S. 1299 (104th): Bringing Opportunity to Our Small Business and Taxpayers (BOOST) Act

104th Congress, 1995–1996. Text as of Oct 10, 1995 (Introduced).

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S 1299 IS

104th CONGRESS

1st Session

S. 1299

To amend the Internal Revenue Code of 1986 to bring opportunity to small business and taxpayers.

IN THE SENATE OF THE UNITED STATES

October 10, 1995

Mr. PRYOR introduced the following bill; which was read twice and referred to the Committee on Finance


A BILL

To amend the Internal Revenue Code of 1986 to bring opportunity to small business and taxpayers.

    Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled,

SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE; TABLE OF CONTENTS.

    (a) SHORT TITLE- This Act may be cited as the ‘Bringing Opportunity to Our Small Business and Taxpayers (BOOST) Act’.

    (b) AMENDMENT OF 1986 CODE- Except as otherwise expressly provided, whenever in this Act an amendment or repeal is expressed in terms of an amendment to, or repeal of, a section or other provision, the reference shall be considered to be made to a section or other provision of the Internal Revenue Code of 1986.

    (c) TABLE OF CONTENTS- The table of contents of this Act is as follows:

      Sec. 1. Short title; amendment of 1986 Code; table of contents.

TITLE I--TAXPAYER BILL OF RIGHTS 2

      Sec. 1001. Short title.

Subtitle A--Taxpayer Advocate

      Sec. 1011. Establishment of position of Taxpayer Advocate within Internal Revenue Service.

      Sec. 1012. Expansion of authority to issue taxpayer assistance orders.

Subtitle B--Modifications to Installment Agreement Provisions

      Sec. 1021. Taxpayer’s right to installment agreement.

      Sec. 1022. Running of failure to pay penalty suspended during period installment agreement in effect.

      Sec. 1023. Notification of reasons for termination or denial of installment agreements.

      Sec. 1024. Administrative review of denial of request for, or termination of, installment agreement.

Subtitle C--Interest

      Sec. 1031. Expansion of authority to abate interest.

      Sec. 1032. Extension of interest-free period for payment of tax after notice and demand.

Subtitle D--Joint Returns

      Sec. 1041. Disclosure of collection activities.

      Sec. 1042. Joint return may be made after separate returns without full payment of tax.

Subtitle E--Collection Activities

      Sec. 1051. Modifications to lien and levy provisions.

      Sec. 1052. Offers-in-compromise.

      Sec. 1053. Notification of examination.

      Sec. 1054. Increase in limit on recovery of civil damages for unauthorized collection actions.

      Sec. 1055. Safeguards relating to designated summons.

Subtitle F--Information Returns

      Sec. 1061. Phone number of person providing payee statements required to be shown on such statement.

      Sec. 1062. Civil damages for fraudulent filing of information returns.

      Sec. 1063. Requirement to conduct reasonable investigations of information returns.

Subtitle G--Modifications to Penalty for Failure To Collect and Pay Over Tax

      Sec. 1071. Preliminary notice requirement.

      Sec. 1072. Disclosure of certain information where more than 1 person subject to penalty.

      Sec. 1073. Penalties under section 6672.

Subtitle H--Awarding of Costs and Certain Fees

      Sec. 1081. Motion for disclosure of information.

      Sec. 1082. Increased limit on attorney fees.

      Sec. 1083. Failure to agree to extension not taken into account.

      Sec. 1084. Authority for court to award reasonable administrative costs.

      Sec. 1085. Effective date.

Subtitle I--Other Provisions

      Sec. 1091. Required content of certain notices.

      Sec. 1092. Treatment of substitute returns under section 6651.

      Sec. 1093. Relief from retroactive application of Treasury Department regulations.

      Sec. 1094. Required notice of certain payments.

      Sec. 1095. Unauthorized enticement of information disclosure.

Subtitle J--Form Modifications; Studies

      Sec. 1100. Definitions.

Chapter 1--Form Modifications

      Sec. 1101. Explanation of certain provisions.

      Sec. 1102. Improved procedures for notifying service of change of address or name.

      Sec. 1103. Rights and responsibilities of divorced individuals.

Chapter 2--Studies

      Sec. 1111. Pilot program for appeal of enforcement actions.

      Sec. 1112. Study on taxpayers with special needs.

      Sec. 1113. Reports on taxpayer-rights education program.

      Sec. 1114. Biennial reports on misconduct by Internal Revenue Service employees.

      Sec. 1115. Study of notices of deficiency.

      Sec. 1116. Notice and form accuracy study.

TITLE II--INCREASE OF DEDUCTION FOR HEALTH INSURANCE COSTS OF SELF-EMPLOYED INDIVIDUALS

      Sec. 2001. Increase of deduction for health insurance costs of self-employed individuals.

TITLE III--S CORPORATION REFORM ACT OF 1995

      Sec. 3001. Short title.

Subtitle A--Eligible Shareholders of S Corporation

Chapter 1--Number of Shareholders

      Sec. 3101. S corporations permitted to have 50 shareholders.

      Sec. 3102. Members of family treated as 1 shareholder.

Chapter 2--Persons Allowed as Shareholders

      Sec. 3111. Certain exempt organizations.

      Sec. 3112. Financial institutions.

      Sec. 3113. Nonresident aliens.

      Sec. 3114. Electing small business trusts.

Chapter 3--Other Provisions

      Sec. 3121. Expansion of post-death qualification for certain trusts.

Subtitle B--Qualification and Eligibility Requirements for S Corporations

Chapter 1--One Class of Stock

      Sec. 3201. Issuance of preferred stock permitted.

      Sec. 3202. Financial institutions permitted to hold safe harbor debt.

Chapter 2--Elections And Terminations

      Sec. 3211. Rules relating to inadvertent terminations and invalid elections.

      Sec. 3212. Agreement to terminate year.

      Sec. 3213. Expansion of post-termination transition period.

      Sec. 3214. Repeal of excessive passive investment income as a termination event.

Chapter 3--Other Provisions

      Sec. 3221. S corporations permitted to hold subsidiaries.

      Sec. 3222. Treatment of distributions during loss years.

      Sec. 3223. Consent dividend for AAA bypass election.

      Sec. 3224. Treatment of S corporations under subchapter C.

      Sec. 3225. Elimination of pre-1983 earnings and profits.

      Sec. 3226. Allowance of charitable contributions of inventory and scientific property.

      Sec. 3227. C corporation rules to apply for fringe benefit purposes.

Subtitle C--Taxation of S Corporation Shareholders

      Sec. 3301. Uniform treatment of owner-employees under prohibited transaction rules.

      Sec. 3302. Treatment of losses to shareholders.

Subtitle D--Effective Date

      Sec. 3401. Effective date.

TITLE IV--PENSION SIMPLIFICATION

Subtitle A--Simplification of Nondiscrimination Provisions

      Sec. 4000. Short title.

      Sec. 4001. Definition of highly compensated employees; repeal of family aggregation.

Subtitle B--Targeted Access to Pension Plans for Small Employers

      Sec. 4011. Credit for pension plan start-up costs of small employers.

      Sec. 4012. Modifications of simplified employee pensions.

      Sec. 4013. Exemption from top-heavy plan requirements.

      Sec. 4014. Regulatory treatment of small employers.

TITLE V--ESTATE TAX EXCLUSION FOR FAMILY-OWNED BUSINESS

      Sec. 5001. Short title.

      Sec. 5002. Family-owned business exclusion.

TITLE VI--SPENDING REDUCTIONS

      Sec. 6001. Short title.

      Sec. 6002. Service contracts.

      Sec. 6003. Federally funded research and development centers.

      Sec. 6004. Foreign military financing.

TITLE I--TAXPAYER BILL OF RIGHTS 2

SEC. 1001. SHORT TITLE.

    This title may be cited as the ‘Taxpayer Bill of Rights 2’.

Subtitle A--Taxpayer Advocate

SEC. 1011. ESTABLISHMENT OF POSITION OF TAXPAYER ADVOCATE WITHIN INTERNAL REVENUE SERVICE.

    (a) GENERAL RULE- Section 7802 (relating to Commissioner of Internal Revenue; Assistant Commissioner (Employee Plans and Exempt Organizations)) is amended by adding at the end the following new subsection:

    ‘(d) OFFICE OF TAXPAYER ADVOCATE-

      ‘(1) IN GENERAL- There is established in the Internal Revenue Service an office to be known as the ‘Office of the Taxpayer Advocate’. Such office, including all problem resolution officers, shall be under the supervision and direction of an official to be known as the ‘Taxpayer Advocate’ who shall report directly to the Commissioner of Internal Revenue. The Taxpayer Advocate shall be entitled to compensation at the same rate as the Chief Counsel for the Internal Revenue Service.

      ‘(2) FUNCTIONS OF OFFICE-

        ‘(A) IN GENERAL- It shall be the function of the Office of Taxpayer Advocate to--

          ‘(i) assist taxpayers in resolving problems with the Internal Revenue Service,

          ‘(ii) identify areas in which taxpayers have problems in dealings with the Internal Revenue Service,

          ‘(iii) to the extent possible, propose changes in the administrative practices of the Internal Revenue Service to mitigate problems identified under clause (ii), and

          ‘(iv) identify potential legislative changes which may be appropriate to mitigate such problems.

        ‘(B) ANNUAL REPORTS-

          ‘(i) OBJECTIVES- Not later than June 30 of each calendar year after 1995, the Taxpayer Advocate shall report to the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate on the objectives of the Taxpayer Advocate for the fiscal year beginning in such calendar year. Any such report shall contain full and substantive analysis, in addition to statistical information.

          ‘(ii) ACTIVITIES- Not later than December 31 of each calendar year after 1995, the Taxpayer Advocate shall report to the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate on the activities of the Taxpayer Advocate during the fiscal year ending during such calendar year. Any such report shall contain full and substantive analysis, in addition to statistical information, and shall--

            ‘(I) identify the initiatives the Taxpayer Advocate has taken on improving taxpayer services and Internal Revenue Service responsiveness,

            ‘(II) contain recommendations received from individuals with the authority to issue taxpayer assistance orders under section 7811,

            ‘(III) contain a summary of at least 20 of the most serious problems encountered by taxpayers, including a description of the nature of such problems,

            ‘(IV) contain an inventory of the items described in subclauses (I), (II), and (III) for which action has been taken and the result of such action,

            ‘(V) contain an inventory of the items described in subclauses (I), (II), and (III) for which action remains to be completed and the period during which each item has remained on such inventory,

            ‘(VI) contain an inventory of the items described in subclauses (II) and (III) for which no action has been taken, the period during which each item has remained on such inventory, the reasons for the inaction, and identify any Internal Revenue Service official who is responsible for such inaction,

            ‘(VII) identify any Taxpayer Assistance Order which was not honored by the Internal Revenue Service in a timely manner, as specified under section 7811(b),

            ‘(VIII) contain recommendations for such administrative and legislative action as may be appropriate to resolve problems encountered by taxpayers, and

            ‘(IX) include such other information as the Taxpayer Advocate may deem advisable.

          ‘(iii) REPORT TO BE SUBMITTED DIRECTLY- Each report required under this subparagraph shall be provided directly to the Committees referred to in clauses (i) and (ii) without any prior review or comment from the Commissioner of the Internal Revenue Service, the Secretary of the Treasury, any other officer or employee of the Department of the Treasury, or the Office of Management and Budget.

      ‘(3) RESPONSIBILITIES OF COMMISSIONER OF INTERNAL REVENUE SERVICE- The Commissioner of Internal Revenue shall establish procedures requiring a formal response to all recommendations submitted to the Commissioner by the Taxpayer Advocate.’

    (b) CONFORMING AMENDMENTS-

      (1) Section 7811 (relating to taxpayer assistance orders) is amended--

        (A) by striking ‘the Office of Ombudsman’ in subsection (a) and inserting ‘the Office of the Taxpayer Advocate’, and

        (B) by striking ‘Ombudsman’ each place it appears (including in the headings of subsections (e) and (f)) and inserting ‘Taxpayer Advocate’.

