104th Congress – H.R. 3286

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United States Congress
104th Congress – H.R. 3286

HR 3286 RS

104th CONGRESS
2d Session
H. R. 3286
[Report No. 104-279]
IN THE SENATE OF THE UNITED STATES
May 13, 1996
Received; read twice and referred to the Committee on Finance

MAY 23, 1996
Ordered, if and when reported by the Committee on Finance the bill then be referred to the Committee on Indian Affairs for the purpose of considering title 3, for a period of 10 days of session, to report or be discharged

June 13, 1996
Reported by Mr. ROTH, with amendments; referred to the Committee on Indian Affairs pursuant to the order of May 23, 1996

[Omit the part struck through and insert the part printed in italic]

AN ACT
To help families defray adoption costs, and to promote the adoption of minority children.

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

SECTION 1. SHORT TITLE.

    This Act may be cited as the `Adoption Promotion and Stability Act of 1996′.

SEC. 2. TABLE OF CONTENTS.

    The table of contents of this Act is as follows:
      Sec. 1. Short title.
      Sec. 2. Table of contents.

TITLE I–CREDIT FOR ADOPTION EXPENSES

      Sec. 101. Credit for adoption expenses.

TITLE II–INTERETHNIC ADOPTION

      Sec. 201. Removal of barriers to interethnic adoption.

TITLE III–CHILD CUSTODY PROCEEDINGS AFFECTED BY THE INDIAN CHILD WELFARE ACT OF 1978

      Sec. 301. Inapplicability of the Indian Child Welfare Act of 1978 to child custody proceedings involving a child whose parents do not maintain affiliation with their Indian tribe.
      Sec. 302. Membership and child custody proceedings.
      Sec. 303. Effective date.

TITLE IV–REVENUE OFFSETS

      Sec. 400. Amendment of 1986 Code.

[Struck out->] Subtitle A--Exclusion for Energy Conservation Subsidies Limited to Subsidies With Respect to Dwelling Units [<-Struck out]

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Sec. 401. Exclusion for energy conservation subsidies limited to subsidies with respect to dwelling units.

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[Struck out->] Subtitle B--Foreign Trust Tax Compliance [<-Struck out]

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Sec. 411. Improved information reporting on foreign trusts.

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Sec. 412. Comparable penalties for failure to file return relating to transfers to foreign entities.

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Sec. 413. Modifications of rules relating to foreign trusts having one or more United States beneficiaries.

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Sec. 414. Foreign persons not to be treated as owners under grantor trust rules.

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Sec. 415. Information reporting regarding foreign gifts.

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Sec. 416. Modification of rules relating to foreign trusts which are not grantor trusts.

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Sec. 417. Residence of trusts, etc.

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Sec. 401. Repeal of bad debt reserve method for thrift savings associations.Sec. 402. Depreciation under income forecast method.

[Struck out->] TITLE I--CREDIT FOR ADOPTION EXPENSES [<-Struck out]

[Struck out->] SEC. 101. CREDIT FOR ADOPTION EXPENSES. [<-Struck out]

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(a) IN GENERAL- Subpart A of part IV of subchapter A of chapter 1 of the Internal Revenue Code of 1986 (relating to nonrefundable personal credits) is amended by inserting after section 22 the following new section:

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[Struck out->] `SEC. 23. ADOPTION EXPENSES. [<-Struck out]

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`(a) ALLOWANCE OF CREDIT- In the case of an individual, there shall be allowed as a credit against the tax imposed by this chapter for the taxable year the amount of the qualified adoption expenses paid or incurred by the taxpayer during such taxable year.

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`(b) LIMITATIONS-

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`(1) DOLLAR LIMITATION- The aggregate amount of qualified adoption expenses which may be taken into account under subsection (a) for all taxable years with respect to the adoption of a child by the taxpayer shall not exceed $5,000.

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`(2) INCOME LIMITATION- The amount allowable as a credit under subsection (a) for any taxable year shall be reduced (but not below zero) by an amount which bears the same ratio to the amount so allowable (determined without regard to this paragraph but with regard to paragraph (1)) as--

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`(A) the amount (if any) by which the taxpayer's adjusted gross income (determined without regard to sections 911, 931, and 933) exceeds $75,000, bears to

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`(B) $40,000.

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`(3) DENIAL OF DOUBLE BENEFIT-

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`(A) IN GENERAL- No credit shall be allowed under subsection (a) for any expense for which a deduction or credit is allowable under any other provision of this chapter.

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`(B) GRANTS- No credit shall be allowed under subsection (a) for any expense to the extent that funds for such expense are received under any Federal, State, or local program. The preceding sentence shall not apply to expenses for the adoption of a child with special needs.

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`(C) REIMBURSEMENT- No credit shall be allowed under subsection (a) for any expense to the extent that such expense is reimbursed and the reimbursement is excluded from gross income under section 137.

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`(c) CARRYFORWARDS OF UNUSED CREDIT- If the credit allowable under subsection (a) for any taxable year exceeds the limitation imposed by section 26(a) for such taxable year reduced by the sum of the credits allowable under this subpart (other than this section), such excess shall be carried to the succeeding taxable year and added to the credit allowable under subsection (a) for such taxable year. No credit may be carried forward under this subsection to any taxable year following the fifth taxable year after the taxable year in which the credit arose. For purposes of the preceding sentence, credits shall be treated as used on a first-in first-out basis.

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`(d) DEFINITIONS- For purposes of this section--

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`(1) QUALIFIED ADOPTION EXPENSES- The term `qualified adoption expenses' means reasonable and necessary adoption fees, court costs, attorney fees, and other expenses--

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`(A) which are directly related to, and the principal purpose of which is for, the legal adoption of an eligible child by the taxpayer, and

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`(B) which are not incurred in violation of State or Federal law or in carrying out any surrogate parenting arrangement.

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`(2) EXPENSES FOR ADOPTION OF SPOUSE'S CHILD NOT ELIGIBLE- The term `qualified adoption expenses' shall not include any expenses in connection with the adoption by an individual of a child who is the child of such individual's spouse.

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`(3) ELIGIBLE CHILD- The term `eligible child' means any individual--

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`(A) who has not attained age 18 as of the time of the adoption, or

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`(B) who is physically or mentally incapable of caring for himself.

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`(4) CHILD WITH SPECIAL NEEDS- The term `child with special needs' means any child if--

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`(A) a State has determined that the child cannot or should not be returned to the home of his parents, and

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`(B) such State has determined that there exists with respect to the child a specific factor or condition (such as his ethnic background, age, or membership in a minority or sibling group, or the presence of factors such as medical conditions or physical, mental, or emotional handicaps) because of which it is reasonable to conclude that such child cannot be placed with adoptive parents without providing adoption assistance.

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`(e) SPECIAL RULES FOR FOREIGN ADOPTIONS- In the case of a foreign adoption--

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`(1) subsection (a) shall not apply to any qualified adoption expense with respect to such adoption unless such adoption becomes final, and

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`(2) any such expense which is paid or incurred before the taxable year in which such adoption becomes final shall be taken into account under this section as if such expense were paid or incurred during such year.

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`(f) MARRIED COUPLES MUST FILE JOINT RETURNS- Rules similar to the rules of paragraphs (2), (3), and (4) of section 21(e) shall apply for purposes of this section.

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`(g) BASIS ADJUSTMENTS- For purposes of this subtitle, if a credit is allowed under this section for any expenditure with respect to any property, the increase in the basis of such property which would (but for this subsection) result from such expenditure shall be reduced by the amount of the credit so allowed.

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`(h) REGULATIONS- The Secretary shall prescribe such regulations as may be appropriate to carry out this section and section 137, including regulations which treat unmarried individuals who pay or incur qualified adoption expenses with respect to the same child as 1 taxpayer for purposes of applying the dollar limitation in subsection (b)(1) of this section and in section 137(b)(1).'.

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(b) EXCLUSION OF AMOUNTS RECEIVED UNDER EMPLOYER'S ADOPTION ASSISTANCE PROGRAMS- Part III of subchapter B of chapter 1 of such Code (relating to items specifically excluded from gross income) is amended by redesignating section 137 as section 138 and by inserting after section 136 the following new section:

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[Struck out->] `SEC. 137. ADOPTION ASSISTANCE PROGRAMS. [<-Struck out]

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`(a) IN GENERAL- Gross income of an employee does not include amounts paid or expenses incurred by the employer for qualified adoption expenses in connection with the adoption of a child by an employee if such amounts are furnished pursuant to an adoption assistance program.

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`(b) LIMITATIONS-

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`(1) DOLLAR LIMITATION- The aggregate amount excludable from gross income under subsection (a) for all taxable years with respect to the adoption of a child by the taxpayer shall not exceed $5,000.

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`(2) INCOME LIMITATION- The amount excludable from gross income under subsection (a) for

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[Struck out->] any taxable year shall be reduced (but not below zero) by an amount which bears the same ratio to the amount so excludable (determined without regard to this paragraph but with regard to paragraph (1)) as-- [<-Struck out]

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`(A) the amount (if any) by which the taxpayer's adjusted gross income exceeds $75,000, bears to

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`(B) $40,000.

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`(3) DETERMINATION OF ADJUSTED GROSS INCOME- For purposes of paragraph (2), adjusted gross income shall be determined--

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`(A) without regard to this section and sections 911, 931, and 933, and

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`(B) after the application of sections 86, 135, 219, and 469.

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`(c) ADOPTION ASSISTANCE PROGRAM- For purposes of this section, an adoption assistance program is a plan of an employer--

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`(1) under which the employer provides employees with adoption assistance, and

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`(2) which meets requirements similar to the requirements of paragraphs (2), (3), and (5) of section 127(b).

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An adoption reimbursement program operated under section 1052 of title 10, United States Code (relating to armed forces) or section 514 of title 14, United States Code (relating to members of the Coast Guard) shall be treated as an adoption assistance program for purposes of this section.

