The summary below was written by the Congressional Research Service, which is a nonpartisan division of the Library of Congress, and was published on Sep 18, 1986.
(Conference report filed in House, H. Rept. 99-841) Tax Reform Act of 1986 - Specifies that the Internal Revenue Code shall be cited as the "Internal Revenue Code of 1986." Title I: Individual Income Tax Provisions - Subtitle A: Rate Reductions; Increase in Standard Deduction and Personal Exemptions - Amends the Internal Revenue Code to revise the income tax rates for individuals and certain estates and trusts. Sets such rates at: (1) 15 percent of taxable income up to $29,750 and $4,462.50 plus 28 percent of the excess over $29,750 for married individuals filing joint returns and surviving spouses; (2) 15 percent of taxable income up to $23,900 and $3,585 plus 28 percent of the excess over $23,900 for heads of households; (3) 15 percent of taxable income up to $17,850 and $2,677.50 plus 28 percent of the excess over $18,850 for single individuals; (4) 15 percent of taxable income up to $14,875 and $2,231.25 plus 28 percent of the excess over $14,875 for married individuals filing separate returns; and (5) 15 percent of taxable income up to $5,000 and $750 plus 28 percent of the excess over $5,000 for estates and trusts. Allows cost-of-living adjustments in such tax rates. Phases out the 15-percent bracket for taxpayers above certain income levels through a rate adjustment requiring additional tax liability. Provides that such revised rates shall tax effect for taxable years beginning in 1988. Sets forth an interim tax rate schedule for taxable years beginning in 1987. Allows a basic standard deduction of: (1) $5,000 for married individuals filing jointly and for surviving spouses; (2) $4,400 for heads of household; (3) $3,000 for single individuals; and (4) $2,500 for married individuals filing separately. Allows an additional standard deduction of $600 for an elderly or blind individual ($1,200 for an individual who is both elderly and blind). Allows cost-of-living adjustments to such amounts. Sets forth lower transitional amounts for taxable years beginning in 1987. Increases the personal exemption amount to $1,900 in 1987, $1,950 in 1988, and $2,000 in 1989 and thereafter. Provides for cost-of-living adjustments to such amount. Repeals the additional personal tax exemption for the elderly or blind. Revises provisions relating to minimum income levels for individuals required to file income tax returns. Subtitle B: Provisions Related to Tax Credits - Increases the amount of the earned income credit from 11 percent of the first $5,000 of income to 14 percent of the first $5,714 of income. Increases the income level at which the phase-out of such credit begins. Provides for cost-of-living adjustments to such amounts. Repeals the income tax credit for contributions to candidates for public office. Subtitle C: Provisions Related to Exclusions - Includes in gross income the total amount of unemployment compensation received by an individual. Allows an income tax exclusion for certain prizes and awards for charitable, artistic, and scientific achievements only if the recipient designates that the prize award is to be transferred by the payor to a governmental unit or a tax-exempt charitable, educational, or religious organization. Provides a limited tax exclusion for employee achievement awards provided such an award: (1) is awarded as part of a meaningful presentation; and (2) is awarded under conditions and circumstances that do not create a significant likelihood of the payment of disguised compensation. Excludes from gross income any amount received as a qualified scholarship grant by an individual who is a candidate for a degree at an educational institution. Provides that such exclusion shall not apply to any payments for teaching, research, or other services by the individual as a condition for receiving such a scholarship. Subtitle D: Provisions Related to Deduction - Repeals the income tax deduction for two-earner married couples. Allows miscellaneous itemized income tax deductions only to the extent that the aggregate amount of such deductions exceeds two percent of adjusted gross income. Disallows the moving expense deduction in the computation of adjusted gross income. Increases the limitation of the income tax deduction for medical expenses from five percent to seven and one-half percent of adjusted gross income. Repeals the income tax deduction for State and local sales taxes. Repeals the income tax deduction for adoption expenses. Subtitle E: Miscellaneous Provisions - Repeals income averaging. Allows an income tax deduction for business meals, travel, and entertainment provided such expenses have a clear business purpose. Limits to 80 percent the amount of meal and entertainment expenses allowed as a business expense deduction. Limits the amount of such a deduction for the costs of entertainment tickets and the costs of luxury water transportation. Disallows such a deduction for expenses for travel as a form of education. Revises the treatment of hobby losses. Allows an income tax deduction for mortgage interest and real property taxes where a parsonage allowance or a military housing allowance has been received. Subtitle F: Effective Dates - Sets forth effective dates for provisions of this Title. Title II: Provisions Relating to Capital Cost - Subtitle A: Depreciation Provisions - Modifes the Accelerated Cost Recovery System (ACRS) for property placed in service after December 31, 1986, except for property covered by transition rules. Provides accelerated depreciation for revised three-year, five-year, and 10-year classes. Reclassifies certain assets according to their present class life. Creates a seven-year class, a 20-year class, a 27.5-year class, and a 31.5-year class. Prescribes depreciation methods for each ACRS class (in lieu of providing statutory tables). Sets forth transitional rules and makes specified exemptions. Limits the expensing of depreciable assets to $10,000 for any taxable year for taxpayers whose total investment in tangible property is $200,000 or less. Provides that the aggregate cost of property taken into account for purposes of such limitation shall be based on income from trade or business. Subtitle B: Repeal of Regular Investment Tax Credit - Repeals the regular investment tax credit for property placed in service after December 31, 1985. Makes exceptions for qualified progress expenditures for periods before January 1, 1986, and for specified transition property. Provides for a 15-year carryback of existing carry-forwards of the investment tax credit for certain steel companies and for qualified farmers. Subtitle C: General Business Credit Reduction - Reduces the amount of the income tax liability which may be offset by the business tax credit from 85 percent to 75 percent. Subtitle D: Research and Development Provisions - Extends the income tax credit for increasing research activities for three years from 1985 to 1988. Revises the definition of "qualified research" for purposes of such income tax credit. Extends the income tax credit for the clinical testing expenses for certain drugs for three years from 1987 to 1990. Subtitle E: Changes in Certain Amortization Provisions - Repeals the five-year amortization of trademark and trade name expenditures. Repeals the amortization of railroad grading and tunnel bores. Allows an income tax deduction ratably over a 60-month period for the adjusted basis of bus operating authorities held on November 19, 1982, or acquired after that date under a written contract that was binding on that date. Allows a similar deduction for freight forwarders as of the time of deregulation. Extends permanently the election to deduct qualifying expenses for the removal of architectural and transportation barriers to the handicapped and elderly. Subtitle F: Provisions Relating to Real Estate - Reduces the percentage of costs to be taken into account for purposes of the investment tax credit for rehabilitation expenditures. Revises certain definitions and special rules relating to such tax credit. Subtitle G: Merchant Marine Capital Construction Funds - Limits the amount of funds which may be deposited in a capital construction fund established under the Merchant Marine Act, 1936. Sets forth the method of calculating such limit. Exempts from taxation any funds deposited in such an account. Specifies the tax treatment of funds withdrawn from such an account. Title III: Capital Gains - Subtitle A: Individual Capital Gains - Repeals the exclusion for long-term capital gains of individuals. Sets a maximum 28-percent capital gains rate for taxpayers other than corporations. Subtitle B: Repeal of Corporate Capital Gains Treatment - Sets the rate of tax for capital gains realized by a corporation at a maximum of 34 percent (the regular corporate rate). Makes such rate effective for gain properly taken into account under the taxpayer's method of accounting on or after January 1, 1987, without regard to whether the gain is pursuant to a written binding contact in effect at any earlier time. Subtitle C: Incentive Stock Options - Repeals the requirement that the incentive stock options must be exercised in the order granted. Modifies the limit on such options to provide that the amount of incentive stock options that are first exercisable during any one calender year may not in the aggregate exceed $100,000. Subtitle D: Straddles - Revises the year-end rule relating to straddles to provide that the loss-deferral rule shall be applied to cases in which a stock is sold at a loss and the related option is not held for 30 days thereafter and the gain on which is included in the subsequent year. Title IV: Agriculture, Energy, and Natural Resources - Subtitle A: Agriculture - Limits the soil and water conservation expenditures that may be deducted to amounts incurred that are consistent with a conservation plan approved by the Soil Conservation Service of the Department of Agriculture. Repeals the deduction allowed to farmers for expenditures incurred in clearing land. Treats as ordinary income any gain realized on the disposition of converted wetland or highly erodible cropland. Treats as long-term capital loss a loss realized on the disposition of such property. Limits the amount of the income tax deduction allowed to farmers for certain prepaid farming expenses. Treats the discharge of indebtedness income arising from an agreement between a solvent individual engaged in the trade business of farming and an unrelated person in order to discharge qualified farming indebtedness as income realized by an insolvent individual. Retains capital gains treatment for sales of dairy cattle under the milk production termination program to the extent such gain is properly taken into account under the taxpayer's method of accounting after January 1, 1987, and before September 1, 1987. Subtitle B: Treatment of Oil, Gas, Geothermal, and Hard Minerals - Allows 70 percent of intangible drilling costs to be expensed. Allows the remaining 30 percent of such costs to be amortized ratably over a 60-month period beginning in the month the costs are paid or incurred. Sets forth special rules for intangible drilling and development costs incurred outside the United States. Disallows a percentage depletion allowance for lease bonuses, advance royalties, or other payments made without regard to actual production from oil, gas, or geothermal property. Includes depletion allowances and the expensing of intangible drilling costs in the recapture of amounts realized from the disposition of an interest in oil, gas, or geothermal property. Subtitle C: Other Provisions - Extends the energy investment tax credit for solar, geothermal, ocean thermal, and biomass property. Reduces the excise tax exemption for qualified methanol and ethanol fuels. Extends the four-cent-per-gallon partial exemption from the motor fuels excise tax through September 30, 1988. Allows ethyl alcohol (or ethyl alcohol mixture) to be admitted into the United States duty-free, if it is an indigenous product of a U.S. insular possession or Caribbean Basin Inititive beneficiary country. Sets forth specifications for the treatment as such an indigenous product. Allows transitional exemptions. Title V: Tax Shelter Limitations; Interest Limitations - Subtitle A: Limitations on Tax Shelters - Limits an income tax deduction or an income tax credit related to passive activities to the amount of income derived from such passive activities. Requires that such a deduction or credit must be carried forward to the next taxable year. Provides transitional rules with respect to passive activity losses of qualified investors in qualified low-income housing projects. Extends at-risk limitations to real property to provide that qualified nonrecourse financing shall be treated as an amount