AMENDMENTS RELATED TO TITLE VI OF THE REFORM ACT.

SEC. 1006. AMENDMENTS RELATED TO TITLE VI OF THE REFORM ACT. (a) Amendment Related to Section 601 of the Reform Act.—Section 15 of the 1986 Code is amended by adding at the end thereof the following new subsection: “(e) References to Highest Rate.—If the change referred to in subsection (a) involves a change in the highest rate of tax imposed by section 1 or 11(b), any reference in this chapter to such highest rate (other than in a provision imposing a tax by reference to such rate) shall be treated as a reference to the weighted average of the highest rates before and after the change determined on the basis of the respective portions of the taxable year before the date of the change and on or after the date of the change.” (b) Amendments Related to Sections 611 and 612 of the Reform Act.— (1) In the case of dividends received or accrued during 1987— (A) subparagraph (B) of section 245(c)(1) of the 1986 Code shall be applied by substituting “80 percent” for the percentage specified therein, and (B) subparagraph (B) of section 861(a)(2) of the 1986 Code shall be applied by substituting “100/80ths” for the fraction specified therein. (2) Paragraph (3) of section 854(b) of the 1986 Code is amended to read as follows: “(3) Aggregate dividends.—For purposes of this subsection— “(A) In general.— In computing the amount of aggregate dividends received, there shall only be taken into account dividends received from domestic corporations. “(B) Dividends.—For purposes of subparagraph (A), the term ‘dividend’ shall not include any distribution from— “(i) a corporation which, for the taxable year of the corporation in which the distribution is made, or for the next preceding taxable year of the corporation, is a corporation exempt from tax under section 501 (relating to certain charitable, etc., organizations) or section 521 (relating to farmers’ cooperative associations), or “(ii) a real estate investment trust which, for the taxable year of the trust in which the dividend is paid, qualifies under part 11 of subchapter M (section 856 and following). “(C) Limitations on dividends from regulated investment companies.—Id determining the amount of any dividend for purposes of this paragraph, a dividend received from a regulated investment company shall be subject to the limitations prescribed in this section.” (c) Amendments Related to Section 614 of the Reform Act.— (1) Section 1059(d) of the 1986 Code (relating to extension to certain property distributions) is amended by striking out para-102 STAT. 3394graph (5) and redesignating paragraphs (6) and (7) as paragraphs (5) and (6), respectively. (2) Section 1059(d)(5) of the 1986 Code (defining dividend announcement date), as redesignated by paragraph (1), is amended by inserting “amount or” before “payment”. (3) Section 1059(d)(6) of the 1986 Code (relating to exception where stock held during entire existence of corporation), as redesignated by paragraph (1), is amended to read as follows: “(6) Exception where stock held during entire existence of corporation.— “(A) In general.— Subsection (a) shall not apply to any extraordinary dividend with respect to any share of stock of a corporation if— “(i) such stock was held by the taxpayer during the entire period such corporation was in existence, and “(ii) except as provided in regulations, no earnings and profits of such corporation were attributable to transfers of property from (or earnings and profits of) a corporation which is not a qualified corporation. “(B) Qualified corporation.— For purposes of subparagraph (A), the term ‘qualified corporation’ means any corporation (including a predecessor corporation)— “(i) with respect to which the taxpayer holds directly or indirectly during the entire period of such corporation’s existence at least the same ownership interest as the taxpayer holds in the corporation distributing the extraordinary dividend, and “(ii) which has no earnings and profits— “(I) which were earned by, or “(II) which are attributable to gain on property which accrued during a period the corporation holding the property was, a corporation not described in clause (i). “(C) Appucation of paragraph—This paragraph shall not apply to any extraordinary dividend to the extent such application is inconsistent with the purposes of this section.” (4) Paragraph (1) of section 1059(e) of the 1986 Code (relating to treatment of partial liquidation) is amended by striking out “for purposes of this section (without regard to the holding period of the stock)” and inserting in lieu thereof: “to which paragraphs (1) and (2) of subsection (a) apply without regard to the period the taxpayer held such stock”. (5) Paragraph (2) of section 1059(e) of the 1986 Code (relating to qualifying dividends) is amended to read as follows: “(12) Qualifying dividends.— “(A) In general.—Except as provided in regulations, the term ‘extraordinary dividend’ does not include any qualifying dividend (within the meaning of section 243). “(B) Exception.— Subparagraph (A) shall not apply to any portion of a dividend which is attributable to earnings and profits which— “(i) were earned by a corporation during a period it was not a member of the affiliated group, or “(ii) are attributable to gain on property which accrued during a period the corporation holding the property was not a member of the affiliated group.” 102 STAT. 3395 (6) Subparagraph (A) of section 1059(e)(3) of the 1986 Code (relating to qualified preferred dividends) is amended to read as follows: “(A) In general.— In the case of 1 or more qualified preferred dividends with respect to any share of stock— “(i) this section shall not apply to such dividends if the taxpayer holds such stock for more than 5 years, and “(ii) if the taxpayer disposes of such stock before it has been held for more than 5 years, the aggregate reduction under subsection (a)(1) with respect to such dividends shall not be greater than the excess (if any) of— “(I) the qualified preferred dividends paid with respect to such stock during the period the tax-payer held such stock, over “(II) the qualified preferred dividends which would have been paid during such period on the basis of the stated rate of return.” (7) Clause (i) of section 1059(e)(3)(C) of the 1986 Code is amended— (A) by striking out “any dividend payable” and inserting in lieu thereof “any fixed dividend payable”, and (B) by adding at the end thereof the following new sentence: “Such term shall not include any dividend payable with respect to any share of stock if the actual rate of return on such stock exceeds 15 percent.” (8) Subparagraph (B) of section 1059(e)(3) of the 1986 Code is amended— (A) by striking out “subparagraph (A)” and the material preceding clause (i) and inserting in lieu thereof “this paragraph”, and (B) by striking out “subparagraph (B)(i)(II)” in clause (ii) and inserting in lieu thereof “clause (i)(II)”. (9) Subsection (f) of section 1059 of the 1986 Code is amended by inserting before the period at the end thereof the following: “and in the case of stock held by pass-thru entities”. (d) Amendments Related to Section 621 or the Reform Act.