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H.R. 3448
SEC. 1202. EMPLOYER-PROVIDED EDUCATIONAL ASSISTANCE PROGRAMS.
(a) EXTENSION- Subsection (d) of section 127 (relating to
educational 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
beginning before July 1, 1997, shall be taken into account in
determining 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-
(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 subsection (b)
shall apply with respect to expenses relating to courses
beginning after June 30, 1996.
(3) EXPEDITED PROCEDURES- The Secretary of the Treasury 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
demonstrates to the satisfaction of the Secretary that any 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) (defining
employment) 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
taxpayer 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:
`(i) TAXPAYERS TO WHICH SUBPARAGRAPH APPLIES- The
fixed-base percentage shall be determined under this
subparagraph if--
`(I) the first taxable year in which a taxpayer had both gross
receipts and qualified research expenses begins after 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- Subsection (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 of--
`(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
Secretary.'.
(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 taxpayer 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.'.
(e) CONFORMING AMENDMENT- Subparagraph (D) of section 28(b)(1)
is amended by inserting `, and before July 1, 1996, and periods
after May 31, 1997' after `June 30, 1995'.
(f) EFFECTIVE DATES-
(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 installment
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 IV
is amended by adding at the end the following new item:
`Sec. 45C. Clinical testing expenses for certain drugs for rare
diseases or conditions.'.
(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 taxable year
which is attributable to the orphan drug credit determined
under section 45C may be carried back to a taxable year ending
before July 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' 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 by
striking 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 (d)(2) thereof' in paragraphs
(1) and (2)(A) and inserting `section 38(c)'.
(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) (relating
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) after December 31, 1994, and before July 1,
1996, or
`(ii) after May 31, 1997.'.
(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 striking `January 1,
1997' and inserting `July 1, 1998' and by striking `January 1,
1996' and inserting `January 1, 1997'.
(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
imposition of tax on diesel fuel and special motor fuels) is
amended by redesignating clauses (i) and (ii) as clauses (ii) and
(iii), respectively, 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 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 beneficiary
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 from tax under this subtitle.
`(C) PURCHASE- For purposes of subparagraph (A), the term
`purchase' means any acquisition if the basis of the
property acquired is determined under section 1012.
`(2) POTENTIAL CURRENT BENEFICIARY- For purposes of this
section, the term `potential current beneficiary' means, with
respect to any period, any person who at any time during such
period is entitled to, or at the discretion of any person may
receive, a distribution from the principal or income of the
trust. If a trust disposes of all of the stock which it holds
in an S corporation, then, with respect to such corporation,
the term `potential current beneficiary' does not include any
person who first met the requirements of the preceding sentence
during the 60-day period ending on the date of such disposition.
`(3) ELECTION- An election under this subsection shall be
made by the trustee. Any such election shall apply to the
taxable year of the trust for which made and all subsequent
taxable years of such trust unless revoked with the consent of
the Secretary.
`(4) CROSS REFERENCE-
`For special treatment of electing small business trusts, see
section 641(d).'.
(d) TAXATION OF ELECTING SMALL BUSINESS TRUSTS- Section 641
(relating to imposition of tax on trusts) is amended by adding at
the end the following new subsection:
`(d) SPECIAL RULES FOR TAXATION OF ELECTING SMALL BUSINESS 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
modifications 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 DISTRIBUTIONS- For
purposes of determining--
`(A) the amount of the tax imposed by this chapter on the
portion of any electing small business trust not treated as
a separate trust under paragraph (1), and
`(B) the distributable net income of the entire trust,
the items referred to in paragraph (2)(C) shall be excluded.
Except as provided in the preceding sentence, this subsection
shall not affect the taxation of any distribution from the trust.
`(4) TREATMENT OF UNUSED DEDUCTIONS WHERE TERMINATION 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
resulting 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 termination, steps were taken--
`(A) so that the corporation is a small business
corporation, or
`(B) to acquire the required shareholder consents, and
`(4) the corporation, and each person who was a shareholder
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
corporation) as may be required by the Secretary with respect
to such period,
then, notwithstanding the circumstances resulting in such
ineffectiveness 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 reasonable
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).'.
(c) EFFECTIVE DATE- The amendments made by subsections (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 shareholders 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 subparagraph:
`(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 to tax
treatment of subchapter S items) is hereby repealed.
(2) CONSISTENT TREATMENT REQUIRED- Section 6037 (relating to
return of S corporation) is amended by adding at the end the
following new subsection:
`(c) SHAREHOLDER'S RETURN MUST BE CONSISTENT WITH CORPORATE
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 INFORMATION- A
shareholder shall be treated as having complied with clause
(ii) of subparagraph (A) with respect to a subchapter S
item if the shareholder--
`(i) demonstrates to the satisfaction of the
Secretary that the treatment of the subchapter S item
on the shareholder's return is consistent with the
treatment of the item on the schedule furnished to the
shareholder by the corporation, and
`(ii) elects to have this paragraph apply with
respect to that item.
