companies 
in exchange solely for stock in the company or companies 
to which such assets are so transferred, and 
"(B) such stock is distributed by such common trust 
fund to participants in such common trust fund in exchange 
solely for their interests in such common trust fund, 
no gain or loss shall be recognized by such common trust 
fund by reason of such transfer or distribution, and no gain 
or loss shall be recognized by any participant in such common 
trust fund by reason of such exchange. 
"(2) BASIS RULES.— 
"(A) REGULATED INVESTMENT COMPANY.—The basis of 
any asset received by a regulated investment company 
in a transfer referred to in paragraph (1)(A) shall be the 
same as it would be in the hands of the common trust 
fund. 
"(B) PARTICIPANTS.—The basis of the stock which is 
received in an exchange referred to in paragraph (1)(B) 
shall be the same as that of the property exchanged. If 
stock in more than one regulated investment company is 
received in such exchange, the basis determined under 
the preceding sentence shall be allocated among the stock 
in each such company on the basis of respective fair market 
values. 
"(3) TREATMENT OF ASSUMPTIONS OF LIABILITY.— 
"(A) IN GENERAL.—In determining whether the transfer 
referred to in paragraph (1)(A) is in exchange solely for 
stock in one or more regulated investment companies, the 
assumption by any such company of a liability of the com-
mon trust fund, and the fact that any property transferred 
by the common trust fund is subject to a liability, shall 
be disregarded. 
"(B) SPECIAL RULE WHERE ASSUMED LIABILITIES EXCEED 
BASIS.— 
"(i) IN GENERAL.—If, in any transfer referred to 
in paragraph (1)(A), the assumed liabilities exceed the 
aggregate adjusted bases (in the hands of the common 
trust fund) of the assets trsinsferred to the regulated 
investment company or companies— 
"(I) notwithstanding paragraph (1), gain shall 
be recognized to the common trust fund on such 
transfer in an amount equal to such excess, 
"(II) the basis of the assets received by the 
regulated investment company or companies in 
such transfer shall be increased by the amount 
so recognized, and 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1895 
"(III) any adjustment to the basis of a partici-
pant's interest in the common trust fund as a 
result of the gain so recognized shall be treated 
as occurring immediately before the exchange 
referred to in paragraph (1)(B). 
If the transfer referred to in paragraph (1)(A) is to 
two or more regulated investment companies, the basis 
increase under subclause (II) shall be allocated among 
such companies on the basis of the respective fair 
market values of the assets received by each of such 
companies. 
"(ii) ASSUMED LIABILITIES.—For purposes of clause 
(i), the term 'assumed liabilities' means the aggre-
gate o
f
— 
"(I) any liability of the common trust fund 
assumed by any regulated investment company 
in connection with the transfer referred to in para-
graph (1)(A), and 
"(ID any liability to which property so trans-
ferred is subject. 
"(4) 
COMMON TRUST FUND MUST MEET DIVERSIFICATION 
RULES.—This subsection shall not apply to any common trust 
fund which would not meet the requirements of section 
368(a)(2)(F)(ii) if it were a corporation. For purposes of the 
preceding sentence. Government securities shall not be treated 
as securities of an issuer in appl5dng the 25-percent and 50-
percent test and such securities shall not be excluded for pur-
poses of determining total assets under clause (iv) of section 
368(a)(2)(F).". 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 
26 use 584 note. 
shall apply to transfers after December 31, 1995. 
SEC. 1806. QUALIFIED STATE TUITION PROGRAMS. 
(a) IN GENERAL.—Subchapter F of chapter 1 (relating to exempt 
organizations) is amended by adding at the end the following new 
part: 
"PART VIII—QUALIFIED STATE TUITION 
PROGRAMS 
"Sec. 529. Qualified State tuition programs. 
"SEC. 529. QUALIFIED STATE TUITION PROGRAMS. 
"(a) GENERAL RULE.—^A qualified State tuition program shall 
be exempt from taxation under this subtitle. Notwithstanding the 
preceding sentence, such program shall be subject to the taxes 
imposed by section 511 (relating to imposition of tax on unrelated 
business income of charitable organizations). 
"(b) QUALIFIED STATE TUITION PROGRAM.—For purposes of this 
section— 
"(1) IN GENEIL\L.—The term 'quaUfied State tuition pro-
gram' means a program established and maintained by a State 
or agency or instrumentality thereof— 
"(A) under which a person— 
"(i) may purchase tuition credits or certificates 
on behalf of a designated beneficiary which entitle 
the beneficiary to the waiver or payment of qualified 
higher education expenses of the beneficiary, or 
110 STAT. 1896 
PUBLIC LAW 104-188—AUG. 20, 1996 
"(ii) may make contributions to an account which 
is established for the purpose of meeting the quahfied 
higher education expenses of the designated beneficiary 
of the account, and 
"(B) which meets the other requirements of this 
subsection. 
"(2) CASH CONTRIBUTIONS.—A program shall not be treated 
as a qualified State tuition program unless it provides that 
purchases or contributions may only be made in cash. 
"(3) REFUNDS.—A program shall not be treated as a quali-
fied State tuition program unless it imposes a more than de 
minimis penalty on any refund of earnings from the account 
which are not— 
"(A) used for qualified higher education expenses of 
the designated beneficiary, 
"(B) made on account of the death or disability of 
the designated beneficiary, or 
"(C) made on account of a scholarship (or allowance 
or payment described in section 135(d)(1) (B) or (C)) 
received by the designated beneficiary to the extent the 
amount of the refund does not exceed the amount of the 
scholarship, allowance, or pa)niient. 
"(4) SEPARATE ACCOUNTING.—A program shall not be 
treated as a qualified State tuition program unless it provides 
separate accounting for each designated beneficiary. 
"(5) No INVESTMENT DIRECTION.—A program shall not be 
treated as a qualified State tuition program unless it provides 
that any contributor to, or designated beneficiary under, such 
program may not direct the investment of any contributions 
to the program (or any earnings thereon). 
"(6) N o PLEDGING OF INTEREST AS SECURITY.—^A p r o g r a m 
shall not be treated as a qualified State tuition program if 
it allows any interest in the program or any portion thereof 
to be used as security for a loan. 
"(7) PROHIBITION ON EXCESS CONTRIBUTIONS.—^A program 
shall not be treated as a qualified State tuition program unless 
it provides adequate safeguards to prevent contributions on 
behalf of a designated beneficiary in excess of those necessary 
to provide for the qualified higher education expenses of the 
beneficiary. 
"(c) 
TAX TREATMENT OF DESIGNATED BENEFICIARIES AND 
CONTRIBUTORS.— 
"(1) IN GENERAL.—Except as otherwise provided in this 
subsection, no amount shall be includible in gross income of— 
"(A) a designated beneficiary under a qualified State 
tuition program, or 
"(B) a contributor to such program on behalf of a 
designated beneficiary, 
with respect to any distribution or earnings under such pro-
gram. 
"(2) CONTRIBUTIONS.—In no event shall a contribution 
to a qualified State tuition program on behalf of a designated 
beneficiary be treated as a taxable gift for purposes of chapter 
12. 
"(3) DISTRIBUTIONS.— 
"(A) IN GENERAL.—Any distribution under a qualified 
State tuition program shall be includible in the gross 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT, 1897 
income of the distributee in the manner as provided under 
section 72 to the extent not excluded from gross income 
under any other provision of this chapter. 
"(B) IN-KIND DISTRIBUTIONS.—Any benefit furnished to 
a designated beneficiary under a quaUfied State tuition 
program shall be treated as a distribution to the bene-
ficiary. 
"(C) CHANGE: IN BENEFICIARIES.— 
"(i) ROLLOVERS.—Subparagraph (A) shall not apply 
to that portion of any distribution which, within 60 
days of such distribution, is transferred to the credit 
of another designated beneficiary under a qualified 
State tuition program who is a member of the family 
of the designated beneficiary with respect to which 
the distribution was made. 
"(ii) CHANGE IN DESIGNATED BENEFICIARIES.—Any 
change in the designated beneficiary of an interest 
in a qualified State tuition program shall not be treated 
as a distribution for purposes of subparagraph (A) if 
the new beneficiary is a member of the family of the 
old beneficiary. 
"(D) OPERATING RULES.—For purposes of appljdng sec-
tion 72— 
"(i) to the extent provided by the Secretary, all 
qualified State tuition programs of which an individual 
is a designated beneficiary shall be treated as one 
program, 
"(ii) all distributions during a taxable year shall 
be treated as one distribution, and 
"(iii) the value of the contract, income on the con-
tract, and investment in the contract shall be computed 
as of the close of the calendar year in which the taxable 
year begins. 
"(4) ESTATE TAX INCLUSION.—The value of any interest 
in any qualified State tuition program which is attributable 
to contributions made by an individual to such program on 
behalf of any designated beneficiary shall be includible in the 
gross estate of the contributor for purposes of chapter 11. 
"(5) SPECIAL RULE FOR APPLYING SECTION 2503(e).—For 
purposes of section 2503(e), the waiver (or payment to an 
educational institution) of qualified higher education expenses 
of a designated beneficiary under a qualified State tuition pro-
gram shall be treated as a qualified transfer. 
"(d) REPORTING REQUIREMENTS.— 
"(1) IN GENERAL.—If there is a distribution to any indi-
vidual with respect to an interest in a qualified State tuition 
program during any calendar year, each officer or employee 
having control of the qualified State tuition program or their 
designee shall make such reports as the Secretary may require 
regarding such distribution to the Secretary and to the des-
ignated beneficiary or the individual to whom the distribution 
was made. Any such report shall include such information 
as the Secretary may prescribe. 
"(2) TIMING OF REPORTS.—Any report required by this sub-
section— 
"(A) shall be filed at such time and in such matter 
as the Secretary prescribes, and 
110 STAT. 1898 
PUBLIC LAW 104-188—AUG. 20, 1996 
"(B) shall be furnished to individuals not later than 
January 31 of the calendar year following the calendar 
year to which such report relates. 
"(e) 
OTHER DEFINITIONS AND SPECIAL RULES.—For purposes 
of this section— 
"(1) DESIGNATED BENEFICIARY.—The term 'designated bene-
ficiary' means— 
"(A) the individual designated at the commencement 
of participation in the qualified State tuition program as 
the beneficiary of amounts paid (or to be paid) to the 
program, 
"(B) in the case of a change in beneficiaries described 
in subsection (c)(2)(C), the individual who is the new bene-
ficiary, and 
"(C) in the case of an interest in a qualified State 
tuition program purchased by a State or local government 
or an organization described in section 501(c)(3) and exempt 
from taxation under section 501(a) as part of a scholarship 
program operated by such government or organization, the 
individual receiving such interest as a scholarship. 
"(2) MEMBER OF FAMILY.—The term 'member of the family' 
has the same meaning given such term as section 2032A(e)(2). 
"(3) QUALIFIED HIGHER EDUCATION EXPENSES.—The term 
'qualified higher education expenses' means tuition, fees, books, 
supplies, and equipment required for the enrollment or attend-
ance of a designated beneficiary at an eligible educational 
institution (as defined in section 135(c)(3)). 
"(4) APPLICATION OF SECTION 514.—An interest in a quali-
fied State tuition program shall not be treated as debt for 
purposes of section 514.". 
(b) CONFORMING AMENDMENTS.— 
(1) Section 135(d)(1) is amended by striking "or" at the 
end of subparagraph (B), by striking the period at the end 
of subparagraph (C) and inserting ", or", and by adding at 
the end the following new subparagraph: 
"(D) a payment, waiver, or reimbursement of qualified 
higher education expenses under a qualified State tuition 
program (within the meaning of section 529(b)).". 
(2) The table of parts for subchapter F of chapter 1 is 
amended by adding at the end the following new item: 
"Part Vlll. Qualified State tuition programs.". 
26 u s e 529 note. 
(c) EFFECTIVE DATES.— 
(1) IN GENERAL.—The amendments made by this section 
shall apply to taxable years ending after the date of the enact-
ment of this Act. 