at risk. Subtitle B: Interest Expense - Limits the amount of the income tax deduction for investment interest to the amount of net investment income of the taxpayer for the taxable year. Allows a carry over of any disallowed investment interest to the succeeding taxable year. Sets forth definitions and transitional rules. Disallows an income tax deduction for personal interest expenses of individuals. Defines "personal interest" as any interest paid or incurred except: (1) in connection with the conduct of a trade or business; (2) investment interest; (3) interest used in computing income or loss from a passive activity; (4) home mortgage interest; and (5) interest on tax deficiencies. Phases in such disallowance over a five-year period. Specifies that the amount of such interest disallowed shall be: (1) 35 percent in 1987; (2) 60 percent in 1988; (3) 80 percent in 1989; (4) 90 percent in 1990; and (5) 100 percent in years thereafter. Title VI: Corporate Provisions - Subtitle A: Rate Reductions - Revises the income tax rates for corporations. Sets such rate as the sum of: (1) 15 percent of taxable income less than $50,000; (2) 25 percent of taxable income between $50,000 and $75,000; and (3) 34 percent of taxable income in excess of $75,000. Increases the amount of tax for corporations with a taxable income in excess of $100,000 by five percent or $11,750 whichever is less. Subtitle B: Treatment of Stock and Stock Dividends - Reduces the amount of the dividends received from 85 percent to 80 percent. Repeals the partial tax exclusion of dividends received by individuals. Denies an income tax deduction for any amount paid or incurred by a corporation in connection with the redemption of its stock. Requires a corporation which disposes of stock to reduce its basis in such stock (but not below zero) by the nontaxed portion of any extraordinary dividend paid with respect to such stock at any time during the corporation's holding period. Subtitle C: Limitation on Net Operating Loss Carryforwards and Excess Credit Carry forwards - Limits the net operating loss carry overs and certain built-in losses following a change in control of a corporation. Sets forth the method of calculating such limit. Requires the Secretary to prescribe regulations to apply limitations, in the case of an ownership change of a corporation, for any: (1) unused general business credits; and (2) unused minimum tax credits. Subtitle D: Recognition of Gain and Loss on Distributions of Property in Liquidation - Provides that any gain or loss shall be recognized to a liquidating corporation on the distribution of property in complete liquidation as if such property were sold to the distributee at its fair market value. Specifies certain exemptions to such requirement. Provides for the nonrecognition of gain or loss to a liquidating corporation on the distribution to the 80-percent distributee of any property in a complete liquidation. Provides for the recognition of gain to a distributing corporation if appreciated property (other than an obligation of the corporation) is distributed to shareholders outside of complete liquidation. Imposes a tax on the recognised built-in gains of a subchapter C corporation electing subchapter S status. Sets forth the method of calculating such gain and the tax imposed. Requires the Secretary to conduct a study of provisions relating to subchapter C corporations and to report results to specified Congressional committees by January 1, 1988. Subtitle E: Other Corporate Provisions - Sets forth special allocation rules for certain asset acquisitions. Treats an amortizable bond premium as interest for purposes of applying the investment interest limitations. Provides special rules relating to cooperative housing corporations to provide that tenant-stockholders may include persons other than individuals. Sets forth rules for the treatment of cooperative property subject to depreciation and income tax deductions proportionately allocated to tenant-stockholders. Exempts computer software royalties from the personal holding company tax provided such royalties constitute at least 50 percent of income. Subtitle F: Regulated Investment Companies - Imposes an excise tax on the undistributed income of regulated investment companies. Sets forth the method of calculating such tax. Provides that a business development company registered under the Investment Company Act of 1940 may qualify as a Regulated Investment Company (RIC). Provides that foreign currency gains are included in the definition of qualifying income as well as other income with respect to a regulated investment company's business of investing in stocks, securities, or income from gains from options or futures contracts. Permits the Secretary of the Treasury to issue regulations which exclude from qualifying income foreign currency gains that are not ancillary to the company's principal business of investing in stock or securities (or options and futures thereon). Provides that each separate portfolio in a series fund will be treated as a separate corporation for purposes of eligibility for conduit treatment of a regulated investment company. Sets forth the treatment of certain existing series funds. Extends from 45 to 60 days the period for mailing various notices to a shareholders of regulated investment companies. Expands the definition of "third-party recordkeeping" to include regulated investment companies with respect to certain protections of mutual funds receiving third-party summonses. Provides that distributions by a regulated investment company to a shareholder who made an initial investment of at least $10,000,000 shall not be treated as preferential dividends. Subtitle G: Real Estate Investment Trusts - Modifies the provisions relating to the requirements for qualifications as a real estate investment trust to provide that an entity that otherwise meets the applicable requirements may elect real estate investment trust (REIT) status notwithstanding its meeting the personal holding company stock ownership test or having fewer than 100 shareholders, provided that the entity was not a REIT in any prior year. Requires that in order to elect REIT status, the electing entity must either have been treated as a REIT for all taxable years beginning after February 28, 1986, or must have no earnings and profits accumulated for any year in which the entity was in existence and not treated as a REIT. Permits any entity that has not engaged in any active trade or business to change its annual accounting period to a calendar year without approval of the Internal Revenue Service in connection with electing REIT status. Provides that all the assets, liabilities, and items of income, deduction, and credit of a "qualified REIT subsidiary" are treated as the assets, liabilities, and respective items of the REIT that owns the stock of the qualified REIT subsidiary. Provides that a subsidiary of a REIT is a qualified REIT subsidiary only if 100 percent of the subsidiary's stock is owned by the REIT at all times that the subsidiary is in existence. Sets forth rules relating to the receipt of new equity capital by a REIT. Modifies the definitions of rents and interest for purposes of the REIT provisions of the Code. Modifies the distribution requirement with respect to REITs to provide that the minimum amount that the REIT is required to distribute (i.e., the minimum dividends paid deduction), is reduced by a portion of certain amounts that the REIT is required to include in income in advance of receiving cash. Provides that for purposes of determining the maximum amount of capital gains dividends that a REIT may pay for a taxable year, the REIT cannot offset its net capital gain with the amount of any net operating loss, whether current or carried over from a previous taxable year. Permits a REIT, to the extent that the REIT elects to pay capital gains dividends in excess of its net income, to increase the amount of its net operating loss carry over by such amount. Allows a REIT to mail a notice of capital gains dividends with its annual report. Modifies the rules relating to prohibited transactions to increase from five to seven the number of sales of property that a REIT may make within the safe harbor rules. Increases from 20 percent to 30 percent of the net selling price of the property the extent of expenditures that the REIT may make within four years of sale that are included in the basis of the property. Provides an alternative safe harbor rule whereby the REIT may make any number of sales during the taxable year, provided that the gross income from such sales does not exceed ten percent of the taxable income of the REIT for the taxable year. Provides that in determining the amount of the net income derived from prohibited transactions, losses from prohibited transactions (and deductions attributable to prohibited transactions in which a loss was incurred) may not be taken into account. Permits the amount of any net loss from prohibited transactions to be taken into account in computing the real estate investment trust taxable income. Repeals the penalty tax on deficiency dividends. Imposes an excise tax on the undistributed income of real estate investment trusts. Sets forth the method of calculating such tax. Subtitle H: Taxation of Interests in Entities Holding Real Estate Mortgages - Establishes a new type of entity known as a Real Estate Mortgage Investment Company (REMIC), an entity which hold a fixed pool of mortgages and issues multiple classes of interests in itself to investors. Provides rules prescribing: (1) the Federal income tax treatment of the REMIC; (2) the treatment of taxpayers who exchange mortgages for interests in the REMIC; (3) the treatment of taxpayer-holding interests in the REMIC; and (4) the treatment of the disposition of interests in the REMIC. Revises the application of the original issue discount rules for certain obligations the timing of whose maturities in contingent upon the timing of payments on the underlying collateral. Imposes certain new information reporting requirements with respect to the REMIC. Treats as a corporation any entity, referred to as an "owners' debt pool," that is used primarily th hold mortgages and issue its own debt instruments with varying maturities. Title VII: Alternative Minimum Tax - Revises the method of calculating the alternative minimum tax for corporations and individuals. Phases out the exemption amount for individuals whose income exceeds certain amounts. Revises the types of tax preferences which may be taken into account in calculating such minimum tax. Disallows certain losses in the calculation of such minimum tax. Revises definitions and sets forth special rules with respect to such minimum tax. Allows an income tax credit for prior year minimum tax liability. Title VIII: Accounting Provisions - Subtitle A: General Provisions - Disallows the use of the cash method of accounting by: (1) a C corporation; (2) a partnership which has a C corporation as a partner; and (3) a tax shelter. Allows certain exceptions. Allows certain small businesses to elect to use the simplified dollar-value method of pricing inventories for purposes of the LIFO (last-in, first-out) method of accounting. Disallows an income tax deduction for and requires the capitalization and inclusion in inventory costs of certain specified business expenses such as inventory, construction, and development costs. Makes specified exceptions to such requirement. Provides special rules for the percentage of completion-capitalized cost method of accounting for long term contracts. Repeals the income tax deduction for a reserve for bad debts for taxpayers other than financial institutions. Includes in gross income any increase in any suspense account relating to the accrual of vacation pay. Requires all partnerships, S corporations, and personal service corporations to conform their taxable years to the taxable years of their owners. Allows an exception to such requirement upon a showing of a business purpose for having a different taxable year. Subtitle B: Treatment of Installment Obligations - Requires the allocation of indebtedness as payment on installment obligations. Disallows the use of the installment method of accounting for: (1) any disposition of personal property under a revolving credit plan; or (2) any stock, securities, or other property regularly traded on an established market. Subtitle C: Other Provisions - Requires accrual basis taxpayers to reorganize income attributable to the furnishing or sale of utility services to customers not later than the taxable year in which such services are provided to the customer. Repeals the application of discharge of indebtedness rules to qualified business indebtedness. Repeals the income tax deduction for qualified discount coupons redeemend after the close of the taxable year. Includes in