`(3) EFFECT OF FAILURE TO NOTIFY- In any case--
`(A) described in subparagraph (A)(i)(I) of paragraph
(2), and
`(B) in which the shareholder does not comply with
subparagraph (A)(ii) of paragraph (2),
any adjustment required to make the treatment of the items by
such shareholder consistent with the treatment of the items on
the corporate return shall be treated as arising out of
mathematical or clerical errors and assessed according to
section 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 provide
that, for purposes of this subtitle, such item is more
appropriately determined at the corporation level than at the
shareholder level.
`(5) ADDITION TO TAX FOR FAILURE TO COMPLY WITH SECTION-
`For addition to tax in the case of a shareholder's negligence in
connection with, or disregard of, the requirements of this section,
see part II of subchapter A of chapter 68.'.
(3) CONFORMING AMENDMENTS-
(A) Section 1366 is amended by striking 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
subparagraphs (A), (B), (C), and (D), respectively.
(b) TREATMENT OF CERTAIN WHOLLY OWNED S CORPORATION SUBSIDIARIES-
Section 1361(b) (defining small business corporation) is amended by
adding at the end the following new paragraph:
`(3) TREATMENT OF CERTAIN WHOLLY OWNED SUBSIDIARIES-
`(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
corporation, 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 purposes 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
corporation as a qualified subchapter S subsidiary.
`(C) TREATMENT OF TERMINATIONS OF QUALIFIED SUBCHAPTER S
SUBSIDIARY STATUS- For purposes of this title, if any
corporation which was a qualified subchapter S subsidiary
ceases to meet the requirements of subparagraph (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--
`(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 corporation
holds stock in a C corporation meeting the requirements 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 earnings 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
corporation) 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
adjustments 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 applying this section to
distributions 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) of--
`(I) the reductions in the account for the taxable
year (other than for distributions), over
`(II) the increases in such account for such taxable
year.'.
(c) CONFORMING AMENDMENTS- Subparagraph (A) of section 1368(e)(1)
is amended--
(1) by striking `as provided in subparagraph (B)' and
inserting `as otherwise provided in this paragraph', and
(2) by striking `section 1367(b)(2)(A)' and inserting
`section 1367(a)(2)'.
SEC. 1310. TREATMENT OF S CORPORATIONS UNDER SUBCHAPTER C.
Subsection (a) of section 1371 (relating to application of
subchapter C rules) is amended to read as follows:
`(a) APPLICATION OF SUBCHAPTER C RULES- Except as otherwise
provided in this title, and except to the extent inconsistent with
this subchapter, subchapter C shall apply to an S corporation and
its shareholders.'.
SEC. 1311. ELIMINATION OF CERTAIN EARNINGS AND PROFITS.
(a) IN GENERAL- If--
(1) a corporation was an electing small business corporation
under subchapter S of chapter 1 of the Internal Revenue Code of
1986 for any taxable year beginning before January 1, 1983, and
(2) such corporation is an S corporation under subchapter S
of chapter 1 of such Code for its first taxable year beginning
after December 31, 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 heading
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
respective meanings as when used in paragraph (3) of section
1362(d).'.
(C) The section heading for section 1375 is amended by
striking ` [Bold->] subchapter C [<-Bold] ' and inserting `
[Bold->] accumulated [<-Bold] '.
(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
disallowed losses and deductions to post-termination transition
period) is amended by adding at the end the following new
subparagraph:
`(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 any item of income of the S
corporation 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) shall
apply in the case of decedents dying after the date of the
enactment of this Act.
SEC. 1314. S CORPORATIONS ELIGIBLE FOR RULES APPLICABLE TO REAL
PROPERTY SUBDIVIDED FOR SALE BY NONCORPORATE 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
corporation), 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 BE SHAREHOLDERS.
(a) ELIGIBILITY TO BE 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
organization described in subsection (c)(7)) who is not an
individual,'.
(2) ELIGIBLE EXEMPT ORGANIZATIONS- Section 1361(c) (relating
to special rules for applying subsection (b)) is amended by
adding at the end the following new paragraph:
`(7) CERTAIN EXEMPT ORGANIZATIONS PERMITTED AS SHAREHOLDERS-
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'.
(f) EFFECTIVE DATE- The amendments made by this section shall
apply to taxable years beginning after December 31, 1997.
SEC. 1317. EFFECTIVE DATE.
(a) IN GENERAL- Except as otherwise provided in this subtitle,
the amendments made by this subtitle shall apply to taxable years
beginning after December 31, 1996.