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`(d) QUALIFIED ADOPTION EXPENSES- For purposes of this section, the term `qualified adoption expenses' has the meaning given such term by section 23(d).

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`(e) CERTAIN RULES TO APPLY- Rules similar to the rules of subsections (e) and (g) of section 23 shall apply for purposes of this section.'.

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(c) Conforming Amendments-

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(1) Sections 86(b)(2)(A) and 135(c)(4)(A) of such Code are each amended by inserting `137,' before `911'.

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(2) Clause (i) of section 219(g)(3)(A) of such Code is amended by inserting `, 137,' before `and 911'.

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(3) Clause (ii) of section 469(i)(3)(E) of such Code is amended to read as follows:

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`(ii) the amounts excludable from gross income under sections 135 and 137,'.

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(4) Subsection (a) of section 1016 of such Code is amended by striking `and' at the end of paragraph (24), by striking the period at the end of paragraph (25) and inserting `, and', and by adding at the end the following new paragraph:

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`(26) to the extent provided in sections 23(g) and 137(e).'

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(5) The table of sections for subpart A of part IV of subchapter A of chapter 1 of such Code is amended by inserting after the item relating to section 22 the following new item:

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`Sec. 23. Adoption expenses.'.

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(6) The table of sections for part III of subchapter B of chapter 1 of such Code is amended by striking the item relating to section 137 and inserting the following:

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`Sec. 137. Adoption assistance programs.

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`Sec. 138. Cross reference to other Acts.'.

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(d) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 1996.

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TITLE I–CREDIT FOR ADOPTION EXPENSES

SEC. 101. CREDIT FOR ADOPTION EXPENSES.

(a) IN GENERAL- Subpart A of part IV of subchapter A of chapter 1 of the Internal Revenue Code of 1986 (relating to nonrefundable personal credits) is amended by inserting after section 22 the following new section:

`SEC. 23. ADOPTION EXPENSES.

`(a) ALLOWANCE OF CREDIT- In the case of an individual, there shall be allowed as a credit against the tax imposed by this chapter for the taxable year the amount of the qualified adoption expenses paid or incurred by the taxpayer during such taxable year.`(b) LIMITATIONS-`(1) DOLLAR LIMITATION- The aggregate amount of qualified adoption expenses which may be taken into account under subsection (a) for all taxable years with respect to the adoption of a child by the taxpayer shall not exceed $5,000 ($6,000, in the case of a child with special needs).`(2) INCOME LIMITATION-`(A) IN GENERAL- The amount allowable as a credit under subsection (a) for any taxable year shall be reduced (but not below zero) by an amount which bears the same ratio to the amount so allowable (determined without regard to this paragraph but with regard to paragraph (1)) as–`(i) the amount (if any) by which the taxpayer’s adjusted gross income exceeds $75,000, bears to`(ii) $40,000.`(B) DETERMINATION OF ADJUSTED GROSS INCOME- For purposes of subparagraph (A), adjusted gross income shall be determined–`(i) without regard to sections 911, 931, and 933, and`(ii) after the application of sections 86, 135, 137, 219, and 469.`(3) DENIAL OF DOUBLE BENEFIT-`(A) IN GENERAL- No credit shall be allowed under subsection (a) for any expense for which a deduction or credit is allowed under any other provision of this chapter.`(B) GRANTS- No credit shall be allowed under subsection (a) for any expense to the extent that funds for such expense are received under any Federal, State, or local program.`(c) CARRYFORWARDS OF UNUSED CREDIT- If the credit allowable under subsection (a) for any taxable year exceeds the limitation imposed by section 26(a) for such taxable year reduced by the sum of the credits allowable under this subpart (other than this section), such excess shall be carried to the succeeding taxable year and added to the credit allowable under subsection (a) for such taxable year. No credit may be carried forward under this subsection to any taxable year following the fifth taxable year after the taxable year in which the credit arose. For purposes of the preceding sentence, credits shall be treated as used on a first-in first-out basis.`(d) DEFINITIONS- For purposes of this section–`(1) QUALIFIED ADOPTION EXPENSES- The term `qualified adoption expenses’ means reasonable and necessary adoption fees, court costs, attorney fees, and other expenses–`(A) which are directly related to, and the principal purpose of which is for, the legal adoption of an eligible child by the taxpayer,`(B) which are not incurred in violation of State or Federal law or in carrying out any surrogate parenting arrangement,`(C) which are not expenses in connection with the adoption by an individual of a child who is the child of such individual’s spouse, and`(D) which are not reimbursed under an employer program or otherwise.`(2) ELIGIBLE CHILD- The term `eligible child’ means any individual–`(A) who–`(i) has not attained age 18, or`(ii) is physically or mentally incapable of caring for himself, and`(B) in the case of qualified adoption expenses paid or incurred after December 31, 2000, who is a child with special needs.`(4) CHILD WITH SPECIAL NEEDS- The term `child with special needs’ means any child if–`(A) a State has determined that the child cannot or should not be returned to the home of his parents, and`(B) such State has determined that there exists with respect to the child a specific factor or condition (such as his ethnic background, age, or membership in a minority or sibling group, or the presence of factors such as medical conditions or physical, mental, or emotional handicaps) because of which it is reasonable to conclude that such child cannot be placed with adoptive parents without providing adoption assistance.`(e) SPECIAL RULES FOR FOREIGN ADOPTIONS- In the case of an adoption of a child who is not a citizen or resident of the United States (as defined in section 217(h)(3))–`(1) subsection (a) shall not apply to any qualified adoption expense with respect to such adoption unless such adoption becomes final, and`(2) any such expense which is paid or incurred before the taxable year in which such adoption becomes final shall be taken into account under this section as if such expense were paid or incurred during such year.`(f) MARRIED COUPLES MUST FILE JOINT RETURNS- Rules similar to the rules of paragraphs (2), (3), and (4) of section 21(e) shall apply for purposes of this section.`(g) BASIS ADJUSTMENTS- For purposes of this subtitle, if a credit is allowed under this section for any expenditure with respect to any property, the increase in the basis of such property which would (but for this subsection) result from such expenditure shall be reduced by the amount of the credit so allowed.`(h) REGULATIONS- The Secretary shall prescribe such regulations as may be appropriate to carry out this section and section 137, including regulations which treat unmarried individuals who pay or incur qualified adoption expenses with respect to the same child as 1 taxpayer for

purposes of applying the dollar limitation in subsection (b)(1) of this section and in section 137(b)(1).’

(b) EXCLUSION OF AMOUNTS RECEIVED UNDER EMPLOYER’S ADOPTION ASSISTANCE PROGRAMS- Part III of subchapter B of chapter 1 of such Code (relating to items specifically excluded from gross income) is amended by redesignating section 137 as section 138 and by inserting after section 136 the following new section:

`SEC. 137. ADOPTION ASSISTANCE PROGRAMS.

`(a) IN GENERAL- Gross income of an employee does not include amounts paid or expenses incurred by the employer for qualified adoption expenses in connection with the adoption of a child by an employee if such amounts are furnished pursuant to an adoption assistance program.`(b) LIMITATIONS-`(1) DOLLAR LIMITATION- The aggregate amount excludable from gross income under subsection (a) for all taxable years with respect to the adoption of a child by the taxpayer shall not exceed $5,000 ($6,000, in the case of a child with special needs).`(2) INCOME LIMITATION- The amount excludable from gross income under subsection (a) for any taxable year shall be reduced (but not below zero) by an amount which bears the same ratio to the amount so excludable (determined without regard to this paragraph but with regard to paragraph (1)) as–`(A) the amount (if any) by which the taxpayer’s adjusted gross income exceeds $75,000, bears to`(B) $40,000.`(3) DETERMINATION OF ADJUSTED GROSS INCOME- For purposes of paragraph (2), adjusted gross income shall be determined–`(A) without regard to this section and sections 911, 931, and 933, and`(B) after the application of sections 86, 135, 219, and 469.`(c) ADOPTION ASSISTANCE PROGRAM- For purposes of this section, an adoption assistance program is a separate written plan of an employer for the exclusive benefit of such employer’s employees–`(1) under which the employer provides such employees with adoption assistance, and`(2) which meets requirements similar to the requirements of paragraphs (2), (3), (5), and (6) of section 127(b).An adoption reimbursement program operated under section 1052 of title 10, United States Code (relating to armed forces) or section 514 of title 14, United States Code (relating to members of the Coast Guard) shall be treated as an adoption assistance program for purposes of this section.`(d) QUALIFIED ADOPTION EXPENSES- For purposes of this section, the term `qualified adoption expenses’ has the meaning given such term by section 23(d).`(e) CERTAIN RULES TO APPLY- Rules similar to the rules of subsections (e), (f), and (g) of section 23 shall apply for purposes of this section.`(f) TERMINATION- This section shall not apply to amounts paid or expenses incurred after December 31, 2000.’(c) Conforming Amendments-(1) Subparagraph (C) of section 25(e)(1) of such Code is amended by inserting `and section 23′ after `this section’.(2) Sections 86(b)(2)(A) and 135(c)(4)(A) of such Code are each amended by inserting `137,’ before `911′.(3) Clause (i) of section 219(g)(3)(A) of such Code is amended by inserting `, 137,’ before `and 911′.(4) Clause (ii) of section 469(i)(3)(E) of such Code is amended to read as follows:`(ii) the amounts excludable from gross income under sections 135 and 137,’.(5) Subsection (a) of section 1016 of such Code is amended by striking `and’ at the end of paragraph (24), by striking the period at the end of paragraph (25) and inserting `, and’, and by adding at the end the following new paragraph:`(26) to the extent provided in sections 23(g) and 137(e).’(6) The table of sections for subpart A of part IV of subchapter A of chapter 1 of such Code is amended by inserting after the item relating to section 22 the following new item:`Sec. 23. Adoption expenses.’(7) The table of sections for part III of subchapter B of chapter 1 of such Code is amended by striking the item relating to section 137 and inserting the following:`Sec. 137. Adoption assistance programs.`Sec. 138. Cross reference to other Acts.’(d) STUDY AND REPORT- The Secretary of the Treasury shall study the effect on adoptions of the tax credit and gross income exclusion established by the amendments made by this section and shall submit a report regarding the study to the Committee on Finance of the Senate and the Committee on Ways and Means of the House of Representatives not later than January 1, 2000.(e) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after December 31, 1996.