      (2) The heading for section 7802 is amended to read as follows:

‘SEC. 7802. COMMISSIONER OF INTERNAL REVENUE; ASSISTANT COMMISSIONERS; TAXPAYER ADVOCATE.’

      (3) The table of sections for subchapter A of chapter 80 of subtitle F is amended by striking the item relating to section 7802 and inserting the following new item:

‘Sec. 7802. Commissioner of Internal Revenue; Assistant Commissioners; Taxpayer Advocate.’

    (c) EFFECTIVE DATE- The amendments made by this section shall take effect on the date of the enactment of this Act.

SEC. 1012. EXPANSION OF AUTHORITY TO ISSUE TAXPAYER ASSISTANCE ORDERS.

    (a) TAXPAYER’S HARDSHIP- Section 7811(a) (relating to authority to issue) is amended by striking ‘significant’.

    (b) TERMS OF ORDERS- Subsection (b) of section 7811 (relating to terms of taxpayer assistance orders) is amended--

      (1) by inserting ‘within a specified time period’ after ‘the Secretary’, and

      (2) by inserting ‘take any action as permitted by law,’ after ‘cease any action,’.

    (c) LIMITATION ON AUTHORITY TO MODIFY OR RESCIND- Section 7811(c) (relating to authority to modify or rescind) is amended to read as follows:

    ‘(c) AUTHORITY TO MODIFY OR RESCIND- Any Taxpayer Assistance Order issued by the Taxpayer Advocate under this section may be modified or rescinded only by the Taxpayer Advocate, the Commissioner, or any superior of either.’

    (d) EFFECTIVE DATE- The amendments made by this section shall take effect on the date of the enactment of this Act.

Subtitle B--Modifications to Installment Agreement Provisions

SEC. 1021. TAXPAYER’S RIGHT TO INSTALLMENT AGREEMENT.

    (a) IN GENERAL- Subsection (a) of section 6159 (relating to agreements for payment of tax liability in installments) is amended to read as follows:

    ‘(a) IN GENERAL-

      ‘(1) AUTHORIZATION OF AGREEMENTS- The Secretary is authorized to enter into written agreements with any taxpayer under which such taxpayer is allowed to satisfy liability for payment of any tax in installment payments if the Secretary determines that such agreement will facilitate collection of such liability.

      ‘(2) AGREEMENT AS A MATTER OF RIGHT- In the case of any taxpayer other than a corporation, the Secretary shall enter into such an agreement if--

        ‘(A) the taxpayer requests such an agreement,

        ‘(B) the tax liability is attributable to the tax imposed under chapter 1 and is less than $10,000, and

        ‘(C) the taxpayer has paid any tax liability for the 3 preceding taxable years at the time such liability was due.

      ‘(3) NOTICE- The Secretary shall include in the instructions for returns of the tax imposed under chapter 1 the rights of taxpayers under this subsection and the steps necessary to exercise those rights.’

    (b) EFFECTIVE DATE- The amendment made by subsection (a) shall take effect on the date of the enactment of this Act.

SEC. 1022. RUNNING OF FAILURE TO PAY PENALTY SUSPENDED DURING PERIOD INSTALLMENT AGREEMENT IN EFFECT.

    (a) GENERAL RULE- Section 6651 (relating to penalty for failure to file tax return or to pay tax) is amended by adding at the end the following new subsection:

    ‘(g) TREATMENT OF INSTALLMENT AGREEMENTS UNDER SECTION 6159- If--

      ‘(1) an agreement is entered into under section 6159 for the payment of any tax in installments, and

      ‘(2) the taxpayer requested the Secretary to enter into the agreement on or before the due date (including extensions) for the return of the tax,

    the period during which such agreement is in effect shall be disregarded in determining the amount of any addition under paragraph (2) or (3) of subsection (a) with respect to such tax.’

    (b) EFFECTIVE DATE- The amendment made by subsection (a) shall apply to installment agreements entered into after the date of the enactment of this Act.

SEC. 1023. NOTIFICATION OF REASONS FOR TERMINATION OR DENIAL OF INSTALLMENT AGREEMENTS.

    (a) TERMINATIONS- Subsection (b) of section 6159 (relating to extent to which agreements remain in effect) is amended by adding at the end the following new paragraph:

      ‘(5) NOTICE REQUIREMENTS- The Secretary may not take any action under paragraph (2), (3), or (4) unless--

        ‘(A) a notice of such action is provided to the taxpayer not later than the day 30 days before the date of such action, and

        ‘(B) such notice includes an explanation why the Secretary intends to take such action.

      The preceding sentence shall not apply in any case in which the Secretary believes that collection of any tax to which an agreement under this section relates is in jeopardy.’

    (b) DENIALS- Section 6159 (relating to agreements for payment of tax liability in installments) is amended by adding at the end the following new subsection:

    ‘(c) NOTICE REQUIREMENTS FOR DENIALS- The Secretary may not deny any request for an installment agreement under this section unless--

      ‘(1) a notice of the proposed denial is provided to the taxpayer not later than the day 30 days before the date of such denial,

      ‘(2) such notice includes an explanation why the Secretary intends to deny such request, and

      ‘(3) such notice includes a statement of the taxpayer’s right to administrative review under subsection (d).

    The preceding sentence shall not apply in any case in which the Secretary believes that collection of any tax to which a request for an agreement under this section relates is in jeopardy.’

    (c) CONFORMING AMENDMENT- Paragraph (3) of section 6159(b) is amended to read as follows:

      ‘(3) SUBSEQUENT CHANGE IN FINANCIAL CONDITIONS- If the Secretary makes a determination that the financial condition of a taxpayer with whom the Secretary has entered into an agreement under subsection (a) has significantly changed, the Secretary may alter, modify, or terminate such agreement.’

    (d) EFFECTIVE DATE- The amendments made by this section shall take effect on the date 6 months after the date of the enactment of this Act.

SEC. 1024. ADMINISTRATIVE REVIEW OF DENIAL OF REQUEST FOR, OR TERMINATION OF, INSTALLMENT AGREEMENT.

    (a) GENERAL RULE- Section 6159 (relating to agreements for payment of tax liability in installments), as amended by section 1023(b), is amended by adding at the end the following new subsection:

    ‘(d) ADMINISTRATIVE REVIEW- The Secretary shall establish procedures for an independent administrative review of denials of requests for, or terminations of, installment agreements under this section.’

    (b) EFFECTIVE DATE- The amendment made by subsection (a) shall take effect on January 1, 1996.

Subtitle C--Interest

SEC. 1031. EXPANSION OF AUTHORITY TO ABATE INTEREST.

    (a) GENERAL RULE- Paragraph (1) of section 6404(e) (relating to abatement of interest in certain cases) is amended--

      (1) by inserting ‘unreasonable’ before ‘error’ each place it appears in subparagraphs (A) and (B), and

      (2) by striking ‘in performing a ministerial act’ each place it appears.

    (b) MANDATORY ABATEMENT FOR SMALL TAXPAYERS- The first sentence of section 6404(e)(1) is amended by inserting ‘in the case of a taxpayer not described in section 7430(c)(4)(A)(iii) and shall abate the assessment of such interest until the date demand for payment is made in the case of a taxpayer described in section 7430(c)(4)(A)(iii)’ before the period at the end.

    (c) CLERICAL AMENDMENT- The subsection heading for subsection (e) of section 6404 is amended by striking ‘Assessments’ and inserting ‘Abatement’.

    (d) EFFECTIVE DATE- The amendments made by this section shall apply to interest accruing with respect to deficiencies or payments for taxable years beginning after the date of the enactment of this Act.

SEC. 1032. EXTENSION OF INTEREST-FREE PERIOD FOR PAYMENT OF TAX AFTER NOTICE AND DEMAND.

    (a) GENERAL RULE- Paragraph (3) of section 6601(e) (relating to payments made within 10 days after notice and demand) is amended to read as follows:

      ‘(3) PAYMENTS MADE WITHIN SPECIFIED PERIOD AFTER NOTICE AND DEMAND- If notice and demand is made for payment of any amount and if such amount is paid within 21 days (10 days if the amount for which such notice and demand is made equals or exceeds $100,000) after the date of such notice and demand, interest under this section on the amount so paid shall not be imposed for the period after the date of such notice and demand.’

    (b) CONFORMING AMENDMENT- Paragraph (3) of section 6651(a) (relating to addition to tax for failure to file tax return or pay tax) is amended by striking ‘10 days’ and inserting ‘21 days (10 days if the amount for which such notice and demand is made equals or exceeds $100,000)’.

    (c) EFFECTIVE DATE- The amendments made by this section shall apply in the case of any notice and demand given after December 31, 1995.

Subtitle D--Joint Returns

SEC. 1041. DISCLOSURE OF COLLECTION ACTIVITIES.

    (a) GENERAL RULE- Subsection (e) of section 6103 (relating to disclosure to persons having material interest) is amended by adding at the end the following new paragraph:

      ‘(8) DISCLOSURE OF COLLECTION ACTIVITIES WITH RESPECT TO JOINT RETURN- If any deficiency of tax with respect to a joint return is assessed and the individuals filing such return are no longer married or no longer reside in the same household, upon request in writing of either of such individuals, the Secretary may disclose in writing to the individual making the request whether the Secretary has attempted to collect such deficiency from such other individual, the general nature of such collection activities, and the amount collected.’

    (b) EFFECTIVE DATE- The amendment made by subsection (a) shall take effect on the date of the enactment of this Act.

SEC. 1042. JOINT RETURN MAY BE MADE AFTER SEPARATE RETURNS WITHOUT FULL PAYMENT OF TAX.

    (a) GENERAL RULE- Paragraph (2) of section 6013(b) (relating to limitations on filing of joint return after filing separate returns) is amended by striking subparagraph (A) and redesignating the following subparagraphs accordingly.

    (b) EFFECTIVE DATE- The amendment made by subsection (a) shall apply to taxable years beginning after the date of the enactment of this Act.

Subtitle E--Collection Activities

SEC. 1051. MODIFICATIONS TO LIEN AND LEVY PROVISIONS.

    (a) WITHDRAWAL OF CERTAIN NOTICES- Section 6323 (relating to validity and priority against certain persons) is amended by adding at the end the following new subsection:

    ‘(j) WITHDRAWAL OF NOTICE IN CERTAIN CIRCUMSTANCES-

      ‘(1) IN GENERAL- The Secretary may withdraw a notice of a lien filed under this section and this chapter shall be applied as if the withdrawn notice had not been filed, if the Secretary determines that--

        ‘(A) the filing of such notice was premature or otherwise not in accordance with administrative procedures of the Secretary,

        ‘(B) the taxpayer has entered into an agreement under section 6159 to satisfy the tax liability for which the lien was imposed by

means of installment payments, unless such agreement provides otherwise,

        ‘(C) the withdrawal of such notice will facilitate the collection of the tax liability, or

        ‘(D) with the consent of the taxpayer or the Taxpayer Advocate, the withdrawal of such notice would be in the best interests of the taxpayer (as determined by the Taxpayer Advocate) and the United States.

      Any such withdrawal shall be made by filing notice at the same office as the withdrawn notice. A copy of such notice of withdrawal shall be provided to the taxpayer.

      ‘(2) NOTICE TO CREDIT AGENCIES, ETC- Upon written request by the taxpayer with respect to whom a notice of a lien was withdrawn under paragraph (1), the Secretary shall promptly make reasonable efforts to notify credit reporting agencies, and any financial institution or creditor whose name and address is specified in such request, of the withdrawal of such notice. Any such request shall be in such form as the Secretary may prescribe.’

    (b) RETURN OF LEVIED PROPERTY IN CERTAIN CASES- Section 6343 (relating to authority to release levy and return property) is amended by adding at the end the following new subsection:

    ‘(d) RETURN OF PROPERTY IN CERTAIN CASES- If--

      ‘(1) any property has been levied upon, and

      ‘(2) the Secretary determines that--

        ‘(A) the levy on such property was premature or otherwise not in accordance with administrative procedures of the Secretary,

        ‘(B) the taxpayer has entered into an agreement under section 6159 to satisfy the tax liability for which the levy was imposed by means of installment payments, unless such agreement provides otherwise,

        ‘(C) the return of such property will facilitate the collection of the tax liability, or

        ‘(D) with the consent of the taxpayer or the Taxpayer Advocate, the return of such property would be in the best interests of the taxpayer (as determined by the Taxpayer Advocate) and the United States,

    the provisions of subsection (b) shall apply in the same manner as if such property had been wrongly levied upon, except that no interest shall be allowed under subsection (c).’