— (1) (A) Section 382(e)(2) of the 1986 Code is amended— (i) by inserting “or other corporate contraction” after “redemption” each place it appears, and (ii) by inserting “or other corporate contraction” after “redemption” in the heading thereof. (B) Clause (ii) of section 382(h)(3)(A) of the 1986 Code is amended— (i) by inserting “or other corporate contraction” after “redemption” each place it appears, and (ii) by inserting “or other corporate contractions” after “redemptions” in the heading thereof. (C) Section 382(m) of the 1986 Code is amended by inserting “and” at the end of paragraph (3), by striking out paragraph (4), and by redesignating paragraph (5) as paragraph (4). (D) The amendments made by this paragraph shall apply with respect to ownership changes after June 10, 1987. (2) Section 382(g)(4)(C) of the 1986 Code is amended by inserting “rules similar to” before “the rules”. 102 STAT. 3396 (3) (A) Section 382(h)(1)(C) of the 1986 Code is amended to read as follows: “(C) Special rules for certain section 338 gains.— If an election under section 338 is made in connection with an ownership change and the net unrealized built-in gain is zero by reason of paragraph (3)(B), then, with respect to such change, the section 382 limitation for the post-change year in which gain is recognized by reason of such election shall be increased by the lesser of— “(i) the recognized built-in gains by reason of such election, or “(ii) the net unrealized built-in gain (determined without regard to paragraph (3)(B)).” (B) Paragraph (5) of section 382(h) of the 1986 Code is amended by striking out “recognized built-in gains and losses” and inserting in lieu thereof “recognized built-in gains to the extent such gains increased the section 382 limitation for the year (or recognized built-in losses to the extent such losses are treated as prechange losses)”. (4) Section 382(i)(3) of the 1986 Code is amended— (A) by inserting “the earlier of” before “the 1st day”, and (B) by inserting “or the taxable year in which the trans-action being tested occurs” after “1st post-change year”. (5) (A) Section 382(k)(1) of the 1986 Code is amended by inserting “or having a net operating loss for the taxable year in which the ownership change occurs” after “carryover”. (B) Section 382(k)(2) of the 1986 Code is amended to read as follows: “(2) Old loss corporation.—The term ‘old loss corporation’ means any corporation— “(A) with respect to which there is an ownership change, and “(B) which (before the ownership change) was a loss corporation.” (6) Section 382(1)(3)(A) of the 1986 Code is amended by striking out “and” at the end of clause (iii), and by striking out clause (iv) and inserting in lieu thereof the following new clauses: “(iv) except to the extent provided in regulations, an option to acquire stock shall be treated as exercised if such exercise results in an ownership change, and “(v) in attributing stock from an entity under paragraph (2) of section 318(a), there shall not be taken into account— “(I) in the case of attribution from a corporation, stock which is not treated as stock for purposes of this section, or “(II) in the case of attribution from another entity, an interest in such entity similar to stock described in subclause (I).” (7) Clause (ii) of section 382(1)(5)(A) of the 1986 Code is amended by striking out “immediately after such ownership change” and inserting in lieu thereof “after such ownership change and as a result of being shareholders or creditors immediately before such change”. (8) Section 382(1)(5)(F) of the 1986 Code is amended— (A) by inserting “ ‘1504(a)(2)(B)’ for ‘1504(a)(2)’ and” after “substituting” in clause (i)(I), and 102 STAT. 3397 (B) by striking out “deposits described in subclause (II)” in clause (ii)(III) and inserting in lieu thereof “the amount of deposits in the new loss corporation immediately after the change”. (9) Paragraph (6) of section 382(1) of the 1986 Code is amended by striking out “shall be the value of the new loss corporation immediately after the ownership change” and inserting in lieu thereof “shall reflect the increase (if any) in value of the old loss corporation resulting from any surrender or cancellation of creditors’ claims in the transaction”. (10) Section 382(1) of the 1986 Code is amended by adding at the end thereof the following new paragraph: “(8) Predecessor and successor entities.—Except as provided in regulations, any entity and any predecessor or successor entities of such entity shall be treated as 1 entity.” (11) Paragraph (1) of section 621(f) of the Reform Act is amended to read as follows: (1) Amendments made by subsections (a), (b), and (c).— “(A) In general.— “(i) Changes after 1986.—The amendments made by subsections (a), (b), and (c) shall apply to any ownership change after December 31, 1986. “(ii) Plans of reorganization adopted before 1987.—For purposes of clause (i), any equity structure shift pursuant to a plan of reorganization adopted before January 1, 1987, shall be treated as occurring when such plan was adopted. “(B) Termination of old section 382.— Except in a case described in any of the following paragraphs— “(i) section 382(a) of the Internal Revenue Code of 1954 (as in effect before the amendment made by subsection (a) and the amendments made by section 806 of the Tax Reform Act of 1976) shall not apply to any increase in percentage points occurring after December 31, 1988, and “(ii) section 382(b) of such Code (as so in effect) shall not apply to any reorganization occurring pursuant to a plan of reorganization adopted after December 31, 1986. In no event shall sections 382 (a) and (b) of such Code (as so in effect) apply to any ownership change described in subparagraph (A). “(C) Coordination with section 382 ci).