gross income (and not as a contribution to the capital of a corporation) any contribution in aid of construction or any other contribution as a customer or potential customer. Title IX: Financial Institutions - Repeals the deduction for additions to a bad debt reserve made by a large bank. Defines a bank as a "large bank" if for the year the average adjusted basis for all assets of such bank exceeded $500,000,000, or such bank was a member of a parent-subsidiary controlled group where the average adjusted basis of the assets of the group exceeded $500,000,000. Requires a large bank to take into income the balance of any bad debt reserve account over a five-year period unless the bank makes an election to use the cut-off method for the bad debt reserves. Allows any domestic building and loan association, any mutual savings bank, or any cooperative bank without capital stock organized and operated for mutual purposes and without profit to take a deduction for a reasonable addition to a reserve for bad debt. Provides that the amount of the deduction for additions to bad debt reserves based on a percentage of taxable income shall be limited to eight percent of taxable income for such year. Repeals the percentage of eligible loans method for calculating the amount of the deduction. Provides that the reserves calculated under this provision will not be treated as tax preference items. Denies financial institutions (banks, thrift institutions, and other financial institutions) a deduction for that portion of the taxpayer's interest expense which is allocated to tax-exempt obligations acquired after August 7, 1986. Provides that the disallowance of interest expenses allocated to tax-exempt obligations must be applied before the application of the rules relating to the capitalization of preproductive expenses including interest and taxes. Repeals the special treatment of face-amount certificate companies. Repeals the special rules which permit financial institutions a ten-year carryback and a five-year carryforward of net operating losses. Repeals the special provisions relating to the acquisitions of financially troubled thrift institutions and the exclusion from income and the basis reduction requirement of FSLIC payments to such thrift institutions. Provides that no deduction shall be disallowed relating to expenses allocable to tax-exempt income for any amount paid or incurred by a taxpayer on the ground that such amount is allocated to amounts of excluded FSLIC payments. Permits qualified individuals to elect to deduct losses on deposits in qualified financial institutions as casualty losses in the year in which the amount of the loss can be reasonably estimated. Defines "qualified individual" as any individual other than the owner of one eprcent or more of the value of the stock of institution in which the loss was sustained, an officer of such institution, and certain relatives and persons related to such owners and officers. Prohibits the deduction of such loss as a bad debt deduction if this election is made by the taxpayer. Title X: Insurance Products and Companies - Subtitle A: Policyholder Issues - Repeals the income tax exclusion for interest on installment payments of life insurance proceeds. Limits the income tax exclusion for structured insurance settlements to payments relating to damages on account of a claim for personal injuries that involve physical injury or physical sickness of the claimant. Disallows an income tax deduction for interest on loans from certain life insurance contracts. Allows an income tax deduction for nonbusiness casualty losses covered by insurance only if an insurance claim is filed. Subtitle B: Life Insurance Companies - Repeals the special life insurance company deduction which allowed life insurance companies, in computing their life insurance company taxable income, to deduct 20 percent of the income from the insurance business in arriving at their taxable income. Repeals tax-exempt status for certain organizations which provide commercial-type insurance. Excludes from the definition of "commercial-type insurance": (1) insurance provided at substantially below cost to a class of charitable recipients; (2) incidental health insurance provided by a health maintenance organization of a kind customarily provided by such organization; (3) property or casualty insurance provided by a church or convention or association of churches for such church or convention or association of churches; and (4) insurance providing retirement or welfare benefits (or both) by a church or a convention or association churches for the employees of such church or convention or association of churches or the beneficiaries of such employees. Provides special rules for the tax treatment of Blue Cross and Blue Shield organizations. Allows insolvent insurance companies an operations loss income tax deduction to offset distributions from policyholders' surplus accounts. Subtitle C: Property and Casualty Insurance Companies - Permits a property and casualty insurance company to deduct only 80 percent of the increase in unearned premiums on outstanding business for the taxable year for tax years beginning after 1986. Provides that life insurance reserves which are included in unearned premium reserves are not subject to this 80 percent limitation. Requires the deduction for losses incurred to be reduced by a specified portion of the insurer's tax-exempt interest and of the deductible portion of dividends received (with special rules for dividends received from affiliates). Provides that the specified portion by which the deduction for losses incurred is reduced under such provisions shall be 15 percent for all taxable years beginning after December 31, 1986. Provides that in the case of insurance against default in the payment of principal or interest on securities with a maturity of five years or more, the deduction for increases in unearned premiums is reduced by ten percent, rather than 20 percent. Limits the amount of the deduction for unpaid losses (reported losses that have not been paid, estimates of losses incurred but not reported and resisted claims, and unpaid loss adjustment expenses) to the amount of discounted unpaid losses. Defines "discounted unpaid losses." Repeals the deduction for contributions to protection against loss accounts of mutual property and casualty insurance companies. Imposes an alternative tax on insurance companies other than life insurance companies. Requires the Secretary to study the tax treatment of policyholder dividends by mutual property and casualty insurance companies. Directs that such study be submitted to specified congressional committees no later than January 1, 1989. Gives the Secretary the authority to require the furnishing of such information as may be necessary to conduct the study. Subtitle D: Miscellaneous Provisions - Excludes from the gross income of any eligible physicians' and surgeons' mutual protection and interindemnity arrangement or association any capital contributions by a member joining such association. Requires such payment to be included in gross income for the taxable year with respect to any member who elects to deduct such payment as a trade or business expense. Allows any member of such an arrangement or association to elect, with the consent of the association, to treat any capital contribution made during the taxable year as an ordinary and necessary business expense for purposes of the deduction allowed for business expenses to the extent such payment does not exceed the amount which would be payable to an independent insurance company for similar insurance coverage and further reduced by any annual dues, assessments, or premiums paid during such taxable year. Requires any refund of such capital contribution in a subsequent year to be included in income for the taxable year received to the extent a deduction for such payment was allowed. Requires the arrangement or association: (1) to have been operative and providing protection under the laws of any State prior to January 1, 1984; (2) to not be subject to regulation by any State insurance department; (3) to have a right to make unlimited assessments against all members to cover current claims and losses; and (4) to not be a member of, nor subject to protection by, any insurance guaranty plan or association of any State. Title XI: Pensions and Deferred Compensation; Employee Benefits; Employee Stock Ownership Plans - Subtitle A: Pensions and Deferred Compensation - Limits the amount of the income tax deduction for contributions to an Individual Retirement Account (IRA) for active participants in certain employer-maintained retirement plans. Includes within the definition of an "employer-maintained retirement plan:" (1) a qualified pension, profit sharing, or stock bonus plan; (2) a qualified annuity plan; (3) a simplified employee pension plan; (4) a plan established for its employees by the United States, by a State or political subdivision, or by any agency or instrumentality of the United States, or a State or political subdivision; or (5) an employee trust. Provides that members of a reserve component of the armed forces and volunteer firefighters shall not be treated as active participants in certain retirement plans if specified conditions are met. Allows nondeductible contributions to be made to individual retirement plans up to a specified limit per year. Requires individuals to report the amounts of nondeductible contributions. Requires any amount of excess deferrals contributed in excess of the $7,000 limit to be included in the employee's gross income for the year to which the excess deferrals relate. Makes specified adjustments to the limitations on contributions and benefits under qualified deferred compensation plans. Provides that an employee is not required to include in income currently the amounts an employee elects to have contributed to a simplified employee pension (SEP). Treats the elective deferrals under a SEP similar to the elective deferrals under a qualified cash or deferred arrangement and, therefore, subjects the deferrals to the $7,000 cap on the amount of the elective deferral. Provides that the election to have amounts contributed to a SEP or received in cash is available only if at least 50 percent of the employees of the employer elect to have amounts contributed to the SEP and is available only in a taxable year in which the employer maintaining the SEP has 25 or fewer employees as of the beginning of the year. Permits nonelective SEP contributions to be tested for nondiscrimination under the new rules for qualified defined contribution plans permitting a limited disparity between the contribution percentages applicable to compensation below and compensation above the social security wage base. Provides that a plan will not be considered to be discriminatory merely because the contributions and benefits of (or on behalf of) employees under the plan favor highly compensated employees if the plan meets certain requirements relating to the integration of contributions or benefits. Provides that a defined contribution plan meets the disparity limits for integrated plans only if the excess contribution percentage under the plan does not exceed the base contribution percentage by the lesser of: (1) 20 percent of the base contribution percentage; or (2) the sum of the base contribution percentage and the rate imposed on employers under the Federal Insurance Contribution Act as of the beginning of the plan year. Provides that a defined benefit pension plan meets the requirement of integrated plans only if it meets the requirements for integrated offset plans or those for integrated excess plans. Provides that a defined benefit plan will not fail to meet the nondiscrimination rules merely because it limits benefits by reference to the final pay of a participant. Modifies the minimum coverage requirements for qualified employer plans to provide that such plans must meet one of the following requirements: (1) the plan benefits at least 70 percent of all nonhighly compensated employees; (2) the plan benefits a percentage of nonhighly compensated employees which is at least 70 percent of the percentage of highly compensated employees benefiting under the plan; or (3) the plan meets the average benefits test. Provides that a plan is not a qualified plan unless a participant's employer-provided benefits vest at least as rapidly as under one of two alternative minimum vesting schedules. Sets forth the two alternatives as follows: (1) requires a participant to have a nonforfeitable right to 100 percent of the participant's accrued benefit derived from employer contributions upon the participant's completion of five years of service; or (2) requires a participant to have a nonforfeitable right to at least 20 percent of the participant's accrued benefit derived from employer