    (c) MODIFICATIONS IN CERTAIN LEVY EXEMPTION AMOUNTS-

      (1) FUEL, ETC- Paragraph (2) of section 6334(a) (relating to fuel, provisions, furniture, and personal effects exempt from levy) is amended--

        (A) by striking ‘If the taxpayer is the head of a family, so’ and inserting ‘So’, and

        (B) by striking ‘$1,650 ($1,550 in the case of levies issued during 1989)’ and inserting ‘$1,750’.

      (2) BOOKS, ETC- Paragraph (3) of section 6334(a) (relating to books and tools of a trade, business, or profession exempt from levy) is amended by striking ‘$1,100 ($1,050 in the case of levies issued during 1989)’ and inserting ‘$1,250’.

      (3) INDEXED FOR INFLATION- Section 6334 (relating to property exempt from levy) is amended by adding at the end the following new subsection:

    ‘(f) INFLATION ADJUSTMENTS-

      ‘(1) IN GENERAL- In the case of any calendar year beginning after 1996, each dollar amount referred to in paragraphs (2) and (3) of subsection (a) shall be increased by an amount equal to--

        ‘(A) such dollar amount, multiplied by

        ‘(B) the cost-of-living adjustment determined under section 1(f)(3) for such calendar year, by substituting ‘calendar year 1995’ for ‘calendar year 1992’ in subparagraph (B) thereof.

      ‘(2) ROUNDING- If any dollar amount after being increased under paragraph (1) is not a multiple of $10, such dollar amount shall be rounded to the nearest multiple of $10 (or, if such dollar amount is a multiple of $5, such dollar amount shall be increased to the next higher multiple of $10).’

    (d) EFFECTIVE DATES-

      (1) IN GENERAL- Except as provided in paragraph (2), the amendments made by this section shall take effect on the date of the enactment of this Act.

      (2) EXEMPT AMOUNTS- The amendments made by subsection (c) shall take effect with respect to levies issued after December 31, 1995.

SEC. 1052. OFFERS-IN-COMPROMISE.

    (a) GENERAL RULE- Subsection (a) of section 7122 (relating to compromises) is amended by adding at the end the following new sentence: ‘The Secretary may make such a compromise in any case where the Secretary determines that such compromise would be in the best interests of the United States.’

    (b) REVIEW REQUIREMENTS- Subsection (b) of section 7122 (relating to records) is amended by striking ‘$500.’ and inserting ‘$50,000. However, such compromise shall be subject to continuing quality review by the Secretary.’

    (c) EFFECTIVE DATE- The amendments made by this section shall take effect on the date of the enactment of this Act.

SEC. 1053. NOTIFICATION OF EXAMINATION.

    (a) IN GENERAL- Section 7605 (relating to restrictions on examination of taxpayer) is amended by redesignating subsection (c) as subsection (d) and by inserting after subsection (b) the following new subsection:

    ‘(c) NOTIFICATION REQUIREMENT- No examination described in subsection (a) shall be made unless the Secretary notifies the taxpayer in writing by mail to an address determined under section 6212(b) that the taxpayer is under examination and provides the taxpayer with an explanation of the process as described in section 7521(b)(1). The preceding sentence shall not apply in the case of any examination if the Secretary determines that--

      ‘(1) such examination is in connection with a criminal investigation or is with respect to a tax the collection of which is in jeopardy, or

      ‘(2) the application of the preceding sentence would be inconsistent with national security needs or would interfere with the effective conduct of a confidential law enforcement or foreign counterintelligence activity.’

    (b) CONFORMING AMENDMENT- Paragraph (1) of section 7521(b) (relating to safeguards) is amended by striking ‘or at’.

    (c) EFFECTIVE DATE- The amendments made by this section shall take effect on the date of the enactment of this Act.

SEC. 1054. INCREASE IN LIMIT ON RECOVERY OF CIVIL DAMAGES FOR UNAUTHORIZED COLLECTION ACTIONS.

    (a) GENERAL RULE- Subsection (b) of section 7433 (relating to damages) is amended by striking ‘$100,000’ and inserting ‘$1,000,000’.

    (b) EFFECTIVE DATE- The amendment made by subsection (a) shall apply to actions by officers or employees of the Internal Revenue Service after the date of the enactment of this Act.

SEC. 1055. SAFEGUARDS RELATING TO DESIGNATED SUMMONS.

    (a) STANDARD OF REVIEW- Subparagraph (A) of section 6503(k)(2) (defining designated summons) is amended by redesignating clauses (i) and (ii) as clauses (ii) and (iii), respectively, and by inserting before clause (ii) (as so redesignated) the following new clause:

          ‘(i) the issuance of such summons is preceded by a review of such issuance by the regional counsel of the Office of Chief Counsel for the region in which the examination of the corporation is being conducted,’.

    (b) NOTICE REQUIREMENTS FOR ISSUANCE- Section 6503(k) is amended by adding at the end the following new paragraph:

      ‘(4) NOTICE REQUIREMENTS- With respect to any summons referred to in paragraph (1)(A) issued to any person other than the corporation, the Secretary shall promptly notify the corporation, in writing, that such summons has been issued with respect to such corporation’s return of tax.’

    (c) EFFECTIVE DATE- The amendments made by this section shall apply to summons issued after the date of the enactment of this Act.

Subtitle F--Information Returns

SEC. 1061. PHONE NUMBER OF PERSON PROVIDING PAYEE STATEMENTS REQUIRED TO BE SHOWN ON SUCH STATEMENT.

    (a) GENERAL RULE- The following provisions are each amended by striking ‘name and address’ and inserting ‘name, address, and phone number of the information contact’:

      (1) Section 6041(d)(1).

      (2) Section 6041A(e)(1).

      (3) Section 6042(c)(1).

      (4) Section 6044(e)(1).

      (5) Section 6045(b)(1).

      (6) Section 6049(c)(1)(A).

      (7) Section 6050B(b)(1).

      (8) Section 6050H(d)(1).

      (9) Section 6050I(e)(1).

      (10) Section 6050J(e).

      (11) Section 6050K(b)(1).

      (12) Section 6050N(b)(1).

    (b) EFFECTIVE DATE- The amendments made by subsection (a) shall apply to statements required to be furnished after December 31, 1995 (determined without regard to any extension).

SEC. 1062. CIVIL DAMAGES FOR FRAUDULENT FILING OF INFORMATION RETURNS.

    (a) GENERAL RULE- Subchapter B of chapter 76 (relating to proceedings by taxpayers and third parties) is amended by redesignating section 7434 as section 7435 and by inserting after section 7433 the following new section:

‘SEC. 7434. CIVIL DAMAGES FOR FRAUDULENT FILING OF INFORMATION RETURNS.

    ‘(a) IN GENERAL- If any person willfully files a false or fraudulent information return with respect to payments purported to be made to any other person, such other person may bring a civil action for damages against the person so filing such return.

    ‘(b) DAMAGES- In any action brought under subsection (a), upon a finding of liability on the part of the defendant, the defendant shall be liable to the plaintiff in an amount equal to the greater of $5,000 or the sum of--

      ‘(1) any actual damages sustained by the plaintiff as a proximate result of the filing of the false or fraudulent information return (including any costs attributable to resolving deficiencies asserted as a result of such filing), and

      ‘(2) the costs of the action.

    ‘(c) PERIOD FOR BRINGING ACTION- Notwithstanding any other provision of law, an action to enforce the liability created under this section may be brought without regard to the amount in controversy and may be brought only within the later of--

      ‘(1) 6 years after the date of the filing of the false or fraudulent information return, or

      ‘(2) 1 year after the date such false or fraudulent information return would have been discovered by exercise of reasonable care.

    ‘(d) COPY OF COMPLAINT FILED WITH IRS- Any person bringing an action under subsection (a) shall provide a copy of the complaint to the Internal Revenue Service upon the filing of such complaint with the court.

    ‘(e) FINDING OF COURT TO INCLUDE CORRECT AMOUNT OF PAYMENT- The judgment of the court in an action brought under subsection (a) shall include a finding of the correct amount which should have been reported in the information return.

    ‘(f) INFORMATION RETURN- For purposes of this section, the term ‘information return’ means any statement described in section 6724(d)(1)(A).’

    (b) CLERICAL AMENDMENT- The table of sections for subchapter B of chapter 76 is amended by striking the item relating to section 7434 and inserting the following:

‘Sec. 7434. Civil damages for fraudulent filing of information returns.

‘Sec. 7435. Cross references.’

    (c) EFFECTIVE DATE- The amendments made by this section shall apply to false or fraudulent information returns filed after the date of the enactment of this Act.

SEC. 1063. REQUIREMENT TO CONDUCT REASONABLE INVESTIGATIONS OF INFORMATION RETURNS.

    (a) GENERAL RULE- Section 6201 (relating to assessment authority) is amended by redesignating subsection (d) as subsection (e) and by inserting after subsection (c) the following new subsection:

    ‘(d) REQUIRED REASONABLE INVESTIGATION OF INFORMATION RETURNS- If a taxpayer asserts a reasonable dispute with respect to any item of income reported on an information return filed with the Secretary under chapter 61 by a third party, the Secretary, when making a determination of a deficiency based on such information return, shall have the burden of proof with respect to such determination unless the Secretary has conducted a reasonable investigation to corroborate the accuracy of such information return.’

    (b) EFFECTIVE DATE- The amendment made by subsection (a) shall take effect on the date of the enactment of this Act.

Subtitle G--Modifications to Penalty for Failure To Collect and Pay Over Tax

SEC. 1071. PRELIMINARY NOTICE REQUIREMENT.

    (a) IN GENERAL- Section 6672 (relating to failure to collect and pay over tax, or attempt to evade or defeat tax) is amended by redesignating subsection (b) as subsection (c) and by inserting after subsection (a) the following new subsection:

    ‘(b) PRELIMINARY NOTICE REQUIREMENT-

      ‘(1) IN GENERAL- No penalty shall be imposed under subsection (a) unless the Secretary notifies the taxpayer in writing by mail to an address as determined under section 6212(b) that the taxpayer shall be subject to an assessment of such penalty.

      ‘(2) TIMING OF NOTICE- The mailing of the notice described in paragraph (1) shall precede any notice and demand of any penalty under subsection (a) by at least 60 days.

      ‘(3) STATUTE OF LIMITATIONS- If a notice described in paragraph (1) with respect to any penalty is mailed before the expiration of the period provided by section 6501 for the assessment of such penalty (determined without regard to this paragraph), the period provided by such section for the assessment of such penalty shall not expire before the date 90 days after the date on which such notice was mailed.

      ‘(4) EXCEPTION FOR JEOPARDY- This subsection shall not apply if the Secretary finds that the collection of the penalty is in jeopardy.’

    (b) EFFECTIVE DATE- The amendment made by subsection (a) shall apply to assessments made after December 31, 1995.

SEC. 1072. DISCLOSURE OF CERTAIN INFORMATION WHERE MORE THAN 1 PERSON SUBJECT TO PENALTY.

    (a) IN GENERAL- Subsection (e) of section 6103 (relating to disclosure to persons having material interest), as amended by section 1041(a), is amended by adding at the end the following new paragraph:

      ‘(9) DISCLOSURE OF CERTAIN INFORMATION WHERE MORE THAN 1 PERSON SUBJECT TO PENALTY UNDER SECTION 6672- If the Secretary determines that a person is liable for a penalty under section 6672(a) with respect to any failure, upon request in writing of such person, the Secretary shall disclose in writing to such person--

        ‘(A) the name of any other person whom the Secretary has determined to be liable for such penalty with respect to such failure, and

        ‘(B) whether the Secretary has attempted to collect such penalty from such other person, the general nature of such collection activities, and the amount collected.’

    (b) EFFECTIVE DATE- The amendment made by subsection (a) shall take effect on the date of the enactment of this Act.