—For purposes of section 382(i) of the Internal Revenue Code of 1986 (as added by this section), any equity structure shift pursuant to a plan of reorganization adopted before January 1, 1987, shall be treated as occurring when such plan was adopted.” (12) (A) Section 621(f)(2)(O) of the Reform Act is amended by inserting “and reincorporated in Delaware in 1987,” after “1924,”. (B) Clause (ii) of section 621(f)(2)(C) of the Reform Act is amended to read as follows: “(ii) the amendments made by subsections (e) and (0 of section 806 of the Tax Reform Act of 1976 shall not apply to such debt restructuring, except that the amendment treated as part of such subsections under section 59(b) of the Tax Reform Act of 1984 (relating102 STAT. 3398 to qualified workouts) shall apply to such debt restructuring.” (13) Subparagraph (D) of section 621(f)(2) of the Reform Act is amended— (A) by striking out “or reorganization”, and (B) by adding at the end thereof the following new sentence: “For purposes of the preceding sentence, in applying section 382 (as so in effect), if a person has a warrant to acquire stock, such stock shall be considered as owned by such person.” (14) Section 621(f)(3) of the Reform Act is amended by striking out “after December 31, 1986”. (15) Paragraph (4) of section 621(f) of the Reform Act is amended by striking out the last sentence and inserting in lieu thereof the following: “Any regulations prescribed under section 382 of the Internal Revenue Code of 1986 (as added by subsection (a)) which have the effect of treating a group of shareholders as a separate 5-percent shareholder by reason of a public offering shall not apply to any public offering before January I, 1989, for the benefit of institutions described in section 591 of such Code. Unless the corporation otherwise elects, an underwriter of any offering of stock in a corporation before September 19, 1986 (January 1, 1989, in the case of an offering for the benefit of an institution described in the preceding sentence), shall not be treated as acquiring any stock of such corporation by reason of a firm commitment underwriting to the extent the stock is dis-posed of pursuant to the offering (but in no event later than 60 days after the initial offering).” (16) Subparagraph (A) of section 621(f)(7) of the Reform Act is amended by striking out “the parent corporation referred to in section 203(d)(13)(B)” and inserting in lieu thereof “a parent corporation incorporated in March 1980 under the laws of Delaware”. (17) (A) Subsection (e) of section 382 of the 1986 Code is amended by adding at the end thereof the following new paragraph: (17) Treatment of foreign corporations.—Except as other-wise provided in regulations, in determining the value of any old loss corporation which is a foreign corporation, there shall be taken into account only items treated as connected with the conduct of a trade or business in the United States.” (B) The amendment made by subparagraph (A) shall apply to any ownership change after June 10, 1987. For purposes of the preceding sentence, any equity structure shift pursuant to a plan of reorganization adopted on or before June 10, 1987, shall be treated as occurring when such plan was adopted. (18) Subparagraph (C) of section 382(1)(5) of the 1986 Code is amended to read as follows: “(C) Reduction of tax attributes where discharge of indebtedness.— “(i) In general.—In any case to which subparagraph (A) applies, 50 percent of the amount which, but for the application of section 108f(e)(10)(B), would have been applied to reduce tax attributes under section 108(b) shall be so applied. 102 STAT. 3399 “(ii) Clarification with subparagraph(b).—In applying clause (i), there shall not be taken into ac-count any indebtedness for interest described in subparagraph (B).” (19) Subparagraph (E) of section 382(1)(5) of the 1986 Code is amended by striking out so much of such subparagraph as precedes clause (i) thereof and inserting in lieu thereof the following: “(E) Only certain stock taken into account.—For purposes of subparagraph (A)(ii), stock transferred to a creditor shall be taken into account only to the extent such stock is transferred in satisfaction of indebtedness and only if such indebtedness— (20) Paragraph (4) of section 382(h) of the 1986 Code is amended— (A) by inserting before the comma at the end of subparagraph (A) the following: “(or to the extent the amount so disallowed is attributable to capital losses, under rules similar to the rules for the carrying forward of net capital losses)”, and (B) by striking out “treated as a net operating loss” in the paragraph heading and inserting in lieu thereof “allowed as a carryforward”. (21) Paragraph (1) of section 382(g) of the 1986 Code is amended— (A) by striking out “new loss corporation” and inserting in lieu thereof “loss corporation”, and (B) by striking out “old loss corporation” and inserting in lieu thereof “loss corporation”. (22) Paragraph (6) of section 382(h) of the 1986 Code is amended to read as follows: “(6) Treatment of certain built-in items.— “(A) Income items.—Any item of income which is properly taken into account during the recognition period but which is attributable to periods before the change date shall be treated as a recognized built-in gain for the taxable year in which it is properly taken into account. “(B) Deduction items.—Any amount which is allowable as a deduction during the recognition period but which is attributable to periods before the change date shall be treated as a recognized built-in loss for the taxable year for which it is allowable as a deduction. “(C) Adjustments.—The amount of the net unrealized built-in gain or loss shall be properly adjusted for amounts treated as recognized built-in gains or losses under this paragraph.” (23) Paragraph (9) of section 382(h) of the 1986 Code is amended by striking out “is transferred” and inserting in lieu thereof “was acquired (or is subsequently transferred)”. (24) Subsection (m) of section 382 of the 1986 Code (as amended by paragraph (1)) is amended by striking out “and” at the end of paragraph (3), by striking out the period at the end of paragraph (4) and inserting in lieu thereof “, and”, and by adding at the end thereof the following: “(5) providing, in the case of any group of corporations described in section 1563(a) (determined by substituting ‘50 percent’ for ‘80 percent’ each place it appears and determined 102 STAT. 3400without regard to paragraph (4) thereof), appropriate adjustments to value, built-in gain or loss, and other items so that items are not omitted or taken into account