contributions after three years of service, 40 percent at the end of four years of service, 60 percent at the end of five years of service, 80 percent at the end of six years of service, and 100 percent at the end of seven years of service. Treats an employee as a highly compensated employee with respect to a year, if, at any time during the year or preceding year, the employee: (1) was a five-percent owner of the employer; (2) earned more than $75,000 in annual compensation from the employer; (3) earned more than $50,000 in annual compensation from the employer and was a member of the top-paid group of employees during the same year; or (4) was an officer of the employer. Provides that if an employer establishes to the satisfaction of the Secretary that the employer operates separate lines of business or operating units for bona fide business reasons, a plan maintained by the employer for employees in a line of business or operating unit will not be considered discriminatory if, with respect to the employees in the line of business or operating unit for which the plan is maintained, it satisfies: (1) the reasonable classification test, or (2) the alternative reasonable classification test. Provides that distributions may be made to a participant in a qualified cash or deferred arrangement on account of the sale of a subsidiary or termination of the plan of which the arrangement is a part. Provides that the exception for distributions upon the sale of a subsidiary is available with respect to a participant who has not separataed from the service with the subsidiary. Makes other modifications in the withdrawal requirements for qualified cash or deferred arrangements. Establishes special nondiscrimination requirements with respect to employer matching contributions and employee contributions under all qualified defined contribution plans and employee contributions under a defined benefit plan (to the extent allocated to a separate account on behalf of the employee). Applies these nondiscrimination tests in lieu of the usual nondiscrimination rules applicable to the amount of contributions under qualified plans. Provides that benefits are to be treated as accruing ratably for purposes of determining whether a plan should be considered top-heavy. Modifies the rules for benefit forfeitures to establish uniform rules for forfeitures under any defined contribution plan. Imposes a penalty tax on excess contributions to a qualified employer-plan. Imposes a penalty tax on certain accumulations in qualified retirement plans which fail to make required distributions. Revises rules relating to the inclusion in gross income of distributions from a qualified employee plan. Allows the averaging over five years to individuals receiving lump-sum distributions after age 59 and one-half. Limits such averaging to only one such lump-sum distribution. Repeals the capital gains treatment for such distributions. Imposes a uniform additional tax on early distributions from qualified retirement plans. Allows an election to treat certain lump sum distributions received during 1987 as received during 1986. Repeals the limit carryforward applicable to profit-sharing and stock bonus plans. Extends the combined plan deduction limit to any combination of a defined benefit pension plan and a money purchase pension plan. Requires that certain social security taxes be taken into account in applying the 15-percent and 25-percent compensation deduction limits. Imposes a ten percent excise tax on the reversion of qualified employee plan assets to an employer. Imposes a 15 percent penalty tax on excess distributions from qualified retirement plans. Reduces the $50,000 limit on loans to a participant in a qualified employee plan by an amount equal to the participant's highest outstanding loan balance during the preceding 12-month period. Provides an exception to the $50,000 limit to any loan used for the acquisition of a principal residence. Specifies that deferred annuities shall be made available only to natural persons. Provides that an employer's contribution to a profit-sharing plan is not limited to the employer's current or accumulated profits. Applies such rule without regard to whether the employer is tax-exempt. Requires that an agreement shall not be treated as a collective bargaining agreement unless it is a bona fide agreement between bona fide employee respresentatives and one or more employers. Imposes a penalty tax on underpayments attributable to overstatements of pension liabilities. Sets forth interest rate assumptions for purposes of determining the present value of a participant's accrued benefit in a qualified employer's plan. Specifies that plan amendments shall not be required until January 1, 1989. Requires the Secretary to begin to accept, no later than May 1, 1987, applications for opinion letters with respect to master and prototype plans for qualified cash or deferred arrangements. Provides that members of certain fishing boat crews are treated as self-employed individuals for purposes of the rules relating to qualified pension, profit-sharing, or stock bonus plans. Permits the acquisition of certain gold and silver coins by an individual retirement account. Requires the Secretary to issue final regulations with respect to certain provisions of the Act by February 1, 1988, in order to provide time for employers. Exempts survivor annuity and preretirement annuity requirements of the Employee Retirement Income Security Act of 1974 and the Retirement Equity Act of 1984 for a certain plan. Sets forth special rules for the treatment of leased employees. Specifies the tax treatment of the Federal Thrift Savings Fund. Subtitle B: Employee Benefit Provisions - Sets forth specified nondiscrimination rules for coverage and benefits under certain statutory employee benefit plans. Permits an income tax deduction for 25 percent of the amounts paid by self-employed individuals for health insurance for the individual, spouse, and dependents. Terminates such deduction for taxable years beginning after December 31, 1989. Extends for two years, from 1985 to 1987, the income tax exclusion for educational assistance programs and group legal plans. Limits the tax exclusion for dependent care assistance to $5,000 per taxable year. Provides that if the rent paid for qualified campus lodging is equal to or exceeds on an annualized basis five percent of the value of the campus lodging, determined by appraisal, no amount is included, on account of such housing, in the employee's gross income for income tax purposes or in the wage or benefit base for social security and other employment tax purposes. Applies this provision to lodging furnished to any employee of the educational institution (or to the employee's spouse or dependents), including nonfaculty employees, for use as a residence, if the employer-furnished lodging is located on a campus of, or in the proximity of, the educational institution. Limits the income tax deduction for additions to a reserve account for vacation pay to amounts paid during the taxable year or within eight and one-half months (reduced from 12 months) after the close of the taxable year. Permits a full-time life insurance salesperson to be treated as an employee for purposes of the cafeteria plan fringe benefit provisions. Extends the due date for the study of welfare benefit plans required by the Tax Reform Act of 1984 to the date that is one year after the date of the enactment of this Act. Excludes from gross income certain military benefits. Subtitle C: Changes Relating to Employee Stock Ownership Plans - Repeals the employee stock ownership tax credit for compensation paid or accrued after December 31, 1986. Permits the exclusion from the gross estate of a decedent of 50 percent of the qualified proceeds from a qualified sale of employer securities. Defines a "qualified sale" as meaning any sale of employer securities by the executor of an estate to: (1) an ESOP if the ESOP meets certain requirements; or (2) an eligible worker-owned cooperative. Provides rules concerning the exclusion of such proceeds from the estate. Expands the deduction for dividends paid on ESOP stock to apply to dividends that are used to repay ESOP loans. Modifies the 50 percent exclusion for interest paid on security acquisition loans to provide that such exclusion is available with respect to a loan to a corporation to the extent that, within 30 days, employer securities are transferred to the plan in an amount equal to the proceeds of the loan and such contributions are allocable to participants' accounts within one year after the date of the loan. Requires that the original commitment period of the loan is not to exceed seven years. Provides that the partial interest exclusion will apply to include a regulated investment company. Requires ESOP's to: (1) permit distributions upon termination of the ESOP; and (2) require the distribution of nonreadily tradable securities of an employer from a stock bonus plan to be subject to the put option requirements applicable to an ESOP. Modifies the definition of an employee who is subject to the one-third allocation limit for purposes of the special limitation on annual additions for ESOPs to conform to the new definition of highly compensated employees added by this Act for purposes of qualified pension, profit-sharing, or stock bonus plans, and for purposes of employee benefit plans. Provides that the special employee stock ownership plan requirements shall not apply to defined contribution plans established by an employer whose stock is not publicly traded and who publishes a newspaper. Permits nonvoting common stock of an employer whose stock is not publicly traded and who publishes a newspaper to be treated as employer securities if an employer has a class of nonvoting common stock outstanding and the specific shares that the plan acquires have been issued and outstanding for at least 24 months. Title XII: Foreign Tax Provisions - Subtitle A: Foreign Tax Credit Modifications - Provides for the separate application of foreign tax credit limitations with respect to: (1) passive income; (2) high withholding tax interest; (3) financial services income; (4) shipping income; and (5) dividends from each noncontrolled section 902 corporation. Sets forth special rules and definitions concerning such separate application. Provides that a U.S. corporation's share of foreign taxes paid by a foreign subsidiary shall be limited to the percentage of the foreign subsidiary's multi-year pool of accumulated earnings and profits represented by the dividends received. Revises the treatment of separate limitation losses. Places a limitation on the carryback of foreign tax credits. Provides that any income, war profits, or excess profits tax shall not be treated as a tax eligible for the foreign tax credit to the extent that the amount of the tax is used, directly or indirectly, by the country imposing the tax to provide a subsidy to the taxpayer, a related person, or any party to the transaction or to a related transaction. Subtitle B: Source Rules - Sets forth rules for the determination of the source of income in the case of sales of personal property. Provides that as a general rule income from the sale of personal property by a U.S. resident shall be sourced in the United States and income from such a sale by a nonresident shall be sourced outside the United States. Makes an exception for inventory property and depreciable personal property. Sets forth special rules for transportation income. Imposes a four percent tax on the gross transportation income of nonresident aliens and foreign corporations. Sets forth source rules for space activities and certain ocean activities. Provides that interest and dividends paid by a domestic corporation with less than 20 percent U.S. source income shall be subject to rules that bases the source of such dividends and interest on the source of the income earned by the corporation. Sets forth rules for the allocation and apportionment of interest and other expenses to foreign source income. Modifies specified regulations providing for the allocation of research and experimental expenditures. Terminates such modification as of August 1,1987. Subtitle C: Taxation of Income Earned Through Foreign Corporations - Revises the definition of foreign personal holding company income to provide that such income shall include dividends, interest, royalties, rents, annuities, and gains realized from certain property transactions, commodities transactions, and foreign currency transactions. Revises the definition of a controlled foreign corporation to provide that a corporation shall be considered owned by U.S. persons if 50 percent of the total combined voting power of all classes of stock of the corporation or more than 50 percent of the total value of the stock of the corporation is owned by