(2) TRANSITION RULE.—If— 
(A) a State or agency or instrumentality thereof main-
tains, on the date of the enactment of this Act, a program 
under which persons may purchase tuition credits or certifi-
cates on behalf of, or make contributions for education 
expenses of, a designated beneficiary, and 
(B) such program meets the requirements of a qualified 
State tuition program before the later of— 
(i) the date which is 1 year after such date of 
enactment, or 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1899 
(ii) the first day of the first calendar quarter after 
the close of the first regular session of the State legisla-
ture that begins after such date of enactment, 
the amendments made by this section shall apply to con-
tributions (and earnings allocable thereto) made before the 
date such program meets the requirements of such amend-
ments without regard to whether any requirements of such 
amendments are met with respect to such contributions 
and earnings. 
For purposes of subparagraph (B)(ii), if a State has a 2-year 
legislative session, each year of such session shall be deemed 
to be a separate regular session of the State legislature. 
SEC. 1807. ADOPTION ASSISTANCE. 
(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 22 the following new section: 
"SEC. 23. ADOPTION EXPENSES. 
"(a) ALLOWANCE OF CREDIT.— 
"(1) IN GENERAL.—In the case of an individual, there shall 
be allowed as a credit against the tax imposed by this chapter 
the amount of the qualified adoption expenses paid or incurred 
by the taxpayer. 
"(2) YEAR CREDIT ALLOWED.—The credit under paragraph 
(1) with respect to any expense shall be allowed— 
"(A) for the taxable year following the taxable year 
during which such expense is paid or incurred, or 
"(B) in the case of an expense which is paid or incurred 
during the taxable year in which the adoption becomes 
final, for such taxable year. 
"(b) LIMITATIONS.— 
"(1) DOLLAR LIMITATION.—The aggregate amount of quali-
fied adoption expenses which may be taken into account under 
subsection (a) for all taxable years with respect to the adoption 
of a child by the taxpayer shall not exceed $5,000 ($6,000, 
in the case of a child with special needs). 
"(2) INCOME LIMITATION.— 
"(A) IN GENERAL.—The amount allowable as a credit 
under subsection (a) for any taxable year shall be reduced 
(but not below zero) by an amount which bears the same 
ratio to the amount so allowable (determined without 
regard to this paragraph but with regard to para-
graph (1)) as— 
"(i) the amount (if any) by which the taxpayer's 
adjusted gross income exceeds $75,000, bears to 
"(ii) $40,000. 
"(B) DETERMINATION OF ADJUSTED GROSS INCOME.— 
For purposes of subparagraph (A), adjusted gross income 
shall be determined— 
"(i) without regard to sections 911, 931, and 
933, and 
"(ii) after the application of sections 86, 135, 137, 
219, and 469. 
"(3) DENIAL OF DOUBLE BENEFIT.— 
"(A) IN GENERAL.—No credit shall be allowed under 
subsection (a) for any expense for which a deduction or 
credit is allowed under any other provision of this chapter. 
110 STAT. 1900 
PUBLIC LAW 104-188—AUG. 20, 1996 
"(B) GRANTS.—No credit shall be allowed under sub-
section (a) for any expense to the extent that funds for 
such expense are received under any Federal, State, or 
local program. 
"(c) CARRYFORWARDS OF UNUSED CREDIT.—If the credit allow-
able under subsection (a) for any taxable year exceeds the limitation 
imposed by section 26(a) for such taxable year reduced by the 
sum of the credits allowable under this subpart (other than this 
section), such excess shall be carried to the succeeding taxable 
year and added to the credit allowable under subsection (a) for 
such taxable year. No credit may be carried forward under this 
subsection to any taxable year following the fifth taxable year 
after the taxable year in which the credit arose. For purposes 
of the preceding sentence, credits shall be treated as used on a 
first-in first-out basis. 
"(d) DEFINITIONS.—For purposes of this section— 
"(1) QUALIFIED ADOPTION EXPENSES.—The term 'qualified 
adoption expenses' means reasonable and necessary adoption 
fees, court costs, attorney fees, and other expenses— 
"(A) which are directly related to, and the principal 
purpose of which is for, the legal adoption of an eligible 
child by the taxpayer, 
"(B) which are not incurred in violation of State or 
Federal law or in carrying out any surrogate parenting 
arrangement, 
"(C) which are not expenses in connection with the 
adoption by an individual of a child who is the child of 
such individual's spouse, and 
"(D) which are not reimbursed imder an employer pro-
gram or otherwise. 
"(2) ELIGIBLE CHILD.—The term 'ehgible child' means any 
individual— 
"(A) who— 
"(i) has not attained age 18, or 
"(ii) is physically or mentally incapable of caring 
for himself, and 
"(B) in the case of qualified adoption expenses paid 
or incurred after December 31, 2001, who is a child with 
special needs. 
"(3) CHILD WITH SPECIAL NEEDS.—The term 'child with 
special needs' means any child if— 
"(A) a State has determined that the child cannot 
or should not be returned to the home of his parents, 
"(B) such State has determined that there exists with 
respect to the child a specific factor or condition (such 
as his ethnic background, age, or membership in a minority 
or sibling group, or the presence of factors such as medical 
conditions or physical, mental, or emotional handicaps) 
because of which it is reasonable to conclude that such 
child cannot be placed with adoptive parents without 
providing adoption assistance, and 
"(C) such child is a citizen or resident of the United 
States (as defined in section 217(h)(3)). 
"(e) SPECIAL RULES FOR FOREIGN ADOPTIONS.—In the case of 
an adoption of a child who is not a citizen or resident of the 
United States (as defined in section 217(h)(3))— 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1901 
"(1) subsection (a) shall not apply to any qualified adoption 
expense with respect to such adoption unless such adoption 
becomes final, and 
"(2) any such expense which is paid or incurred before 
the taxable year in which such adoption becomes final shall 
be taken into account under this section as if such expense 
were paid or incurred during such year. 
"(f) FILING REQUIREMENTS.— 
"(1) MARRIED COUPLES MUST FILE JOINT RETURNS.—Rules 
similar to the rules of paragraphs (2), (3), and (4) of section 
21(e) shall apply for purposes of this section. 
"(2) TAXPAYER MUST INCLUDE TIN.— 
"(A) IN GENERAL.—No credit shall be allowed under 
this section with respect to any eligible child unless the 
taxpayer includes (if known) the name, age, and TIN of 
such child on the return of tax for the taxable year. 
"(B) OTHER METHODS.—The Secretary may, in lieu of 
the information referred to in subparagraph (A), require 
other information meeting the purposes of subparagraph 
(A), including identification of an agent assisting with the 
adoption. 
"(g) BASIS ADJUSTMENTS.—For purposes of this subtitle, if a 
credit is allowed under this section for any expenditure with respect 
to any property, the increase in the basis of such property which 
would (but for this subsection) result from such expenditure shall 
be reduced by the amount of the credit so allowed. 
"(h) REGULATIONS.—The Secretary shall prescribe such regula-
tions as may be appropriate to carry out this section and section 
137, including regulations which treat unmarried individuals who 
pay or incur qualified adoption expenses with respect to the same 
child as 1 taxpayer for purposes of applying the dollar limitation 
in subsection (b)(1) of this section and in section 137(b)(1).". 
(b) EXCLUSION OF AMOUNTS RECEIVED UNDER EMPLOYER'S 
ADOPTION ASSISTANCE PROGRAMS.—Part III of subchapter B of 
chapter 1 (relating to items specifically excluded from gross income) 
is amended by redesignating section 137 as section 138 and by 
inserting after section 136 the following new section: 
"SEC. 137. ADOPTION ASSISTANCE PROGRAMS. 
"(a) IN GENERAL.—Gross income of an employee does not 
include amounts paid or expenses incurred by the employer for 
qualified adoption expenses in connection with the adoption of 
a child by an employee if such amounts are furnished pursuant 
to an adoption assistance program. 
"(b) LIMITATIONS.— 
"(1) DOLLAR LIMITATION.—The aggregate amount exclud-
able from gross income under subsection (a) for all taxable 
years with respect to the adoption of a child by the taxpayer 
shall not exceed $5,000 ($6,000, in the case of a child with 
special needs). 
"(2) INCOME LIMITATION.—The amount excludable from 
gross income under subsection (a) for any taxable year 
shall be reduced (but not below zero) by an amount which 
bears the same ratio to the amount so excludable (determined 
without regard to this paragraph but with regard to paragraph 
(D) as— 
110 STAT. 1902 
PUBLIC LAW 104-188—AUG. 20, 1996 
"(A) the amount (if any) by which the taxpayer's 
adjusted gross income exceeds $75,000, bears to 
"(B) $40,000. 
"(3) DETERMINATION OF ADJUSTED GROSS INCOME.—For pur-
poses of paragraph (2), adjusted gross income shall be 
determined— 
"(A) without regard to this section and sections 911, 
931, and 933, and 
"(B) after the application of sections 86, 135, 219, 
and 469. 
"(c) ADOPTION ASSISTANCE PROGRAM.—For purposes of this sec-
tion, an adoption assistance program is a separate written plan 
of an employer for the exclusive benefit of such employer's 
employees— 
"(1) under which the employer provides such employees 
with adoption assistance, and 
"(2) which meets requirements similar to the requirements 
of paragraphs (2), (3), (5), and (6) of section 127(b). 
An adoption reimbursement program operated under section 1052 
of title 10, United States Code (relating to armed forces) or section 
514 of title 14, United States Code (relating to members of the 
Coast Guard) shall be treated as an adoption assistance program 
for purposes of this section. 
"(d) QUALIFIED ADOPTION EXPENSES.—For purposes of this sec-
tion, the term 'qualified adoption expenses' has the meaning given 
such term by section 23(d) (determined without regard to reimburse-
ments under this section). 
"(e) CERTAIN RULES TO APPLY.—Rules similar to the rules 
of subsections (e), (f), and (g) of section 23 shall apply for purposes 
of this section. 
"(f) TERMINATION.—This section shall not apply to amounts 
paid or expenses incurred after December 31, 2001.". 
(c) CONFORMING AMENDMENTS.— 
(1) Subparagraph (C) of section 25(e)(1) is amended by 
inserting "and section 23" after "this section". 
(2) Sections 86(b)(2)(A) and 135(c)(4)(A) are each amended 
by inserting "137," before "911". 
(3) Clause (i) of section 219(g)(3)(A) is amended by inserting 
",137," before "and 911". 
(4) Clause (ii) of section 469(i)(3)(E) is amended to read 
as follows: 
"(ii) the amounts excludable from gross income 
under sections 135 and 137,". 
(5) Subsection (a) of section 1016 is amended by striking 
"and" at the end of paragraph (24), by striking the period 
at the end of paragraph (25) and inserting ", and", and by 
adding at the end the following new paragraph: 
"(26) to the extent provided in sections 23(g) and 137(e).". 
(6) 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 22 the following new item: 
"Sec. 23. Adoption expenses.". 
(7) The table of sections for part III of subchapter B of 
chapter 1 is amended by striking the item relating to section 
137 and inserting the following: 
"Sec. 137. Adoption assistance programs. 
"Sec. 138. Cross reference to other Acts.". 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1903 
(d) STUDY AND REPORT.—The Secretary of the Treasury shall 
26 USC 23 note, 
study the effect on adoptions of the tax credit and gross income 
exclusion established by the amendments made by this section 
and shall submit a report regarding the study to the Committee 
on Finance of the Senate and the Committee on Ways and Means 
of the House of Representatives not later than January 1, 2000. 
(e) EFFECTIVE DATE.—The amendments made by this section 
shall apply to taxable years beginning after December 31, 1996. 
SEC. 1808. REMOVAL OF BARRIERS TO INTERETHNIC ADOPTION. 
(a) STATE PLAN REQUIREMENTS.—Section 471(a) of the Social 
Security Act (42 U.S.C 671(a)) is amended— 
(1) by striking "and" at the end of paragraph (16); 
(2) by striking the period at the end of paragraph (17) 
and inserting "; and"; and 
(3) by adding at the end the following: 
"(18) not later than January 1, 1997, provides that neither 
the State nor £iny other entity in the State that receives funds 
from the Federal Government and is involved in adoption or 
foster care placements may— 
"(A) deny to any person the opportunity to become 
an adoptive or a foster parent, on the basis of the race, 
color, or national origin of the person, or of the child, 
involved; or 
"(B) delay or deny the placement of a child for adoption 
or into foster care, on the basis of the race, color, or 
national origin of the adoptive or foster parent, or the 
child, involved.". 