more than once.” (25) Clause (ii) of section 382(1)(5)(A) of the 1986 Code is amended by striking out “stock of controlling corporation” and inserting in lieu thereof “stock of a controlling corporation”. (26) Clause (ii) of section 382(h)(3)(B) of the 1986 Code is amended by striking out “there shall not” and inserting in lieu thereof “except as provided in regulations, there shall not”. (27) Subparagraph (B) of section 382(1)(5) of the 1986 Code is amended by striking out “the net operating loss deduction under section 172(a) for any post-change year shall be determined” and inserting in lieu thereof “the prechange losses and excess credits (within the meaning of section 383(a)(2)) which may be carried to a post-change year shall be computed”. (28) (A) Clause (ii) of section 382(h)(3)(A) of the 1986 Code is amended by striking out “determinations under clause (i)” and inserting in lieu thereof “to the extent provided in regulations, determinations under clause (i)”. (B) The amendment made by subparagraph (A) shall apply in the case of ownership changes on or after June 21, 1988. (29) Subclause (I) of section 382(1)(5)(F)(iii) of the 1986 Code is amended by striking out “section 368(a)(1))(ii)” and inserting in lieu thereof “section 368(a)(3)(D)(ii)”. (e) Amendments Related to Section 631 of the Reform Act.— (1) Clause (ii) of section 336(d)(2)(B) of the 1986 Code is amended to read as follows: “(ii) Certain acquisitions treated as part of plan.—For purposes of clause (i), any property described in clause (i)(I) acquired by the liquidated corporation after the date 2 years before the date of the adoption of the plan of complete liquidation shall, except as provided in regulations, be treated as acquired as part of a plan described in clause (i)(II).” (2) Paragraph (3) of section 336(d) of the 1986 Code is amended by adding at the end thereof the following new sentence: “The preceding sentence shall apply to any distribution to the 80-percent distributee only if subsection (a) or (b)(1) of section 337 applies to such distribution.” (3) Subsection (e) of section 336 of the 1986 Code is amended by striking out “such corporation may elect” and inserting in lieu thereof “an election may be made.”. (4) Subparagraph (B) of section 337(b)(2) of the 1986 Code is amended— (A) by striking out “or 51 l(b)(2)” in clause (i), (B) by striking out “in an unrelated trade or business (as defined in section 513)” in clause (i) and inserting in lieu thereof “in an activity the income from which is subject to tax under section 511(a)”, and (C) by striking out “an unrelated trade or business of such organization” in clause (ii) and inserting in lieu thereof “an activity referred to in clause (i)”. (5) (A) Subsection (d) of section 337 of the 1986 Code is amended— (i) by striking out “made to this subpart by the Tax Reform Act of 1986” and inserting in lieu thereof “made by subtitle D of title VI of the Tax Reform Act of 1986”, and 102 STAT. 3401 (ii) by inserting “or through the use of a regulated investment company, real estate investment trust, or tax-exempt entity” after “subchapter)” in paragraph (1). (B) The amendment made by subparagraph (A)(ii) shall not apply to any reorganization if before June 10, 1987— (i) the board of directors of a party to the reorganization adopted a resolution to solicit shareholder approval for the transaction, or (ii) the shareholders or the board of directors of a party to the reorganization approved the transaction. (6) Subsection (b) of section 334 of the 1986 Code is amended to read as follows: “(b) Liquidation of Subsidiary.— (1) In general.—If property is received by a corporate distributee in a distribution in a complete liquidation to which section 332(a) applies (or in a transfer described in section 337(b)(1))» the basis of such property in the hands of such distributee shall be the same as it would be in the hands of the transferor; except that, in any case in which gain or loss is recognized by the liquidating corporation with respect to such property, the basis of such property in the hands of such distributee shall be the fair market value of the property at the time of the distribution. (2) Corporate distributee.—For purposes of this subsection, the term ‘corporate distributee’ means only the corporation which meets the stock ownership requirements specified in section 332(b).” (7) (A) Subparagraph (B) of section 453(h)(1) of the 1986 Code is amended by striking out “to one person” and inserting in lieu thereof “to 1 person in 1 transaction”. (B) Subparagraph (E) of section 453(h)(1) of the 1986 Code is amended by striking out “section 368(c)(I)” and inserting in lieu thereof “section 368(c)”. (8) (A) Part VII of subchapter C of chapter 1 of the 1986 Code is hereby repealed. (B) Subsection (b) of section 311 of the 1986 Code is amended by adding at the end thereof the following new paragraph: “(3) Special rule for certain distributions of partnership or trust interests.—If the property distributed consists of an interest in a partnership or trust, the Secretary may by regulations provide that the amount of the gain recognized under paragraph (1) shall be computed without regard to any loss attributable to property contributed to the partnership or trust for the principal purpose of recognizing such loss on the distribution.” (C) The table of parts for subchapter C of chapter 1 of the 1986 Code is amended by striking out the item relating to part VII. (9) Paragraph (1) of section 267(a) of the 1986 Code is amended— (A) by striking out “(other than a loss in case of a distribution in corporate liquidation)”, and (B) by adding at the end thereof the following new sentence: “The preceding sentence shall not apply to any loss of the distributing corporation (or the distributee) in the case of a distribution in complete liquidation.” (10) Paragraph (1) of section 301(b) of the 1986 Code is amended to read as follows: 102 STAT. 3402 “(1) General rule.—For purposes of this section, the amount of any distribution shall be the amount of money received, plus the fair market value of the other property received.” (11) Subsection (d) of section 301 of the 1986 Code is amended to read as follows: ”(d) Basis.—The basis of property received in a distribution to which subsection (a) applies shall be the fair market value of such property.” (12) Section 301 of the 1986 Code is amended by striking out subsection (e) and by redesignating subsections (f) and (g) as subsections (e) and (f), respectively. (13) (A) Subsection (a) of section 367 of the 1986 Code is amended by redesignating paragraph (5) as paragraph (6) and by inserting after paragraph (4) the following new paragraph: “(5) Paragraphs (2) and (3) not to apply to certain section 361 transactions.