SEC. 1073. PENALTIES UNDER SECTION 6672.

    (a) PUBLIC INFORMATION REQUIREMENTS- The Secretary of the Treasury or the Secretary’s delegate (hereafter in this section referred to as the ‘Secretary’) shall take such actions as may be appropriate to ensure that employees are aware of their responsibilities under the Federal tax depository system, the circumstances under which employees may be liable for the penalty imposed by section 6672 of the Internal Revenue Code of 1986, and the responsibility to promptly report to the Internal Revenue Service any failure referred to in subsection (a) of such section 6672. Such actions shall include--

      (1) printing of a warning on deposit coupon booklets and the appropriate tax returns that certain

employees may be liable for the penalty imposed by such section 6672, and

      (2) the development of a special information packet.

    (b) BOARD MEMBERS OF TAX-EXEMPT ORGANIZATIONS-

      (1) VOLUNTARY BOARD MEMBERS-

        (A) IN GENERAL- The penalty under section 6672 of the Internal Revenue Code of 1986 shall not be imposed on unpaid, volunteer members of any board of trustees or directors of an organization referred to in section 501 of such Code to the extent such members are solely serving in an honorary capacity, do not participate in the day-to-day or financial operations of the organization, and do not have actual knowledge of the failure on which such penalty is imposed.

        (B) APPLICATION OF PARAGRAPH- This paragraph shall not apply if it results in no person being held liable for the penalty described in section 6672(a) of the Internal Revenue Code of 1986.

      (2) DEVELOPMENT OF EXPLANATORY MATERIALS- The Secretary shall develop materials explaining the circumstances under which board members of tax-exempt organizations (including voluntary and honorary members) may be subject to penalty under section 6672 of such Code. Such materials shall be made available to tax-exempt organizations.

      (3) IRS INSTRUCTIONS- The Secretary shall clarify the instructions to Internal Revenue Service employees on the application of the penalty under section 6672 of such Code with regard to voluntary members of boards of trustees or directors of tax- exempt organizations.

    (c) PROMPT NOTIFICATION- To the maximum extent practicable, the Secretary shall notify all persons who have failed to make timely and complete deposit of any taxes described in section 6672 of the Internal Revenue Code of 1986 of such failure within 30 days after the return was filed reflecting such failure or after the date on which the Secretary is first aware of such failure. If the person failing to make the deposit is not an individual, the Secretary shall notify the entity subject to such deposit requirement and that entity shall notify, within 15 days of the notification by the Secretary, all officers, general partners, trustees, or other managers of the failure.

Subtitle H--Awarding of Costs and Certain Fees

SEC. 1081. MOTION FOR DISCLOSURE OF INFORMATION.

    Paragraph (4) of section 7430(c) (defining prevailing party) is amended by adding at the end the following new subparagraph:

        ‘(C) MOTION FOR DISCLOSURE OF INFORMATION- Once a taxpayer substantially prevails as described in subparagraph (A)(ii), the taxpayer may file a motion for an order requiring the disclosure (within a reasonable period of time specified by the court) of all information and copies of relevant records in the possession of the Internal Revenue Service with respect to such taxpayer’s case and the substantial justification for the position taken by the Internal Revenue Service.’

SEC. 1082. INCREASED LIMIT ON ATTORNEY FEES.

    Paragraph (1) of section 7430(c) (defining reasonable litigation costs) is amended--

      (1) by striking ‘$75’ in clause (iii) of subparagraph (B) and inserting ‘$110’,

      (2) by striking ‘an increase in the cost of living or’ in clause (iii) of subparagraph (B), and

      (3) by adding after clause (iii) the following:

      ‘In the case of any calendar year beginning after 1995, the dollar amount referred to in clause (iii) shall be increased by an amount equal to such dollar amount multiplied by the cost-of-living adjustment determined under section 1(f)(3) for such calendar year, by substituting ‘calendar year 1994’ for ‘calendar year 1992’ in subparagraph (B) thereof. If any dollar amount after being increased under the preceding sentence is not a multiple of $10, such dollar amount shall be rounded to the nearest multiple of $10 (or, if such dollar amount is a multiple of $5, such dollar amount shall be increased to the next higher multiple of $10).’

SEC. 1083. FAILURE TO AGREE TO EXTENSION NOT TAKEN INTO ACCOUNT.

    Paragraph (1) of section 7430(b) (relating to requirement that administrative remedies be exhausted) is amended by adding at the end the following new sentence: ‘Any failure to agree to an extension of the time for the assessment of any tax shall not be taken into account for purposes of determining whether the prevailing party meets the requirements of the preceding sentence.’

SEC. 1084. AUTHORITY FOR COURT TO AWARD REASONABLE ADMINISTRATIVE COSTS.

    Section 7430(c)(7)(B) is amended to read as follows:

        ‘(B) the position taken in an administrative proceeding to which subsection (a) applies.’

SEC. 1085. EFFECTIVE DATE.

    The amendments made by this subtitle shall apply in the case of proceedings commenced after the date of the enactment of this Act.

Subtitle I--Other Provisions

SEC. 1091. REQUIRED CONTENT OF CERTAIN NOTICES.

    (a) GENERAL RULE- Subsection (a) of section 7522 (relating to content of tax due, deficiency, and other notices) is amended by striking ‘shall describe the basis for, and identify’ and inserting ‘shall set forth the adjustments which are the basis for, and shall identify’.

    (b) EFFECTIVE DATE- The amendment made by subsection (a) shall apply to notices sent after the date 6 months after the date of the enactment of this Act.

SEC. 1092. TREATMENT OF SUBSTITUTE RETURNS UNDER SECTION 6651.

    (a) GENERAL RULE- Section 6651 (relating to failure to file tax return or to pay tax), as amended by section 1022(a), is amended by adding at the end the following new subsection:

    ‘(h) TREATMENT OF RETURNS PREPARED BY SECRETARY UNDER SECTION 6020(b)- In the case of any return made by the Secretary under section 6020(b)--

      ‘(1) such return shall be disregarded for purposes of determining the amount of the addition under paragraph (1) of subsection (a), but

      ‘(2) such return shall be treated as the return filed by the taxpayer for purposes of determining the amount of the addition under paragraphs (2) and (3) of subsection (a).’

    (b) EFFECTIVE DATE- The amendment made by subsection (a) shall apply in the case of any return the due date for which (determined without regard to extensions) is after the date of the enactment of this Act.

SEC. 1093. RELIEF FROM RETROACTIVE APPLICATION OF TREASURY DEPARTMENT REGULATIONS.

    (a) IN GENERAL- Subsection (b) of section 7805 (relating to rules and regulations) is amended to read as follows:

    ‘(b) RETROACTIVITY OF REGULATIONS-

      ‘(1) IN GENERAL- Except as otherwise provided in this subsection, no temporary, proposed, or final regulation relating to the internal revenue laws shall apply to any taxable period ending before the earliest of the following dates:

        ‘(A) The date on which such regulation is filed with the Federal Register.

        ‘(B) In the case of any final regulation, the date on which any proposed or temporary regulation to which such final regulation relates was filed with the Federal Register.

        ‘(C) The date on which any notice substantially describing the expected contents of any temporary, proposed, or final regulation is issued to the public.

      ‘(2) PREVENTION OF ABUSE- The Secretary may provide that any regulation may take effect or apply retroactively to prevent abuse of a statute to which the regulation relates.

      ‘(3) CORRECTION OF PROCEDURAL DEFECTS- The Secretary may provide that any regulation may apply retroactively to correct a procedural defect in the issuance of any prior regulation.

      ‘(4) INTERNAL REGULATIONS- The limitation of paragraph (1) shall not apply to any regulation relating to internal Treasury Department policies, practices, or procedures.

      ‘(5) CONGRESSIONAL AUTHORIZATION- The limitation of paragraph (1) may be superseded by a legislative grant from Congress authorizing the Secretary to prescribe the effective date with respect to any regulation.

      ‘(6) ELECTION TO APPLY RETROACTIVELY- The Secretary may provide for any taxpayer to elect to apply any regulation before the dates specified in paragraph (1).

      ‘(7) APPLICATION TO RULINGS- The Secretary may prescribe the extent, if any, to which any ruling (including any judicial decision or any administrative determination other than by regulation) relating to the internal revenue laws shall be applied without retroactive effect.’

    (b) EFFECTIVE DATE-

      (1) IN GENERAL- Except as provided in paragraph (2), the amendment made by subsection (a) shall apply with respect to--

        (A) any temporary or proposed regulation filed on or after January 5, 1993, and

        (B) any temporary or proposed regulation filed before January 5, 1993, and filed as a final regulation after such date.

      (2) SPECIAL RULE- Section 7805(b)(2) of the Internal Revenue Code of 1986 (as added by subsection (a)) shall apply only to statutes enacted on or after the date of the enactment of this Act.

SEC. 1094. REQUIRED NOTICE OF CERTAIN PAYMENTS.

    If any payment is received by the Secretary of the Treasury or the Secretary’s delegate (hereafter in this section referred to as the ‘Secretary’) from any taxpayer and the Secretary cannot associate such payment with any outstanding tax liability of such taxpayer, the Secretary shall make reasonable efforts to notify the taxpayer of such inability within 60 days after the receipt of such payment.

SEC. 1095. UNAUTHORIZED ENTICEMENT OF INFORMATION DISCLOSURE.

    (a) IN GENERAL- Subchapter B of chapter 76 (relating to proceedings by taxpayers and third parties), as amended by section 1062(a), is amended by redesignating section 7435 as section 7436 and by inserting after section 7434 the following new section:

‘SEC. 7435. CIVIL DAMAGES FOR UNAUTHORIZED ENTICEMENT OF INFORMATION DISCLOSURE.

    ‘(a) IN GENERAL- If any officer or employee of the United States intentionally compromises the determination or collection of any tax due from an attorney, certified public accountant, or enrolled agent representing a taxpayer in exchange for information conveyed by the taxpayer to the attorney, certified public accountant, or enrolled agent for purposes of obtaining advice concerning the taxpayer’s tax liability, such taxpayer may bring a civil action for damages against the United States in a district court of the United States. Such civil action shall be the exclusive remedy for recovering damages resulting from such actions.

    ‘(b) DAMAGES- In any action brought under subsection (a), upon a finding of liability on the part of the defendant, the defendant shall be liable to the plaintiff in an amount equal to the lesser of $500,000 or the sum of--

      ‘(1) actual, direct economic damages sustained by the plaintiff as a proximate result of the information disclosure, and

      ‘(2) the costs of the action.

    Damages shall not include the taxpayer’s liability for any civil or criminal penalties, or other losses attributable to incarceration or the imposition of other criminal sanctions.

    ‘(c) PAYMENT AUTHORITY- Claims pursuant to this section shall be payable out of funds appropriated under section 1304 of title 31, United States Code.

    ‘(d) PERIOD FOR BRINGING ACTION- Notwithstanding any other provision of law, an action to enforce liability created under this section may be brought without regard to the amount in controversy and may be brought only within 2 years after the date the actions creating such liability would have been discovered by exercise of reasonable care.

    ‘(e) MANDATORY STAY- Upon a certification by the Commissioner or the Commissioner’s delegate that there is an ongoing investigation or prosecution of the taxpayer, the district court before which an action under this section is pending, shall stay all proceedings with respect to such action pending the conclusion of the investigation or prosecution.

    ‘(f) CRIME-FRAUD EXCEPTION- Subsection (a) shall not apply to information conveyed to an attorney, certified public accountant, or enrolled agent for the purpose of perpetrating a fraud or crime.’

    (b) CLERICAL AMENDMENT- The table of sections for subchapter B of chapter 76, as amended by section 1062(b), is amended by striking the item relating to section 7435 and by adding at the end the following new items:

‘Sec. 7435. Civil damages for unauthorized enticement of information disclosure.

‘Sec. 7436. Cross references.’

    (c) EFFECTIVE DATE- The amendments made by this section shall apply to actions after the date of the enactment of this Act.

Subtitle J--Form Modifications; Studies

SEC. 1100. DEFINITIONS.