[Struck out->] TITLE II--INTERETHNIC ADOPTION [<-Struck out]

[Struck out->] SEC. 201. REMOVAL OF BARRIERS TO INTERETHNIC ADOPTION. [<-Struck out]

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(a) STATE PLAN REQUIREMENTS- Section 471(a) of the Social Security Act (42 U.S.C 671(a)) is amended--

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(1) by striking `and' at the end of paragraph (16);

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(2) by striking the period at the end of paragraph (17) and inserting `; and'; and

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(3) by adding at the end the following:

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`(18) not later than January 1, 1997, provides that neither the State nor any other entity in the State that receives funds from the Federal Government and is involved in adoption or foster care placements may--

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`(A) deny to any person the opportunity to become an adoptive or a foster parent, on the basis of the race, color, or national origin of the person, or of the child, involved; or

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`(B) delay or deny the placement of a child for adoption or into foster care, on the basis of the race, color, or national origin of the adoptive or foster parent, or the child, involved.'.

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(b) ENFORCEMENT- Section 474 of such Act (42 U.S.C. 674) is amended by adding at the end the following:

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`(d)(1) If a State's program operated under this part is found, as a result of a review conducted under section 1123, to have violated section 471(a)(18) during a quarter with respect to any person, then, notwithstanding subsection (a) of this section and any regulations promulgated under section 1123(b)(3), the Secretary shall reduce the amount otherwise payable to the State under this part, for the quarter and for each subsequent quarter before the 1st quarter for which the State program is found, as a result of such a review, not to have violated section 471(a)(18) with respect to any person, by--

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`(A) 2 percent of such otherwise payable amount, in the case of the 1st such finding with respect to the State;

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`(B) 5 percent of such otherwise payable amount, in the case of the 2nd such finding with respect to the State; or

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`(C) 10 percent of such otherwise payable amount, in the case of the 3rd or subsequent such finding with respect to the State.

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`(2) Any other entity which is in a State that receives funds under this part and which violates section 471(a)(18) during a quarter with respect to any person shall remit to the Secretary all funds that were paid by the State to the entity during the quarter from such funds.

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`(3)(A) Any individual who is aggrieved by a violation of section 471(a)(18) by a State or other entity may bring an action seeking relief from the State or other entity in any United States district court.

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`(B) An action under this paragraph may not be brought more than 2 years after the date the alleged violation occurred.

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`(4) This subsection shall not be construed to affect the application of the Indian Child Welfare Act of 1978.'.

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(c) CIVIL RIGHTS-

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(1) PROHIBITED CONDUCT- A person or government that is involved in adoption or foster care placements may not--

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(A) deny to any individual the opportunity to become an adoptive or a foster parent, on the basis of the race, color, or national origin of the individual, or of the child, involved; or

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(B) delay or deny the placement of a child for adoption or into foster care, on the basis of the race, color, or national origin of the adoptive or foster parent, or the child, involved.

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(2) ENFORCEMENT- Noncompliance with paragraph (1) is deemed a violation of title VI of the Civil Rights Act of 1964.

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(3) NO EFFECT ON THE INDIAN CHILD WELFARE ACT OF 1978- This subsection shall not be construed to affect the application of the Indian Child Welfare Act of 1978.

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(d) CONFORMING REPEAL- Section 553 of the Howard M. Metzenbaum Multiethnic Placement Act of 1994 (42 U.S.C. 5115a) is repealed.

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TITLE II–INTERETHNIC ADOPTION

SEC. 201. REMOVAL OF BARRIERS TO INTERETHNIC ADOPTION.

(a) STATE PLAN REQUIREMENTS- Section 471(a) of the Social Security Act (42 U.S.C 671(a)) is amended–(1) by striking `and’ at the end of paragraph (16);(2) by striking the period at the end of paragraph (17) and inserting `; and’; and(3) by adding at the end the following:`(18) not later than January 1, 1997, provides that neither the State nor any other entity in the State that receives funds from the Federal Government and is involved in adoption or foster care placements may–`(A) deny to any person the opportunity to become an adoptive or a foster parent, on the basis of the race, color, or national origin of the person, or of the child, involved; or`(B) delay or deny the placement of a child for adoption or into foster care, on the basis of the race, color, or national origin of the adoptive or foster parent, or the child, involved.’.(b) ENFORCEMENT- Section 474 of such Act (42 U.S.C. 674) is amended by adding at the end the following:`(d) PENALTIES FOR VIOLATIONS OF INTERETHNIC ADOPTION REQUIREMENTS-`(1) STATE VIOLATIONS- If, during a fiscal year, a State’s program operated under this part is found, as a result of a completed review under section 1123A, including the completion of any administrative appeal or judicial review conducted under subsection (c) of such section, to have violated section 471(a)(18) during a quarter of such fiscal year with respect to a person, then, notwithstanding subsection (a) of this section and any regulations promulgated under section 1123A(b)(3), the Secretary shall reduce the amount otherwise payable to the State under this part, for that fiscal year quarter and for any subsequent quarter of such fiscal year, until the State program is found, as a result of a subsequent review under section 1123A, not to have violated section 471(a)(18) with respect to such person, or no penalty remains to be carried forward under paragraph (2)(B).`(2) AMOUNT OF REDUCTION-`(A) IN GENERAL- For purposes of paragraph (1), the amount otherwise payable to a State under this part shall be reduced as follows:`(i) 2 percent of such otherwise payable amount, in the case of the 1st such finding for the fiscal year with respect to the State.`(ii) 5 percent of such otherwise payable amount, in the case of the 2nd such finding for the fiscal year with respect to the State.`(iii) 10 percent of such otherwise payable amount, in the case of the 3rd or subsequent such finding for the fiscal year with respect to the State.`(B) LIMITATION ON AMOUNT OF PENALTY-`(i) IN GENERAL- In imposing the penalties described in this subsection, the Secretary shall not reduce any quarterly payment to a State by more than 25 percent.`(ii) CARRYFORWARD OF UNRECOVERED PENALTIES- To the extent that clause (i) prevents the Secretary from recovering during a fiscal year the full amount of all penalties imposed on a State under this subsection for such fiscal year, the Secretary shall apply any remaining amount of such penalties to the amount payable to the State under this part for the immediately succeeding fiscal year quarter.`(3) PRIVATE VIOLATIONS- Any other entity which is in a State that receives funds under this part and which violates section 471(a)(18) during a fiscal year quarter with respect to any person shall remit to the Secretary all funds that were paid by the State to the entity during such quarter from such funds.`(4) PRIVATE CAUSE OF ACTION-`(A) IN GENERAL- Any individual who is aggrieved by a violation of section 471(a)(18) by a State or other entity may bring an action seeking relief from the State or other entity in any United States district court.`(B) STATUTE OF LIMITATIONS- An action under this paragraph may not be brought more than 2 years after the date the alleged violation occurred.`(5) RULE OF CONSTRUCTION- This subsection shall not be construed to affect the application of the Indian Child Welfare Act of 1978.’.(c) CIVIL RIGHTS-(1) PROHIBITED CONDUCT- A person or government that is involved in adoption or foster care placements may not–(A) deny to any individual the opportunity to become an adoptive or a foster parent, on the basis of the race, color, or national origin of the individual, or of the child, involved; or(B) delay or deny the placement of a child for adoption or into foster care, on the basis of the race, color, or national origin of the adoptive or foster parent, or the child, involved.(2) ENFORCEMENT- Noncompliance with paragraph (1) is deemed a violation of title VI of the Civil Rights Act of 1964.(3) NO EFFECT ON THE INDIAN CHILD WELFARE ACT OF 1978- This subsection shall not be construed to affect the application of the Indian Child Welfare Act of 1978.(d) CONFORMING AMENDMENTS-(1) REPEAL- Section 553 of the Howard M. Metzenbaum Multiethnic Placement Act of 1994 (42 U.S.C. 5115a) is repealed.(2) REDESIGNATION OF SECTION 1123- The Social Security Act is amended by redesignating section 1123, the second place it appears (42 U.S.C. 1320a-1a), as section 1123A.

TITLE III–CHILD CUSTODY PROCEEDINGS AFFECTED BY THE INDIAN CHILD WELFARE ACT OF 1978

SEC. 301. INAPPLICABILITY OF THE INDIAN CHILD WELFARE ACT OF 1978 TO CHILD CUSTODY PROCEEDINGS INVOLVING A CHILD WHOSE PARENTS DO NOT MAINTAIN AFFILIATION WITH THEIR INDIAN TRIBE.

    Title I of the Indian Child Welfare Act of 1978 (25 U.S.C. 1911 et seq.) is amended by adding at the end the following:
    `SEC. 114. (a) This title does not apply to any child custody proceeding involving a child who does not reside or is not domiciled within a reservation unless–
      `(1) at least one of the child’s biological parents is of Indian descent; and
      `(2) at least one of the child’s biological parents maintains significant social, cultural, or political affiliation with the Indian tribe of which either parent is a member.
    `(b) The factual determination as to whether a biological parent maintains significant social, cultural, or political affiliation with the Indian tribe of which either parent is a member shall be based on such affiliation as of the time of the child custody proceeding.
    `(c) The determination that this title does not apply pursuant to subsection (a) is final, and, thereafter, this title shall not be the basis for determining jurisdiction over any child custody proceeding involving the child.’.