—Paragraphs (2) and (3) shall not apply in the case of an exchange described in section 361. Subject to such basis adjustments and such other conditions as shall be provided in regulations, the preceding sentence shall not apply if the transferor corporation is controlled (within the meaning of section 368(c)) by 5 or fewer domestic corporations. For purposes of the preceding sentence, all members of the same affiliated group (within the meaning of section 1504) shall be treated as 1 corporation.” (B) The amendment made by subparagraph (A) shall apply to exchanges on or after June 21, 1988, except that such amendment shall not apply to any exchange pursuant to any reorganization for which a plan of reorganization was adopted before June 21, 1988. (C) Section 367(e)(2) of the 1986 Code (as amended by theReform Act) shall not apply in the case of any corporation completely liquidated before June 10, 1987, into a corporation organized in a country which has an income tax treaty with the United States. (14) (A) Subsection (d) of section 1248 of the 1986 Code is amended by striking out paragraph (2). (B) Subparagraph (B) of section 1248(0(1) of the 1986 Code is amended to read as follows: “(B) such domestic corporation distributes stock of such foreign corporation in a distribution to which section 311(a), 337, or 361(c)(1) applies,”. (C) Paragraph (1) of section 1248(0 of the 1986 Code is amended by striking out “distribution, sale, or exchange” in the last sentence and inserting in lieu thereof “distribution”. (D) Subsection (0 of section 1248 of the 1986 Code is amended by striking out paragraph (3) and by redesignating paragraph (4) as paragraph (3). (E) The subsection heading for section 1248(0 of the 1986 Code is amended by striking out “Section 311, 336, or 337 Trans-actions” and inserting in lieu thereof “Nonrecognition Trans actions” (15) Paragraph (1) of section 995(c) of the 1986 Code is amended by inserting “or” at the end of subparagraph (A), by striking out “, or” at the end of subparagraph (B) and inserting in lieu thereof a period, and by striking out subparagraph (C) and the sentence following subparagraph (C). 102 STAT. 3403 (16) Subsection (d) of section 245 of the 1986 Code is hereby repealed. (17) Paragraph (14) of section 1223 of the 1986 Code is amended to read as follows: “(14) Cross reference.— “For special holding period provision relating to certain partnership distributions, see section 735(b).”. (18) Clause (ii) of section 341(e)(1)(C) of the 1986 Code is amended— (A) by striking out “sale or exchange” the first place it appears and inserting in lieu thereof “liquidating sale or exchange”, and (B) by striking out “, gain or loss on which was not recognized to such other corporation under section 337(a),”. (19) Subsection (1) of section 897 of the 1986 Code is hereby repealed. (20) Paragraph (7) of section 338(h) of the 1986 Code is hereby repealed. (21) (A) The heading of subsection (b) of section 336 of the 1986 Code is amended by striking out “in Excess of Basis”. (B) The heading of paragraph (2) of section 311(b) of the 1986 Code is amended by striking out “in Excess of Basis”. (22) Section 453B of the 1986 Code is amended by adding at the end thereof the following new subsection: “(h) Certain Liquidating Distributions by S Corporations.—If— “(1) an installment obligation is distributed by an S corporation in a complete liquidation, and “(2) receipt of the obligation is not treated as payment for the stock by reason of section 453(h)(1), then, except for purposes of any tax imposed by subchapter S, no gain or loss with respect to the distribution of the obligation shall be recognized by the distributing corporation. Under regulations prescribed by the Secretary, the character of the gain or loss to the shareholder shall be determined in accordance with the principles of section 1366(b).” (f) Amendments Related to Section 632 of the Reform Act.— (1) Subsection (a) of section 1374 of the 1986 Code is amended by striking out “a recognized built-in gain” and inserting in lieu thereof “a net recognized built-in gain”. (2) Subsection (b) of section 1374 of the 1986 Code is amended by striking out paragraphs (1) and (2) and inserting in lieu thereof the following: “(1) In general.—The amount of the tax imposed by subsection (a) shall be computed by applying the highest rate of tax specified in section 11(b) to the net recognized built-in gain of the S corporation for the taxable year. “(2) Net operating loss carryforwards from c years allowed.—Notwithstanding section 1371(b)(1), any net operating loss carryforward arising in a taxable year for which the corporation was a C corporation shall be allowed for purposes of this section as a deduction against the net recognized built-in gain of the S corporation for the taxable year. For purposes of determining the amount of any such loss which may be carried to subsequent taxable years, the amount of the net recognized built-in gain shall be treated as taxable income. Rules similar to 102 STAT. 3404the rules of the preceding sentences of this paragraph shall apply in the case of a capital loss carryforward arising in a taxable year for which the corporation was a C corporation.” (3) Subparagraph (B) of section 1374(b)(4) of the 1986 Code is amended to read as follows: “(B) the amount of the net recognized built-in gain shall be treated as the taxable income.” (4) Paragraph (2) of section 1374(c) of the 1986 Code is amended by striking out “recognized built-in gains” each place it appears and inserting in lieu thereof “net recognized built-in gain”. (5) (A) Section 1374 of the 1986 Code is amended by striking out all that follows paragraph (1) of subsection (d) and inserting in lieu thereof the following: “(2) Net recognized built-in gain.— “(A) In general.— The term ‘net recognized built-in gain’ means, with respect to any taxable year in the recognition period, the lesser of— “(i) the amount which would be the taxable income of the S corporation for such taxable year if (except as provided in subsection (b)(2)) only recognized built-in gains and recognized built-in losses were taken into account, or “(ii) such corporation’s taxable income for such tax-able year (determined as provided in section 1375(b)(1)(B)). “(B) Carryover.