    For purposes of this subtitle:

      (1) SECRETARY- The term ‘Secretary’ means the Secretary of the Treasury or his delegate.

      (2) 1986 CODE- The term ‘1986 Code’ means the Internal Revenue Code of 1986.

      (3) TAX-WRITING COMMITTEES- The term ‘tax-writing Committees’ means the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate.

CHAPTER 1--FORM MODIFICATIONS

SEC. 1101. EXPLANATION OF CERTAIN PROVISIONS.

    (a) GENERAL RULE- The Secretary shall take such actions as may be appropriate to ensure that taxpayers are aware of the provisions of the 1986 Code permitting payment of tax in installments, extensions of time for payment of tax, and compromises of tax liability. Such actions shall include revising the instructions for filing income tax returns so that such instructions include an explanation of--

      (1) the procedures for requesting the benefits of such provisions, and

      (2) the terms and conditions under which the benefits of such provisions are available.

    (b) COLLECTION NOTICES- In any notice of an underpayment of tax or proposed underpayment of tax sent by the Secretary to any taxpayer, the Secretary shall include a notification of the availability of the provisions of sections 6159, 6161, and 7122 of the 1986 Code.

SEC. 1102. IMPROVED PROCEDURES FOR NOTIFYING SERVICE OF CHANGE OF ADDRESS OR NAME.

    The Secretary shall provide improved procedures for taxpayers to notify the Secretary of changes in names and addresses. Not later than June 30, 1997, the Secretary shall institute procedures for timely updating all Internal Revenue Service records with change-of-address information provided to the Secretary by taxpayers.

SEC. 1103. RIGHTS AND RESPONSIBILITIES OF DIVORCED INDIVIDUALS.

    The Secretary shall include in the Internal Revenue Service publication entitled ‘Your Rights As A Taxpayer’ a section on the rights and responsibilities of divorced individuals.

CHAPTER 2--STUDIES

SEC. 1111. PILOT PROGRAM FOR APPEAL OF ENFORCEMENT ACTIONS.

    (a) GENERAL RULE- The Secretary shall establish a 1-year pilot program for appeals of enforcement actions (including lien, levy, and seizure actions) to the Appeals Division of the Internal Revenue Service--

      (1) where the deficiency was assessed without actual knowledge of the taxpayer,

      (2) where the deficiency was assessed without an opportunity for administrative appeal, and

      (3) in other appropriate circumstances.

    (b) REPORT- Not later than June 30, 1997, the Secretary shall submit to the tax-writing Committees a report on the pilot program established under subsection (a), together with such recommendations as he may deem advisable.

SEC. 1112. STUDY ON TAXPAYERS WITH SPECIAL NEEDS.

    (a) GENERAL RULE- The Secretary shall conduct a study on ways to assist the elderly, physically impaired, foreign-language speaking, and other taxpayers with special needs to comply with the internal revenue laws.

    (b) REPORT- Not later than June 30, 1996, the Secretary shall submit to the tax-writing Committees a report on the study conducted under subsection (a), together with such recommendations as he may deem advisable.

SEC. 1113. REPORTS ON TAXPAYER-RIGHTS EDUCATION PROGRAM.

    Not later than April 1, 1996, the Secretary shall submit a report to the tax-writing Committees on the scope and content of the Internal Revenue Service’s taxpayer-rights education program for its officers and employees. Not later than June 30, 1996, the Secretary shall submit a report to the tax-writing Committees on the effectiveness of the program referred to in the preceding sentence.

SEC. 1114. BIENNIAL REPORTS ON MISCONDUCT BY INTERNAL REVENUE SERVICE EMPLOYEES.

    Not later than June 30, 1996, and during June of each second calendar year thereafter, the Secretary shall report to the tax-writing Committees on all cases involving complaints about misconduct of Internal Revenue Service employees and the disposition of such complaints.

SEC. 1115. STUDY OF NOTICES OF DEFICIENCY.

    (a) GENERAL RULE- The Comptroller General shall conduct a study on--

      (1) the effectiveness of current Internal Revenue Service efforts to notify taxpayers with regard to tax deficiencies under section 6212 of the 1986 Code,

      (2) the number of registered or certified letters and other notices returned to the Internal Revenue Service as undeliverable,

      (3) any followup action taken by the Internal Revenue Service to locate taxpayers who did not receive actual notice,

      (4) the effect that failures to receive notice of such deficiencies have on taxpayers, and

      (5) recommendations to improve Internal Revenue Service notification of taxpayers.

    (b) REPORT- Not later than June 30, 1996, the Comptroller General shall submit to the tax-writing Committees a report on the study conducted under subsection (a), together with such recommendations as he may deem advisable.

SEC. 1116. NOTICE AND FORM ACCURACY STUDY.

    (a) GENERAL RULE- The Comptroller General shall conduct annual studies of the accuracy of 25 of the most commonly used Internal Revenue Service forms, notices, and publications. In conducting any such study, the Comptroller General shall examine the suitability and usefulness of Internal Revenue Service telephone numbers on Internal Revenue Service notices and shall solicit and consider the comments of organizations representing taxpayers, employers, and tax professionals.

    (b) REPORTS- The Comptroller General shall submit to the tax-writing Committees a report on each study conducted under subsection (a), together with such recommendations as he may deem advisable. The first such report shall be submitted not later than June 30, 1996.

TITLE II--INCREASE OF DEDUCTION FOR HEALTH INSURANCE COSTS OF SELF-EMPLOYED INDIVIDUALS

SEC. 2001. INCREASE OF DEDUCTION FOR HEALTH INSURANCE COSTS OF SELF-EMPLOYED INDIVIDUALS.

    (a) INCREASE IN DEDUCTION- Section 162(l) is amended--

      (1) by striking ‘30 percent’ in paragraph (1) and inserting ‘the applicable percentage’, and

      (2) by adding at the end the following new paragraph:

      ‘(6) APPLICABLE PERCENTAGE- For purposes of paragraph (1), the applicable percentage shall be determined as follows:

‘For taxable years

--The applicable

beginning in:

--percentage is:

1996

--75

1997 and thereafter

--100.’

    (b) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 1995.

TITLE III--S CORPORATION REFORM ACT OF 1995

SEC. 3001. SHORT TITLE.

    This title may be cited as the ‘S Corporation Reform Act of 1995’.

Subtitle A--Eligible Shareholders of S Corporation

CHAPTER 1--NUMBER OF SHAREHOLDERS

SEC. 3101. S CORPORATIONS PERMITTED TO HAVE 50 SHAREHOLDERS.

    Subparagraph (A) of section 1361(b)(1) (defining small business corporation) is amended by striking ‘35 shareholders’ and inserting ‘50 shareholders’.

SEC. 3102. MEMBERS OF FAMILY TREATED AS 1 SHAREHOLDER.

    Paragraph (1) of section 1361(c) (relating to special rules for applying subsection (b)) is amended to read as follows:

      ‘(1) MEMBERS OF FAMILY TREATED AS 1 SHAREHOLDER-

        ‘(A) IN GENERAL- For purposes of subsection (b)(1)(A)--

          ‘(i) except as provided in clause (ii), a husband and wife (and their estates) shall be treated as 1 shareholder, and

          ‘(ii) in the case of a family with respect to which an election is in effect under subparagraph (E), all members of the family shall be treated as 1 shareholder.

        ‘(B) MEMBERS OF THE FAMILY- For purposes of subparagraph (A)(ii), the term ‘members of the family’ means the lineal descendants of the common ancestor and the spouses (or former spouses) of such lineal descendants or common ancestor.

        ‘(C) COMMON ANCESTOR- For purposes of this paragraph, an individual shall not be considered a common ancestor if, as of the later of the effective date of this paragraph or the time the election under section 1362(a) is made, the individual is more than 6 generations removed from the youngest generation of shareholders.

        ‘(D) EFFECT OF ADOPTION, ETC- In determining whether any relationship specified in subparagraph (B) or (C) exists, the rules of section 152(b)(2) shall apply.

        ‘(E) ELECTION- An election under subparagraph (A)(ii)--

          ‘(i) must be made with the consent of all shareholders,

          ‘(ii) shall remain in effect until terminated, and

          ‘(iii) shall apply only with respect to 1 family in any corporation.’

CHAPTER 2--PERSONS ALLOWED AS SHAREHOLDERS

SEC. 3111. CERTAIN EXEMPT ORGANIZATIONS.

    (a) CERTAIN EXEMPT ORGANIZATIONS ALLOWED 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 described in section 401(a) or 501(c)(3) 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 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) SPECIAL RULES APPLICABLE TO PARTNERSHIPS AND S CORPORATIONS-

      (1) IN GENERAL- Subsection (c) of section 512 (relating to unrelated business tax income) is amended--

        (A) by inserting ‘or S corporation’ after ‘partnership’ each place it appears in paragraphs (1) and (3),

        (B) by inserting ‘or shareholder’ after ‘member’ in paragraph (1), and

        (C) by inserting ‘AND S CORPORATIONS’ after ‘PARTNERSHIPS’ in the heading.

      (2) REPORTING REQUIREMENT- Section 6037 (relating to return of S corporation) is amended by adding at the end the following new subsection:

    ‘(c) SEPARATE STATEMENT OF ITEMS OF UNRELATED BUSINESS TAXABLE INCOME- In the case of any S corporation regularly carrying on a trade or business (within the meaning of section 512(c)(1)), the information required under subsection (b) to be furnished to any shareholder described in section 1361(c)(7) shall include such information as is necessary to enable the shareholder to compute its pro rata share of the corporation’s income or loss from the trade or business in accordance with section 512(a)(1), but without regard to the modifications described in paragraphs (8) through (15) of section 512(b).’

SEC. 3112. FINANCIAL INSTITUTIONS.

    Subparagraph (B) of section 1361(b)(2) (defining ineligible corporation) is amended to read as follows:

        ‘(B) a financial institution which uses the reserve method of accounting for bad debts described in section 585 or 593,’.

SEC. 3113. NONRESIDENT ALIENS.

    (a) NONRESIDENT ALIENS ALLOWED TO BE SHAREHOLDERS-

      (1) IN GENERAL- Paragraph (1) of section 1361(b) (defining small business corporation) is amended--

        (A) by adding ‘and’ at the end of subparagraph (B),

        (B) by striking subparagraph (C), and

        (C) by redesignating subparagraph (D) as subparagraph (C).

      (2) CONFORMING AMENDMENTS- Paragraphs (4) and (5)(A) of section 1361(c) (relating to special rules for applying subsection (b)) are each amended by striking ‘subsection (b)(1)(D)’ and inserting ‘subsection (b)(1)(C)’.

    (b) NONRESIDENT ALIEN SHAREHOLDER TREATED AS ENGAGED IN TRADE OR BUSINESS WITHIN UNITED STATES-

      (1) IN GENERAL- Section 875 is amended--

        (A) by striking ‘and’ at the end of paragraph (1),

        (B) by striking the period at the end of paragraph (2) and inserting ‘, and’, and

        (C) by adding at the end the following new paragraph:

      ‘(3) a nonresident alien individual shall be considered as being engaged in a trade or business within the United States if the S corporation of which such individual is a shareholder is so engaged.’

      (2) APPLICATION OF WITHHOLDING TAX ON NONRESIDENT ALIEN SHAREHOLDERS- Section 1446 (relating to withholding tax on foreign partners’ share of effectively connected income) is amended by redesignating subsection (f) as subsection (g) and by inserting after subsection (e) the following new subsection:

    ‘(f) S CORPORATION TREATED AS PARTNERSHIP, ETC- For purposes of this section--

      ‘(1) an S corporation shall be treated as a partnership,

      ‘(2) the shareholders of such corporation shall be treated as partners of such partnership, and

      ‘(3) any reference to section 704 shall be treated as a reference to section 1366.’

      (3) CONFORMING AMENDMENTS-

        (A) The heading of section 875 is amended to read as follows:

‘SEC. 875. PARTNERSHIPS; BENEFICIARIES OF ESTATES AND TRUSTS; S CORPORATIONS.’

        (B) The heading of section 1446 is amended to read as follows:

‘SEC. 1446. WITHHOLDING TAX ON FOREIGN PARTNERS’ AND S CORPORATE SHAREHOLDERS’ SHARE OF EFFECTIVELY CONNECTED INCOME.’