U.S. persons. Provides that foreign personal holding company rules will apply if more than 50 percent of either the voting power or the value of a foreign corporation belongs to five or fewer U.S. individuals. Provides that if less than five percent (reduced from ten percent) of a controlled foreign corporation's gross income is foreign base company income, then none of its income shall be treated as foreign base company income or insurance income. Repeals the exemption from controlled foreign corporation treatment status available to possession-chartered corporations. Provides that only effectively connected capital gains and losses of foreign corporations shall be taken into account for purposes of the accumulated earnings tax and personal holding company provisions. Allows a limited income tax deduction for dividends received from ten-percent owned foreign corporations. Subtitle D: Special Tax Provisions for United States Persons - Revises provisions relating to the possessions income tax credit with respect to the computation of taxable income. Specifies that nothing in the Panama Canal Treaty (or in any agreement implementing such Treaty) shall be construed as exempting any citizen or resident of the United States from tax on any item of income. Provides that employees of the Panama Canal Commission and civilian employees of the Department of Defense may exclude from gross income allowances which are comparable to allowances excludable by employees of the Department of State stationed in Panama. Limits the foreign earned income exclusion to $70,000 per year per U.S. individual. Sets forth information reporting requirements for individuals with resident status. Allows certain corporations to be treated as passive foreign investment companies (PFIC). Defines as passive foreign investment company any foreign corporation having 75 percent or more gross income for the taxable year consisting of passive income or having 50 percent or more of its average value of assets consisting of assets that produce, or held for the production of, passive income. Provides that U.S. persons who invest in a PFIC shall be subject to tax and an interest charge on gain derived from the disposition of the investment or on distributions from the company. Provides that interest on obligations of the United States received by a bank organized in Guam shall not be treated as U.S. source income if such bank is a Guam corporation which is treated as not being a foreign corporation. Subtitle E: Treatment of Foreign Taxpayers - Imposes a branch-level tax on profits of foreign corporations operating businesses in the United States. Sets the amount of such tax at 30 percent of the dividend equivalent amount. Sets forth the method of calculating such dividend equivalent amount. Treats any deferral income or gain of a nonresident alien or a foreign corporation from a previous taxable year as effectively connected with the conduct of a trade or business within the United States if such income or gain would have been treated as such in the previous taxable year. Revises the treatment of property received in tax-free exchange to provide that any gain on the sale or exchange of property whose basis is determined in whole or in part by reference to the basis of U.S. property shall be treated as gain from the sale of U.S. property. Requires the Secretary of the Treasury to conduct a study to determine whether U.S. reinsurance corporations are placed at a significant competitive disadvantage with foreign reinsurance corporations by existing treaties between the United States and foreign countries. Sets forth information reporting requirements with respect to certain foreign-owned corporations. Requires the withholding of tax on amounts paid by partnerships to foreign partners. Treats income received by the commercial activity of a foreign government or international organization as taxable income. Exempts from taxation any interest income or investment income earned in the United States by foreign governments or international organizations. Imposes limits on the taxpayer's basis or inventory cost in property imported into the United States in a transaction (directly or indirectly) between related persons. Sets forth rules for the treatment of dual residence corporations. Subtitle F: Foreign Currency Transactions - Sets forth rules for the treatment of foreign currency denominated transactions. Requires taxpayers to use the U.S. dollar as the functional currency, or, in certain circumstances, a foreign currency as the functional currency of a qualified business unit. Sets forth rules for the computation of a foreign corporation's earnings and profits and foreign taxes. Sets forth rules for the computation and taxation of branch transactions. Subtitle G: Tax Treatment of Possessions - Authorizes Guam, American Samoa, and the Northern Mariana Islands to enact revenue laws with respect to income from sources within such possessions or received by any resident of such possessions. Requires each possession to enter into an agreement with the United States which provides for: (1) eliminating double taxation of income by the possession and the United States; (2) establishing rules for the prevention of evasion or avoidance of U.S. tax; (3) the exchange of information between the possession and the United States for purposes of tax administration; and (4) resolving other problems arising in connection with the administration of the tax laws of such possession and the United States. Excludes from gross income any income of a bona fide resident of Guam, American Samoa, or the Northern Mariana Islands if such income is derived from sources within such a possession or effectively connected with the conduct of a trade or business by an individual within such a possession. Exempts alien residents of Puerto Rico, Guam, American Samoa, and the Northern Mariana Islands from the withholding tax. Exempts bona fide residents of Guam, American Samoa, and the Northern Mariana Islands from being considered U.S. persons for purposes of applying certain reporting and taxation rules with respect to corporations incorporated in such possessions if: (1) at least 80 percent or more of the corporation's gross income for a preceding three-year period was from sources, or effectively connected with the conduct of a trade or business in, the possession; and (2) at least 50 percent or more of the corporation's gross income for such period was derived from the conduct of an active trade or business in such possession. Provides that a corporation conducted or organized in Guam, American Samoa, the Northern Mariana Islands; or the Virgin Island shall be exempt from withholding tax if: (1) less than 25 percent of the value of the corporation's stock is beneficially owned by foreign persons; (2) at least 65 percent of the corporation's income is effectively connected with the conduct of a trade or business in a U.S. possession or in the United States; and (3) no substantial part of the income of such corporation is used to satisfy obligations to persons who are not bona fide residents of such a possession or the United States. Provides for the coordination of United States and Virgin Islands income taxes. Provides that corporations operating in the Virgin Islands are eligible for the possession tax credit. Provides that the net amount of taxes collected with respect to an individual who is a bona fide resident of U.S. possessions shall be covered over into the Treasury of the specified possession of which such individual is a resident. Title XIII: Tax Exempt Bonds - Subtitle A: Amendments of Internal Revenue Code of 1954 - Revises rules relating to the exclusion of interest earned on State and local government bonds. Excludes interest earned on State or local government bonds, except: (1) a private activity bond which is not a qualified bond; (2) arbitrage bonds; and (3) any registration-required bond which is not in registered form. Defines a "private activity bond" as any bond issued as part of an issue which meets: (1) a private business use test and a private security or payment test; or (2) a private loan financing test. Sets forth methods of calculating whether a bond meets such tests. Defines a "qualified bond" as any nonessential function bond if such bond is: (1) an exempt facility bond; (2) a qualified mortgage bond; (3) a qualified veterans' mortgage bond; (4) a qualified small issue bond; (5) a qualified hospital bond or tax-exempt organization bond; (6) a qualified student loan bond; or (7) a qualified redevelopment bond. Defines each such qualified bond. Sets the volume cap of such qualified bonds which may be issued in a calendar year at the greater of: (1) an amount equal to 75 multiplied by the State population; or (2) $250,000,000. Defines an "arbitrage bond" as any State or local bond issued as part of an issue any portion of the proceeds of which are reasonably expected to be used directly or indirectly: (1) to acquire higher yielding investments; or (2) to replace funds which are used directly or indirectly to acquire higher yielding investments. Disallows a tax exemption for any State or local bond if such bond is federally guaranteed. Sets forth definitions and special rules. Repeals provisions relating to general stock ownership corporations. Sets forth effective dates and makes exceptions for presently binding agreements and certain projects presently under construction. Sets forth transitional rules. Subtitle B: Effective Dates and Transitional Rules - Sets forth effective dates and transitional rule provisions. Title XIV: Trusts and Estates; Unearned Income of Certain Minor Children; Gift and Estate Taxes; Generation-Skipping Transfer Tax - Subtitle A: Income Taxation of Trusts and Estates - Provides, for purposes of the grantor trust provisions. that the grantor is treated as holding any power or interest held by the grantor's spouse if that spouse is living with the grantor. Treats a trust as a grantor trust where there is more than a five percent possibility that any of certain proscribed powers or interests will become effective in the grantor after the transfer of property to the trust. Provides that the grantor is deemed not to have retained a proscribed power or interest if that interest or power can become effective in the grantor only after the death of a lineal descendant of the grantor who also is a beneficiary of that portion of the trust. Requires that the taxable year of trusts shall be the calendar year. Allows an exception to such requirement for tax-exempt trusts and charitable trusts. Requires the payment of estimated payments of tax by: (1) any trust; and (2) any estate with respect to any taxable year ending two or more years after the date of the death of the decedent. Subtitle B: Unearned Income of Certain Minor Children - Provides that certain unearned income of minor children shall be taxed as if income of the parent. Applies such unearned income tax rules with respect to a child who has not attained 14 years of age before the close of the taxable year and who has at least one living parent. Subtitle C: Gift and Estate Taxes - Provides that, if an estate timely elected the current use valuation provisions and provided substantially all the information elicited on the estate tax return, the election is valid if the estate provides the Treasury Department with additional information necessary to perfect the election within 90 days after such additional information is requested. Allows a gift and estate tax deduction for certain conservation easement donations. Provides that the conveyance of certain real property of the decedent James H. W. Thompson, to the J.H.W. Thompson Foundation shall be treated as a charitable contribution. Subtitle D: Generation-Skipping Transfers - Amends the generation-skipping transfer tax, which attempts to determine the additional gift or estate tax that would have been paid if property has been transferred directly from one generation to another, to impose a simplified tax determined at the maximum gift and estate tax rate (currently the tax rate is 55 percent). Expands the generation-skipping transfer tax to include direct generation-skipping transfers (e.g., a direct transfer from a grandparent to a grandchild) as well as transfers in which benefits are shared by beneficiaries in more than one younger generation. Provides for an exemption of transfers up to $1,000,000 per grantor from the tax. Provides additional exemptions from the tax for certain transfers that are not subject to gift tax. Defines various terms relating to generation-skipping transfers. Sets forth the methods for determining the taxable amount for various generation-skipping transactions. Sets forth various special rules and definitions. Directs the Secretary to prescribe by regulation the person who is required to make the return with respect to the generation-skipping