—If, for any taxable year, the amount referred to in clause (i) of subparagraph (A) exceeds the amount referred to in clause (ii) of subparagraph (A), such excess shall be treated as a recognized built-in gain in the succeeding taxable year. The preceding sentence shall apply only in the case of a corporation treated as an S corporation by reason of an election made on or after March 31, 1988. “(3) Recognized built-in gain.— The term ‘recognized built-in gain’ means any gain recognized during the recognition period on the disposition of any asset except to the extent that the S corporation establishes that— “(A) such asset was not held by the S corporation as of the beginning of the 1st taxable year for which it was an S corporation, or “(B) such gain exceeds the excess (if any) of— “(i) the fair market value of such asset as of the beginning of such 1st taxable year, over “(ii) the adjusted basis of the asset as of such time. “(4) Recognized built-in losses.— The term ’recognized built-in loss’ means any loss recognized during the recognition period on the disposition of any asset to the extent that the S corporation establishes that— “(A) such asset was held by the S corporation as of the beginning of the 1st taxable year referred to in paragraph (3), and “(B) such loss does not exceed the excess of— “(i) the adjusted basis of such asset as of the beginning of such 1st taxable year, over “(ii) the fair market value of such asset as of such time. 102 STAT. 3405 “(5) Treatment of certain built-in items.— “(A) Income items.—Any item of income which is properly taken into account during the recognition period but which is attributable to periods before the 1st taxable year for which the corporation was an S corporation shall be treated as a recognized built-in gain for the taxable year in which it is properly taken into account. “(B) Deduction items.—Any amount which is allowable as a deduction during the recognition period but which is attributable to periods before the 1st taxable year referred to in subparagraph (A) shall be treated as a recognized built-in loss for the taxable year for which it is allowable as a deduction. “(C) Adjustment to net unrealized built-in gain.—The amount of the net unrealized built-in gain shall be properly adjusted for amounts treated as recognized built-in gains or losses under this paragraph. “(6) Treatment of certain property.— If the adjusted basis of any asset is determined (in whole or in part) by reference to the adjusted basis of any other asset held by the S corporation as of the beginning of the 1st taxable year referred to in paragraph (3)— “(A) such asset shall be treated as held by the S corporation as of the beginning of such 1st taxable year, and “(B) any determination under paragraph (3)(B) or (4)(B) with respect to such asset shall be made by reference to the fair market value and adjusted basis of such other asset as of the beginning of such 1st taxable year. “(7) Recognition period.—The term ‘recognition period’ means the 10-year period beginning with the 1st day of the 1st taxable year for which the corporation was an S corporation. “(8) Treatment of transfer of assets from c corporation to s corporation.— “(A) In general.— Except to the extent provided in regulations, if— “(i) an S corporation acquires any asset, and “(ii) the S corporation’s basis in such asset is determined (in whole or in part) by reference to the basis of such asset (or any other property) in the hands of a C corporation, then a tax is hereby imposed on any net recognized built-in gain attributable to any such assets for any taxable year beginning in the recognition period. The amount of such tax shall be determined under the rules of this section as modified by subparagraph (B). “(B) Modifications.— For purposes of this paragraph, the modifications of this subparagraph are as follows: “(i) In general.— The preceding paragraphs of this subsection shall be applied by taking into account the day on which the assets were acquired by the S corporation in lieu of the beginning of the 1st taxable year for which the corporation was an S corporation. “(ii) Subsection (c)(1) not to apply.—Subsection (c)(1) shall not apply. “(9) Reference to 1st taxable year.—Any reference in this section to the 1st taxable year for which the corporation was an S corporation shall be treated as a reference to the 1st taxable 102 STAT. 3406year for which the corporation was an S corporation pursuant to its most recent election under section 1362. “(e) Regulations.—The Secretary shall prescribe such regulations as may be necessary to cany out the purposes of this section including regulations providing for the appropriate treatment of successor corporations.” (B) Subparagraph (B) of section 1375(b)(1) of the 1986 Code is amended to read as follows: “(B) Limitation.— The amount of the excess net passive income for any taxable year shall not exceed the amount of the corporation’s taxable income for such taxable year as determined under section 63(a)— “(i) without regard to the deductions allowed by part VIII of subchapter B (other than the deduction allowed by section 248, relating to organization expenditures), and “(ii) without regard to the deduction under section 172.” (C) Subsection (b) of section 1375 of the 1986 Code is amended by adding at the end thereof the following new paragraph: “(4) Coordination with section 1374.— Notwithstanding paragraph (3), the amount of passive investment income shall be determined by not taking into account any recognized built-in gain or loss of the S corporation for any taxable year in the recognition period. Terms used in the preceding sentence shall have the same respective meanings as when used in section 1374.” (D) Subsection (c) of section 1375 of the 1986 Code is amended to read as follows: “(c) Credits Not Allowable.—No credit shall be allowed under part IV of subchapter A of this chapter (other than section 34) against the tax imposed by subsection (a).” (E) Paragraph (2) of section 1366(f) of the 1986 Code is amended by striking out “as defined in section 1374(d)(2)” and inserting in lieu thereof “within the meaning of section 1374”. (6) Paragraph (3) of section 1362(d) of the 1986 Code is amended— (A) by striking out clause (v) of subparagraph (D), and (B) by adding at the end thereof the following new subparagraph: “(E) Special rule for options and commodity dealings.— “(i) In general.