      (4) CLERICAL AMENDMENTS-

        (A) The item relating to section 875 in the table of sections for subpart A of part II of subchapter N of chapter 1 is amended to read as follows:

      ‘Sec. 875. Partnerships; beneficiaries of estates and trusts; S corporations.’

        (B) The item relating to section 1446 in the table of sections for subchapter A of chapter 3 is amended to read as follows:

      ‘Sec. 1446. Withholding tax on foreign partners’ and S corporate shareholders’ share of effectively connected income.’

    (c) PERMANENT ESTABLISHMENT OF PARTNERS AND S CORPORATION SHAREHOLDERS- Section 894 (relating to income affected by treaty) is amended by adding at the end the following new subsection:

    ‘(c) PERMANENT ESTABLISHMENT OF PARTNERS AND S CORPORATION SHAREHOLDERS- If a partnership or S corporation has a permanent establishment in the United States (within the meaning of a treaty to which the United States is a party) at any time during a taxable year of such entity, a nonresident alien individual or foreign corporation which is a partner in such partnership, or a nonresident alien individual who is a shareholder in such S corporation, shall be treated as having a permanent establishment in the United States for purposes of such treaty.’

SEC. 3114. 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 an individual, an estate, or an organization described in section 401(a) or 501(c)(3),

          ‘(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 in such manner and form, and at such time, as the Secretary may prescribe. 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).’

CHAPTER 3--OTHER PROVISIONS

SEC. 3121. 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).

Subtitle B--Qualification and Eligibility Requirements for S Corporations

CHAPTER 1--ONE CLASS OF STOCK

SEC. 3201. ISSUANCE OF PREFERRED STOCK PERMITTED.

    (a) IN GENERAL- Section 1361(c), as amended by section 3111(a)(2), is amended by adding at the end the following new paragraph:

      ‘(8) TREATMENT OF QUALIFIED PREFERRED STOCK-

        ‘(A) IN GENERAL- Notwithstanding subsection (b)(1)(D), an S corporation may issue qualified preferred stock.

        ‘(B) QUALIFIED PREFERRED STOCK DEFINED- For purposes of this paragraph, the term ‘qualified preferred stock’ means stock described in section 1504(a)(4) which is issued to a person eligible to hold common stock of an S corporation.

        ‘(C) DISTRIBUTIONS- A distribution (not in part or full payment in exchange for stock) made by the corporation with respect to qualified preferred stock shall be includible as interest income of the holder and deductible to the corporation as interest expense in computing taxable income under section 1363(b) in the year such distribution is received.’

    (b) CONFORMING AMENDMENTS-

      (1) Subparagraph (C) of section 1361(b)(1), as redesignated by section 3113(a)(1)(C), is amended by inserting ‘except as provided in paragraph (8),’ before ‘have’.

      (2) Subsection (a) of section 1366 is amended by adding at the end the following new paragraph:

      ‘(3) ALLOCATION WITH RESPECT TO QUALIFIED PREFERRED STOCK- The holders of qualified preferred stock shall not, with respect to such stock, be allocated any of the items described in paragraph (1).’

SEC. 3202. FINANCIAL INSTITUTIONS PERMITTED TO HOLD SAFE HARBOR DEBT.

    Subparagraph (B) of section 1361(c)(5) (defining straight debt) is amended by adding ‘and’ at the end of clause (i) and by striking clauses (ii) and (iii) and inserting the following:

          ‘(ii) in any case in which the terms of such promise include a provision under which the obligation to pay may be converted (directly or indirectly) into stock of the corporation, such terms, taken as a whole, are substantially the same as the terms which could have been obtained on the effective date of the promise from a person which is not a related person (within the meaning of section 465(b)(3)(C)) to the S corporation or its shareholders, and

          ‘(iii) the creditor is--

            ‘(I) an individual,

            ‘(II) an estate,

            ‘(III) a trust described in paragraph (2), or

            ‘(IV) a person which is actively and regularly engaged in the business of lending money.’

CHAPTER 2--ELECTIONS AND TERMINATIONS

SEC. 3211. 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) 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- Subsection (b) of section 1362 is amended by adding at the end the following new paragraph:

      ‘(5) AUTHORITY TO TREAT LATE ELECTIONS 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, and

        ‘(B) the Secretary determines that there was reasonable cause for the failure to timely make such election,

      the Secretary may treat such election as timely made for such taxable year (and paragraph (3) shall not apply).’

    (c) AUTOMATIC WAIVERS- The Secretary of the Treasury shall provide for an automatic waiver procedure under section 1362(f) of the Internal Revenue Code of 1986 in cases in which the Secretary determines appropriate.

    (d) EFFECTIVE DATE- The amendments made by subsection (a) and (b) shall apply with respect to elections for taxable years beginning after December 31, 1982.

SEC. 3212. 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 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. 3213. 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 SUBCHAPTER 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), as amended by section 3111(c)(2), is amended by adding at the end the following new subsection:

    ‘(d) 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 subsection (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. 3214. REPEAL OF EXCESSIVE PASSIVE INVESTMENT INCOME AS A TERMINATION EVENT.

    (a) IN GENERAL- Section 1362(d) (relating to termination) is amended by striking paragraph (3).

    (b) MODIFICATION OF TAX IMPOSED ON EXCESSIVE PASSIVE INVESTMENT INCOME-

      (1) INCREASE IN THRESHOLD- Subsections (a)(2) and (b)(1)(A)(i) of section 1375 (relating to tax imposed when passive investment income of a corporation having subchapter C earnings and profits exceeds 25 percent of gross receipts) are each amended by striking ‘25 percent’ and inserting ‘50 percent’.

      (2) TAX RATE INCREASE AFTER THIRD CONSECUTIVE YEAR- Section 1375 is amended by redesignating subsections (c) and (d) as subsections (d) and (e), respectively, and by inserting after subsection (b) the following new subsection:

    ‘(c) TAX RATE INCREASE AFTER THIRD CONSECUTIVE YEAR-

      ‘(1) IN GENERAL- If an S corporation is described in subsection (a) for more than 3 consecutive taxable years, then the rate of tax imposed under subsection (a) with respect to each succeeding consecutive taxable year (if any) shall be determined under the following table:

The rate of tax imposed under

subsection (a) shall be

equal to such rate of tax for

the 3rd taxable year, plus

the following percentage

‘In the case of the--

points:

4th taxable year

10

5th taxable year

20

6th taxable year

30

7th taxable year

40

8th taxable year and thereafter

50.

      ‘(2) YEARS TAKEN INTO ACCOUNT- No tax shall be increased under paragraph (1) for any taxable year beginning before January 1, 1996.’

    (c) CONFORMING AMENDMENTS-

      (1) Section 1362(f)(1) is amended by striking ‘or (3)’.

      (2) Subsection (b) of section 1375 is amended by striking paragraphs (3) and (4) and inserting the following new paragraphs:

      ‘(3) SUBCHAPTER C EARNINGS AND PROFITS- The term ‘subchapter C earnings and profits’ means earnings and profits of any corporation for any taxable year with respect to which an election under section 1362(a) (or under section 1372 of prior law) was not in effect.

      ‘(4) GROSS RECEIPTS FROM SALES OF CAPITAL ASSETS (OTHER THAN STOCK AND SECURITIES)- In the case of dispositions of capital assets (other than stock and securities), gross receipts from such dispositions shall be taken into account only to the extent of the capital gain net income therefrom.

      ‘(5) PASSIVE INVESTMENT INCOME DEFINED-

        ‘(A) IN GENERAL- Except as otherwise provided in this paragraph, the term ‘passive investment income’ means gross receipts derived from royalties, rents, dividends, interest, and annuities.

        ‘(B) EXCEPTION FOR INTEREST ON NOTES FROM SALES OF INVENTORY- The term ‘passive investment income’ shall not include interest on any obligation acquired in the ordinary course of the corporation’s trade or business from its sale of property described in section 1221(1).

        ‘(C) TREATMENT OF CERTAIN LENDING OR FINANCE COMPANIES- If the S corporation meets the requirements of section 542(c)(6) for the taxable year, the term ‘passive investment income’ shall not include gross receipts for the taxable year which are derived directly from the active and regular conduct of a lending or finance business (as defined in section 542(d)(1)).

        ‘(D) SPECIAL RULE FOR OPTIONS AND COMMODITY DEALINGS-

          ‘(i) IN GENERAL- In the case of any options dealer or commodities dealer, passive investment income shall be determined by not taking into account any gain or loss (in the normal course of the taxpayer’s activity of dealing in or trading section 1256 contracts) from any section 1256 contract or property related to such a contract.

          ‘(ii) DEFINITIONS- For purposes of this subparagraph--

            ‘(I) OPTIONS DEALER- The term ‘options dealer’ has the meaning given such term by section 1256(g)(8).

            ‘(II) COMMODITIES DEALER- The term ‘commodities dealer’ means a person who is actively engaged in trading section 1256 contracts and is registered with a domestic board of trade which is designated as a contract market by the Commodities Futures Trading Commission.

            ‘(III) SECTION 1256 CONTRACT- The term ‘section 1256 contract’ has the meaning given to such term by section 1256(b).

        ‘(E) COORDINATION WITH SECTION 1374- The amount of passive investment income shall be determined by not taking into account any recognized built-in gain or loss of the S corporation for any taxable year in the recognition period. Terms used in the preceding sentence shall have the same respective meaning as when used in section 1374.’

      (3) The heading for section 1375 is amended by striking ‘25’ and inserting ‘50’.

      (4) The table of sections for part III of subchapter S of chapter 1 is amended by striking ‘25’ in the item relating to section 1375 and inserting ‘50’.

      (5) Clause (i) of section 1042(c)(4)(A) is amended by striking ‘section 1362(d)(3)(D)’ and inserting ‘section 1375(b)(5)’.

CHAPTER 3--OTHER PROVISIONS

SEC. 3221. S CORPORATIONS PERMITTED TO HOLD SUBSIDIARIES.

    (a) IN GENERAL- Paragraph (2) of section 1361(b) (defining ineligible corporation), as amended by section 3112, 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 subsection:

      ‘(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 subsection, the term ‘qualified subchapter S subsidiary’ means any corporation 100 percent of the stock of which is held by an S corporation as of the later of the effective date of the S election of the S corporation or the acquisition of the subsidiary, and at all times thereafter.

        ‘(C) TREATMENT OF TERMINATIONS OF QUALIFIED SUBCHAPTER S SUBSIDIARY STATUS- For purposes of this subtitle, 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.’.

    (c) CERTAIN DIVIDENDS NOT TREATED AS PASSIVE INVESTMENT INCOME- Section 1375(b)(5) (defining passive investment income), as added by section 3214(c)(2), 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, as amended by sections 3111(a)(2) and 3201(a), is amended by striking paragraph (6) and redesignating paragraphs (7) and (8) as paragraphs (6) and (7), respectively.

      (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. 3222. 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 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. 3223. CONSENT DIVIDEND FOR AAA BYPASS ELECTION.

    Section 1368(e)(3) (relating to election to distribute earnings first) is amended by adding at the end the following new subparagraph:

        ‘(C) CONSENT DIVIDEND- Under regulations prescribed by the Secretary, an S corporation may, subject to the election under this paragraph, consent to treat as a distribution the amount specified in such consent, to the extent such amount does not exceed the accumulated earnings and profits of such corporation. The amount so specified shall be considered--

          ‘(i) as distributed in money by the corporation to its shareholders on the last day of the taxable year of the corporation and as contributed to the capital of the corporation by the shareholders on such day, and

          ‘(ii) if any such shareholder is an organization described in section 511(a)(2), as unrelated business taxable income (as defined in section 512) to such shareholder.’

SEC. 3224. 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. 3225. ELIMINATION OF PRE-1983 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, 1995,

    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)(A) Subsection (a) of section 1375 is amended by striking ‘subchapter C’ in paragraph (1) and inserting ‘accumulated’.

      (B) Subsection (b) of section 1375, as amended by section 3214(c)(2), is amended by striking paragraph (3) and by redesignating paragraphs (4) and (5) as paragraphs (3) and (4), respectively.