tax and the time the return is to be filed. Title XV: Compliance and Tax Administration - Subtitle A: Revision of Certain Penalties, Etc. - Consolidates the penalty for failure to file an information return with the penalty for failure to supply a copy of that information return to the taxpayer. Sets such penalty at $50 for each failure. Increases the maximum penalty from $50,000 to $100,000 for each category of failure. Imposes such penalties without limit where the failure to file information returns is due to the intentional disregard of the filing requirement. Imposes a penalty for failure to include correct information on either an information return or on a copy of such a return supplied to the taxpayer. Allows a waiver of such penalties upon a showing that the failure to supply such required returns was due to a reasonable cause and not to willful neglect. Sets forth special rules for the failure to file interest and dividend returns or statements. Sets forth definitions and special rules concerning the penalties for failure to file information returns or statements. Increases the maximum penalty for failure to supply identifying numbers from $50,000 to $100,000. Specifies rules regarding statements furnished to persons with respect to whom information is required. Increases the penalty for failure to pay taxes from one-half of one percent of such tax per month to one percent per month. Provides that such increased rate of penalty shall accrue from time of notice of a levy upon the assets of the taxpayer. (Continues the rate of one-half of one percent for such time prior to such notice.) Increases the penalty for failure to pay taxes due to fraud from 50 percent to 75 percent of that portion of underpayment of tax which is attributable to such fraud. Increases the penalty for failure to pay taxes due to substantial understatement of tax from ten percent to 20 percent of the amount of underpayment attributable to the understatement. Subtitle B: Interest Provisions - Sets the interest rate on repayment to taxpayers of overpayment of taxes as the Federal short-term rate plus two percentage points. Sets the interest rate on the underpayment of taxes as the Federal short-term rate plus three percentage points. Provides that interest imposed on underpayments of the accumulated earnings tax shall accrue from the date the return for such tax is due. Subtitle C: Information Reporting Provisions - Requires real estate brokers to file an information return concerning any real estate transaction. Requires Federal executive agencies to file information returns concerning persons receiving contracts from such agencies. Requires persons making royalty payments aggregating $10 or more during any calendar year to file information returns concerning such payments. Provides that a copy of such return must be supplied to the taxpayer who receives such royalties. Requires the furnishing of taxpayer identification numbers for dependents claimed on tax returns. Requires that any tax-exempt interest received must be shown on a taxpayer's income tax return. Subtitle D: Provisions Relating to Tax Shelters - Increases the tax shelter ratio test for registration of tax shelters from 200 percent to 350 percent. Increases the penalty for failure to register a tax shelter to one percent of the aggregate amount invested in such tax or $500 whichever is greater. Increases the penalty for failure to include tax shelter identification numbers on a tax return from $50 to $250. Increases the maximum penalty for failure to maintain lists of investors in potentially abusive tax shelters from $50,000 to $100,000. Subtitle E: Estimated Tax Provisions - Increases from 80 percent to 90 percent the current year liability test for estimated tax payments by individuals. Subjects certain tax-exempt organizations to corporate estimated tax rules. Waives any estimated penalties for 1986 underpayments attributable to this Act. Subtitle F: Provisions Regarding Judicial Proceedings - Removes the maximum dollar amount limitation on the awarding of court costs and attorney's fees in civil litigation. Denies the awarding of court costs and attorney's fees if the prevailing party protracts the proceedings. Allows the assessment of penalties for failure to pursue administrative remedies. Requires the Secretary to prepare a report for 1987 and for each two-calendar-year period thereafter on the inventory of cases in the Tax Court and on measures to close cases more efficiently. Authorizes the U.S. Tax Court to impose a periodic registration fee on practitioners admitted to practice before it. Limits the amount of such fee to $30 per year. Makes funds raised by such fee available to pay independent counsel engaged by the Court to pursue disciplinary matters. Specifies that the U.S. Tax Court shall have jurisdiction over any addition to tax for failure to pay the amount of tax shown on a tax return. Authorizes the attendence of United States Marshals at sessions of the U.S. Tax Court. Authorizes the chief judge of the Tax Court to appoint special trial judges who shall proceed under such rules and regulations as may be promulgated by the Tax Court. Provides that such special trial judges may be assigned to: (1) any declaratory judgment proceeding; (2) any proceeding where the dispute involves $10,000 or less; (3) any proceeding where neither the amount of the deficiency placed in dispute nor the amount of any claimed overpayment exceeds $10,000; and (4) any other proceeding which the chief judge may designate. Allows the Tax Court to authorize a special trial judge to make the decision of the court with respect to any proceeding described in the previous sentence, subject to such conditions and review as the court may provide. Specifies the salary of such special trial judges and allows expenses for travel and subsistence. Revises the age and service requirements for retirement for judges of the Tax Court. Provides for a one-year forfeiture for failure to perform judicial duties and permanent forfeiture of retired pay where certain non-government services are performed by retired Tax Court judges. Requires the suspension of retired pay during periods of compensated government service by Tax Court judges. Allows an election to receive reduced retired pay. Provides that such forfeiture shall not apply if such an election is in effect. Authorizes appeals from interlocutory orders of the United States Tax Court. Increases salary deductions, and authorizes appropriations, for the Tax Court judges' survivors annuity fund. Subtitle G: Tax Administration Provisions - Provides for the suspension of the statute of limitations if third-party records are not produced within six months after the service of summons. Authorizes the Secretary to rescind a notice of deficiency with the taxpayer's consent. Authorizes the Secretary to abate interest on deficiencies attributable in whole or in part to errors or delays by the Internal Revenue Service. Provides for the suspension of compounding where interest on a deficiency is suspended. Exempts from levy for taxes certain service-connected disability payments. Increases the value of personal property subject to certain listing and notice procedures. Treats the use of an automobile by a special agent of the Internal Revenue Service in the same manner as use of an automobile by an officer of any other law enforcement agency. Provides that any city with a population in excess of 2,000,000 that imposes an income or wage tax may receive Federal tax returns and tax information for the same purposes for which States may obtain information under present law, subject to the same procedures as apply to States under present law. Provides that a forfeiture under local law of property seized by a law enforcement agency of either a State or a political subdivision of a State relates back to the time of seizure. Sets forth special procedures for tax sales of seized property where no person offers a minimum price. Provides that the method of allocation of tips may be utilized only by an establishment that employs less than the equivalent of 25 full-time employees during a payroll period. Provides that forfeitures of land sales contracts are subject to notification requirements. Subtitle H: Miscellaneous Provisions - Requires the Secretary to modify tax withholding schedules to reflect new rate schedules. Requires the Secretary to report to the Congress on a return-free system for the Federal income tax of individuals. Title XVI: Exempt and Nonprofit Organizations - Provides that certain distributions of low-cost articles and exchanges and rentals of member lists by certain tax-exempt organizations shall not be treated as an unrelated trade or business for purposes of the excise tax on unrelated trade or business income. Exempts from such excise tax: (1) qualified trade shows or conventions at which supplies to the sponsoring organization's members sell products or services related to the exempt activities of the organization; and (2) qualified trade show and convention activities of charitable organizations and social welfare organizations. Adds a new category of tax-exempt organizations, consisting of certain corporations or trusts that are organized for the exclusive purpose of acquiring and holding title to property, collecting income from the property, and remitting the income to certain tax-exempt organizations. Provides that the limitation on the deduction or expenses incurred by certain membership organizations will not apply to an organization which is primarily engaged in the gathering and distribution of news to its members for syndication. Provides that an organization that transfers technology from universities and scientific research organizations to the private sector is treated as a tax-exempt charitable organization if it meets certain requirements. Title XVII: Miscellaneous Provisions - Extends the targeted jobs income tax credit for three years from 1985 to 1988. Revises the method of calculating the amount of such credit. Provides that under regulations prescribed by the Secretary the excise tax on diesel fuel for highway vehicle use may be imposed on the sale to the retailer. Provides that the nine-cents-per-gallon excise tax on gasoline shall generally be collected by the refiner, importer, or the terminal operator. Sets forth definitions, rules, and administrative procedures for the collection of such tax. Provides a limited period during which a clergyman who previously had elected out of social security coverage may make an irrevocable election back into social security coverage. Provides an exemption from the unemployment compensation tax for Indian tribal governments for specified services not covered by a State unemployment compensation program as of a certain date. Provides special rules for the treatment of certain technical personnel as employees for purposes of the Federal employment tax. Exempts from gross income amounts received by a foster care provider as qualified foster care payments. Provides that the tax relief provisions applicable with respect to Vietnam MIA's (and their spouses) that expired after 1982 are retroactively reinstated and made permanent. Exempts from Federal income taxation any income derived directly from the sale of reindeer and reindeer products as provided by the Reindeer Industry Act of 1937. Provides that the required study of the quality control systems for the Aid to Families with Dependent Children Program (Title IV of the Social Security Act) must be completed within one year after the Secretary of Health and Human Services and the National Academy of Sciences enter into a contract for such study. Requires the Secretary of Health and Human Services to issue regulations within six months after the completion of the contracted studies on the quality control systems. Title XVIII: Technical Corrections - Subtitle A: Amendments Related to the Tax Reform Act of 1984 - Chapter I: Amendments Related to Title I of the Act - Permits a taxpayer to elect to have the amendment of the Tax Reform act of 1984 that defers the finance lease rules apply to any agreement entered into before March 7, 1984. Provides that certain specified farm finance leases are not to be disqualified where a C corporation becomes a partner or beneficiary in the partnership or trust which was the lessor. Restores the year 1985 to the table of years for which the three percent telephone excise tax applies. Clarifies the rules relating to the electronic funds transfer of alcohol taxes to provide that all corporations that are members of a controlled group of corporations are treated as one taxpayer for purposes of the electronic funds transfer. Requires that distilled spirits held in a foreign trade zone on October 1, 1985, and entered into U.S. customs territory after that date, be subject to the floor stock tax. Modifies the