(b) ENFORCEMENT.—Section 474 of such Act (42 U.S.C. 674) 
is amended by adding at the end the following: 
"(d)(1) If, during any quarter of a fiscal year, a State's program 
operated under this part is found, as a result of a review conducted 
under section 1123A, or otherwise, to have violated section 
471(a)(18) with respect to a person or to have failed to implement 
a corrective action plan within a period of time not to exceed 
6 months with respect to such violation, then, notwithstanding 
subsection (a) of this section and any regulations promulgated under 
section 1123A(b)(3), the Secretary shall reduce the amount other-
wise payable to the State under this part, for that fiscal year 
quarter and for any subsequent quarter of such fiscal year, until 
the State program is found, as a result of a subsequent review 
under section 1123A, to have implemented a corrective action plan 
with respect to such violation, by— 
"(A) 2 percent of such otherwise payable amount, in the 
case of the 1st such finding for the fiscal year with respect 
to the State; 
"(B) 3 percent of such otherwise payable amount, in the 
case of the 2nd such finding for the fiscal year with respect 
to the State; or 
"(C) 5 percent of such otherwise payable amount, in the 
case of the 3rd or subsequent such finding for the fiscal year 
with respect to the State. 
In imposing the penalties described in this paragraph, the Secretary 
shall not reduce any fiscal year payment to a State by more than 
5 percent. 
"(2) Any other entity which is in a State that receives funds 
under this part and which violates section 471(a)(18) during a 
110 STAT. 1904 
PUBLIC LAW 104-188—AUG. 20, 1996 
fiscal year quarter with respect to any person shall remit to the 
Secretary all funds that were paid by the State to the entity 
during the quarter from such funds, 
"(3)(A) Any individual who is aggrieved by a violation of section 
471(a)(18) by a State or other entity may bring an action seeking 
relief from the State or other entity in any United States district 
court. 
"(B) An action under this paragraph may not be brought more 
than 2 years after the date the alleged violation occurred. 
"(4) This subsection shall not be construed to affect the applica-
tion of the Indian Child Welfare Act of 1978.". 
42 u s e 1996b. 
(c) CiVIL RIGHTS.— 
(1) PROHIBITED CONDUCT.—^A person or government that 
is involved in adoption or foster care placements may not— 
(A) deny to any individual the opportunity to become 
an adoptive or a foster parent, on the basis of the race, 
color, or national origin of the individual, or of the child, 
involved; or 
(B) delay or deny the placement of a child for adoption 
or into foster care, on the basis of the race, color, or 
national origin of the adoptive or foster parent, or the 
child, involved. 
(2) ENFORCEMENT.—Noncompliance with paragraph (1) is 
deemed a violation of title VI of the Civil Rights Act of 1964. 
(3) No EFFECT ON THE INDIAN CHILD WELFARE ACT OF 
1978.—This subsection shall not be construed to affect the 
application of the Indian Child Welfare Act of 1978. 
(d) CONFORMING AMENDMENT.—Section 553 of the Howard M. 
Metzenbaum Multiethnic Placement Act of 1994 (42 U.S.C. 5115a) 
is repealed. 
26 use 6302 
SEC. 1809. 6-MONTH DELAY OF ELECTRONIC FUND TRANSFER 
note. 
REQUIREMENT. 
Notwithstanding any other provision of law, the increase in 
the applicable required percentages for fiscal year 1997 in clauses 
(i)(IV) and (ii)(IV) of section 6302(h)(2)(C) of the Internal Revenue 
Code of 1986 shall not take effect before July 1, 1997. 
Subtitle I—Foreign Trust Tax Compliance 
SEC. 1901. IMPROVED 
INFORMATION 
REPORTING 
ON 
FOREIGN 
TRUSTS. 
(a) IN GENERAL.—Section 6048 (relating to returns as to certain 
foreign trusts) is amended to read as follows: 
"SEC. 6048. INFORMATION WITH RESPECT TO CERTAIN FOREIGN 
TRUSTS. 
"(a) NOTICE OF CERTAIN EVENTS.— 
"(1) GENERAL RULE.—On or before the 90th day (or such 
later day as the Secretary may prescribe) after any reportable 
event, the responsible party shall provide written notice of 
such event to the Secretary in accordance with paragraph (2). 
"(2) CONTENTS OF NOTICE.—The notice required by para-
graph (1) shall contain such information as the Secretary may 
prescribe, including— 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1905 
"(A) the amount of money or other property (if any) 
transferred to the trust in connection with the reportable 
event, and 
"(B) the identity of the trust and of each trustee and 
t 
beneficiary (or class of beneficiaries) of the trust. 
"(3) REPORTABLE EVENT.—For purposes of this subsection— 
"(A) IN GENERAL.—The term 'reportable event' means— 
"(i) the creation of any foreign trust by a United 
States person, 
"(ii) the transfer of any money or property (directly 
or indirectly) to a foreign trust by a United States 
person, including a transfer by reason of death, and 
"(iii) the death of a citizen or resident of the United 
States if— 
"(I) the decedent was treated as the owner 
of any portion of a foreign trust under the 
rules of subpart E of part I of subchapter J of 
chapter 1, or 
"(II) any portion of a foreign trust was included 
in the gross estate of the decedent. 
"(B) EXCEPTIONS.— 
"(i) FAIR MARKET VALUE SALES.—Subparagraph 
(A)(ii) shall not apply to any transfer of property to 
a trust in exchange for consideration of at least the 
fair market value of the transferred property. For pur-
poses of the preceding sentence, consideration other 
than cash shall be taken into account at its fair market 
value and the rules of section 679(a)(3) shall apply, 
"(ii) DEFERRED COMPENSATION AND CHARITABLE 
TRUSTS.—Subparagraph (A) shall not apply with 
respect to a trust which is— 
"(I) described in section 402(b), 404(a)(4), or 
404A, or 
"(II) determined by the Secretary to be 
described in section 501(c)(3). 
"(4) RESPONSIBLE PARTY.—For purposes of this subsection, 
the term 'responsible party means— 
"(A) the grantor in the case of the creation of an 
inter vivos trust, 
"(B) the transferor in the case of a reportable event 
described in paragraph (3)(A)(ii) other than a transfer by 
reason of death, and 
"(C) the executor of the decedent's estate in any 
other case. 
"(b) UNITED STATES GRANTOR OF FOREIGN TRUST.— 
"(1) IN GENERAL.—If, at any time during any taxable year 
of a United States person, such person is treated as the owner 
of any portion of a foreign trust under the rules of subpart 
E of part I of subchapter J of chapter 1, such person shall 
be responsible to ensure that— 
"(A) such trust makes a return for such year which 
sets forth a full and complete accounting of all trust activi-
ties and operations for the year, the name of the United 
States agent for such trust, and such other information 
as the Secretary may prescribe, and 
"(B) such trust furnishes such information as the Sec-
retary may prescribe to each United States person (i) who 
110 STAT. 1906 
PUBLIC LAW 104-188—AUG. 20, 1996 
is treated as the owner of any portion of such trust or 
(ii) who receives (directly or indirectly) any distribution 
from the trust. 
"(2) TRUSTS NOT HAVING UNITED STATES AGENT.— 
"(A) IN GENERAL.—If the rules of this paragraph apply 
to any foreign trust, the determination of amounts required 
to be taken into account with respect to such trust by 
a United States person under the rules of subpart E of 
part I of subchapter J of chapter 1 shall be determined 
by the Secretary. 
"(B) UNITED STATES AGENT REQUIRED.—The rules of 
this paragraph shall apply to any foreign trust to which 
paragraph (1) applies unless such trust agrees (in such 
manner, subject to such conditions, and at such time as 
the Secretary shall prescribe) to authorize a United States 
person to act as such trust's limited agent solely for pur-
poses of applying sections 7602, 7603, and 7604 with 
respect to— 
"(i) any request by the Secretary to examine 
records or produce testimony related to the proper 
treatment of amounts required to be taken into account 
under the rules referred to in subparagraph (A), or 
"(ii) any summons by the Secretary for such 
records or testimony. 
The appearance of persons or production of records by 
reason of a United States person being such an agent 
shall not subject such persons or records to legal process 
for any purpose other than determining the correct treat-
ment under this title of the amounts required to be taken 
into account under the rules referred to in subparagraph 
(A). A foreign trust which appoints an agent described 
in this subparagraph shall not be considered to have an 
office or a permanent establishment in the United States, 
or to be engaged in a trade or business in the United 
States, solely because of the activities of such agent pursu-
ant to this subsection. 
"(C) 
OTHER RULES TO APPLY.—Rules similar to 
the 
rules of paragraphs (2) and (4) of section 6038A(e) shall 
apply for purposes of this paragraph. 
"(c) REPORTING BY UNITED STATES BENEFICIARIES OF FOREIGN 
TRUSTS.— 
"(1) IN GENERAL.—If any United States person receives 
(directly or indirectly) during any taxable year of such person 
any distribution from a foreign trust, such person shall make 
a return with respect to such trust for such year which in-
cludes— 
"(A) the name of such trust, 
"(B) the aggregate amount of the distributions so 
received from such trust during such taxable year, and 
"(C) such other information as the Secretary may 
prescribe. 
"(2) INCLUSION IN INCOME IF RECORDS NOT PROVIDED.— 
"(A) IN GENERAL.—If adequate records are not provided 
to the Secretary to determine the proper treatment of any 
distribution from a foreign trust, such distribution shall 
be treated as an accumulation distribution includible in 
the gross income of the distributee under chapter 1. To 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1907 
the extent provided in regulations, the preceding sentence 
shall not apply if the foreign trust elects to be subject 
to rules similar to the rules of subsection (b)(2)(B). 
"(B) 
APPLICATION OF ACCUMULATION DISTRIBUTION 
RULES.—For purposes of applying section 668 in a case 
to which subparagraph (A) applies, the applicable number 
of years for purposes of section 668(a) shall be V
2 of the 
number of years the trust has been in existence. 
"(d) SPECIAL RULES.— 
"(1) DETERMINATION OF WHETHER UNITED STATES PERSON 
MAKES TRANSFER OR RECEIVES DISTRIBUTION.—For purposes of 
this section, in determining whether a United States person 
makes a transfer to, or receives a distribution from, a foreign 
trust, the fact that a portion of such trust is treated as owned 
by another person under the rules of subpart E of part I 
of subchapter J of chapter 1 shall be disregarded. 
"(2) DOMESTIC TRUSTS WITH FOREIGN ACTIVITIES.—To the 
extent provided in regulations, a trust which is a United States 
person shall be treated as a foreign trust for purposes of this 
section and section 6677 if such trust has substantial activities, 
or holds substantial property, outside the United States. 
"(3) TIME AND MANNER OF FILING INFORMATION.—Any notice 
or return required under this section shall be made at such 
time and in such manner as the Secretary shall prescribe. 
"(4) MODIFICATION OF RETURN REQUIREMENTS.—The Sec-
retary is authorized to suspend or modify any requirement 
of this section if the Secretary determines that the United 
States has no significant tax interest in obtaining the required 
information.". 
(b) INCREASED PENALTIES.—Section 6677 (relating to failure 
to file information returns with respect to certain foreign trusts) 
is amended to read as follows: 
"SEC. 6677. FAILURE TO FILE INFORMATION WITH RESPECT TO 
CERTAIN FOREIGN TRUSTS. 
"(a) CIVIL PENALTY.—In addition to any criminal penalty 
provided by law, if any notice or return required to be filed by 
section 6048— 
"(1) is not filed on or before the time provided in such 
section, or 
"(2) does not include all the information required pursuant 
to such section or includes incorrect information, 
the person required to file such notice or return shall pay a penalty 
equal to 35 percent of the gross reportable amount. If any failure 
described in the preceding sentence continues for more than 90 
days after the day on which the Secretary mails notice of such 
failure to the person required to pay such penalty, such person 
shall pay a penalty (in addition to the amount determined under 
the preceding sentence) of $10,000 for each 30-day period (or 
fraction thereof) during which such failure continues after the 
expiration of such 90-day period. In no event shall the penalty 
under this subsection with respect to any failure exceed the gross 
reportable amount. 
"(b) SPECIAL RULES FOR RETURNS UNDER SECTION 6048(b).— 
In the case of a return required under section 6048(b)— 
"(1) the United States person referred to in such section 
shall be liable for the penalty imposed by subsection (a), and 
110 STAT. 1908 
PUBLIC LAW 104-188—AUG. 20, 1996 
"(2) subsection (a) shall be applied by substituting *5 per-
cent' for '35 percent'. 