SEC. 302. MEMBERSHIP AND CHILD CUSTODY PROCEEDINGS.

    Title I of the Indian Child Welfare Act of 1978 (25 U.S.C. 1911 et seq.), as amended by section 301 of this title, is further amended by adding at the end the following:
    `SEC. 115. (a) A person who attains the age of 18 years before becoming a member of an Indian tribe may become a member of an Indian tribe only upon the person’s written consent.
    `(b) For the purposes of any child custody proceeding involving an Indian child, membership in an Indian tribe shall be effective from the actual date of admission to membership in the Indian tribe and shall not be given retroactive effect.’.

SEC. 303. EFFECTIVE DATE.

    The amendments made by this title shall take effect on the date of the enactment of this Act and shall apply with respect to any child custody proceeding in which a final decree has not been entered as of such date.

TITLE IV–REVENUE OFFSETS

SEC. 400. AMENDMENT OF 1986 CODE.

    Except as otherwise expressly provided, whenever in this title an amendment or repeal is expressed in terms of an amendment to, or repeal of, a section or other provision, the reference shall be considered to be made to a section or other provision of the Internal Revenue Code of 1986.

[Struck out->] Subtitle A--Exclusion for Energy Conservation Subsidies Limited to Subsidies With Respect to Dwelling Units [<-Struck out]

[Struck out->] SEC. 401. EXCLUSION FOR ENERGY CONSERVATION SUBSIDIES LIMITED TO SUBSIDIES WITH RESPECT TO DWELLING UNITS. [<-Struck out]

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(a) IN GENERAL- Paragraph (1) of section 136(c) (defining energy conservation measure) is amended by striking `energy demand--' and all that follows and inserting `energy demand with respect to a dwelling unit.'

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(b) CONFORMING AMENDMENTS-

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(1) Subsection (a) of section 136 is amended to read as follows:

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`(a) EXCLUSION- Gross income shall not include the value of any subsidy provided (directly or indirectly) by a public utility to a customer for the purchase or installation of any energy conservation measure.'

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(2) Paragraph (2) of section 136(c) is amended--

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(A) by striking subparagraph (A) and by redesignating subparagraphs (B) and (C) as subparagraphs (A) and (B), respectively, and

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(B) by striking `AND SPECIAL RULES' in the paragraph heading.

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(c) EFFECTIVE DATE- The amendments made by this section shall apply to amounts received after December 31, 1996, unless received pursuant to a written binding contract in effect on September 13, 1995, and at all times thereafter.

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[Struck out->] Subtitle B--Foreign Trust Tax Compliance [<-Struck out]

[Struck out->] SEC. 411. IMPROVED INFORMATION REPORTING ON FOREIGN TRUSTS. [<-Struck out]

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(a) IN GENERAL- Section 6048 (relating to returns as to certain foreign trusts) is amended to read as follows:

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[Struck out->] `SEC. 6048. INFORMATION WITH RESPECT TO CERTAIN FOREIGN TRUSTS. [<-Struck out]

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`(a) NOTICE OF CERTAIN EVENTS-

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`(1) GENERAL RULE- On or before the 90th day (or such later day as the Secretary may prescribe) after any reportable event, the responsible party shall provide written notice of such event to the Secretary in accordance with paragraph (2).

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`(2) CONTENTS OF NOTICE- The notice required by paragraph (1) shall contain such information as the Secretary may prescribe, including--

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`(A) the amount of money or other property (if any) transferred to the trust in connection with the reportable event, and

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`(B) the identity of the trust and of each trustee and beneficiary (or class of beneficiaries) of the trust.

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`(3) REPORTABLE EVENT- For purposes of this subsection--

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`(A) IN GENERAL- The term `reportable event' means--

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`(i) the creation of any foreign trust by a United States person,

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`(ii) the transfer of any money or property (directly or indirectly) to a foreign trust by a United States person, including a transfer by reason of death, and

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`(iii) the death of a citizen or resident of the United States if--

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`(I) the decedent was treated as the owner of any portion of a foreign trust under the rules of subpart E of part I of subchapter J of chapter 1, or

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`(II) any portion of a foreign trust was included in the gross estate of the decedent.

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`(B) EXCEPTIONS-

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`(i) FAIR MARKET VALUE SALES- Subparagraph (A)(ii) shall not apply to any transfer of property to a trust in exchange for consideration of at least the fair market value of the transferred property. For purposes of the preceding sentence, consideration other than cash shall be taken into account at its fair market value and the rules of section 679(a)(3) shall apply.

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`(ii) DEFERRED COMPENSATION AND CHARITABLE TRUSTS- Subparagraph (A) shall not apply with respect to a trust which is--

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`(I) described in section 402(b), 404(a)(4), or 404A, or

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`(II) determined by the Secretary to be described in section 501(c)(3).

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`(4) RESPONSIBLE PARTY- For purposes of this subsection, the term `responsible party' means--

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`(A) the grantor in the case of the creation of an inter vivos trust,

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`(B) the transferor in the case of a reportable event described in paragraph (3)(A)(ii) other than a transfer by reason of death, and

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`(C) the executor of the decedent's estate in any other case.

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`(b) UNITED STATES GRANTOR OF FOREIGN TRUST-

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`(1) IN GENERAL- If, at any time during any taxable year of a United States person, such person is treated as the owner of any portion of a foreign trust under the rules of subpart E of part I of subchapter J of chapter 1, such person shall be responsible to ensure that--

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`(A) such trust makes a return for such year which sets forth a full and complete accounting of all trust activities and operations for the year, the name of the United States agent for such trust, and such other information as the Secretary may prescribe, and

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`(B) such trust furnishes such information as the Secretary may prescribe to each United States person (i) who is treated as the owner of any portion of such trust or (ii) who receives (directly or indirectly) any distribution from the trust.

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`(2) TRUSTS NOT HAVING UNITED STATES AGENT-

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`(A) IN GENERAL- If the rules of this paragraph apply to any foreign trust, the determination of amounts required to be taken into account with respect to such trust by a United States person under the rules of subpart E of part I of subchapter J of chapter 1 shall be determined by the Secretary.

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`(B) UNITED STATES AGENT REQUIRED- The rules of this paragraph shall apply to any foreign trust to which paragraph (1) applies unless such trust agrees (in such manner, subject to such conditions, and at such time as the Secretary shall prescribe) to authorize a United States person to act as such trust's limited agent solely for purposes of applying sections 7602, 7603, and 7604 with respect to--

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`(i) any request by the Secretary to examine records or produce testimony related to the proper treatment of amounts required to be taken into account under the rules referred to in subparagraph (A), or

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`(ii) any summons by the Secretary for such records or testimony.

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The appearance of persons or production of records by reason of a United States person being such an agent shall not subject such persons or records to legal process for any purpose other than determining the correct treatment under this title of the amounts required to be taken into account under the rules referred to in subparagraph (A). A foreign trust which appoints an described in this subparagraph shall not be considered to have an office or a permanent establishment in the United States, or to be engaged in a trade or business in the United States, solely because of the activities of such agent pursuant to this subsection.

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`(C) OTHER RULES TO APPLY- Rules similar to the rules of paragraphs (2) and (4) of section 6038A(e) shall apply for purposes of this paragraph.

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`(c) REPORTING BY UNITED STATES BENEFICIARIES OF FOREIGN TRUSTS-

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`(1) IN GENERAL- If any United States person receives (directly or indirectly) during any taxable year of such person any distribution from a foreign

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[Struck out->] trust, such person shall make a return with respect to such trust for such year which includes-- [<-Struck out]

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`(A) the name of such trust,

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`(B) the aggregate amount of the distributions so received from such trust during such taxable year, and

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`(C) such other information as the Secretary may prescribe.

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`(2) INCLUSION IN INCOME IF RECORDS NOT PROVIDED-

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`(A) IN GENERAL- If adequate records are not provided to the Secretary to determine the proper treatment of any distribution from a foreign trust, such distribution shall be treated as an accumulation distribution includible in the gross income of the distributee under chapter 1. To the extent provided in regulations, the preceding sentence shall not apply if the foreign trust elects to be subject to rules similar to the rules of subsection (b)(2)(B).

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`(B) APPLICATION OF ACCUMULATION DISTRIBUTION RULES- For purposes of applying section 668 in a case to which subparagraph (A) applies, the applicable number of years for purposes of section 668(a) shall be 1/2 of the number of years the trust has been in existence.

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`(d) SPECIAL RULES-

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`(1) DETERMINATION OF WHETHER UNITED STATES PERSON MAKES TRANSFER OR RECEIVES DISTRIBUTION- For purposes of this section, in determining whether a United States person makes a transfer to, or receives a distribution from, a foreign trust, the fact that a portion of such trust is treated as owned by another person under the rules of subpart E of part I of subchapter J of chapter 1 shall be disregarded.

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`(2) DOMESTIC TRUSTS WITH FOREIGN ACTIVITIES- To the extent provided in regulations, a trust which is a United States person shall be treated as a foreign trust for purposes of this section and section 6677 if such trust has substantial activities, or holds substantial property, outside the United States.

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`(3) TIME AND MANNER OF FILING INFORMATION- Any notice or return required under this section shall be made at such time and in such manner as the Secretary shall prescribe.

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`(4) MODIFICATION OF RETURN REQUIREMENTS- The Secretary is authorized to suspend or modify any requirement of this section if the Secretary determines that the United States has no significant tax interest in obtaining the required information.'.