—In the case of any options dealer or commodities dealer, passive investment income shall be determined by not taking into account any gain or loss (in the normal course of the taxpayer’s activity of dealing in or trading section 1256 contracts) from any section 1256 contract or property related to such a contract. “(ii) Definitions.— For purposes of this subparagraph— “(I) Options dealer.—The term ‘options dealer’ has the meaning given such term by section 1256(g)(8). “(II) Commodities dealer—The term ‘commodities dealer’ means a person who is actively engaged in trading section 1256 contracts and is 102 STAT. 3407registered with a domestic board of trade which is designated as a contract market by the Commodities Futures Trading Commission. “(III) Section 1256 contract.—The term ‘section 1256 contract’ has the meaning given to such term by section 1256(b).” (7) The subsection (d) of section 1363 of the 1986 Code which relates to distributions of appreciated property, and subsection (e) of section 1363 of the 1986 Code, are hereby repealed. (g) Amendments Related to Section 633 of the Reform Act.— (1) Subsection (b) of section 633 of the Reform Act is amended to read as follows: “(b) Built-In Gains of S Corporations.— (1) In general.—The amendments made by section 632 (other than subsection (b) thereof) shall apply to taxable years beginning after December 31, 1986, but only in cases where the return for the taxable year is filed pursuant to an S election made after December 31, 1986. (2) Application of prior law.—In the case of any taxable year of an S corporation which begins after December 31, 1986, and to which the amendments made by section 632 (other than subsection (b) thereof do not apply, paragraph (1) of section 1374(b) of the Internal Revenue Code of 1954 (as in effect on the date before the date of the enactment of this Act) shall be applied as if it read as follows: “‘(1) ‘(1) an amount equal to 34 percent of the amount by which the net capital gain of the corporation for the taxable year exceeds $25,000, or”. (2) Subparagraph (B) of section 633(c)(1) of the Reform Act is amended by striking out “50 percent or more” and inserting in lieu thereof “more than 50 percent”. (3) Paragraph (1) of section 633(d) of the Reform Act is amended— (A) by striking out “this section” and inserting in lieu thereof “this subtitle”, (B) by striking out “would be recognized and inserting in lieu thereof “would be recognized by the liquidating corporation”, and (C) by adding at the end thereof the following new sentence: “Section 333 of the Internal Revenue Code of 1954 (as in effect on the day before the date of the enactment of this Act) shall continue to apply to any complete liquidation described in the preceding sentence.”. (4) Subparagraph (C) of section 633(d)(2) of the Reform Act is amended to read as follows: “(C) any gain on an asset acquired by the qualified corporation if— “(i) the basis of such asset in the hands of the qualified corporation is determined (in whole or in part) by reference to the basis of such asset in the hands of the person from whom acquired, and “(ii) a principal purpose for the transfer of such asset to the qualified corporation was to secure the benefits of this subsection.” (5) (A) Subparagraph (A) of section 633(d)(5) of the Reform Act is amended by striking out “10 or fewer qualified persons” and inserting in lieu thereof “a qualified group”. 102 STAT. 3408 (B) Paragraph (6) of section 633(d) of the Reform Act is amended to read as follows: “(6) Definitions and special rules.— For purposes of this subsection— “(A) Qualified group — “(i) In general.—Except as provided in clause (ii), the term ‘qualified group’ means any group of 10 or fewer qualified persons who at all times during the 5-year period ending on the date of the adoption of the plan of complete liquidation (or, if shorter, the period during which the corporation or any predecessor was in existence) owned (or was treated as owning under the rules of subparagraph (C)) more than 50 percent (by value) of the stock in such corporation. “(ii) 5-year ownership requirement not to apply in certain cases.— In the case of— “(I) any complete liquidation pursuant to a plan of liquidation adopted before March 31, 1988, “(II) any distribution not in liquidation made before March 31, 1988, “(III) an election to be an S corporation filed before March 31, 1988, or “(IV) a transaction described in section 338 of the Internal Revenue Code of 1986 where the acquisition date (within the meaning of such section 338) is before March 31, 1988, the term ‘qualified group’ means any group of 10 or fewer qualified persons. “(B) Qualified person.—The term ‘qualified person’ means— “(i) an individual, “(ii) an estate, or “(iii) any trust described in clause (ii) or clause (iii) of section 1361(c)(2)(A) of the Internal Revenue Code of 1986. “(C) Attribution rules.— “(i) In general—Any stock owned by a corporation, trust (other than a trust referred to in subparagraph (B)(iii), or partnership shall be treated as owned proportionately by its shareholders, beneficiaries, or partners, and shall not be treated as owned by such corporation, trust, or partnership. Stock considered to be owned by a person by reason of the application of the preceding sentence shall, for purposes of applying such sentence, be treated as actually owned by such person. “(ii) Family members.—Stock owned (or treated as owned) by members of the same family (within the meaning of section 318(a)(1) of the Internal Revenue Code of 1986) shall be treated as owned by 1 person, and shall be treated as owned by such 1 person for any period during which it was owned (or treated as owned) by any such member. “(iii) Treatment of certain trusts.—Stock owned (or treated as owned) by the estate of any decedent or by any trust referred to in subparagraph (B)(iii) with respect to such decedent shall be treated as owned by 1 person and shall be treated as owned by such 1 person 102 STAT. 3409for the period during which it was owned (or treated as owned) by such estate or any such trust or by the decedent. “(D) Special holding period rules.—Any property acquired by reason of the death of an individual shall be treated as owned at all times during which such property was owned (or treated as owned) by the decedent. “(E) Controlled group of corporations.