      (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’.

      (2) Clause (i) of section 1042(c)(4)(A), as amended by section 3214(c)(5), is amended by striking ‘section 1375(b)(5)’ and inserting ‘section 1375(b)(4)’.

SEC. 3226. ALLOWANCE OF CHARITABLE CONTRIBUTIONS OF INVENTORY AND SCIENTIFIC PROPERTY.

    (a) IN GENERAL- Section 170(e) (relating to certain contributions of ordinary income and capital gain property) is amended--

      (1) by striking ‘(other than a corporation which is an S corporation)’ in paragraph (3)(A), and

      (2) by striking clause (i) of paragraph (4)(D) and by redesignating clauses (ii) and (iii) of such paragraph as clauses (i) and (ii), respectively.

    (b) STOCK BASIS ADJUSTMENT- Paragraph (1) of section 1367(a) (relating to adjustments to basis of stock of shareholders, etc.) is amended by striking ‘and’ at the end of subparagraph (B), by striking the period at the end of subparagraph (C) and inserting ‘, and’, and by adding at the end the following new subparagraph:

        ‘(D) the excess of the deductions for charitable contributions over the basis of the property contributed.’

SEC. 3227. C CORPORATION RULES TO APPLY FOR FRINGE BENEFIT PURPOSES.

    (a) IN GENERAL- Section 1372 (relating to partnership rules to apply for fringe benefit purposes) is repealed.

    (b) PARTNERSHIP RULES TO APPLY FOR HEALTH INSURANCE COSTS OF CERTAIN S CORPORATION SHAREHOLDERS- Paragraph (5) of section 162(l) is amended to read as follows:

      ‘(5) TREATMENT OF CERTAIN S CORPORATION SHAREHOLDERS-

        ‘(A) IN GENERAL- This subsection shall apply in the case of any 2-percent shareholder of an S corporation, except that--

          ‘(i) for purposes of this subsection, such shareholder’s wages (as defined in section 3121) from the S corporation shall be treated as such shareholder’s earned income (within the meaning of section 401(c)(1)), and

          ‘(ii) there shall be such adjustments in the application of this subsection as the Secretary may by regulations prescribe.

        ‘(B) 2-PERCENT SHAREHOLDER DEFINED- For purposes of this paragraph, the term ‘2-percent shareholder’ means any person who owns (or is considered as owning within the meaning of section 318) on any day during the taxable year of the S corporation more than 2 percent of the outstanding stock of such corporation or stock possessing more than 2 percent of the total combined voting power of all stock of such corporation.’

    (b) CONFORMING AMENDMENT- The table of sections for part III of subchapter S of chapter 1 is amended by striking the item relating to section 1372.

Subtitle C--Taxation of S Corporation Shareholders

SEC. 3301. UNIFORM TREATMENT OF OWNER-EMPLOYEES UNDER PROHIBITED TRANSACTION RULES.

    The last sentence of section 4975(d) (relating to exemptions from prohibited transactions) is amended by striking ‘a shareholder-employee (as defined in section 1379, as in effect on the day before the date of the enactment of the Subchapter S Revision Act of 1982),’.

SEC. 3302. TREATMENT OF LOSSES TO SHAREHOLDERS.

    (a) TREATMENT OF LOSSES IN LIQUIDATIONS- Section 331 (relating to gain or loss to shareholders in corporate liquidations) is amended by redesignating subsection (c) as subsection (d) and by inserting after subsection (b) the following new subsection:

    ‘(c) LOSSES ON LIQUIDATIONS OF S CORPORATION-

      ‘(1) IN GENERAL- The portion of any loss recognized by a shareholder of an S corporation (as defined in section 1361(a)(1)) on amounts received by such shareholder in a distribution in complete liquidation of such S corporation which does not exceed the ordinary income basis of stock of such S corporation in the hands of such shareholder shall not be treated as a loss from the sale or exchange of a capital asset but shall be treated as an ordinary loss.

      ‘(2) ORDINARY INCOME BASIS- For purposes of this subsection, the ordinary income basis of stock of an S corporation in the hands of a shareholder of such S corporation shall be an amount equal to the portion of such shareholder’s basis in such stock which is equal to the aggregate increases in such basis under section 1367(a)(1) resulting from such shareholder’s pro rata share of ordinary income of such S corporation attributable to the complete liquidation.’

    (b) 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).’

Subtitle D--Effective Date

SEC. 3401. EFFECTIVE DATE.

    (a) IN GENERAL- Except as otherwise provided in this title, the amendments made by this title shall apply to taxable years beginning after December 31, 1995.

    (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 (as in effect on the day before the date of the enactment of this Act) shall not be taken into account.

TITLE IV--PENSION SIMPLIFICATION

Subtitle A--Simplification of Nondiscrimination Provisions

SEC. 4000. SHORT TITLE.

    This title may be cited as the ‘Pension Simplification Act of 1995’.

SEC. 4001. 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 ‘highly compensated employee’ means any employee who--

        ‘(A) was a 5-percent owner at any time during the year or the preceding year,

        ‘(B) had compensation for the preceding year from the employer in excess of $80,000, or

        ‘(C) was the most highly compensated officer of the employer for the preceding year.

      The Secretary shall adjust the $80,000 amount under subparagraph (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 beginning October 1, 1995.’

    (b) SPECIAL RULE WHERE NO EMPLOYEE HAS COMPENSATION OVER SPECIFIED AMOUNT- Paragraph (2) of section 414(q) is amended to read as follows:

      ‘(2) SPECIAL RULE IF NO EMPLOYEE HAS COMPENSATION OVER SPECIFIED AMOUNT-

        ‘(A) IN GENERAL- Except as provided in subparagraph (B), if a defined benefit plan or a defined contribution plan meets the requirements of sections 401(a)(4) and 410(b) with respect to the availability of contributions, benefits, and other plan features, then for all other purposes, subparagraphs (A) and (C) of paragraph (1) shall not apply to such plan.

        ‘(B) EXCEPTION- Subparagraph (A) shall not apply to a plan to the extent provided in regulations that are prescribed by the Secretary to prevent the evasion of the purposes of this paragraph.’

    (c) 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 (l) of section 404 is amended by striking the last sentence.

    (d) Conforming Amendments-

      (1) Paragraphs (4), (5), (8), and (12) of section 414(q) are hereby repealed.

      (2)(A) Section 414(r) is amended by adding at the end the following new paragraph:

      ‘(9) EXCLUDED EMPLOYEES- For purposes of this subsection, the following employees shall be excluded:

        ‘(A) Employees who have not completed 6 months of service.

        ‘(B) Employees who normally work less than 17 1/2 hours per week.

        ‘(C) Employees who normally work not more than 6 months during any year.

        ‘(D) Employees who have not attained the age of 21.

        ‘(E) Except to the extent provided in regulations, employees who are included in a unit of employees covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and the employer.

      Except as provided by the Secretary, the employer may elect to apply subparagraph (A), (B), (C), or (D) by substituting a shorter period of service, smaller number of hours or months, or lower age for the period of service, number of hours or months, or age (as the case may be) specified in such subparagraph.’

      (B) Subparagraph (A) of section 414(r)(2) is amended by striking ‘subsection (q)(8)’ and inserting ‘paragraph (9)’.

      (3) Section 1114(c)(4) of the Tax Reform Act of 1986 is 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 before the Pension Simplification Act of 1995.’

    (e) EFFECTIVE DATE- The amendments made by this section shall apply to years beginning after December 31, 1995, except that in determining whether an employee is a highly compensated employee for years beginning in 1996, such amendments shall be treated as having been in effect for years beginning in 1995.

Subtitle B--Targeted Access to Pension Plans for Small Employers

SEC. 4011. CREDIT FOR PENSION PLAN START-UP COSTS OF SMALL EMPLOYERS.

    (a) ALLOWANCE OF CREDIT- Section 38(b) (defining current year 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 small employer pension plan start-up cost credit.’

    (b) SMALL EMPLOYER PENSION PLAN START-UP COST CREDIT- Subpart D of part IV of subchapter A of chapter 1 (relating to business related credits) is amended by adding at the end the following new section:

‘SEC. 45C. SMALL EMPLOYER PENSION PLAN START-UP COST CREDIT.

    ‘(a) AMOUNT OF CREDIT- For purposes of section 38--

      ‘(1) IN GENERAL- The small employer pension plan start-up cost credit for any taxable year is an amount equal to the qualified start-up costs of an eligible employer in establishing a qualified pension plan.

      ‘(2) AGGREGATE LIMITATION- The amount of the credit under paragraph (1) for any taxable year shall not exceed $1,000, reduced by the aggregate amount determined under this section for all preceding taxable years of the taxpayer.

    ‘(b) QUALIFIED START-UP COSTS; QUALIFIED PENSION PLAN- For purposes of this section--

      ‘(1) QUALIFIED START-UP COSTS- The term ‘qualified start-up costs’ means any ordinary and necessary expenses of an eligible employer which--

        ‘(A) are paid or incurred in connection with the establishment of a qualified pension plan, and

        ‘(B) are of a nonrecurring nature.

      ‘(2) QUALIFIED PENSION PLAN- The term ‘qualified pension plan’ means--

        ‘(A) a plan described in section 401(a) which includes a trust exempt from tax under section 501(a), or

        ‘(B) a simplified employee pension (as defined in section 408(k)).

    ‘(c) ELIGIBLE EMPLOYER- For purposes of this section--

      ‘(1) IN GENERAL- The term ‘eligible employer’ means an employer which--

        ‘(A) had an average daily number of employees during the preceding taxable year not in excess of 50, and

        ‘(B) did not make any contributions on behalf of any employee to a qualified pension plan during the 2 taxable years immediately preceding the taxable year.

      ‘(2) PROFESSIONAL SERVICE EMPLOYERS EXCLUDED- Such term shall not include an employer substantially all of the activities of which involve the performance of services in the fields of health, law, engineering, architecture, accounting, actuarial science, performing arts, or consulting.

    ‘(d) SPECIAL RULES- For purposes of this section--

      ‘(1) AGGREGATION RULES- All persons treated as a single employer under subsection (a) or (b) of section 52 or subsection (n) or (o) of section 414 shall be treated as one person.

      ‘(2) DISALLOWANCE OF DEDUCTION- No deduction shall be allowable under this chapter for any qualified start-up costs for which a credit is allowable under subsection (a).’

    (c) CONFORMING AMENDMENTS-

      (1) Section 39(d) is amended by adding at the end the following new paragraph:

      ‘(7) NO CARRYBACK OF PENSION CREDIT- No portion of the unused business credit for any taxable year which is attributable to the small employer pension plan start-up cost credit determined under section 45C may be carried back to a taxable year ending before the date of the enactment of section 45C.’

      (2) The table of sections for subpart D of part IV of subchapter A of chapter 1 is amended by adding at the end the following new item:

      ‘Sec. 45C. Small employer pension plan start-up cost credit.’

    (d) EFFECTIVE DATE- The amendments made by this section shall apply to costs incurred after the date of the enactment of this Act in taxable years ending after such date.

SEC. 4012. MODIFICATIONS OF SIMPLIFIED EMPLOYEE PENSIONS.

    (a) INCREASE IN NUMBER OF ALLOWABLE PARTICIPANTS FOR SALARY REDUCTION ARRANGEMENTS- Section 408(k)(6)(B) is amended by striking ‘25’ each place it appears in the text and heading thereof and inserting ‘100’.

    (b) REPEAL OF PARTICIPATION REQUIREMENT-

      (1) IN GENERAL- Section 408(k)(6)(A) is amended by striking clause (ii) and by redesignating clauses (iii) and (iv) as clauses (ii) and (iii), respectively.

      (2) CONFORMING AMENDMENTS- Clause (ii) of section 408(k)(6)(C) and clause (ii) of section 408(k)(6)(F) are each amended by striking ‘subparagraph (A)(iii)’ and inserting ‘subparagraph (A)(ii)’.