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(b) INCREASED PENALTIES- Section 6677 (relating to failure to file information returns with respect to certain foreign trusts) is amended to read as follows:

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[Struck out->] `SEC. 6677. FAILURE TO FILE INFORMATION WITH RESPECT TO CERTAIN FOREIGN TRUSTS. [<-Struck out]

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`(a) CIVIL PENALTY- In addition to any criminal penalty provided by law, if any notice or return required to be filed by section 6048--

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`(1) is not filed on or before the time provided in such section, or

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`(2) does not include all the information required pursuant to such section or includes incorrect information,

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the person required to file such notice or return shall pay a penalty equal to 35 percent of the gross reportable amount. If any failure described in the preceding sentence continues for more than 90 days after the day on which the Secretary mails notice of such failure to the person required to pay such penalty, such person shall pay a penalty (in addition to the amount determined under the preceding sentence) of $10,000 for each 30-day period (or fraction thereof) during which such failure continues after the expiration of such 90-day period. In no event shall the penalty under this subsection with respect to any failure exceed the gross reportable amount.

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`(b) SPECIAL RULES FOR RETURNS UNDER SECTION 6048(b)- In the case of a return required under section 6048(b)--

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`(1) the United States person referred to in such section shall be liable for the penalty imposed by subsection (a), and

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`(2) subsection (a) shall be applied by substituting `5 percent' for `35 percent'.

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`(c) GROSS REPORTABLE AMOUNT- For purposes of subsection (a), the term `gross reportable amount' means--

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`(1) the gross value of the property involved in the event (determined as of the date of the event) in the case of a failure relating to section 6048(a),

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`(2) the gross value of the portion of the trust's assets at the close of the year treated as owned by the United States person in the case of a failure relating to section 6048(b)(1), and

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`(3) the gross amount of the distributions in the case of a failure relating to section 6048(c).

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`(d) REASONABLE CAUSE EXCEPTION- No penalty shall be imposed by this section on any failure which is shown to be due to reasonable cause and not due to willful

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[Struck out->] neglect. The fact that a foreign jurisdiction would impose a civil or criminal penalty on the taxpayer (or any other person) for disclosing the required information is not reasonable cause. [<-Struck out]

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`(e) DEFICIENCY PROCEDURES NOT TO APPLY- Subchapter B of chapter 63 (relating to deficiency procedures for income, estate, gift, and certain excise taxes) shall not apply in respect of the assessment or collection of any penalty imposed by subsection (a).'.

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(c) CONFORMING AMENDMENTS-

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(1) Paragraph (2) of section 6724(d) is amended by striking `or' at the end of subparagraph (S), by striking the period at the end of subparagraph (T) and inserting `, or', and by inserting after subparagraph (T) the following new subparagraph:

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`(U) section 6048(b)(1)(B) (relating to foreign trust reporting requirements).'.

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(2) The table of sections for subpart B of part III of subchapter A of chapter 61 is amended by striking the item relating to section 6048 and inserting the following new item:

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`Sec. 6048. Information with respect to certain foreign trusts.'.

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(3) The table of sections for part I of subchapter B of chapter 68 is amended by striking the item relating to section 6677 and inserting the following new item:

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`Sec. 6677. Failure to file information with respect to certain foreign trusts.'.

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(d) EFFECTIVE DATES-

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(1) REPORTABLE EVENTS- To the extent related to subsection (a) of section 6048 of the Internal Revenue Code of 1986, as amended by this section, the amendments made by this section shall apply to reportable events (as defined in such section 6048) occurring after the date of the enactment of this Act.

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(2) GRANTOR TRUST REPORTING- To the extent related to subsection (b) of such section 6048, the amendments made by this section shall apply to taxable years of United States persons beginning after December 31, 1995.

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(3) REPORTING BY UNITED STATES BENEFICIARIES- To the extent related to subsection (c) of such section 6048, the amendments made by this section shall apply to distributions received after the date of the enactment of this Act.

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[Struck out->] SEC. 412. COMPARABLE PENALTIES FOR FAILURE TO FILE RETURN RELATING TO TRANSFERS TO FOREIGN ENTITIES. [<-Struck out]

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(a) IN GENERAL- Section 1494 is amended by adding at the end the following new subsection:

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`(c) PENALTY- In the case of any failure to file a return required by the Secretary with respect to any transfer described in section 1491, the person required to file such return shall be liable for the penalties provided in section 6677 in the same manner as if such failure were a failure to file a notice under section 6048(a).'.

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

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[Struck out->] SEC. 413. MODIFICATIONS OF RULES RELATING TO FOREIGN TRUSTS HAVING ONE OR MORE UNITED STATES BENEFICIARIES. [<-Struck out]

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(a) TREATMENT OF TRUST OBLIGATIONS, ETC-

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(1) Paragraph (2) of section 679(a) is amended by striking subparagraph (B) and inserting the following:

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`(B) TRANSFERS AT FAIR MARKET VALUE- To any transfer of property to a trust in exchange for consideration of at least the fair market value of the transferred property. For purposes of the preceding sentence, consideration other than cash shall be taken into account at its fair market value.'.

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(2) Subsection (a) of section 679 (relating to foreign trusts having one or more United States beneficiaries) is amended by adding at the end the following new paragraph:

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`(3) CERTAIN OBLIGATIONS NOT TAKEN INTO ACCOUNT UNDER FAIR MARKET VALUE EXCEPTION-

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`(A) IN GENERAL- In determining whether paragraph (2)(B) applies to any transfer by a person described in clause (ii) or (iii) of subparagraph (C), there shall not be taken into account--

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`(i) except as provided in regulations, any obligation of a person described in subparagraph (C), and

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`(ii) to the extent provided in regulations, any obligation which is guaranteed by a person described in subparagraph (C).

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`(B) TREATMENT OF PRINCIPAL PAYMENTS ON OBLIGATION- Principal payments by the trust on any obligation referred to in subparagraph (A) shall be taken into account on and after the date of the payment in determining the portion of the trust attributable to the property transferred.

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`(C) PERSONS DESCRIBED- The persons described in this subparagraph are--

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`(i) the trust,

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`(ii) any grantor or beneficiary of the trust, and

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`(iii) any person who is related (within the meaning of section 643(i)(2)(B)) to any grantor or beneficiary of the trust.'.

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(b) EXEMPTION OF TRANSFERS TO CHARITABLE TRUSTS- Subsection (a) of section 679 is amended by striking `section 404(a)(4) or 404A' and inserting `section 6048(a)(3)(B)(ii)'.

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(c) OTHER MODIFICATIONS- Subsection (a) of section 679 is amended by adding at the end the following new paragraphs:

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`(4) SPECIAL RULES APPLICABLE TO FOREIGN GRANTOR WHO LATER BECOMES A UNITED STATES PERSON-

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`(A) IN GENERAL- If a nonresident alien individual has a residency starting date within 5 years after directly or indirectly transferring property to a foreign trust, this section and section 6048 shall be applied as if such individual transferred to such trust on the residency starting date an amount equal to the portion of such trust attributable to the property transferred by such individual to such trust in such transfer.

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`(B) TREATMENT OF UNDISTRIBUTED INCOME- For purposes of this section, undistributed net income for periods before such individual's residency starting date shall be taken into account in determining the portion of the trust which is attributable to property transferred by such individual to such trust but shall not otherwise be taken into account.

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`(C) RESIDENCY STARTING DATE- For purposes of this paragraph, an individual's residency starting date is the residency starting date determined under section 7701(b)(2)(A).

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`(5) OUTBOUND TRUST MIGRATIONS- If--

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`(A) an individual who is a citizen or resident of the United States transferred property to a trust which was not a foreign trust, and

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`(B) such trust becomes a foreign trust while such individual is alive,

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then this section and section 6048 shall be applied as if such individual transferred to such trust on the date such trust becomes a foreign trust an amount equal to the portion of such trust attributable to the property previously transferred by such individual to such trust. A rule similar to the rule of paragraph (4)(B) shall apply for purposes of this paragraph.'.

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(d) MODIFICATIONS RELATING TO WHETHER TRUST HAS UNITED STATES BENEFICIARIES- Subsection (c) of section 679 is amended by adding at the end the following new paragraph:

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`(3) CERTAIN UNITED STATES BENEFICIARIES DISREGARDED- A beneficiary shall not be treated as a United States person in applying this section with respect to any transfer of property to foreign trust if such beneficiary first became a United States person more than 5 years after the date of such transfer.'.

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(e) TECHNICAL AMENDMENT- Subparagraph (A) of section 679(c)(2) is amended to read as follows:

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`(A) in the case of a foreign corporation, such corporation is a controlled foreign corporation (as defined in section 957(a)),'.

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(f) REGULATIONS- Section 679 is amended by adding at the end the following new subsection:

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`(d) REGULATIONS- The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.'.

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(g) EFFECTIVE DATE- The amendments made by this section shall apply to transfers of property after February 6, 1995.

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[Struck out->] SEC. 414. FOREIGN PERSONS NOT TO BE TREATED AS OWNERS UNDER GRANTOR TRUST RULES. [<-Struck out]

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(a) GENERAL RULE-

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(1) Subsection (f) of section 672 (relating to special rule where grantor is foreign person) is amended to read as follows:

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`(f) SUBPART NOT TO RESULT IN FOREIGN OWNERSHIP-

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`(1) IN GENERAL- Notwithstanding any other provision of this subpart, this subpart shall apply only to the extent such application results in an amount (if any) being currently taken into account (directly or through 1 or more entities) under this chapter in computing the income of a citizen or resident of the United States or a domestic corporation.

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`(2) EXCEPTIONS-

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`(A) CERTAIN REVOCABLE AND IRREVOCABLE TRUSTS- Paragraph (1) shall not apply to any portion of a trust if--

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`(i) the power to revest absolutely in the grantor title to the trust property to which such portion is attributable is exercisable solely by the grantor without the approval or consent of any other person or with the consent of a related or subordinate party who is subservient to the grantor, or

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`(ii) the only amounts distributable from such portion (whether income or corpus) during the lifetime of the grantor are amounts distributable to the grantor or the spouse of the grantor.

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`(B) COMPENSATORY TRUSTS- Except as provided in regulations, paragraph (1) shall not apply to any portion of a trust distributions from which are taxable as compensation for services rendered.