"(c) GROSS REPORTABLE AMOUNT.—For purposes of subsection 
(a), the term 'gross reportable amount' means— 
"(1) the gross value of the property involved in the event 
(determined as of the date of the event) in the case of a 
failure relating to section 6048(a), 
"(2) the gross value of the portion of the trust's assets 
at the close of the year treated as owned by the United States 
person in the case of a failure relating to section 6048(b)(1), 
and 
"(3) the gross amount of the distributions in the case of 
a failure relating to section 6048(c). 
"(d) REASONABLE CAUSE EXCEPTION.—NO penalty shall be 
imposed by this section on any failure which is shown to be due 
to reasonable cause and not due to willful neglect. The fact that 
a foreign jurisdiction would impose a civil or criminal penalty 
on the taxpayer (or any other person) for disclosing the required 
information is not reasonable cause. 
"(e) DEFICIENCY PROCEDURES NOT TO APPLY.—Subchapter B 
of chapter 63 (relating to deficiency procedures for income, estate, 
gift, and certain excise taxes) shall not apply in respect of the 
assessment or collection of any penalty imposed by subsection (a).". 
(c) CONFORMING AMENDMENTS.— 
(1) Paragraph (2) of section 6724(d) is amended by striking 
"or" at the end of subparagraph (S), by striking the period 
at the end of subparagraph (T) and inserting ", or", and by 
inserting after subparagraph (T) the following new subpara-
graph: 
"(U) section 6048(b)(1)(B) (relating to foreign trust 
reporting requirements).". 
(2) The table of sections for subpart B of part III of sub-
chapter A of chapter 61 is amended by striking the item relating 
to section 6048 and inserting the following new item: 
"Sec. 6048. Information with respect to certain foreign trusts.". 
(3) The table of sections for part I of subchapter B of 
chapter 68 is amended by striking the item relating to section 
6677 and inserting the following new item: 
"Sec. 6677. Failure to file information with respect to certain foreign trusts.". 
26 u s e 6048 
(d) EFFECTIVE DATES.— 
note. 
(1) REPORTABLE EVENTS.—To the extent related to sub-
section (a) of section 6048 of the Internal Revenue Code of 
1986, as amended by this section, the amendments made by 
this section shall apply to reportable events (as defined in 
such section 6048) occurring after the date of the enactment 
of this Act. 
(2) GRANTOR TRUST REPORTING.—To the extent related to 
subsection (b) of such section 6048, the amendments made 
by this section shall apply to taxable years of United States 
persons beginning after December 31, 1995. 
(3) REPORTING BY UNITED STATES BENEFICIARIES.—To the 
extent related to subsection (c) of such section 6048, the amend-
ments made by this section shall apply to distributions received 
after the date of the enactment of this Act. 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1909 
SEC. 1902. COMPARABLE PENALTIES FOR FAILURE TO FILE RETURN 
RELATING TO TRANSFERS TO FOREIGN ENTITIES. 
(a) IN GENERAL.—Section 1494 is amended by adding at the 
end the following new subsection: 
"(c) PENALTY.—In the case of any failure to file a return 
required by the Secretary with respect to any transfer described 
in section 1491, the person required to file such return shall be 
liable for the penalties provided in section 6677 in the same manner 
as if such failure were a failure to file a notice under section 
6048(a).". 
(b) EFFECTIVE DATE.—The amendment made by subsection (a) 26 use 1494 
shall apply to transfers after the date of the enactment of this i^ote. 
Act. 
SEC. 1903. MODIFICATIONS OF RULES RELATING TO FOREIGN TRUSTS 
HAVING ONE OR MORE UNITED STATES BENEFICIARIES. 
(a) TREATMENT OF TRUST OBLIGATIONS, ETC.— 
(1) Paragraph (2) of section 679(a) is amended by striking 
subparagraph (B) and inserting the following: 
"(B) TRANSFERS AT FAIR MARKET VALUE.—To any trans-
fer of property to a trust in exchange for consideration 
of at least the fair market value of the transferred property. 
For purposes of the preceding sentence, consideration other 
than cash shall be taken into account at its fair market 
value.". 
(2) Subsection (a) of section 679 (relating to foreign trusts 
having one or more United States beneficiaries) is amended 
by adding at the end the following new paragraph: 
"(3) CERTAIN OBLIGATIONS NOT TAKEN INTO ACCOUNT UNDER 
FAIR MARKET VALUE EXCEPTION.— 
"(A) IN GENERAL.—In determining whether paragraph 
(2)(B) applies to any transfer by a person described in 
clause (ii) or (iii) of subparagraph (C), there shall not 
be taken into account— 
"(i) except as provided in regulations, any obliga-
tion of a person described in subparagraph (C), and 
"(ii) to the extent provided in regulations, any 
obligation which is guaranteed by a person described 
in subparagraph (C). 
"(B) TREATMENT OF PRINCIPAL PAYMENTS ON OBLIGA-
TION.—Principal payments by the trust on any obligation 
referred to in subparagraph (A) shall be taken into account 
on and after the date of the payment in determining the 
portion of the trust attributable to the property transferred. 
"(C) PERSONS DESCRIBED.—The persons described in 
this subparagraph are— 
"(i) the trust, 
"(ii) any grantor or beneficiary of the trust, and 
"(iii) any person who is related (within the mean-
ing of section 643(i)(2)(B)) to any grantor or beneficiary 
of the trust.". 
(b) EXEMPTION OF TR/USTSFERS TO CHARITABLE TRUSTS.—Sub-
section (a) of section 679 is amended by striking "section 404(a)(4) 
or 404A" and inserting "section 6048(a)(3)(B)(ii)". 
(c) OTHER MODIFICATIONS.—Subsection (a) of section 679 is 
amended by adding at the end the following new paragraphs: 
110 STAT. 1910 
PUBLIC LAW 104-188—AUG. 20, 1996 
"(4) SPECIAL RULES APPLICABLE TO FOREIGN GRANTOR WHO 
LATER BECOMES A UNITED STATES PERSON.— 
"(A) IN GENERAL.—If a nonresident alien individual 
has a residency starting date within 5 years after directly 
or indirectly transferring property to a foreign trust, 
this section and section 6048 shall be applied as if such 
individual transferred to such trust on the residency start-
ing date an amount equal to the portion of such trust 
attributable to the property transferred by such individual 
to such trust in such transfer. 
"(B) TREATMENT OF UNDISTRIBUTED INCOME.—For pur-
poses of this section, undistributed net income for periods 
before such individual's residency starting date shall be 
taken into account in determining the portion of the trust 
which is attributable to property transferred by such 
individual to such trust but shall not otherwise be taken 
into account. 
"(C) RESIDENCY STARTING DATE.—For purposes of this 
paragraph, an individual's residency starting date is the 
residency 
starting 
date 
determined 
under 
section 
7701(b)(2)(A). 
"(5) OUTBOUND TRUST MIGRATIONS.—If— 
"(A) an individual who is a citizen or resident of the 
United States transferred property to a trust which was 
not a foreign trust, and 
"(B) such trust becomes a foreign trust while such 
individual is alive, 
then this section and section 6048 shall be applied as if such 
individual transferred to such trust on the date such trust 
becomes a foreign trust an amount equal to the portion of 
such trust attributable to the property previously transferred 
by such individual to such trust. A rule similar to the rule 
of paragraph (4)(B) shall apply for purposes of this paragraph.". 
(d) MODIFICATIONS RELATING TO WHETHER TRUST HAS UNITED 
STATES BENEFICIARIES.—Subsection (c) of section 679 is amended 
by adding at the end the following new paragraph: 
"(3) CERTAIN UNITED STATES BENEFICIARIES DISREGARDED.— 
A beneficiary shall not be treated as a United States person 
in applying this section with respect to any transfer of property 
to foreign trust if such beneficiary first became a United States 
person more than 5 years after the date of such transfer.". 
(e) TECHNICAL AMENDMENT.—Subparagraph (A) of section 
679(c)(2) is amended to read as follows: 
"(A) in the case of a foreign corporation, such corpora-
tion is a controlled foreign corporation (as defined in section 
957(a)),". 
(f) REGULATIONS.—Section 679 is amended by adding at the 
end the following new subsection: 
"(d) REGULATIONS.—The Secretary shall prescribe such regula-
tions as may be necessary or appropriate to carry out the purposes 
of this section.". 
26 use 679 note. 
(g) EFFECTIVE DATE.—The amendments made by this section 
shall apply to transfers of property after February 6, 1995. 
SEC. 1904. FOREIGN PERSONS NOT TO BE TREATED AS OWNERS 
UNDER GRANTOR TRUST RULES. 
(a) GENERAL RULE.— 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1911 
(1) Subsection (f) of section 672 (relating to special rule 
where grantor is foreign person) is amended to read as follows: 
"(f) SUBPART NOT TO RESULT IN FOREIGN OWNERSHIP.— 
"(1) IN GENERAL.—Notwithstanding any other provision of 
this subpart, this subpart shall apply only to the extent such 
application results in an amount (if any) being currently taken 
into account (directly or through 1 or more entities) under 
this chapter in computing the income of a citizen or resident 
of the United States or a domestic corporation. 
"(2) EXCEPTIONS.— 
"(A) CERTAIN REVOCABLE AND IRREVOCABLE TRUSTS.— 
Paragraph (1) shall not apply to any portion of a 
trust if— 
"(i) the power to revest absolutely in the grantor 
title to the trust property to which such portion is 
attributable is exercisable solely by the grantor without 
the approval or consent of any other person or with 
the consent of a related or subordinate party who 
is subservient to the grantor, or 
"(ii) the only amounts distributable from such por-
tion (whether income or corpus) during the lifetime 
of the grantor are amounts distributable to the grantor 
or the spouse of the grantor. 
"(B) COMPENSATORY 
TRUSTS.—Except as provided in 
regulations, paragraph (1) shall not apply to any portion 
of a trust distributions from which are taxable as com-
pensation for services rendered. 
"(3) SPECIAL RULES.—Except as otherwise provided in regu-
lations prescribed by the Secretary— 
"(A) a controlled foreign corporation (as defined in sec-
tion 957) shall be treated as a domestic corporation for 
purposes of paragraph (1), and 
"(B) paragraph (1) shall not apply for purposes of apply-
ing section 1296. 
"(4) 
RECHARACTERIZATION OF PURPORTED GIFTS.—In 
the 
case of any transfer directly or indirectly from a partnership 
or foreign corporation which the transferee treats as a 
gift or bequest, the Secretary may recharacterize such transfer 
in such circumstances as the Secretary determines to be appro-
priate to prevent the avoidance of the purposes of this sub-
section. 
"(5) 
SPECIAL 
RULE 
WHERE 
GRANTOR 
IS 
FOREIGN 
PERSON.—If^ 
"(A) but for this subsection, a foreign person would 
be treated as the owner of any portion of a trust, and 
"(B) such trust has a beneficiary who is a United 
States person, 
such beneficiary shall be treated as the grantor of such portion 
to the extent such beneficiary has made (directly or indirectly) 
transfers of property (other than in a sale for full and adequate 
consideration) to such foreign person. For purposes of the 
preceding sentence, any gift shall not be taken into account 
to the extent such gift would be excluded from taxable gifts 
under section 2503(b). 
"(6) REGULATIONS.—The Secretary shall prescribe such 
regulations as may be necessary or appropriate to carry out 
110 STAT. 1912 
PUBLIC LAW 104-188—AUG. 20, 1996 
the purposes of this subsection, including regulations providing 
that paragraph (1) shall not apply in appropriate cases.". 
(2) The last sentence of subsection (c) of section 672 is 
amended by inserting "subsection (f) and" before "sections 674". 
(b) CREDIT FOR CERTAIN TAXES.— 
(1) Paragraph (2) of section 665(d) is amended by adding 
at the end the following new sentence: "Under rules or regula-
tions prescribed by the Secretary, in the case of any foreign 
trust of which the settlor or another person would be treated 
as owner of any portion of the trust under subpart E but 
for section 672(f), the term 'taxes imposed on the trust' includes 
the allocable amount of any income, war profits, and excess 
profits taxes imposed by any foreign country or possession 
of the United States on the settlor or such other person in 
respect of trust income.". 