(b) TREATMENT OF CERTAIN ELECTIONS UNDER PRIOR LAW- For purposes
of section 1362(g) of the Internal Revenue Code of 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
[BOLD->] CHAPTER 1--SIMPLIFIED DISTRIBUTION RULES [<-BOLD]
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 from 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 payment within one taxable
year of the recipient of the balance to the credit of
an employee which becomes payable to the recipient--
`(I) on account of the employee's death,
`(II) after the employee attains age 59 1/2 ,
`(III) on account of the employee's separation from service, or
`(IV) after the employee has become disabled (within the meaning
of section 72(m)(7)),
from a trust which forms a part of a plan described in
section 401(a) and which is exempt from tax under
section 501 or from a plan described in section 403(a).
Subclause (III) of this clause shall be applied only
with respect to an individual who is an employee
without regard to section 401(c)(1), and subclause (IV)
shall be applied only with respect to an employee
within the meaning of section 401(c)(1). For purposes
of this clause, a distribution to two or more trusts
shall be treated as a distribution to one recipient.
For purposes of this paragraph, the balance to the
credit of the employee does not include the accumulated
deductible employee contributions under the plan
(within the meaning of section 72(o)(5)).
`(ii) AGGREGATION OF CERTAIN TRUSTS AND PLANS- For
purposes of determining the balance to the credit of an
employee under clause (i)--
`(I) all trusts which are part of a plan shall be treated as a
single trust, all pension plans maintained by the employer shall be
treated as a single plan, all profit-sharing plans maintained by
the employer shall be treated as a single plan, and all stock bonus
plans maintained by the employer shall be treated as a single plan,
and
`(II) trusts which are not qualified trusts under section 401(a)
and annuity contracts which do not satisfy the requirements of
section 404(a)(2) shall not be taken into account.
`(iii) COMMUNITY PROPERTY LAWS- The provisions of
this paragraph shall be applied without regard to
community property laws.
`(iv) AMOUNTS SUBJECT TO PENALTY- This paragraph
shall not apply to amounts described in subparagraph
(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 DOMESTIC 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 purposes of this
paragraph, the balance to the credit of an employee
under a defined contribution plan shall not include any
amount transferred from such defined contribution plan
to a qualified cost-of-living arrangement (within the
meaning of section 415(k)(2)) under a defined benefit
plan.
`(vii) LUMP-SUM DISTRIBUTIONS OF ALTERNATE PAYEES- If
any distribution or payment of the balance to the
credit of an employee would be treated as a lump-sum
distribution, then, for purposes of this paragraph, the
payment under a qualified domestic relations order
(within the meaning of section 414(p)) of the balance
to the credit of an alternate payee who is the spouse
or former spouse of the employee shall be treated as a
lump-sum distribution. For purposes of this 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 section 402(d)) is hereby repealed.
(5) Section 401(a)(28)(B) (relating to coordination with
distribution 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(e)(4)(D)) with respect to which the individual elects
to have this paragraph apply',
(B) by adding at the end the following new flush sentence:
`An individual may elect to have this paragraph apply to only
one lump-sum distribution.', and
(C) by striking the heading and inserting:
`(4) SPECIAL ONE-TIME ELECTION- '.
(13) Section 402(e) is amended by striking paragraph (5).
(c) EFFECTIVE DATES-
(1) IN GENERAL- The amendments made by this section shall
apply to taxable years beginning after December 31, 1999.
(2) RETENTION OF CERTAIN TRANSITION RULES- The amendments
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.
Notwithstanding 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)'.
(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'.
(c) EFFECTIVE DATE- The amendments made by this section shall
apply with respect to decedents dying after the date of the
enactment of this Act.
SEC. 1403. SIMPLIFIED METHOD FOR TAXING ANNUITY DISTRIBUTIONS UNDER
CERTAIN EMPLOYER PLANS.
(a) GENERAL RULE- Subsection (d) of section 72 (relating to
annuities; certain proceeds of endowment and life insurance
contracts) 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
recovered 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 annuity payment under a qualified
employer retirement plan as does not exceed the amount
obtained by dividing--
`(I) the investment in the contract (as of the annuity starting
date), by
`(II) the number of anticipated payments determined under the
table contained in clause (iii) (or, in the case of a contract to
which subsection (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 subsection (b)
shall apply for purposes of this paragraph.
`(iii) NUMBER OF ANTICIPATED PAYMENTS-
[Bold->] `If the age of the [<-Bold]
--
[Bold->] primary annuitant on [<-Bold]
-- [Bold->] The number [<-Bold]
[Bold->] the annuity starting [<-Bold]
-- [Bold->] of anticipated [<-Bold]
[Bold->] date is: [<-Bold]
-- [Bold->] payments is: [<-Bold]
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 CONNECTION WITH
COMMENCEMENT OF ANNUITY PAYMENTS- If, in connection with
the commencement of annuity payments under any qualified
employer retirement plan, the taxpayer receives a lump-sum
payment--
`(i) such payment shall be taxable under subsection
(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 payment
had been so received.