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`(3) SPECIAL RULES- Except as otherwise provided in regulations prescribed by the Secretary--

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`(A) a controlled foreign corporation (as defined in section 957) shall be treated as a domestic corporation for purposes of paragraph (1), and

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`(B) paragraph (1) shall not apply for purposes of applying section 1296.

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`(4) RECHARACTERIZATION OF PURPORTED GIFTS- In the case of any transfer directly or indirectly from a partnership or foreign corporation which the transferee treats as a gift or bequest, the Secretary may recharacterize such transfer in such circumstances as the Secretary determines to be appropriate to prevent the avoidance of the purposes of this subsection.

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`(5) SPECIAL RULE WHERE GRANTOR IS FOREIGN PERSON- If--

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`(A) but for this subsection, a foreign person would be treated as the owner of any portion of a trust, and

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`(B) such trust has a beneficiary who is a United States person,

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such beneficiary shall be treated as the grantor of such portion to the extent such beneficiary or any member of such beneficiary's family (within the meaning of section 267(c)(4)) has made (directly or indirectly) transfers of property (other than in a sale for full and adequate consideration) to such foreign person. For purposes of the preceding sentence, any gift shall not be taken into account to the extent such gift would be excluded from taxable gifts under section 2503(b).

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`(6) REGULATIONS- The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this subsection, including regulations providing that paragraph (1) shall not apply in appropriate cases.'.

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(2) The last sentence of subsection (c) of section 672 of such Code is amended by inserting `subsection (f) and' before `sections 674'.

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(b) CREDIT FOR CERTAIN TAXES-

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(1) Paragraph (2) of section 665(d) is amended by adding at the end the following new sentence: `Under rules or regulations prescribed by the Secretary, in the case of any foreign trust of which the settlor or another person would be treated as owner of any portion of the trust under subpart E but for section 672(f), the term `taxes imposed on the trust' includes the allocable amount of any income, war profits, and excess profits taxes imposed by any foreign country or possession of the United States on the settlor or such other person in respect of trust income.'.

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(2) Paragraph (5) of section 901(b) is amended by adding at the end the following new sentence: `Under rules or regulations prescribed by the Secretary, in the case of any foreign trust of which the settlor or another person would be treated as owner of any portion of the trust under subpart E but for section 672(f), the allocable amount of any income, war profits, and excess profits taxes imposed by any foreign country or possession of the United States on the settlor or such other person in respect of trust income.'.

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(c) DISTRIBUTIONS BY CERTAIN FOREIGN TRUSTS THROUGH NOMINEES-

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(1) Section 643 is amended by adding at the end the following new subsection:

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`(h) DISTRIBUTIONS BY CERTAIN FOREIGN TRUSTS THROUGH NOMINEES- For purposes of this part, any amount paid to a United States person which is derived directly or indirectly from a foreign trust of which the payor is not the grantor shall be deemed in the year of payment to have been directly paid by the foreign trust to such United States person.'.

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(2) Section 665 is amended by striking subsection (c).

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(d) EFFECTIVE DATE-

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

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(2) EXCEPTION FOR CERTAIN TRUSTS- The amendments made by this section shall not apply to any trust--

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(A) which is treated as owned by the grantor under section 676 or 677 (other than subsection (a)(3) thereof) of the Internal Revenue Code of 1986, and

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(B) which is in existence on September 19, 1995.

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The preceding sentence shall not apply to the portion of any such trust attributable to any transfer to such trust after September 19, 1995.

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(e) TRANSITIONAL RULE- If--

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(1) by reason of the amendments made by this section, any person other than a United States person ceases to be treated as the owner of a portion of a domestic trust, and

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(2) before January 1, 1997, such trust becomes a foreign trust, or the assets of such trust are transferred to a foreign trust,

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no tax shall be imposed by section 1491 of the Internal Revenue Code of 1986 by reason of such trust becoming a foreign trust or the assets of such trust being transferred to a foreign trust.

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[Struck out->] SEC. 415. INFORMATION REPORTING REGARDING FOREIGN GIFTS. [<-Struck out]

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(a) IN GENERAL- Subpart A of part III of subchapter A of chapter 61 is amended by inserting after section 6039E the following new section:

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[Struck out->] `SEC. 6039F. NOTICE OF LARGE GIFTS RECEIVED FROM FOREIGN PERSONS. [<-Struck out]

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`(a) IN GENERAL- If the value of the aggregate foreign gifts received by a United States person (other than an organization described in section 501(c) and exempt from tax under section 501(a)) during any taxable year exceeds $10,000, such United States person shall furnish (at such time and in such manner as the Secretary shall prescribe) such information as the Secretary may prescribe regarding each foreign gift received during such year.

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`(b) FOREIGN GIFT- For purposes of this section, the term `foreign gift' means any amount received from a person other than a United States person which the recipient treats as a gift or bequest. Such term shall not include any qualified transfer (within the meaning of section 2503(e)(2)) or any distribution properly disclosed in a return under section 6048(c).

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`(c) PENALTY FOR FAILURE TO FILE INFORMATION-

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`(1) IN GENERAL- If a United States person fails to furnish the information required by subsection (a) with respect to any foreign gift within the time prescribed therefor (including extensions)--

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`(A) the tax consequences of the receipt of such gift shall be determined by the Secretary, and

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`(B) such United States person shall pay (upon notice and demand by the Secretary and in the same manner as tax) an amount equal to 5 percent of the amount of such foreign gift for each month for which the failure continues (not to exceed 25 percent of such amount in the aggregate).

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`(2) REASONABLE CAUSE EXCEPTION- Paragraph (1) shall not apply to any failure to report a foreign gift if the United States person shows that the failure is due to reasonable cause and not due to willful neglect.

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`(d) COST-OF-LIVING ADJUSTMENT- In the case of any taxable year beginning after December 31, 1996, the $10,000 amount under subsection (a) shall be increased by an amount equal to the product of such amount and the cost-of-living adjustment for such taxable year under section 1(f)(3), except that subparagraph (B) thereof shall be applied by substituting `1995' for `1992'.

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`(e) REGULATIONS- The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this section.'.

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(b) CLERICAL AMENDMENT- The table of sections for such subpart is amended by inserting after the item relating to section 6039E the following new item:

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`Sec. 6039F. Notice of large gifts received from foreign persons.'.

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

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[Struck out->] SEC. 416. MODIFICATION OF RULES RELATING TO FOREIGN TRUSTS WHICH ARE NOT GRANTOR TRUSTS. [<-Struck out]

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(a) MODIFICATION OF INTEREST CHARGE ON ACCUMULATION DISTRIBUTIONS- Subsection (a) of section 668 (relating to interest charge on accumulation distributions from foreign trusts) is amended to read as follows:

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`(a) GENERAL RULE- For purposes of the tax determined under section 667(a)--

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`(1) INTEREST DETERMINED USING UNDERPAYMENT RATES- The interest charge determined under this section with respect to any distribution is the amount of interest which would be determined on the partial tax computed under section 667(b) for the period described in paragraph (2) using the rates and the method under section 6621 applicable to underpayments of tax.

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`(2) PERIOD- For purposes of paragraph (1), the period described in this paragraph is the period which begins on the date which is the applicable number of years before the date of the distribution and which ends on the date of the distribution.

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`(3) APPLICABLE NUMBER OF YEARS- For purposes of paragraph (2)--

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`(A) IN GENERAL- The applicable number of years with respect to a distribution is the number determined by dividing--

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`(i) the sum of the products described in subparagraph (B) with respect to each undistributed income year, by

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`(ii) the aggregate undistributed net income.

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The quotient determined under the preceding sentence shall be rounded under procedures prescribed by the Secretary.

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`(B) PRODUCT DESCRIBED- For purposes of subparagraph (A), the product described in this subparagraph with respect to any undistributed income year is the product of--

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`(i) the undistributed net income for such year, and

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`(ii) the sum of the number of taxable years between such year and the taxable year of the distribution (counting in each case the undistributed income year but not counting the taxable year of the distribution).

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`(4) UNDISTRIBUTED INCOME YEAR- For purposes of this subsection, the term `undistributed income year' means any prior taxable year of the trust for which there is undistributed net income, other than a taxable year during all of which the beneficiary receiving the distribution was not a citizen or resident of the United States.

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`(5) DETERMINATION OF UNDISTRIBUTED NET INCOME- Notwithstanding section 666, for purposes of this subsection, an accumulation distribution from the trust shall be treated as reducing proportionately the undistributed net income for undistributed income years.

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`(6) PERIODS BEFORE 1996- Interest for the portion of the period described in paragraph (2) which occurs before January 1, 1996, shall be determined--

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`(A) by using an interest rate of 6 percent, and

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`(B) without compounding until January 1, 1996.'.

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(b) ABUSIVE TRANSACTIONS- Section 643(a) is amended by inserting after paragraph (6) the following new paragraph:

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`(7) ABUSIVE TRANSACTIONS- The Secretary shall prescribe such regulations as may be necessary or appropriate to carry out the purposes of this part, including regulations to prevent avoidance of such purposes.'.

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(c) TREATMENT OF LOANS FROM TRUSTS-

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(1) IN GENERAL- Section 643 (relating to definitions applicable to subparts A, B, C, and D) is amended by adding at the end the following new subsection:

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`(i) LOANS FROM FOREIGN TRUSTS- For purposes of subparts B, C, and D--

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`(1) GENERAL RULE- Except as provided in regulations, if a foreign trust makes a loan of cash or marketable securities directly or indirectly to--

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`(A) any grantor or beneficiary of such trust who is a United States person, or

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`(B) any United States person not described in subparagraph (A) who is related to such grantor or beneficiary,

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the amount of such loan shall be treated as a distribution by such trust to such grantor or beneficiary (as the case may be).