(2) Paragraph (5) of section 901(b) is amended by adding 
at the end the following new sentence: "Under rules or regula-
tions prescribed by the Secretary, in the case of any foreign 
trust of which the settlor or another person would be treated 
as owner of any portion of the trust under subpart E but 
for section 672(f), the allocable amount of any income, war 
profits, and excess profits taxes imposed by any foreign country 
or possession of the United States on the settlor or such other 
person in respect of trust income.". 
(c) 
DISTRIBUTIONS BY CERTAIN FOREIGN TRUSTS THROUGH 
NOMINEES.— 
(1) Section 643 is amended by adding at the end the follow-
ing new subsection: 
"(h) 
DISTRIBUTIONS BY CERTAIN FOREIGN TRUSTS THROUGH 
NOMINEES.—For purposes of this part, any amount paid to a United 
States person which is derived directly or indirectly from a foreign 
trust of which the payor is not the grantor shall be deemed in 
the year of pa5anent to have been directly paid by the foreign 
trust to such United States person.". 
(2) Section 665 is amended by striking subsection (c). 
26 u s e 643 note. 
(d) EFFECTIVE DATE.— 
(1) IN GENERAL.—Except as provided by paragraph (2), 
the amendments made by this section shall take 
effect 
on the date of the enactment of this Act. 
(2) EXCEPTION FOR CERTAIN TRUSTS.—The amendments 
made by this section shall not apply to any trust— 
(A) which is treated as owned by the grantor under 
section 676 or 677 (other than subsection (a)(3) thereof) 
of the Internal Revenue Code of 1986, and 
(B) which is in existence on September 19, 1995. 
The preceding sentence shall not apply to the portion of any 
such trust attributable to any transfer to such trust after 
September 19, 1995. 
26 use 1491 
(e) TRANSITIONAL RULE.—If— 
note. 
(1) by reason of the amendments made by this section, 
any person other than a United States person ceases to be 
treated as the owner of a portion of a domestic trust, and 
(2) before January 1, 1997, such trust becomes a foreign 
trust, or the assets of such trust are transferred to a foreign 
trust, 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1913 
no tax shall be imposed by section 1491 of the Internal Revenue 
Code of 1986 by reason of such trust becoming a foreign trust 
or the assets of such trust being transferred to a foreign trust. 
SEC. 1905. INFORMATION REPORTING REGARDING FOREIGN GIFTS. 
(a) IN GENERAL.—Subpart A of part III of subchapter A of 
chapter 61 is amended by inserting after section 6039E the following 
new section: 
"SEC. 6039F. NOTICE OF I.ARGE GIFTS RECEIVED FROM FOREIGN 
PERSONS. 
"(a) IN GENERAL.—If the value of the aggregate foreign gifts 
received by a United States person (other than an organization 
described in section 501(c) and exempt from tax under section 
501(a)) during any taxable year exceeds $10,000, such United States 
person shall furnish (at such time and in such manner as the 
Secretary shall prescribe) such information as the Secretary may 
prescribe regarding each foreign gift received during such year. 
"(b) FOREIGN GIFT.—For purposes of this section, the term 
'foreign gift' means any amount received from a person other than 
a United States person which the recipient treats as a gift or 
bequest. Such term shall not include any qualified transfer (within 
the meaning of section 2503(e)(2)) or any distribution properly 
disclosed in a return under section 6048(c). 
"(c) PENALTY FOR FAILURE TO FILE INFORMATION.— 
"(1) IN GENERAL.—If a United States person fails to furnish 
the information required by subsection (a) with respect to 
any foreign gift within the time prescribed therefor (including 
extensions)— 
"(A) the tax consequences of the receipt of such gift 
shall be determined by the Secretary, and 
"(B) such United States person shall pay (upon notice 
and demand by the Secretary and in the same manner 
as tax) an amount equal to 5 percent of the amount of 
such foreign gift for each month for which the failure 
continues (not to exceed 25 percent of such amount in 
the aggregate). 
"(2) REASONABLE CAUSE EXCEPTION.—Paragraph (1) shall 
not apply to any failure to report a foreign gift if the United 
States person shows that the failure is due to reasonable cause 
and not due to willful neglect. 
"(d) COST-OF-LIVING i\DJUSTMENT.—In the case of any taxable 
year beginning after December 31, 1996, the $10,000 amount under 
subsection (a) shall be increased by an amount equal to the product 
of such amount and the cost-of-living adjustment for such taxable 
year under section 1(f)(3), except that subparagraph (B) thereof 
shall be appHed by substituting '1995' for '1992'. 
"(e) REGULATIONS.—The Secretary shall prescribe such regula-
tions as may be necessarj/^ or appropriate to carry out the purposes 
of this section.". 
(b) CLERICAL AMENDMENT.—The table of sections for such sub-
part is amended by inserting after the item relating to section 
6039E the following new item: 
"Sec. 6039F. Notice of large gifts received from foreign persons.". 
(c) EFFECTIVE DATE.—The amendments made by this section 26USC6039F 
shall apply to amounts received after the date of the enactment note. 
of this Act in taxable years ending after such date. 
110 STAT. 1914 
PUBLIC LAW 104-188—AUG. 20, 1996 
SEC. 1906. MODIFICATION OF RULES RELATING TO FOREIGN TRUSTS 
WHICH ARE NOT GRANTOR TRUSTS. 
(a) MODIFICATION OF INTEREST CHARGE ON ACCUMULATION DIS-
TRIBUTIONS.—Subsection (a) of section 668 (relating to interest 
charge on accumulation distributions from foreign trusts) is 
amended to read as follows: 
"(a) GENERAL RULE.—For purposes of the tax determined under 
section 667(a)— 
"(1) INTEREST DETERMINED USING UNDERPAYMENT RATES.— 
The interest charge determined under this section with respect 
to any distribution is the amount of interest which would 
be determined on the partial tax computed under section 667(b) 
for the period described in paragraph (2) using the rates and 
the method imder section 6621 applicable to underpayments 
of tax. 
"(2) PERIOD.—For purposes of paragraph (1), the period 
described in this paragraph is the period which begins on 
the date which is the applicable number of years before the 
date of the distribution and which ends on the date of the 
distribution. 
"(3) APPLICABLE NUMBER OF YEARS.—For purposes of para-
graph (2)— 
"(A) IN GENERAL.—The applicable number of years 
with respect to a distribution is the number determined 
by dividing— 
"(i) the sum of the products described in subpara-
graph (B) with respect to each undistributed income 
year, by 
"(ii) the aggregate undistributed net income. 
The quotient determined under the preceding sentence 
shall be rounded under procedures prescribed by the Sec-
retary. 
"(B) 
PRODUCT 
DESCRIBED.—For purposes 
of sub-
paragraph (A), the product described in this subparagraph 
with respect to any undistributed income year is the prod-
uct of— 
"(i) the undistributed net income for such year, 
and 
"(ii) the sum of the number of taxable years 
between such year and the taxable year of the distribu-
tion (counting in each case the undistributed income 
year but not counting the taxable year of the distribu-
tion). 
"(4) UNDISTRIBUTED INCOME YEAR.—For purposes of this 
subsection, the term 'undistributed income year' means any 
prior taxable year of the trust for which there is undistributed 
net income, other than a taxable year during all of which 
the beneficiary receiving the distribution was not a citizen 
or resident of the United States. 
"(5) DETERMINATION OF UNDISTRIBUTED NET INCOME.—Not-
withstanding section 666, for purposes of this subsection, an 
accumulation distribution from the trust shall be treated as 
reducing proportionately the undistributed net income for 
undistributed income years. 
"(6) PERIODS BEFORE 1996.—Interest for the portion of the 
period described in paragraph (2) which occurs before January 
1, 1996, shall be determined— 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1915 
"(A) by using an interest rate of 6 percent, and 
"(B) without compounding until January 1, 1996.". 
(b) ABUSIVE TRANSACTIONS.—Section 643(a) is amended by 
inserting after paragraph (6) the following new paragraph: 
"(7) ABUSIVE TRANSACTIONS.—The Secretary shall prescribe 
such regulations as may be necessary or appropriate to carry 
out the purposes of this part, including regulations to prevent 
avoidance of such purposes.". 
(c) TREATMENT OF LOANS FROM TRUSTS.— 
(1) IN GENERAL.—Section 643 (relating to definitions 
applicable to subparts A, B, C, and D) is amended by adding 
at the end the following new subsection: 
"(i) LOANS FROM FOREIGN TRUSTS.—For purposes of subparts 
B, C, and D— 
"(1) GENERAL RULE.—Except as provided in regulations, 
if a foreign trust makes a loan of cash or marketable securities 
directly or indirectly to— 
"(A) any grantor or beneficiary of such trust who is 
a United States person, or 
"(B) any United States person not described in 
subparagraph (A) who is related to such grantor or bene-
ficiary, 
the amount of such loan shall be treated as a distribution 
by such trust to such grantor or beneficiary (as the case may 
be). 
"(2) DEFINITIONS AND SPECIAL RULES.—For purposes of this 
subsection— 
"(A) CASH.—The term 'cash' includes foreign currencies 
and cash equivalents. 
"(B) RELATED PERSON.— 
"(i) IN GENERAL.—A person is related to another 
person if the relationship between such persons would 
result in a disallowance of losses under section 267 
or 707(b). In applying section 267 for purposes of the 
preceding sentence, section 267(c)(4) shall be applied 
as if the family of an individual includes the spouses 
of the members of the family. 
"(ii) ALLOCATION.—If any person described in para-
graph (1)(B) is related to more than one person, the 
grantor or beneficiary to whom the treatment under 
this subsection applies shall be determined under regu-
lations prescribed by the Secretary. 
"(C) EXCLUSION OF TAX-EXEMPTS.—The term United 
States person' does not include any entity exempt from 
tax under this chapter. 
"(D) TRUST NOT TREATED AS SIMPLE TRUST.—Any trust 
which is treated under this subsection as making a distribu-
tion shall be treated as not described in section 651. 
"(3) SUBSEQUENT TRANSACTIONS REGARDING LOAN PRIN-
CIPAL.—If any loan is taken into account under paragraph 
(1), any subsequent transaction between the trust and the 
original borrower regarding the principal of the loan (by way 
of complete or partial repajnnent, satisfaction, cancellation, dis-
charge, or otherwise) shall be disregarded for purposes of this 
title.". 
110 STAT. 1916 
PUBLIC LAW 104-188—AUG. 20, 1996 
(2) TECHNICAL AMENDMENT.—Paragraph (8) of section 
7872(f) is amended by inserting ", 643(i)," before "or 1274" 
each place it appears. 
(d) EFFECTIVE DATES.— 
26 use 668 note. 
(1) INTEREST CHARGE.—The amendment made by sub-
section (a) shall apply to distributions after the date of the 
enactment of this Act. 
26 use 643 note. 
(2) ABUSIVE TRANSACTIONS.—The amendment made by sub-
section (b) shall take effect on the date of the enactment of 
this Act. 
26 use 643 note. 
(3) LOANS FROM TRUSTS.—The amendment made by sub-
section (c) shall apply to loans of cash or marketable securities 
made after September 19, 1995. 
SEC. 1907. RESIDENCE OF TRUSTS, ETC. 
(a) TREATMENT AS UNITED STATES PERSON.— 
(1) IN GENERAL.—Paragraph (30) of section 7701(a) is 
amended by striking "and" at the end of subparagraph (C) 
and by striking subparagraph (D) and by inserting the following 
new subparagraphs: 
"(D) any estate (other than a foreign estate, within 
the meaning of paragraph (31)), and 
"(E) any trust if— 
"(i) a court within the United States is able to 
exercise primary supervision over the administration 
of the trust, and 
"(ii) one or more United States fiduciaries have 
the authority to control all substantial decisions of 
the trust.". 
(2) CONFORMING AMENDMENT.—Paragraph (31) of section 
7701(a) is amended to read as follows: 
"(31) FOREIGN ESTATE OR TRUST.— 
"(A) FOREIGN ESTATE.—The term 'foreign estate' means 
an estate the income of which, from sources without the 
United States which is not effectively connected with the 
conduct of a trade or business within the United States, 
is not includible in gross income under subtitle A. 