    (c) ALTERNATIVE TEST- Clause (ii) of section 408(k)(6)(A), as redesignated by subsection (b)(1), is amended by adding at the end the following new flush sentence:

          ‘The requirements of the preceding sentence are met if the employer makes contributions to the simplified employee pension meeting the requirements of sections 401(k)(11) (B) or (C), 401(k)(11)(D), and 401(m)(10)(B).’

    (d) EFFECTIVE DATE- The amendments made by this section shall apply to years beginning after December 31, 1995.

SEC. 4013. EXEMPTION FROM TOP-HEAVY PLAN REQUIREMENTS.

    (a) EXEMPTION FROM TOP-HEAVY PLAN REQUIREMENTS- Section 416(g) (defining top-heavy plans) is amended by adding at the end the following new paragraph:

      ‘(3) EXEMPTION FOR CERTAIN PLANS- A plan shall not be treated as a top-heavy plan if, for such plan year, the employer has no highly compensated employees (as defined in section 414(q)) by reason of section 414(q)(2).’

    (b) EFFECTIVE DATE- The amendment made by this section shall apply to years beginning after December 31, 1995.

SEC. 4014. REGULATORY TREATMENT OF SMALL EMPLOYERS.

    (a) IN GENERAL- Section 7805(f) (relating to review of impact of regulations on small business) is amended by adding at the end the following new subparagraph:

      ‘(4) SPECIAL RULE FOR PENSION REGULATIONS-

        ‘(A) IN GENERAL- Any regulation proposed to be issued by the Secretary which relates to qualified pension plans shall not take effect unless the Secretary includes provisions to address any special needs of the small employers.

        ‘(B) QUALIFIED PENSION PLAN- For purposes of this paragraph, the term ‘qualified pension plan’ means--

          ‘(i) any plan which includes a trust described in section 401(a) which is exempt from tax under section 501(a), or

          ‘(ii) any simplified employee pension (as defined in section 408(k)).’

    (b) EFFECTIVE DATE- The amendment made by this section shall apply to regulations issued after the date of the enactment of this Act.

TITLE V--ESTATE TAX EXCLUSION FOR FAMILY-OWNED BUSINESS

SEC. 5001. SHORT TITLE.

    This title may be cited as the ‘American Family-Owned Business Act’.

SEC. 5002. FAMILY-OWNED BUSINESS EXCLUSION.

    (a) IN GENERAL- Part III of subchapter A of chapter 11 (relating to gross estate) is amended by inserting after section 2033 the following new section:

‘SEC. 2033A. FAMILY-OWNED BUSINESS EXCLUSION.

    ‘(a) IN GENERAL- In the case of an estate of a decedent to which this section applies, the value of the gross estate shall not include the lesser of--

      ‘(1) the adjusted value of the qualified family-owned business interests of the decedent otherwise includible in the estate, or

      ‘(2) the sum of--

        ‘(A) $1,500,000, plus

        ‘(B) 50 percent of the excess (if any) of the adjusted value of such interests over $1,500,000.

    ‘(b) ESTATES TO WHICH SECTION APPLIES- This section shall apply to an estate if--

      ‘(1) the decedent was (at the date of the decedent’s death) a citizen or resident of the United States,

      ‘(2) the excess of--

        ‘(A) the sum of--

          ‘(i) the adjusted value of the qualified family-owned business interests which--

            ‘(I) are included in determining the value of the gross estate (without regard to this section), and

            ‘(II) are acquired by a qualified heir from, or passed to a qualified heir from, the decedent (within the meaning of section 2032A(e)(9)), plus

          ‘(ii) the amount of the adjusted taxable gifts of such interests from the decedent to members of the decedent’s family taken into account under subsection 2001(b)(1)(B), to the extent such interests are continuously held by such members between the date of the gift and the date of the decedent’s death, over

        ‘(B) the amount included in the gross estate under section 2035,

      exceeds 50 percent of the adjusted gross estate, and

      ‘(3) during the 8-year period ending on the date of the decedent’s death there have been periods aggregating 5 years or more during which--

        ‘(A) such interests were owned by the decedent or a member of the decedent’s family, and

        ‘(B) there was material participation (within the meaning of section 2032A(e)(6)) by the decedent or a member of the decedent’s family in the operation of the business to which such interests relate.

    ‘(c) ADJUSTED GROSS ESTATE- For purposes of this section, the term ‘adjusted gross estate’ means the value of the gross estate (determined without regard to this section)--

      ‘(1) reduced by any amount deductible under section 2053(a)(4), and

      ‘(2) increased by the excess of--

        ‘(A) the sum of--

          ‘(i) the amount taken into account under subsection (b)(2)(B)), plus

          ‘(ii) the amount of other gifts from the decedent to the decedent’s spouse (at the time of the gift) within 10 years of the date of the decedent’s death, plus

          ‘(iii) the amount of other gifts (not included under clause (i) or (ii)) from the decedent within 3 years of such date, over

        ‘(B) the amount included in the gross estate under section 2035.

    ‘(d) ADJUSTED VALUE OF THE QUALIFIED FAMILY-OWNED BUSINESS INTERESTS- For purposes of this section, the adjusted value of any qualified family-owned business interest is the value of such interest for purposes of this chapter (determined without regard to this section), reduced by the excess of--

      ‘(1) any amount deductible under section 2053(a)(4), over

      ‘(2) the sum of--

        ‘(A) any indebtedness on any qualified residence of the decedent the interest on which is deductible under section 163(h)(3), plus

        ‘(B) any indebtedness to the extent the taxpayer establishes that the proceeds of such indebtedness were used for the payment of educational and medical expenses of the decedent, the decedent’s spouse, or the decedent’s dependents (within the meaning of section 152), plus

        ‘(C) any indebtedness not described in subparagraph (A) or (B), to the extent such indebtedness does not exceed $10,000.

    ‘(e) QUALIFIED FAMILY-OWNED BUSINESS INTEREST-

      ‘(1) IN GENERAL- For purposes of this section, the term ‘qualified family-owned business interest’ means--

        ‘(A) an interest as a proprietor in a trade or business carried on as a proprietorship, or

        ‘(B) an interest as a partner in a partnership, or stock in a corporation, carrying on a trade or business, if--

          ‘(i) at least--

            ‘(I) 50 percent of such partnership or corporation is owned (directly or indirectly) by the decedent or members of the decedent’s family,

            ‘(II) 70 percent of such partnership or corporation is so owned by 2 families (including the decedent’s family), or

            ‘(III) 90 percent of such partnership or corporation is so owned by 3 families (including the decedent’s family), and

          ‘(ii) at least 30 percent of such partnership or corporation is so owned by each family described in subclause (II) or (III) of clause (i).

      ‘(2) LIMITATION- Such term shall not include--

        ‘(A) any interest in a trade or business the principal place of business of which is not located in the United States,

        ‘(B) any interest in--

          ‘(i) an entity which had, or

          ‘(ii) an entity which is a member of a controlled group (as defined in section 267(f)(1)) which had,

        readily tradable stock or debt on an established securities market or secondary market (as defined by the Secretary) within 3 years of the date of the decedent’s death,

        ‘(C) any interest in a trade or business not described in section 542(c)(2), if more than 35 percent of the adjusted ordinary gross income of such trade or business for the taxable year which includes the date of the decedent’s death would qualify as personal holding company income (as defined in section 543(a)), and

        ‘(D) that portion of an interest in a trade or business that is attributable to cash or marketable securities, or both, in excess of the reasonably expected day-to-day working capital needs of such trade or business.

      ‘(3) OWNERSHIP RULES-

        ‘(A) INDIRECT OWNERSHIP- For purposes of determining indirect ownership under paragraph (1), rules similar to the rules of paragraphs (2) and (3) of section 447(e) shall apply.

        ‘(B) TIERED ENTITIES- For purposes of this section, if--

          ‘(i) a qualified family-owned business holds an interest in another trade or business, and

          ‘(ii) such interest would be a qualified family-owned business interest if held directly by the family (or families) holding interests in the qualified family-owned business meeting the requirements of paragraph (1)(B),

        then the value of the qualified family-owned business shall include the portion attributable to the interest in the other trade or business.

    ‘(f) TAX TREATMENT OF FAILURE TO MATERIALLY PARTICIPATE IN BUSINESS OR DISPOSITIONS OF INTERESTS-

      ‘(1) IN GENERAL- There is imposed an additional estate tax if, within 10 years after the date of the decedent’s death and before the date of the qualified heir’s death--

        ‘(A) the qualified heir ceases to use for the qualified use (within the meaning of section 2032A(c)(6)(B)) the qualified family-owned business interest which was acquired (or passed) from the decedent, or

        ‘(B) the qualified heir disposes of any portion of a qualified family-owned business interest (other than by a disposition to a member of the qualified heir’s family or through a qualified conservation contribution under section 170(h)).

      ‘(2) ADDITIONAL ESTATE TAX- The amount of the additional estate tax imposed by paragraph (1) shall be equal to--

        ‘(A) the adjusted tax difference attributable to the qualified family-owned business interest (as determined under rules similar to the rules of section 2032A(c)(2)(B)), plus

        ‘(B) interest on the amount determined under subparagraph (A) at the annual rate of 4 percent for the period beginning on the date the estate tax liability was due under this chapter and ending on the date such additional estate tax is due.

    ‘(g) OTHER DEFINITIONS AND APPLICABLE RULES- For purposes of this section--

      ‘(1) QUALIFIED HEIR- The term ‘qualified heir’--

        ‘(A) has the meaning given to such term by section 2032A(e)(1), and

        ‘(B) includes any active employee of the trade or business to which the qualified family-owned business interest relates if such employee has been employed by such trade or business for a period of at least 10 years before the date of the decedent’s death.

      ‘(2) MEMBER OF THE FAMILY- The term ‘member of the family’ has the meaning given to such term by section 2032A(e)(2).

      ‘(3) APPLICABLE RULES- Rules similar to the following rules shall apply:

        ‘(A) Section 2032A(b)(4) (relating to decedents who are retired or disabled).

        ‘(B) Section 2032A(b)(5) (relating to special rules for surviving spouses).

        ‘(C) Section 2032A(c)(2)(D) (relating to partial dispositions).

        ‘(D) Section 2032A(c)(3) (relating to only 1 additional tax imposed with respect to any 1 portion).

        ‘(E) Section 2032A(c)(4) (relating to due date).

        ‘(F) Section 2032A(c)(5) (relating to liability for tax; furnishing of bond).

        ‘(G) Section 2032A(c)(7) (relating to no tax if use begins within 2 years; active management by eligible qualified heir treatment as material participation).

        ‘(H) Section 2032A(e)(10) (relating to community property).

        ‘(I) Section 2032A(e)(14) (relating to treatment of replacement property acquired in section 1031 or 1033 transactions).

        ‘(J) Section 2032A(f) (relating to statute of limitations).

        ‘(K) Section 6166(b)(3) (relating to farmhouses and certain other structures taken into account).

        ‘(L) Subparagraphs (B), (C), and (D) of section 6166(g)(1) (relating to acceleration of payment).’

    (b) CLERICAL AMENDMENT- The table of sections for part III of subchapter A of chapter 11 is amended by inserting after the item relating to section 2033 the following new item:

‘Sec. 2033A. Family-owned business exclusion.’

    (c) EFFECTIVE DATE- The amendments made by this section shall apply to estates of decedents dying after December 31, 1995.

TITLE VI--SPENDING REDUCTIONS

SEC. 6001. SHORT TITLE.

    This title may be cited as the ‘Spending Reductions Act of 1995’.

SEC. 6002. SERVICE CONTRACTS.

    Notwithstanding any other provision of law, of the funds available for fiscal year 1996, the total amount available for service contracts shall not exceed $105,000,000,000.

SEC. 6003. FEDERALLY FUNDED RESEARCH AND DEVELOPMENT CENTERS.

    Notwithstanding any other provision of law, of the funds available for the Department of Defense for fiscal year 1996, the total amount available for procurement of work from federally funded research and development centers shall not exceed $1,000,000,000.

SEC. 6004. FOREIGN MILITARY FINANCING.

    Notwithstanding any other provision of law, of the funds available for fiscal year 1996, the total amount available for the Foreign Military Financing Program under section 23 of the Arms Export Control Act shall not exceed $3,500,000,000.