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`(2) DEFINITIONS AND SPECIAL RULES- For purposes of this subsection--

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`(A) CASH- The term `cash' includes foreign currencies and cash equivalents.

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`(B) RELATED PERSON-

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`(i) IN GENERAL- A person is related to another person if the relationship between such persons would result in a disallowance of losses under section 267 or 707(b). In applying section 267 for purposes of the preceding sentence, section 267(c)(4) shall be applied as if the family of an individual includes the spouses of the members of the family.

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`(ii) ALLOCATION- If any person described in paragraph (1)(B) is related to more than one person, the grantor or beneficiary to whom the treatment under this subsection applies shall be determined under regulations prescribed by the Secretary.

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`(C) EXCLUSION OF TAX-EXEMPTS- The term `United States person' does not include any entity exempt from tax under this chapter.

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`(D) TRUST NOT TREATED AS SIMPLE TRUST- Any trust which is treated under this subsection as making a distribution shall be treated as not described in section 651.

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`(3) SUBSEQUENT TRANSACTIONS REGARDING LOAN PRINCIPAL- If any loan is taken into account under paragraph (1), any subsequent transaction between the trust and the original borrower regarding the principal of the loan (by way of complete or partial repayment, satisfaction, cancellation, discharge, or otherwise) shall be disregarded for purposes of this title.'.

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(2) TECHNICAL AMENDMENT- Paragraph (8) of section 7872(f) is amended by inserting `, 643(i),' before `or 1274' each place it appears.

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(d) EFFECTIVE DATES-

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(1) INTEREST CHARGE- The amendment made by subsection (a) shall apply to distributions after the date of the enactment of this Act.

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(2) ABUSIVE TRANSACTIONS- The amendment made by subsection (b) shall take effect on the date of the enactment of this Act.

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(3) LOANS FROM TRUSTS- The amendment made by subsection (c) shall apply to loans of cash or marketable securities made after September 19, 1995.

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[Struck out->] SEC. 417. RESIDENCE OF TRUSTS, ETC. [<-Struck out]

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(a) TREATMENT AS UNITED STATES PERSON-

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(1) IN GENERAL- Paragraph (30) of section 7701(a) is amended by striking `and' at the end of subparagraph (C) and by striking subparagraph (D) and by inserting the following new subparagraphs:

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`(D) any estate (other than a foreign estate, within the meaning of paragraph (31)), and

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`(E) any trust if--

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`(i) a court within the United States is able to exercise primary supervision over the administration of the trust, and

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`(ii) one or more United States fiduciaries have the authority to control all substantial decisions of the trust.'.

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(2) CONFORMING AMENDMENT- Paragraph (31) of section 7701(a) is amended to read as follows:

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`(31) FOREIGN ESTATE OR TRUST-

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`(A) FOREIGN ESTATE- The term `foreign estate' means an estate the income of which, from sources without the United States which is not effectively connected with the conduct of a trade or business within the United States, is not includible in gross income under subtitle A.

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`(B) FOREIGN TRUST- The term `foreign trust' means any trust other than a trust described in subparagraph (E) of paragraph (30).'.

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(3) EFFECTIVE DATE- The amendments made by this subsection shall apply--

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(A) to taxable years beginning after December 31, 1996, or

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(B) at the election of the trustee of a trust, to taxable years ending after the date of the enactment of this Act.

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Such an election, once made, shall be irrevocable.

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(b) DOMESTIC TRUSTS WHICH BECOME FOREIGN TRUSTS-

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(1) IN GENERAL- Section 1491 (relating to imposition of tax on transfers to avoid income tax) is amended by adding at the end the following new flush sentence:

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`If a trust which is not a foreign trust becomes a foreign trust, such trust shall be treated for purposes of this section as having transferred, immediately before becoming a foreign trust, all of its assets to a foreign trust.'.

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

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SEC. 401. REPEAL OF BAD DEBT RESERVE METHOD FOR THRIFT SAVINGS ASSOCIATIONS.

(a) IN GENERAL- Section 593 (relating to reserves for losses on loans) is amended by adding at the end the following new subsections:`(f) TERMINATION OF RESERVE METHOD- Subsections (a), (b), (c), and (d) shall not apply to any taxable year beginning after December 31, 1995.`(g) 6-YEAR SPREAD OF ADJUSTMENTS-`(1) IN GENERAL- In the case of any taxpayer who is required by reason of subsection (f) to change its method of computing reserves for bad debts–`(A) such change shall be treated as a change in a method of accounting,`(B) such change shall be treated as initiated by the taxpayer and as having been made with the consent of the Secretary, and`(C) the net amount of the adjustments required to be taken into account by the taxpayer under section 481(a)–`(i) shall be determined by taking into account only applicable excess reserves, and`(ii) as so determined, shall be taken into account ratably over the 6-taxable year period beginning with the first taxable year beginning after December 31, 1995.`(2) APPLICABLE EXCESS RESERVES-`(A) IN GENERAL- For purposes of paragraph (1), the term `applicable excess reserves’ means the excess (if any) of–`(i) the balance of the reserves described in subsection (c)(1) (other than the supplemental reserve) as of the close of the taxpayer’s last taxable year beginning before January 1, 1996, over`(ii) the lesser of–`(I) the balance of such reserves as of the close of the taxpayer’s last taxable year beginning before January 1, 1988, or`(II) the balance of the reserves described in subclause (I), reduced in the same manner as under section 585(b)(2)(B)(ii) on the basis of the taxable years described in clause (i) and this clause.`(B) SPECIAL RULE FOR THRIFTS WHICH BECOME SMALL BANKS- In the case of a bank (as defined in section 581) which was not a large bank (as defined in section 585(c)(2)) for its first taxable year beginning after December 31, 1995–`(i) the balance taken into account under subparagraph (A)(ii) shall not be less than the amount which would be the balance of such reserves as of the close of its last taxable year beginning before such date if the additions to such reserves for all taxable years had been determined under section 585(b)(2)(A), and`(ii) the opening balance of the reserve for bad debts as of the beginning of such first taxable year shall be the balance taken into account under subparagraph (A)(ii) (determined after the application of clause (i) of this subparagraph).The preceding sentence shall not apply for purposes of paragraphs (5) and (6) or subsection (e)(1).`(3) RECAPTURE OF PRE-1988 RESERVES WHERE TAXPAYER CEASES TO BE BANK- If, during any taxable year beginning after December 31, 1995, a taxpayer to which paragraph (1) applied is not a bank (as defined in section 581), paragraph (1) shall apply to the reserves described in paragraph (2)(A)(ii) and the supplemental reserve; except that such reserves shall be taken into account ratably over the 6-taxable year period beginning with such taxable year.`(4) SUSPENSION OF RECAPTURE IF RESIDENTIAL LOAN REQUIREMENT MET-`(A) IN GENERAL- In the case of a bank which meets the residential loan requirement of subparagraph (B) for the first taxable year beginning after December 31, 1995, or for the following taxable year–`(i) no adjustment shall be taken into account under paragraph (1) for such taxable year, and`(ii) such taxable year shall be disregarded in determining–`(I) whether any other taxable year is a taxable year for which an adjustment is required to be taken into account under paragraph (1), and`(II) the amount of such adjustment.`(B) RESIDENTIAL LOAN REQUIREMENT- A taxpayer meets the residential loan requirement of this subparagraph for any taxable year if the principal amount of the residential loans made by the taxpayer during such year is not less than the base amount for such year.`(C) RESIDENTIAL LOAN- For purposes of this paragraph, the term `residential loan’ means any loan described in clause (v) of section 7701(a)(19)(C) but only if such loan is incurred in acquiring, constructing, or improving the property described in such clause.`(D) BASE AMOUNT- For purposes of subparagraph (B), the base amount is the average of the principal amounts of the residential loans made by the taxpayer during the 6 most recent taxable years beginning on or before December 31, 1995. At the election of the taxpayer who made such loans during each of such 6 taxable years, the preceding sentence shall be applied without regard to the taxable year in which such principal amount was the highest and the taxable year in such principal amount was the lowest. Such an election may be made only for the first taxable year beginning after such date, and, if made for such taxable year, shall apply to the succeeding taxable year unless revoked with the consent of the Secretary.`(E) CONTROLLED GROUPS- In the case of a taxpayer which is a member of any controlled group of corporations described in section 1563(a)(1), subparagraph (B) shall be applied with respect to such group.`(5) CONTINUED APPLICATION OF FRESH START UNDER SECTION 585 TRANSITIONAL RULES- In the case of a taxpayer to which paragraph (1) applied and which was not a large bank (as defined in section 585(c)(2)) for its first taxable year beginning after December 31, 1995:`(A) IN GENERAL- For purposes of determining the net amount of adjustments referred to in section 585(c)(3)(A)(iii), there shall be taken into account only the excess (if any) of the reserve for bad debts as of the close of the last taxable year before the disqualification year over the balance taken into account by such taxpayer under paragraph (2)(A)(ii) of this subsection.`(B) TREATMENT UNDER ELECTIVE CUT-OFF METHOD- For purposes of applying section 585(c)(4)–`(i) the balance of the reserve taken into account under subparagraph (B) thereof shall be reduced by the balance taken into account by such taxpayer under paragraph (2)(A)(ii) of this subsection, and`(ii) no amount shall be includible in gross income by reason of such reduction.`(6) SUSPENDED RESERVE INCLUDED AS SECTION 381(c) ITEMS- The balance taken into account by a taxpayer under paragraph (2)(A)(ii) of this subsection and the supplemental reserve shall be treated as items described in section 381(c).`(7) CONVERSIONS TO CREDIT UNIONS- In the case of a taxpayer to which paragraph (1) applied which becomes a credit union described in section 501(c) and exempt from taxation under section 501(a)–`(A) any amount required to be included in the gross income of the credit union by reason of this subsection shall be treated as derived from an unrelated trade or business (as defined in section 513), and`(B) for purposes of paragraph (3), the credit union shall not be treated as if it were a bank.`(8) REGULATIONS- The Secretary shall prescribe such regulations as may be necessary to carry out this subsection and subsection (e), including regulations providing for the application of such subsections in the case of acquisitions, mergers, spin-offs, and other reorganizations.’(b) CONFORMING AMENDMENTS-(1) Subsection (d) of section 50 is amended by adding at the end the following new sentence:`Paragraphs (1)(A), (2)(A), and (4) of the section 46(e) referred to in paragraph (1) of this subsection shall not apply to any taxable year beginning after December 31, 1995.’(2) Subsection (e) of section 52 is amended by striking paragraph (1) and by redesignating paragraphs (2) and (3) as paragraphs (1) and (2), respectively.(3) Subsection (a) of section 57 is amended by striking paragraph (4).(4) Section 246 is amended by striking subsection (f).(5) Clause (i) of section 291(e)(1)(B) is amended by striking `or to which section 593 applies’.(6) Subparagraph (A) of section 585(a)(2) is amended by striking `other than an organization to which section 593 applies’.(7)(A) The material preceding subparagraph (A) of section 593(e)(1) is amended by striking `by a domestic building and loan association or an institution that is treated as a mutual savings bank under section 591(b)’ and inserting `by a taxpayer having a balance described in subsection (g)(2)(A)(ii)’.(B) Subparagraph (B) of section 593(e)(1) is amended to read as follows:`(B) then out of the balance taken into account under subsection (g)(2)(A)(ii) (properly adjusted for amounts charged against such reserves for taxable years beginning after December 31, 1987),’.(C) The second sentence of section 593(e)(1) is amended by striking `the association or an institution that is treated as a mutual savings bank under section 591(b)’ and inserting `a taxpayer having a balance described in subsection (g)(2)(A)(ii)’.(D) The third sentence of section 593(e)(1) is amended by striking `an association’ and inserting `a taxpayer having a balance described in subsection (g)(2)(A)(ii)’.(E) Paragraph (1) of section 593(e) is amended by adding at the end the following new sentence: `This paragraph shall not apply to any distribution of all of the stock of a bank (as defined in section 581) to another corporation if, immediately after the distribution, such bank and such other corporation are members of the same affiliated group (as defined in section 1504) and the provisions of section 5(e) of the Federal Deposit Insurance Act (as in effect on December 31, 1995) or similar provisions are in effect.’(8) Section 595 is hereby repealed.(9) Section 596 is hereby repealed.(10) Subsection (a) of section 860E is amended–(A) by striking `Except as provided in paragraph (2), the’ in paragraph (1) and inserting `The’,(B) by striking paragraphs (2) and (4) and redesignating paragraphs (3) and (5) as paragraphs (2) and (3), respectively, and(C) by striking in paragraph (2) (as so redesignated) all that follows `subsection’ and inserting a period.(11) Paragraph (3) of section 992(d) is amended by striking `or 593′.(12) Section 1038 is amended by striking subsection (f).(13) Clause (ii) of section 1042(c)(4)(B) is amended by striking `or 593′.(14) Subsection (c) of section 1277 is amended by striking `or to which section 593 applies’.(15) Subparagraph (B) of section 1361(b)(2) is amended by striking `or to which section 593 applies’.(16) The table of sections for part II of subchapter H of chapter 1 is amended by striking the items relating to sections 595 and 596.(c) EFFECTIVE DATES-(1) IN GENERAL- Except as otherwise provided in this subsection, the amendments made by this section shall apply to taxable years beginning after December 31, 1995.(2) SUBSECTION (b)(7)(B)- The amendments made by subsection (b)(7)(B) shall not apply to any distribution with respect to preferred stock if–(A) such stock is outstanding at all times after October 31, 1995, and before the distribution, and(B) such distribution is made before the date which is 1 year after the date of the enactment of this Act (or, in the case of stock which may be redeemed, if later, the date which is 30 days after the earliest date that such stock may be redeemed).(3) SUBSECTION (b)(8)- The amendment made by subsection (b)(8) shall apply to property acquired in taxable years beginning after December 31, 1995.(4) SUBSECTION (b)(10)- The amendments made by subsection (b)(10) shall not apply to any residual interest held by a taxpayer if such interest has been held by such taxpayer at all times after October 31, 1995.