"(B) FOREIGN TRUST.—The term 'foreign trust' means 
any trust other than a trust described in subparagraph 
(E) of paragraph (30).". 
26 use 7701 
(3) EFFECTIVE DATE.—The amendments made by this sub-
note, 
section shall apply— 
(A) to taxable years beginning after December 31, 
1996, or 
(B) at the election of the trustee of a trust, to taxable 
years ending after the date of the enactment of this Act. 
Such an election, once made, shall be irrevocable. 
(b) DOMESTIC TRUSTS WHICH BECOME FOREIGN TRUSTS.— 
(1) IN GENERAL.—Section 1491 (relating to imposition of 
tax on transfers to avoid income tax) is amended by adding 
at the end the following new flush sentence: 
"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.". 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1917 
(2) EFFECTIVE 
DATE.—The amendment made by this 26 use 1491 
subsection shall take effect on the date of the enactment of ^^ote. 
this Act. 
Subtitle J—Generalized System of 
GSP Renewal Act 
•n 
if 
of 1996. 
Preferences 
SEC. 1951. SHORT TITLE. 
19 USC 2101 
This subtitle may be cited as the "GSP Renewal Act of 1996". """^^ 
SEC. 1952. GENERALIZED SYSTEM OF PREFERENCES. 
(a) IN GENERAL.—Title V of the Trade Act of 1974 is amended 
to read as follows: 
"TITLE V—GENERALIZED SYSTEM OF 
PREFERENCES 
"SEC. 501. AUTHORITY TO EXTEND PREFERENCES. 
19 USC 2461. 
"The President may provide duty-free treatment for any eligible 
article from any beneficiary developing country in accordance with 
the provisions of this title. In taking any such action, the President 
shall have due regard for— 
"(1) the effect such action will have on furthering the 
economic development of developing countries through the 
expansion of their exports; 
"(2) the extent to which other major developed countries 
are undertaking a comparable effort to assist developing coun-
tries by granting generalized preferences with respect to 
imports of products of such countries; 
"(3) the anticipated impact of such action on United States 
producers of like or directly competitive products; and 
"(4) the extent of the beneficiary developing country's 
competitiveness with respect to eligible articles. 
"SEC. 502. DESIGNATION OF BENEFICIARY DEVELOPING COUNTRIES. 
19 USC 2462. 
"(a) AUTHORITY TO DESIGNATE COUNTRIES.— 
"(1) BENEFICIARY DEVELOPING COUNTRIES.—The President 
is authorized to designate countries as beneficiary developing 
countries for purposes of this title. 
"(2) LEAST-DEVELOPED BENEFICIARY DEVELOPING COUN-
TRIES.—The President is authorized to designate any bene-
ficiary developing country as a least-developed beneficiary 
developing country for purposes of this title, based on the 
considerations in section 501 and subsection (c) of this section. 
"(b) COUNTRIES INELIGIBLE FOR DESIGNATION.— 
"(1) SPECIFIC COUNTRIES.—The following countries may not 
be designated as beneficiary developing countries for purposes 
of this title: 
"(A) Australia. 
"(B) Canada. 
"(C) European Union member states. 
"(D) Iceland. 
"(E) Japan. 
"(F) Monaco. 
"(G) New Zealand. 
110 STAT. 1918 
PUBLIC LAW 104-188—AUG. 20, 1996 
"(H) Norway. 
"(I) Switzerland. 
President. 
"(2) OTHER BASES FOR INELIGIBILITY.—The President shall 
not designate any country a beneficiary developing country 
under this title if any of the following applies: 
"(A) Such country is a Communist country, unless— 
"(i) the products of such country receive non-
discriminatory treatment, 
"(ii) such country is a WTO Member (as such term 
is defined in section 2(10) of the Uruguay Round Agree-
ments Act) (19 U.S.C. 3501(10)) and a member of the 
International Monetary Fund, and 
"(iii) such country is not dominated or controlled 
by international communism. 
"(B) Such country is a party to an arrangement of 
countries and participates in any action pursuant to such 
arrangement, the effect of which is— 
"(i) to withhold supplies of vital commodity 
resources fi'om international trade or to raise the price 
of such commodities to an unreasonable level, and 
"(ii) to cause serious disruption of the world 
economy. 
"(C) Such country affords preferential treatment to 
the products of a developed country, other than the United 
States, which has, or is likely to have, a significant adverse 
effect on United States commerce. 
"(D)(i) Such country— 
"(I) has nationalized, expropriated, or otherwise 
seized ownership or control of property, including 
patents, trademarks, or copyrights, owned by a United 
States citizen or by a corporation, partnership, or 
association which is 50 percent or more beneficially 
owned by United States citizens, 
"(II) has taken steps to repudiate or nullify an 
existing contract or agreement with a United States 
citizen or a corporation, partnership, or association 
which is 50 percent or more beneficially owned by 
United States citizens, the effect of which is to nation-
alize, expropriate, or otherwise seize ownership or 
control of property, including patents, trademarks, or 
copjrrights, so owned, or 
"(III) has imposed or enforced taxes or other 
exactions, restrictive maintenance or operational condi-
tions, or other measures with respect to property, 
including patents, trademarks, or copyrights, so owned, 
the effect of which is to nationalize, expropriate, or 
otherwise seize ownership or control of such property, 
unless clause (ii) applies. 
"(ii) This clause applies if the President determines 
that— 
"(I) prompt, adequate, and effective compensation 
has been or is being made to the citizen, corporation, 
partnership, or association referred to in clause (i), 
"(II) good faith negotiations to provide prompt, 
adequate, 
and 
effective 
compensation 
under 
the 
applicable provisions of international law are in 
progress, or the country described in clause (i) is other-
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1919 
wise taking steps to discharge its obligations under 
international law with respect to such citizen, corpora-
tion, partnership, or association, or 
"(III) a dispute involving such citizen, corporation, 
partnership, or association over compensation for such 
a seizure has been submitted to arbitration under the 
provisions of the Convention for the Settlement of 
Investment Disputes, or in another mutually agreed 
upon forum, 
and the President promptly furnishes a copy of such deter-
mination to the Senate and House of Representatives. 
"(E) Such country fails to act in good faith in recogniz-
ing as binding or in enforcing arbitral awards in favor 
of United States citizens or a corporation, partnership, 
or association which is 50 percent or more beneficially 
owned by United States citizens, which have 
been 
made by arbitrators appointed for each case or by perma-
nent arbitral bodies to which the parties involved have 
submitted their dispute. 
"(F) Such country aids or abets, by granting sanctuary 
from prosecution to, any individual or group which has 
committed an act of international terrorism. 
"(G) Such country has not taken or is not taking steps 
to afford internationally recognized worker rights to 
workers in the country (including any designated zone in 
that country). 
Subparagraphs (D), (E), (F), and (G) shall not prevent the 
designation of any country as a beneficiary developing country 
under this title if the President determines that such designa-
tion will be in the national economic interest of the United 
States and reports such determination to the Congress with 
the reasons therefor. 
"(c) FACTORS AFFECTING COUNTRY DESIGNATION.—In determin-
ing whether to designate any country as a beneficiary developing 
country under this title, the President shall take into account— 
"(1) an expression by such country of its desire to be so 
designated; 
"(2) the level of economic development of such country, 
including its per capita gross national product, the living stand-
£irds of its inhabitants, and any other economic factors which 
the President deems appropriate; 
"(3) whether or not other major developed countries are 
extending generalized preferential tariff treatment to such 
country; 
"(4) the extent to which such country has assured the 
United States that it will provide equitable and reasonable 
access to the markets and basic commodity resources of such 
country and the extent to which such country has assured 
the United States that it will refrain from engaging in 
unreasonable export practices; 
"(5) the extent to which such country is providing adequate 
and effective protection of intellectual property rights; 
"(6) the 
extent 
to which 
such country has 
taken 
action to— 
"(A) reduce trade distorting investment practices and 
policies (including export performance requirements); and 
110 STAT. 1920 
PUBLIC LAW 104-188—AUG. 20, 1996 
"(B) reduce or eliminate barriers to trade in services; 
and 
"(7) whether or not such country has taken or is taking 
steps to afford to workers in that country (including any des-
ignated zone in that country) internationally recognized worker 
rights. 
"(d) WITHDRAWAL, SUSPENSION, OR LIMITATION OF COUNTRY 
DESIGNATION.— 
"(1) IN GENERAL.—The President may withdraw, suspend, 
or limit the application of the duty-free treatment accorded 
under this title with respect to any country. In taking any 
action under this subsection, the President shall consider the 
factors set forth in section 501 and subsection (c) of this section. 
"(2) CHANGED CIRCUMSTANCES.—The President shall, after 
complying with the requirements of subsection (f)(2), withdraw 
or suspend the designation of any country as a beneficiary 
developing country if, after such designation, the President 
determines that as the result of changed circumstances such 
country would be barred from designation as a beneficiary 
developing country under subsection (b)(2). Such country shall 
cease to be a beneficiary developing country on the day on 
which the President issues an Executive order or Presidential 
proclamation revoking the designation of such country under 
this title. 
President. 
"(3) ADVICE TO CONGRESS.—The President shall, as nec-
essary, advise the Congress on the application of section 501 
and subsection (c) of this section, and the actions the President 
has taken to withdraw, to suspend, or to limit the application 
of duty-free treatment with respect to any country which has 
failed to adequately take the actions described in subsection 
(0. 
"(e) 
MANDATORY GRADUATION OF BENEFICIARY DEVELOPING 
COUNTRIES.—If the President determines that a beneficiary develop-
ing country has become a 'high income' country, as defined by 
the official statistics of the International Bank for Reconstruction 
and Development, then the President shall terminate the designa-
tion of such country as a beneficiary developing country for purposes 
of this title, effective on January 1 of the second year following 
the year in which such determination is made. 
"(f) CONGRESSIONAL NOTIFICATION.— 
"(1) NOTIFICATION OF DESIGNATION.— 
"(A) IN GENERAL.—Before the President designates any 
country as a beneficiary developing country under this 
title, the President shall notify the Congress of the Presi-
dent's intention to make such designation, together with 
the considerations entering into such decision. 
"(B) 
DESIGNATION AS LEAST-DEVELOPED BENEFICIARY 
DEVELOPING COUNTRY.—^At least 60 days before the Presi-
dent designates any country as a least-developed bene-
ficiary developing country, the President shall notify the 
Congress of the President's intention to make such designa-
tion. 
"(2) NOTIFICATION OF TERMINATION.—If the President 
has 
designated any country as a beneficiary developing country 
under this title, the President shall not terminate such designa-
tion unless, at least 60 days before such termination, the Presi-
dent has notified the Congress and has notified such country 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1921 
of the President's intention to terminate such designation, 
together with the considerations entering into such decision. 
"SEC. 503. DESIGNATION OF ELIGIBLE ARTICLES. 
19 USC 2463. 
"(a) ELIGIBLE ARTICLES.— 
"(1) DESIGNATION.— 
"(A) IN GENERAL.—Except as provided in subsection 
(b), the President is authorized to designate articles as 
eligible articles from all beneficiary developing countries 
for purposes of this title by Executive order or Presidential 
proclamation after receiving the advice of the International 
Trade Commission in accordance with subsection (e). 
"(B) LEAST-DEVELOPED BENEFICIARY DEVELOPING COUN-
TRIES.—Except for articles described in subparagraphs (A), 
(B), and (E) of subsection (b)(1) and articles described in 
paragraphs (2) and (3) of subsection (b), the President 
may, in carrying out section 502(d)(1) and subsection (c)(1) 
of this section, designate articles as eligible articles only 
for coTintries designated as least-developed beneficiary 
developing countries under section 502(a)(2) if, after receiv-
ing the advice of the International Trade Commission in 
accordance with subsection (e) of this section, the President 
determines that such articles are not import-sensitive in 
the context of imports from least-developed beneficiary 
developing countries. 
"(C) THREE-YEAR RULE.—If, after receiving the advice 
of the International Trade Commission under subsection 
(e), an article has been formally considered for designation 
as an eligible article under this title and denied such 
designation, such article may not be reconsidered for 
such designation for a period of 3 years after such denial. 