rules relating to tax-exempt entity leasing provisions. Repeals the overlapping regulatory authority relating to high-technology equipment. Provides that any portion of a property that is owned or leased by a partnership that is treated as tax-exempt use property is ineligible for the investment tax credit. Describes the treatment of certain aircraft leased to foreign persons for purposes of the recapture of investment tax credit rules. Provides that thrift institutions cannot avoid the restriction on property leased to thrift institutions by the use of a partnership. Provides that the tax credit for rehabilitation expenditures is allowable on buildings leased to thrift institutions in accordance with the rules applicable to buildings leased to tax-exempt entities. Provides that the determination of whether a tax-exempt partner's share of partnership items is treated as derived from an unrelated trade or business is to be made without regard to the debt-financed income rules. Makes certain modifications in the tax treatment of certain bonds and other debt instruments. Modifies the provisions limiting the dividends received deduction for dividends received by a corporate shareholder with respect to debt-financed portfolio stock. Disallows the dividend received deduction where the holding period requirement is not met, without regard to whether the stock has been disposed of. Applies this rule to obligations acquired after March 1, 1986. Provides that if a taxpayer holds stock of a regulated investment company for six months or less, any loss on the sale or exchange of that stock is disallowed to the extent the taxpayer received exempt-interest dividends with respect to that stock. Provides an exception to this rule where the dispositions are pursuant to a periodic liquidation plan. Gives the Secretary the authority to shorten the six-month period requirement. Provides that, except to the extent provided by the Secretary, no dividends paid deduction will be allowed for purposes of the accumulated earnings tax, in the case of stock redemption by a mere holding or investment company which is not a regulated investment company. Makes certain modifications in the tax rules related to affiliated groups of corporations. Makes certain changes in the definition of a corporation's "earnings and profits." Modifies the rules relating to corporate reorganizations to provide that the transferor corporation does not recognize gain or loss on the transfer to the acquiring corporation pursuant to a plan of reorganization, without regard to whether properties received are distributed pursuant to the plan of reorganization. Makes the collapsible corporation provisions with respect to the recognition of ordinary income or loss applicable whether or not the stock has been held for six months. Makes certain changes in the rules relating to the taxation of "parachute payments" made by corporations to disqualified individuals. Modifies the partnership tax provisions with respect to: (1) retroactive allocation of cash basis items; (2) disguised sales transactions; (3) transfer partnership interests by corporations; and (4) distributions which are treated as exchanges. Modifies the like-kind exchange rules allowing for the non-recognition of gain to provide that like-kind property includes property identified as the property to be received by the taxpayer on or before (rather than only before) the date which is 45 days after the date on which the taxpayer relinquishes property. Provides that the rules regarding the treatment of two or more trusts as one trust will not apply to any trust which was irrevocable on March 1, 1984, except to the extent corpus is transferred to the trust after that date. Makes certain changes in the tax accounting rules relating to: (1) payments to designated settlement funds; (2) tax shelters; (3) mine reclamation and similar costs; (4) nuclear power plant decomissioning expenses; and (5) deferred payment for services. Makes modifications in the tax straddle provisions relating to: (1) subchapter S corporations; (2) amounts received for loaning securities; (3) straddles consisting of stock. Permits the taxpayer to elect to recover the cost of low-income housing using a straight-line method of depreciation over a 15-year period (but not 18 years). Requires the mid-month convention for depreciation to be applied whenever a depreciation computation is made with respect to certain classes of real property. Provides that the cost of certain real property (which does not include low-income housing) financed by the proceeds from industrial development property cannot be recovered more rapidly than on a straight-line basis of depreciation over a fixed period of years, using a mid-month convention. Modifies the rules relating to the depreciation of property by certain transferees of recovery property. Prohibits the use of accelerated methods of depreciation with respect to films, video tapes, and sound recordings. Provides that investment credit property the reconstruction of which is completed by the taxpayer qualifies as new investment credit property. Provides that a domestic corporation which earns less than 20 percent of its gross income from U.S. sources will be treated as a U.S.-owned foreign corporation and thus will be subject to the rules maintaining the source of U.S. source income to foreign income. Requires that the source maintenance rules apply notwithstanding any contrary U.S. treaty obligations, even those entered into after the Act's date of enactment, unless the treaty clearly expresses an intent to override the rules by specific reference. Modifies the rules with respect to maintaining the character of interest income for foreign personal holding companies to insure that there will be no possibility of converting interest income into noninterest income subject to the overall foreign tax credit. Modifies the rules relating to the factoring of income with respect to certain controlled foreign corporations. Makes certain modifications in the rules concerning the repeal of the 30 percent withholding tax requirement on the gross amount of U.S. source investment income payments to foreign persons. Clarifies the rules concerning the taxation of original issue discount obligations of foreign investors. Modifies the rules respecting the disposition of U.S. real property interests by foreigners. Provides that the transfer of stock by a domestic corporation to foreign persons pursuant to a distribution of stock and securities of a controlled corporation will give rise to the recognition of gain on such a transaction, to the extent provided by regulations issued by the Secretary. Modifies the rules concerning the taxation of U.S. shareholders in foreign personal holding companies. Provides that the tracing rules (enacted to prevent avoidance of the foreign personal holding company rules) applies to all foreign trusts and estates interposed between U.S. taxpayers and foreign personal holding companies. Clarifies the treatment of certain indirect transfers of stock in a U.S. corporation for newly issued stock (or treasury stock) of a foreign corporation. Provides that the regulations that the Secretary is to prescribe pertaining to "stapled stock" entities may include regulations providing that any tax imposed on a foreign corporation that is treated as a U.S. corporation may, if that corporation does not pay the tax, be collected from the U.S. corporation to which the foreign stock is stapled or from the shareholders of the foreign corporation. Provides that the "stapled stock" rules will not apply if it is established that both the stapled foreign corporation and the U.S. corporation to which it is stapled are foreign owned. Clarifies the definition of foreign base company service income of controlled foreign corporations with respect to insurance or reinsurance services. Modifies the definition of resident alien to provide that days spent working in the United States as a teacher or trainee during four calendar years in any seven-year period do not count as days of U.S. presence for purposes of the substantial presence test for a resident alien status. Makes miscellaneous changes with respect to the compliance provisions of the Code. Provides that, for purposes of the law benefit rule, an amount is excludible from gross income only to the extent that it does not reduce a taxpayer's income tax. Modifies provisions with respect to the tax treatment of loans with below-market interest rates by treating certain term loans as demand loans for the purpose of determining the timing of deemed interest and compensation payments. Exempts certain loans to Israel from the below-market interest rate rules. Directs the Secretary to issue regulations applying the "matching principles" with respect to deductions generally applicable to related party transactions in cases in which the person to whom the payment is to be made is not a U.S. person. Makes several adjustments in the dividends received deduction for dividends allocable to post-1984 Federal Home Loan Mortgage Corporation income. Modifies the rules relating to the maximum amount of investment tax credit and depreciation that a taxpayer may claim with respect to a passenger automobile or listed property which is required to be used in a trade or business a certain percent of the time. Chapter 2: Amendments Related to Title II of the Act - Makes certain technical corrections with respect to the taxation of life insurance companies. Chapter 3: Amendments Related to Title III of the Act - Revises the rule disqualifying certain foundations from the rate reduction of the excise tax imposed on the net investment income of a private foundation to provide that the rate reduction is not available if the foundation was liable for the excise tax with respect to any year in certain base period years. Chapter 4: Amendments Related to Title IV of the Act - Makes clerical and conforming amendments to the tax simplification provisions of the 1984 Act, including such items as individual estimated tax, domestic relations, at-risk rules, administrative provisions, distilled spirits, the Tax Court, and income tax credits. Chapter 5: Amendments Related to Title V of the Act - Makes technical corrections with respect to the employee benefit provisions of the 1984 Act with respect to: (1) the welfare benefit plan provisions; (2) qualified pension, profit-sharing, and stock bonus plans; (3) fringe benefit provisions; (4) employee stock ownership plans; and (5) certain miscellaneous provisions. Imposes a 50 percent penalty tax on any prohibited allocation of qualified securities by any employee stock ownership plan or eligible worker-owned cooperative. Chapter 6: Amendments Related to Title VI of the Act - Makes certain technical corrections with respect to the tax-exempt bond provisions of the Code, such as mortgage subsidy bonds and mortgage credit certificates and private activity bonds. Chapter 7: Miscellaneous Provisions - Revises the tax treatment of stock transfers between five-percent owned corporations. Makes miscellaneous technical corrections with respect to certain pension provisions. Provides that the rules relating to the computation of interest on tentative carrybacks and refund adjustments set forth in the Act are effective only with respect to applications filed after July 18, 1984. Makes technical corrections with respect to the tax provisions relating to foreign sales corporations and domestic international sales corporations. Allows a full 15-cents-a-gallon refund of excise tax on diesel fuel used in a school bus while engaged in the transportation of students and school employees. Provides that certain helicopter uses are exempt from aviation excise taxes. Makes modifications in the rules relating to the credit against estate tax for transfers to the Toiyabe National Forest. Modifies the acquisition of indebtedness rules with respect to certain exempt organizations. Revises the provision permitting the nonrecognition of gain on the rollover of gain on the sale of a personal residence in the case of military personnel stationed outside the United States. Provides that the expanded prohibition on current deduction of costs and other losses incurred in connection with the demolition of buildings applies only to demolitions commencing after July 18, 1984, in the case of buildings other than certified historic structures. Modifies certain recordkeeping requirements of regulated investment companies. Allows individual taxpayers until April 15, 1985, and corporations until March 15, 1985, (the filing date for calender year returns) to pay their full 1984 income tax liabilities without incurring any additions to tax on account of underpayments of estimated tax to the extent that the underpayments are attributable to changes in the law made by the Tax Reform Act of 1984. Makes certain