SEC. 402. DEPRECIATION UNDER INCOME FORECAST METHOD.

(a) GENERAL RULE- Section 167 (relating to depreciation) is amended by redesignating subsection (g) as subsection (h) and by inserting after subsection (f) the following new subsection:`(g) DEPRECIATION UNDER INCOME FORECAST METHOD-`(1) IN GENERAL- If the depreciation deduction allowable under this section to any taxpayer with respect to any property is determined under the income forecast method or any similar method–`(A) the income from the property to be taken into account in determining the depreciation deduction under such method shall be equal to the amount of income earned in connection with the property before the close of the 10th taxable year following the taxable year in which the property was placed in service,`(B) the adjusted basis of the property shall only include amounts with respect to which the requirements of section 461(h) are satisfied,`(C) the depreciation deduction under such method for the 10th taxable year beginning after the taxable year in which the property was placed in service shall be equal to the adjusted basis of such property as of the beginning of such 10th taxable year, and`(D) such taxpayer shall pay (or be entitled to receive) interest computed under the look-back method of paragraph (2) for any recomputation year.`(2) LOOK-BACK METHOD- The interest computed under the look-back method of this paragraph for any recomputation year shall be determined by–`(A) first determining the depreciation deductions under this section with respect to such property which would have been allowable for prior taxable years if the determination of the amounts so allowable had been made on the basis of the sum of the following (instead of the estimated income from such property)–`(i) the actual income earned in connection with such property for periods before the close of the recomputation year, and`(ii) an estimate of the future income to be earned in connection with such property for periods after the recomputation year and before the close of the 10th taxable year following the taxable year in which the property was placed in service,`(B) second, determining (solely for purposes of computing such interest) the overpayment or underpayment of tax for each such prior taxable year which would result solely from the application of subparagraph (A), and`(C) then using the adjusted overpayment rate (as defined in section 460(b)(7)), compounded daily, on the overpayment or underpayment determined under subparagraph (B).For purposes of the preceding sentence, any cost incurred after the property is placed in service (which is not treated as a separate property under paragraph (5)) shall be taken into account by discounting (using the Federal mid-term rate determined under section 1274(d) as of the time such cost is incurred) such cost to its value as of the date the property is placed in service. The taxpayer may elect with respect to any property to have the preceding sentence not apply to such property.`(3) EXCEPTION FROM LOOK-BACK METHOD- Paragraph (1)(D) shall not apply with respect to any property which had a cost basis of $100,000 or less.`(4) RECOMPUTATION YEAR- For purposes of this subsection, except as provided in regulations, the term `recomputation year’ means, with respect to any property, the 3d and the 10th taxable years beginning after the taxable year in which the property was placed in service, unless the actual income earned in connection with the property for the period before the close of such 3d or 10th taxable year is within 10 percent of the income earned in connection with the property for such period which was taken into account under paragraph (1)(A).`(5) SPECIAL RULES-`(A) CERTAIN COSTS TREATED AS SEPARATE PROPERTY- For purposes of this subsection, the following costs shall be treated as separate properties:`(i) Any costs incurred with respect to any property after the 10th taxable year beginning after the taxable year in which the property was placed in service.`(ii) Any costs incurred after the property is placed in service and before the close of such 10th taxable year if such costs are significant and give rise to a significant increase in the income from the property which was not included in the estimated income from the property.`(B) SYNDICATION INCOME FROM TELEVISION SERIES- In the case of property which is 1 or more episodes in a television series, income from syndicating such series shall not be required to be taken into account under this subsection before the earlier of–`(i) the 4th taxable year beginning after the date the first episode in such series is placed in service, or`(ii) the earliest taxable year in which the taxpayer has an arrangement relating to the future syndication of such series.`(C) SPECIAL RULES FOR FINANCIAL EXPLOITATION OF CHARACTERS, ETC- For purposes of this subsection, in the case of television and motion picture films, the income from the

property shall include income from the exploitation of characters, designs, scripts, scores, and other incidental income associated with such films, but only to the extent that such income is earned in connection with the ultimate use of such items by, or the ultimate sale of merchandise to, persons who are not related persons (within the meaning of section 267(b)) to the taxpayer.

`(D) COLLECTION OF INTEREST- For purposes of subtitle F (other than sections 6654 and 6655), any interest required to be paid by the taxpayer under paragraph (1) for any recomputation year shall be treated as an increase in the tax imposed by this chapter for such year.`(E) DETERMINATIONS- For purposes of paragraph (2), determinations of the amount of income earned in connection with any property shall be made in the same manner as for purposes of applying the income forecast method; except that any income from the disposition of such property shall be taken into account.`(F) TREATMENT OF PASS-THRU ENTITIES- Rules similar to the rules of section 460(b)(4) shall apply for purposes of this subsection.’(b) EFFECTIVE DATE-(1) IN GENERAL- The amendment made by subsection (a) shall apply to property placed in service after September 13, 1995.(2) BINDING CONTRACTS- The amendment made by subsection (a) shall not apply to any property produced or acquired by the taxpayer pursuant to a written contract which was binding on September 13, 1995, and at all times thereafter before such production or acquisition.(3) UNDERPAYMENTS OF INCOME TAX- No addition to tax shall be made under–(A) section 6654 or 6655 of the Internal Revenue Code of 1986 (relating to failure to pay estimated tax) with respect to any underpayment of an installment required to be paid before the date of the enactment of this Act, or(B) section 6662 of such Code as a result of the application of subsection (d) of that section (relating to substantial understatements of income tax) with respect to any underpayment of income tax for any taxable year ending before such date of enactment,to the extent such underpayment was created or increased by the amendments made by subsection (a).

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