"(2) RULE OF ORIGIN.— 
"(A) GENERAL RULE.—The duty-free treatment provided 
under this title shall apply to any eligible article which 
is the growth, product, or manufacture of a beneficiary 
developing country if— 
"(i) that article is imported directly from a bene-
ficiary developing country into the customs territory 
of the United States; and 
"(ii) the sum o
f
— 
"(I) the cost or value of the materials produced 
in the beneficiary developing country or any two 
or more such countries that are members of the 
same association of countries and are treated as 
one country under section 507(2), plus 
"(II) the direct costs of processing operations 
performed in such beneficiary developing country 
or such member countries, is not less than 35 
percent of the appraised value of such article at 
the time it is entered. 
"(B) EXCLUSIONS.—An article shall not be treated as 
the growth, product, or manufacture of a beneficiary devel-
oping country by virtue of having merely undergone— 
"(i) simple combining or packaging operations, or 
"(ii) mere dilution with water or mere dilution 
with another substance that does not materially alter 
the characteristics of the article. 
110 STAT. 1922 
PUBLIC LAW 104-188—AUG. 20, 1996 
"(3) REGULATIONS.—The Secretary of the Treasury, after 
consulting with the United States Trade Representative, shall 
prescribe such regulations as may be necessary to carry out 
paragraph (2), including, but not limited to, regulations provid-
ing that, in order to be eligible for duty-free treatment under 
this title, an article— 
"(A) must be wholly the growth, product, or manufac-
ture of a beneficiary developing country, or 
"(B) must be a new or different article of commerce 
which has been grown, produced, or manufactured in the 
beneficiary developing country. 
"(b) ARTICLES THAT MAY NOT B E DESIGNATED AS ELIGIBLE 
ARTICLES.— 
"(1) IMPORT SENSITIVE ARTICLES.—The President may not 
designate any article as an eligible article under subsection 
(a) if such article is within one of the following categories 
of import-sensitive articles: 
"(A) Textile and apparel articles which were not eligible 
articles for purposes of this title on January 1, 1994, as 
this title was in effect on such date. 
"(B) Watches, except those watches entered after June 
30, 1989, that the President specifically determines, after 
public notice and comment, will not cause material injury 
to watch or watch band, strap, or bracelet manufacturing 
and assembly operations in the United States or the United 
States insular possessions. 
"(C) Import-sensitive electronic articles. 
"(D) Import-sensitive steel articles. 
"(E) Footwear, handbags, luggage, flat goods, work 
gloves, and leather wearing apparel which were not eligible 
articles for purposes of this title on January 1, 1995, as 
this title was in effect on such date. 
"(F) Import-sensitive semimanufactured and manufac-
tured glass products. 
"(G) Any other articles which the President determines 
to be import-sensitive in the context of the Generalized 
System of Preferences. 
"(2) ARTICLES AGAINST WHICH OTHER ACTIONS TAKEN.—An 
article shall not be an eligible article for purposes of this 
title for any period during which such article is the subject 
of £iny action proclaimed pursuant to section 203 of this Act 
(19 U.S.C. 2253) or section 232 or 351 of the Trade Expansion 
Act of 1962 (19 U.S.C. 1862, 1981). 
"(3) AGRICULTURAL PRODUCTS.—NO quantity of an agricul-
tural product subject to a tariff-rate quota that exceeds the 
in-quota quantity shall be eligible for duty-free treatment under 
this title. 
"(c) WITHDRAWAL, SUSPENSION, OR LIMITATION OF DUTY-FREE 
TREATMENT; COMPETITIVE NEED LIMITATION.— 
"(1) IN GENERAL.—The President may withdraw, suspend, 
or limit the application of the duty-free treatment accorded 
under this title with respect to any article, except that no 
rate of duty may be established with respect to any article 
pursuant to this subsection other than the rate which would 
apply but for this title. In taking any action under this sub-
section, the President shall consider the factors set forth in 
sections 501 and 502(c). 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1923 
"(2) COMPETITIVE NEED LIMITATION.— 
"(A) 
BASIS FOR WITHDRAWAL OF DUTY-FREE TREAT-
MENT.— 
"(i) IN GENERAL.—Except as provided in clause 
(ii) and subject to subsection (d), whenever the Presi-
dent determines that a beneficiary developing country 
has exported (directly or indirectly) to the United 
States during any calendar year beginning 
after 
December 31,1995— 
"(I) a quantity of an eligible article having 
an appraised value in excess of the applicable 
amount for the calendar year, or 
"(II) a quantity of £in eligible article equal 
to or exceeding 50 percent of the appraised value 
of the total imports of that article into the United 
States during any calendar year, 
the President shall, not later than July 1 of the next 
calendar year, terminate the duty-free treatment for 
that article fi-om that beneficiary developing country. 
"(ii) 
ANNUAL 
ADJUSTMENT 
OF 
APPLICABLE 
AMOUNT.—For purposes of applying clause (i), the 
applicable amount is— 
"(I) for 1996, $75,000,000, and 
"(II) for each calendar year thereafter, an 
amount equal to the applicable amount in effect 
for the preceding calendar year plus $5,000,000. 
"(B) COUNTRY DEFINED.—For purposes of this para-
graph, the term 'coiuitr^ does not include an association 
of countries which is treated as one country under section 
507(2), but does include a country which is a member 
of any such association. 
"(C) REDESIGNATIONS.—^A country which is no longer 
treated as a beneficiary developing country with respect 
to an eligible article by reason of subparagraph (A) may, 
subject to the considerations set forth in sections 501 and 
502, be redesignated a beneficiary developing country with 
respect to such article if imports of such article fi*om such 
country did not exceed the limitations in subparagraph 
(A) during the preceding calendar year. 
"(D) LEAST-DEVELOPED BENEFICIARY DEVELOPING COUN-
TRIES.—Subparagraph (A) shall not apply to any least-
developed beneficiary developing coimtry. 
"(E) ARTICLES NOT PRODUCED IN THE UNITED STATES 
EXCLUDED.—Subparagraph (A)(iXII) shall not apply with 
respect to any eligible article if a like or directly competitive 
article was not produced in the United States on January 
1,1995. 
"(F) D E MINIMIS WAIVERS.— 
"(i) IN GENERAL.—^The President may disregard 
subparagraph (A)(i)(II) with respect to any eligible 
article from any beneficiary developing country if the 
aggregate appraised v£Jue of the importe of such article 
into tibie United States during the preceding calendar 
year does not exceed the applicable amount for such 
preceding cedendar year. 
"(ii) APPLICABLE AMOUNT.—For purposes of apply-
ing clause (i), the applicable amount is— 
29-lMO-96-7:(^3Pait3 
110 STAT. 1924 
PUBLIC LAW 104-188—AUG. 20, 1996 
"(I) for calendar year 1996, $13,000,000, and 
"(11) for each calendar year thereafter, an 
amount equal to the applicable amount in effect 
for the preceding calendar year plus $500,000. 
"(d) WAIVER OF COMPETITIVE NEED LIMITATION.— 
"(1) IN GENERAL.—^The President may waive the application 
of subsection (c)(2) with respect to any eligible article of any 
beneficiary developing country if, before July 1 of the calendar 
year beginning after the calendar year for which a determina-
tion described in subsection (c)(2)(A) was made with respect 
to such eligible article, the President— 
"(A) receives the advice of the International Trade 
Commission under section 332 of the Tariff Act of 1930 
on whether any industry in the United States is likely 
to be adversely affected by such waiver, 
"(B) determines, based on the considerations described 
in sections 501 and 502(c) and the advice described in 
subparagraph (A), that such waiver is in the national eco-
nomic interest of the United States, and 
"(C) publishes the determination described in subpara-
graph (B) in the Federal Register. 
"(2) CONSIDERATIONS BY THE PRESIDENT.—In making any 
determination under paragraph (1), the President shall give 
great weight to— 
"(A) the extent to which the beneficiary developing 
country has assured the United States that such country 
will provide equitable and reasonable access to the markets 
and basic commodity resources of such country, and 
"(B) the extent to which such country provides ade-
quate and effective protection of intellectual property 
rights. 
"(3) OTHER BASES FOR WAIVER.—The President may waive 
the application of subsection (c)(2) if, before July 1 of the 
calendar year beginning after the calendar year for which a 
determination described in subsection (c)(2) was made with 
respect to a beneficiary developing country, the President deter-
mines that— 
"(A) there has been a historical preferential trade rela-
tionship between the United States and such country, 
"(B) there is a treaty or trade agreement in force 
covering economic relations between such country and the 
United States, and 
"(C) such country does not discriminate against, or 
impose unjustifiable or unreasonable barriers to, United 
States commerce, 
and the President publishes that determination in the Federal 
Register. 
"(4) LIMITATIONS ON WAIVERS.— 
"(A) IN GENERAL.—The President may not exercise the 
waiver authority under this subsection with respect to a 
quantity of an eligible article entered during any calendar 
year beginning after 1995, the aggregate appraised value 
of which equals or exceeds 30 percent of the aggregate 
appraised value of all articles that entered duty-free under 
this title during the preceding calendar year. 
"(B) OTHER WAIVER LIMITS.—The President may not 
exercise the waiver authority provided under this sub-
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1925 
section with "respect to a quantity of an eligible article 
entered during any calendar year beginning after 1995, 
the aggregate appraised value of which exceeds 15 percent 
of the aggregate appraised value of all articles that have 
entered duty-free under this title during the preceding 
calendar year from those beneficiary developing countries 
which for the preceding calendar year— 
"(i) had a per capita gross national product (cal-
culated on the basis of the best available information, 
including 
that 
of 
the 
International 
Bank 
for 
Reconstruction and Development) of $5,000 or more; 
or 
"(ii) had exported (either directly or indirectly) to 
the United States a quantity of articles that was duty-
fi-ee under this title that had an aggregate appraised 
value of more than 10 percent of the aggregate 
appraised value of all articles that entered duty-fi*ee 
under this title during that year. 
"(C) CALCULATION OF LIMITATIONS.—There shall be 
counted against the limitations imposed under subpara-
graphs (A) and (B) for any calendar year only that value 
of any eligible article of any country that— 
"(i) entered duty-fi-ee under this title during such 
calendar year; and 
"(ii) is in excess of the value of that article that 
would have been so entered during such calendar year 
if the limitations under subsection (c)(2)(A) applied. 
"(5) EFFECTIVE PERIOD OF WAIVER.—^Any waiver granted 
under this subsection shall remain in effect until the President 
determines that such waiver is no longer warranted due to 
changed circumstances. 
"(e) INTERNATIONAL TRADE COMMISSION ADVICE.—Before des-
ignating articles as eligible articles under subsection (a)(1), the 
President shall publish and furnish the International Trade 
Commission with lists of articles which may be considered 
for designation as eligible Eirticles for purposes of this title. The 
provisions of sections 131, 132, 133, and 134 shall be complied 
with as though action under section 501 and this section were 
action under section 123 to carry out a trade agreement entered 
into under section 123. 
"(f) SPECIAL RULE CONCERNING PUERTO RICO.—NO action under 
this title may affect £iny tariff duty imposed by the Legislature 
of Puerto Rico pursuant to section 319 of the Tariff Act of 1930 
on coffee imported into Puerto Rico. 
'^EC. 504. REVIEW AND REPORT TO CONGRESS. 
19USC2464. 
"The President shall submit an annual report to the Congress President, 
on the status of internationally recognized worker rights within 
each beneficiary developing country. 
"SEC. 505. DATE OF TERMINATION. 
19USC2465. 
"No duty-fi'ee treatment provided under this title shall remain 
in effect after May 31, 1997. 
"SEC. 606. AGRICULTURAL EXPORTS OF BENEFICIARY DEVELOPING 
19 USC 2466. 
COUNTRIES. 
"The appropriate agencies of the United States shall assist 
beneficiary developing countries to develop and implement meas-
110 STAT. 1926 
PUBLIC LAW 104-188—AUG. 20, 1996 
ures designed to assure that the agricultural sectors of their econo-
mies are not directed to export markets to the detriment of the 
production of foodstuffs for their citizenry. 
19 u s e 2467. 
"SEC. 507. DEFINITIONS. 
"For purposes of this title: 
"(1) BENEFICIARY DEVELOPING COUNTRY.—The term 'bene-
ficiary developing country' means any country with respect 
to which there is in effect an Executive order or Presidential 
proclamation by the President designating such country as 
a beneficiary developing country for purposes of this title. 