`(E) EXCEPTION- This paragraph shall not apply in any
case where the primary annuitant has attained age 75 on the
annuity starting date unless there are fewer than 5 years
of guaranteed payments under the annuity.
`(F) ADJUSTMENT WHERE ANNUITY PAYMENTS NOT ON MONTHLY
BASIS- In any case where the annuity payments are not made
on a monthly basis, appropriate adjustments in the
application of this paragraph shall be made to take into
account the period on the basis of which such payments are
made.
`(G) QUALIFIED EMPLOYER RETIREMENT PLAN- For purposes of
this paragraph, the term `qualified employer retirement
plan' means any plan or contract described in paragraph
(1), (2), or (3) of section 4974(c).
`(2) TREATMENT OF EMPLOYEE CONTRIBUTIONS UNDER DEFINED
CONTRIBUTION PLANS- For purposes of this section, employee
contributions (and any income allocable thereto) under a
defined contribution plan may be treated as a separate
contract.'.
(b) EFFECTIVE DATE- The amendment made by this section shall
apply in cases where the annuity starting date is after 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 beginning
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 70 1/2 ,
or
`(II) the calendar year in which the employee retires.
`(ii) EXCEPTION- Subclause (II) of clause (i) shall
not apply--
`(I) except as provided in section 409(d), in the case of an
employee who is a 5-percent owner (as defined in section 416) with
respect to the plan year ending in the calendar year in which the
employee attains age 70 1/2 , or
`(II) for purposes of section 408 (a)(6) or (b)(3).
`(iii) ACTUARIAL ADJUSTMENT- In the case of an
employee to whom clause (i)(II) applies who retires in
a calendar year after the calendar year in which the
employee attains age 70 1/2 , the employee's accrued
benefit shall be actuarially increased to take into
account the period after age 70 1/2 in which the
employee was not receiving any benefits under the plan.
`(iv) EXCEPTION FOR GOVERNMENTAL AND CHURCH PLANS-
Clauses (ii) and (iii) shall not apply in the case of a
governmental plan or church plan. For purposes of this
clause, the term `church plan' means a plan maintained
by a church for church employees, and the term `church'
means any church (as defined in section 3121(w)(3)(A))
or qualified church-controlled organization (as defined
in section 3121(w)(3)(B)).'.
(b) EFFECTIVE DATE- The amendment made by subsection (a) shall
apply to years beginning after December 31, 1996.
[BOLD->] CHAPTER 2--INCREASED ACCESS TO RETIREMENT PLANS [<-BOLD]
[BOLD->] SUBCHAPTER A--SIMPLE SAVINGS PLANS [<-BOLD]
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
subsection:
`(p) SIMPLE RETIREMENT ACCOUNTS-
`(1) IN GENERAL- For purposes of this title, the term `simple
retirement account' means an individual retirement plan (as
defined in section 7701(a)(37))--
`(A) with respect to which the requirements of paragraphs
(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
written 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-
`(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
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 60-day period
for such year under paragraph (5)(C).
`(ii) COMPENSATION LIMITATION- The compensation 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 eligible 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 subsequent year shall
be treated as an eligible employer for the 2 years following the
last year the employer was an eligible employer. If such failure
is due to any acquisition, disposition, or similar transaction
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 subclause 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.
`(III) 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 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 retirement
account are nonforfeitable. For purposes of this paragraph,
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
paragraph (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 retirement
account if, under the qualified salary reduction arrangement--
`(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 paragraph
(2)(A)(iii) or the nonelective contributions under
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 participation
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
contribution 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 (l)(2)(C)) that the
participant's balance may be transferred without cost or
penalty to another individual account or annuity in accordance
with subsection (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 contributed
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-
`(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 paragraph (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 purposes 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 participated in any
qualified salary reduction arrangement maintained 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
inserting after subsection (b) the following new subsection:
`(c) PENALTIES RELATING TO SIMPLE RETIREMENT ACCOUNTS-
`(1) EMPLOYER PENALTIES- An employer who fails to provide 1
or more notices required by section 408(l)(2)(C) shall pay a
penalty of $50 for each day on which such failures continue.
`(2) TRUSTEE PENALTIES- A trustee who fails--
`(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(l)(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(l) 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
salary reduction arrangement under subsection (p) shall
provide 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
participation.
`(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 election. Such
notice shall include a copy of the description described in
subparagraph (B).'.
(B) Section 408(l) 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
submitted 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:
`(G) SIMPLE RETIREMENT ACCOUNTS- The term `top-heavy
plan' shall not include a simple retirement account under
section 408(p).'.