modifications in the requirements with respect to the tax credit for the qualified clinical testing of certain drugs that are necessary to obtain the approval of the Food and Drug Administration. Modifies the provisions as to the allowability of the tax credit for production of fuels from nonconventional sources. Repeals the requirement that the Joint Committee on Taxation submit an annual report to the Congress on proposed IRS tax refunds and credits submitted to the Committee for its review. Provides that any organization that is exempt from tax and that is engaged primarily in providing electric service on a mutual or cooperative basis is eligible to maintain a qualified cash or deferred arrangement for employees. Modifies the definition of "newly discovered oil" for purposes of the imposition of the windfall profit tax. Makes eligible for drawback medicinal alcohol and other distilled spirits which are unfit for beverage purposes and which are brought into the United States from Puerto Rico and the Virgin Islands. Provides that the acquisition of depreciable property by an eligible religious or apostolic association or corporation for use in the business gives rise to an investment tax credit to the same extent as if the property had been acquired by a tax-exempt organization for use in an unrelated business. Provides that a stock association which is treated as a mutual savings bank for purposes of computing a bad debt deduction is also treated as a mutual savings bank for purposes of the exemption for mutual organizations insuring these banks. Modifies the rules concerning the reorganization of certain investment companies. Revises the rules relating to trusts as shareholders of Subchapter S corporations. Provides that the accumulated adjustment accounts (which measures the amount of subchapter S earnings which may be distributed tax-free) will not be reduced by reason of Federal taxes arising while the corporation was a C corporation. Requires that the election with respect to the tax deduction for gifts of certain life estates to a donee spouse must be made on or before the date, including extension, for filing a gift tax return with respect to the year in which the transfer was made. Provides that the exemption from the windfall profit tax on oil held by certain charitable organizations includes an interest held by the Episcopal Royalty Company. Imposes a moratorium on collection activities relating to self-insured workers' compensation funds. Revises rules concerning returns of alcohol, tobacco, and firearms taxes. Sets forth rules for the tax treatment of stripping tax-exempt bonds. Amends the Single Employer Pension Plan Amendments Act of 1986 to revise the applicability of notice requirements for significant reductions in benefit accruals. Chapter 8: Effective Date - Sets forth effective date provisions. Subtitle B: Related to Other Programs Affected by the Deficit Reduction Act of 1984 - Chapter 1: Amendments Related to Social Security Act Programs - Amends the Internal Revenue Code to disqualify certain church employees from a religion based except to the tax on self-employment income. Amends the Code and title II (Old Age, Survivors and Disability Insurance) of the Social Security Act to exclude certain church employee income from the computation of other net self-employment earnings for purposes of the self-employment taxes. Authorizes a church to revoke its election to have services performed in its employ excluded from employment for taxation purposes. Provides that for purposes of determining the age limit of a minor parent, for purposes of AFDC, the age is that selected by the State for purposes of defining a dependent child, without regard to whether the minor parent is attending school. Amends part D (Child Support and Establishment of Paternity) of title IV of the Social Security Act with respect to the operation of the Federal incentive payments to States involved in the interstate collection of child support payments. Amends part D (Child Support and Establishment of Paternity) of title IV of the Social Security Act to provide that a sibling (of an AFDC child) receiving foster care maintenance payments is not a member of the AFDC unit. Chapter 2: Amendments Related to Unemployment Compensation Program - Makes specified technical corrections to the Federal Unemployment Tax Act. Chapter 3: Amendments Related to Trade and Tariff Programs - Amends the Tariff Schedules of the United States to make technical and conforming amendments. Amends the Tariff Act of 1930 to provide that the administering authority with respect to a countervailing duty investigation, may not accept any agreement from a foreign country to eliminate or offset a subsidy or to cease exports of subsidized merchandise unless such agreement ensures that the quantity of merchandise covered in the agreement does not exceed the quantity of such merchandise exported to the United States during the most recent representative period as determined by the administering authority. Sets forth specified provisions relating to the marking of certain imported articles. Provides that the performing of incidental operations (including testing, cleaning, repacking, and inspecting) on imported merchandise or merchandise of the same kind and quality does not amount to manufacture or production for drawback (refund) purposes. Amends the Trade Act of 1974 to make technical and conforming amendments. Amends the Trade and Tariff Act of 1984 to make technical and conforming amendments. Amends the Caribbean Basin Economic Recovery Act to make technical and conforming amendments. Provides that no fees shall be charged for customs services with respect to the arrival of any passenger who is in transit to a destination outside the customs territory of the United States and for whom customs inspectional services are not provided. Provides for foreign pre-clearance customs services at no cost to the airlines and airline passengers other than certain fees. Reinstates the limitation on charges for other inspection services which are performed during regularly established hours of service on Sundays and holidays. Allows articles to be manufactured or produced from domestic denatured distille spirits, and articles thereof, in a price trade zone. Subtitle C: Miscellaneous - Chapter 1: Amendments Related to the Consolidated Omnibus Budget Reconciliation Act of 1985 - Makes miscellaneous technical corrections to the Social Security Act (OASDI, Medicare, and Medicaid Program) and the Consolidated Omnibus Budget Reconciliation Act of 1985. Permits a claim for refund or credit resulting from certain transfers by insolvent farmers to be filed within one year after the date of enactment of this bill. Chapter 2: Amendments Related to the Retirement Equity Act of 1984 - Amends the Internal Revenue Code (IRC) and the Employee Retirement Income Security Act of 1974 (ERISA) to make technical corrections and other revisions related to the Retirement Equity Act of 1984 (REA). Sets forth amendments related to REA modifications of minimum participation and vesting standards for employee benefit plans. Requires class-year plans, in general, to provide that a participant's rights to benefits derived from employer contributions for any plan year are nonforfeitable not later than when such participant has performed services for the employer as of the close of each of five plan years (whether or not consecutive after the plan year for which the contributions were made), but allows for such plans to provide for forfeiture of such rights if the participant has not performed such services as of the close of each of any five consecutive plan years after such plan year (i.e. a five-year bank in service). Requires, for purposes of determining whether any distribution which becomes payable to the recipient on account of the employee's separation from service is a lump sum distribution, that the balance to the credit of the employee be determined without regard to any increase in vesting which may occur if the employee is reemployed by the employer. Provides for recapture of such reduction in tax, in certain cases. Provides that, in determining whether a distribution to an employee on account of separation from service is eligible to be rolled over to another plan or to an individual retirement account, the balance to the credit of the employee is to be determined without regard to any increased vesting that may occur if the employee returns to service with the employer. Requires that if: (1) the employee excluded the distribution form income on account of a rollover; (2) the employee returns to service with the employer before incurring five consecutive one-year breaks in service; and (3) the vested percentage of benefits accrued before the separation from service is increased, then any subsequent distributions to the employee from the plan in which the subsequent distributions to the employee from the plan in which the increased vesting occurs are not eligible for the ten-year income averaging or capital gains treatment. Provides, under repayment requirements relating to withdrawals of mandatory contributions, that a defined contribution plan may provide that such a repayment must be made before a participant has a period of five consecutive one-year breaks in service (currently any one-year break in service). Reduces from 25 years to 21 years the age which plan participants may be required to attain for purposes of simplified employment pensions. Sets forth amendments related to REA requirements of joint and survivor annuity and preretirement survivor annuity. Provides that qualified preretirement survivor annuity rues apply in the case of death before the annuity starting date. Provides that qualified joint and survivor annuity rules apply in the case of death on or after the annuity starting date. Provides that the transferee plan rule applies only with respect to: (1) transfers made after December 31, 1984; and (2) the transferred assets if the plan separately accounts for assets and any income therefrom. Requires spousal consent for: (1) using a plan assets as security for loans; and (2) changes in designations. Provides that, in the case of a participant hired after age 35, the period for giving notice to the participant of the right to waive a qualified preretirement survivor annuity is a reasonable period after the date of hire. Makes certain clerical amendments. Sets forth amendments related to special rules for assignments in divorce, etc., proceedings (which REA added to IRC and ERISA). Provides that such special rules for determining the taxability of benefits subject to a qualified domestic relations order apply only to distributions made to an alternate payee who is the spouse or the former spouse of the participant. Specifies that the 18-month period during which benefits may be deferred begins with the date on which the first payment would be required to be made under the domestic relations order if there were no deferral. Directs the Secretary of the Treasury to prescribe regulations to coordinate specified requirements (and regulations issued by the Secretary of Labor thereunder) affecting qualified domestic relations orders with the overall qualification requirements. Waives certain distribution requirements which prohibit payment of benefits before termination of employment. Sets forth amendments related to the requirement under IRC, as amended by REA, that a written explanation be given to recipients of distributions eligible for rollover. Defines "eligible rollover distribution" for purposes of such requirement. Sets forth amendments related to provisions, under ERISA as amended by REA, for the treatment of certain plan amendments as reducing benefits. Sets forth amendments related to the REA transitional rule for requirement of joint and survivor annuity and preretirement survivor annuity. Amends REA to provide that, in case of a plan maintained pursuant to one or more collective bargaining agreements, the provisions of REA are generally effective for plan years beginning after the earlier of: (1) the date upon which the last of the collective bargaining agreements relating to the plan terminates (determined without regard to any extension agreed to after the date of enactment); or (2) July 1, 1988. Sets forth amendments related to REA provisions for treatment of certain participants who perform services on or after January 1, 1976. Chapter 3: Amendment Related to the Chid Support Enforcement Amendments of 1984 - Amends part D of title IV of the Social Security Act with respect to distribution of States collected child support to permit payments to be made pursuant to an administrative order, as well as pursuant to court orders. Chapter 4: Miscellaneous Amendments Correcting Errors of Spelling, Punctuation, Etc. - Makes specified amendments concerning spelling and punctuation.