"(2) COUNTRY.—The term 'country' means any foreign coun-
try or territory, including any overseas dependent territory 
or possession of a foreign country, or the Trust Territory of 
the Pacific Islands. In the case of an association of countries 
which is a fi-ee trade area or customs union, or which is contrib-
uting to comprehensive regional economic integration among 
its members through appropriate means, including, but not 
limited to, the reduction of duties, the President may by Execu-
tive order or Presidential proclamation provide that all mem-
bers of such association other than members which are barred 
fi'om designation under section 502(b) shall be treated as one 
country for purposes of this title. 
"(3) ENTERED.—The term 'entered' means entered, or with-
drawn from warehouse for consumption, in the customs terri-
tory of the United States. 
"(4) INTERNATIONALLY RECOGNIZED WORKER RIGHTS.—The 
term 'internationally recognized worker rights' includes— 
"(A) the right of association; 
"(B) the right to organize and bargain collectively; 
"(C) a prohibition on the use of any form of forced 
or compulsory labor; 
"(D) a minimum age for the employment of child-
ren; and 
"(E) acceptable conditions of work with respect to 
minimum wages, hours of work, and occupational safety 
and health. 
"(5) 
LEAST-DEVELOPED BENEFICIARY DEVELOPING COUN-
TRY.—The term 'least-developed beneficiary developing country' 
means a beneficiary developing country that is designated as 
a least-developed beneficiary developing country under section 
502(a)(2).". 
(b) TABLE OF CONTENTS.—The items relating to title V in the 
table of contents of the Trade Act of 1974 are amended to read 
as follows: 
"TITLE V — G E N E R A L I Z E D SYSTEM OF PREFERENCES 
"Sec. 501. Authority to extend preferences. 
"Sec. 502. Designation of beneficiary developing countries. 
"Sec. 503. Designation of eligible articles. 
"Sec. 504. Review and reports to Congress. 
"Sec. 505. Date of termination. 
"Sec. 506. Agricultural exports of beneficiary developing countries. 
"Sec. 507. Definitions.". 
19 u s e 2461 
SEC. 1953. EFFECTIVE DATE. 
(a) IN GENERAL.—The amendments made by this subtitle apply 
to articles entered on or after October 1, 1996. 
(b) RETROACTIVE APPLICATION.— 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1927 
(1) GENERAL RULE.—Notwithstanding section 514 of the 
Tariff Act of 1930 or any other provision of law and subject 
to subsection (c)— 
(A) any article that was entered— 
(i) after July 31,1995, and 
(ii) before January 1,1996, and 
to which duty-free treatment under title V of the Trade 
Act of 1974 would have applied if the entry had been 
made on July 31, 1995, 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, and 
(B) any article that was entered— 
(i) after December 31,1995, and 
(ii) before October 1, 1996, and 
to which duty-free treatment under title V of the Trade 
Act of 1974 (as amended by this subtitle) would have 
applied if the entry had been made on or after October 
1, 1996, 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. 
(2) LIMITATION ON REFUNDS.—NO refund shall be made 
pursuant to this subsection before October 1, 1996. 
(3) ENTRY.—^As used in this subsection, the term "entry" 
includes a withdrawal from warehouse for consumption. 
(c) REQUESTS.—Liquidation or reliquidation may be made under 
subsection (b) 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— 
(1) to locate the entry; or 
(2) to reconstruct the entry if it cannot be located. 
SEC. 1954. CONFORMING AMENDMENTS. 
(a) TRADE LAWS.— 
(1) Section 1211(b) of the Omnibus Trade and Competitive-
ness Act of 1988 (19 U.S.C. 3011(b)) is amended— 
(A) in paragraph (1), by striking "(19 U.S.C. 2463(a), 
2464(c)(3))" and inserting "(as in effect on July 31, 
1995)"; and 
(B) in paragraph (2), by striking "(19 U.S.C. 2464(c)(1))" 
and inserting the following: "(as in effect on July 31,1995)". 
(2) Section 203(c)(7) of the Andean Trade Preference Act 
(19 U.S.C. 3202(c)(7)) is amended by striking "502(a)(4)" and 
inserting "507(4)". 
(3) Section 212(b)(7) of the Caribbean Basin Economic 
Recovery Act (19 U.S.C. 2702(b)(7)) is amended by striking 
"502(a)(4)" and inserting "507(4)". 
(4) Creneral note 3(a)(iv)(C) of the Harmonized Tariff 
Schedule of the United States is amended by striking "sections 
503(b) and 504(c)" and inserting "subsections (a), (c), and (d) 
of section 503". 
(5) Section 201(a)(2) of the North American Free Trade 
Agreement Implementation Act (19 U.S.C. 3331(a)(2)) is 
amended by striking "502(a)(2) of the Trade Act of 1974 (19 
U.S.C. 2462(a)(2))" and inserting "502(f)(2) of the Trade Act 
of 1974". 
110 STAT. 1928 
PUBLIC LAW 104-188—AUG. 20, 1996 
Employee 
Commuting 
Flexibility Act of 
1996. 
29 u s e 251 
note. 
(6) Section 131 of the Uruguay Round Agreements Act 
(19 U.S.C. 3551) is amended in subsections (a) eind (b)(1) by 
striking "502(a)(4)" and inserting "507(4)". 
(b) OTHER LAWS.— 
(1) Section 871(f)(2)(B) of the Internal Revenue Code of 
1986 is amended by striking "within the meaning of section 
502" and inserting "under title V". 
(2) Section 2202(8) of the Export Enhancement Act of 1988 
(15 U.S.C. 4711(8)) is amended by striking "502(a)(4)" and 
inserting "507(4)". 
(3) Section 231A(a) of the Foreign Assistance Act of 1961 
(22 U.S.C. 2191a(a)) is amended— 
(A) in paragraph (1) by striking "502(a)(4) of the Trade 
Act of 1974 (19 U.S.C. 2462(a)(4))" and inserting "507(4) 
of the Trade Act of 1974"; 
(B) in paragraph (2) by striking "505(c) of the Trade 
Act of 1974 (19 U.S.C. 2465(c))" and inserting "504 of 
the Trade Act of 1974"; and 
(C) in paragraph (4) by striking "502(a)(4)" and insert-
ing "507(4)^ 
(4) Section 1621(a)(1) of the International Financial Institu-
tions Act (22 U.S.C. 262p-4p(a)(l)) is amended by striking 
"502(a)(4)" and inserting "507(4)". 
(5) Section 103B of the Agricultural Act of 1949 (7 U.S.C. 
1444-2) is amended in subsections (a)(5)(F)(v) and (n)(l)(C) 
by striking "503(d) of the Trade Act of 1974 (19 U.S.C. 2463(d))" 
and inserting "503(b)(3) of the Trade Act of 1974". 
SEC. 2101. SHORT TITLE. 
This section and sections 2102 and 2103 may be cited as the 
"Employee Commuting FlexibiUty Act of 1996". 
SEC. 2102. PROPER 
COMPENSATION 
FOR 
USE 
OF 
EMPLOYER 
VEfflCLES. 
Section 4(a) of the Portal-to-Portal Act of 1947 (29 U.S.C. 
254(a)) is amended by adding at the end the following: "For purposes 
of this subsection, the use of an employer's vehicle for travel by 
an employee £ind activities performed by an employee which are 
incidental to the use of such vehicle for commuting shall not be 
considered part of the employee's principal activities if the use 
of such vehicle for travel is within the normal commuting area 
for the employer's business or establishment and the use of the 
employer's vehicle is subject to an agreement on the part of the 
employer and the employee or representative of such employee.". 
29 u s e 254 note. 
SEC. 2103. EFFECTIVE DATE. 
Minimum Wage 
Increase Act of 
1996. 
29 u s e 201 note. 
The Eimendment made by section 2101 shall take effect 
on the date of the enactment of this Act and shall apply in determin-
ing the application of section 4 of the Portal-to-Portal Act of 1947 
to an employee in any civil action brought before such date of 
enactment but pending on such date. 
SEC. 2104. MINIMUM WAGE INCREASE. 
(a) SHORT TITLE.—This section may be cited as the "Minimum 
Wage Increase Act of 1996". 
(b) AMENDMENT.—Paragraph (1) of section 6(a) of the Fair 
Labor Standards Act of 1938 (29 U.S.C. 206(a)) is amended to 
read as follows: 
PUBLIC LAW 104-188—AUG. 20, 1996 
110 STAT. 1929 
"(1) except as otherwise provided in this section, not less 
than $4.25 an hour during the period ending on September 
30, 1996, not less than $4.75 an hour during the year beginning 
on October 1, 1996, and not less than $5.15 an hour beginning 
September 1, 1997;". 
(c) CONFORMING AMENDMENT.—Section 6 of such Act (29 U.S.C. 
206) is amended by striking subsection (c). 
SEC. 2105. FAIR LABOR STA>fDARDS ACT AMENDMENTS. 
(a) COMPUTER PROFESSIONALS.—Section 13(a) of the Fair Labor 
Standards Act of 1938 (29 U.S.C. 213(a)) is amended by striking 
the period at the end of paragraph (16) and inserting "; or" and 
by adding after that paragraph the following: 
"(17) any employee who is a computer systems analyst, 
computer programmer, software engineer, or other similarly 
skilled worker, whose primary duty is— 
"(A) the application of systems analysis techniques and 
procedures, including consulting with users, to determine 
hardware, software, or system functional specifications; 
"(B) the design, development, documentation, analysis, 
creation, testing, or modification of computer systems or 
programs, including prototj^Des, based on and related to 
user or system design specifications; 
"(C) the design, documentation, testing, creation, or 
modification of computer programs related to machine 
operating systems; or 
"(D) a combination of duties described in subpara-
graphs (A), (B), and (C) the performance of which requires 
the same level of skills, and 
who, in the case of an employee who is compensated on an 
hourly basis, is compensated at a rate of not less than $27.63 
an hour.". 
(b) TIP CREDIT.—The last sentence of section 3(m) of the Fair 
Labor Standards Act of 1938 (29 U.S.C. 203(m)) is amended by 
striking "previous sentence" and inserting "preceding 2 sentences" 
and by striking "(1)" and "(2)" and such section is amended by 
striking the next to last sentence and inserting the following: "In 
determining the wage an employer is required to pay a tipped 
employee, the amount paid such employee by the employee's 
employer shall be an amount equal to— 
"(1) the cash wage paid such employee which for purposes 
of such determination shall be not less than the cash wage 
required to be paid such an employee on the date of the enact-
ment of this paragraph; and 
"(2) an additional amount on account of the tips received 
by such employee which amount is equal to the difference 
between the wage specified in paragraph (1) and the wage 
in effect under section 6(a)(1). 
The additional amount on account of tips may not exceed the 
value of the tips actually received by an employee.". 
(c) OPPORTUNITY WAGE.—Section 6 of the Fair Labor Standards 
Act of 1938 (29 U.S.C. 206) is amended by adding at the end 
the following: 
"(g)(1) In lieu of the rate prescribed by subsection (a)(1), any 
employer may pay any employee of such employer, during the 
first 90 consecutive calendar days after such employee is initially 
110 STAT. 1930 
PUBLIC LAW 104-188—AUG. 20, 1996 
employed by such employer, a wage which is not less than $4.25 
an hour. 
"(2) No employer may take any action to displace employees 
(including partial displacements such as reduction in hours, wages, 
or employment benefits) for purposes of hiring individuals at the 
wage authorized in paragraph (1). 
"(3) Any employer who violates this subsection shall be consid-
ered to have violated section 15(a)(3). 
"(4) This subsection shall only apply to an employee who has 
not attained the age of 20 years.". 
Approved August 20, 1996. 
LEGISLATIVE HISTORY—H.R. 3448: 
HOUSE REPORTS: Nos. 104-586 (Comm. on Ways and Means) and 104-737 
(Comm. of Conference). 
SENATE REPORTS: No. 104-281 (Comm. on Finance). 
CONGRESSIONAL RECORD, Vol. 142 (1996): 
May 22, considered and passed House. 
July 8, 9, considered and passed Senate, amended. 
Aug. 2, House and Senate agreed to conference report. 
WEEKLY COMPILATION OF PRESIDENTIAL DOCUMENTS, Vol. 32 (1996): 
Aug. 20, Presidential remarks and statement.