—All members of the same controlled group (as defined in section 267(f)(1) of such Code) shall be treated as 1 corporation for purposes of determining whether any of such corporations met the requirement of paragraph (5)(B) and for purposes of deter-mining the applicable percentage with respect to any of such corporations. For purposes of the preceding sentence, an S corporation shall not be treated as a member of a controlled group unless such corporation was a C corporation for its taxable year which includes August 1, 1986, or it was not described for such taxable year in paragraph (1) or (2) of section 1374(c) of such Code (as in effect on the day before the date of the enactment of this Act).” (6) Subsection (d) of section 633 of the Reform Act is amended by adding at the end thereof the following new paragraph: “(9) Application to nonliquidating distributions.—The provisions of this subsection shall also apply In the case of any distribution (not in complete liquidation) made by a qualified corporation before January 1, 1989, without regard to whether such corporation is completely liquidated.” (7) Paragraph (8) of the section 633(d) of the Reform Act is amended by striking out “becomes an S corporation for a taxable year beginning before January 1, 1989” and inserting in lieu thereof “makes an election to be an S corporation under section 1362 of such Code before January 1, 1989, without regard to whether such corporation is completely liquidated”. (8) Section 633 of the Reform Act is amended by redesignating the subsections following the first subsection (d) as subsections (e), (f), and (g), respectively. (9) Subsection (f)(2) of section 633 of the Reform Act (as so redesignated) is amended by striking out “May 9, 1929” and inserting in lieu thereof “May 9, 1929 (or any direct or indirect subsidiary of such corporation)”. (10) Paragraph (3) of section 633(f) of the Reform Act (as so redesignated) is amended by striking out “of such Code)” in the last sentence thereof and inserting in lieu thereof “of such Code”. (11) Subclause (I) of section 633(f)(4)(A)(i) of the Reform Act (as so redesignated) is amended by striking out “binding on the selling corporation to sell substantially all its assets” and inserting in lieu thereof “to sell substantially all of the assets of a selling corporation organized under the laws of Massachusetts on October 20, 1976,”. (12) Subparagraph (A) of section 633(f)(5) of the Reform Act (as so redesignated) is amended to read as follows: “(A) a voting trust established not later than December 31, 1987, shall qualify as a trust permitted as a shareholder of an S corporation and shall be treated as only 1 share-holder if the holders of beneficial interests in such voting trust are— 102 STAT. 3410 “(i) employees or retirees of such corporation, or “(ii) in the case of stock or voting trust certificates acquired from an employee or retiree of such corporation, the spouse, child, or estate of such employee or retiree or a trust created by such employee or retiree which is described in section 1361(c)(2) of the Internal Revenue Code of 1986 (or treated as described in such section by reason of section 1361(d) of such Code), and”. (h) Amendments Related to Section 641 of the Reform Act.— (1) Paragraph (3) of section 1060(b) of the 1986 Code is amended by striking out “the Secretary may find necessary” and inserting in lieu thereof “the Secretary deems necessary”. (2) Section 1060 of the 1986 Code is amended by adding at the end thereof the following new subsection: “(d) Treatment of Certain Partnership Transactions.—In the case of a distribution of partnership property or a transfer of an interest in a partnership— “(1) the rules of subsection (a) shall apply but only for purposes of determining the value of goodwill or going concern value (or similar items) for purposes of applying section 755, and “(2) if section 755 applies, such distribution or transfer (as the case may be) shall be treated as an applicable asset acquisition for purposes of subsection (b).” (3) (A) Subparagraph (B) of section 6724(d)(1) of the 1986 Code (defining information return) is amended by striking out “or” at the end of clause (ix), by striking out the period at the end of clause (x) and inserting in lieu thereof “, or”, and by adding at the end thereof the following new clause: “(xi) section 1060(b) (relating to reporting requirements of transferors and transferees in certain asset acquisitions).” (B) Section 1060 of the 1986 Code is amended by adding at the end thereof the following new subsection: “(e) Cross Reference.— “For provisions relating to penalties Tor failure to file a return required by this section, see section 6721.” (i) Amendments Related to Section 642 of the Reform Act.— (1) Paragraph (1) of section 453(g) of the 1986 Code is amended by striking out subparagraphs (A) and (B) and inserting in lieu thereof the following: “(A) subsection (a) shall not apply, “(B) for purposes of this title— “(i) except as provided in clause (ii), all payments to be received shall be treated as received in the year of the disposition, and “(ii) in the case of any payments which are contingent as to the amount but with respect to which the fair market value may not be reasonably ascertained, the basis shall be recovered ratably, and “(C) the purchaser may not increase the basis of any property acquired in such sale by any amount before the time such amount is includible in the gross income of the seller” (2) (A) Section 453(g) of the 1986 Code is amended by adding at the end thereof the following new paragraph: 102 STAT. 3411 (3) Related persons.—For purposes of this subsection, the term ‘related persons’ has the meaning given to such term by section 1239(b), except that such term shall include 2 or more partnerships having a relationship to each other described in section 707(b)(1)(B)”. (B) Section 453(1) of the 1986 Code is amended by striking out “(within the meaning of section 1239(b))”. (3) The heading of paragraph (2) of section 642(c) of the Reform Act is amended by striking out “Traditional” and inserting in lieu thereof “Transitional”. (j) Amendments Related to Section 643 of the Reform Act.— (1) (A) Subsection (e) of section 171 of the 1986 Code is amended to read as follows: “(e) Treatment as Offset to Interest Payments.—Except as provided in regulations, in the case of any taxable bond— (1) the amount of any bond premium shall be allocated among the interest payments on the bond under rules similar to the rules of subsection (b)(3), and (2) in lieu of any deduction under subsection (a), the amount of any premium so allocated to any interest payment shall be applied against (and operate to reduce) the amount of such interest payment. For purposes of the preceding sentence, the term ‘taxable bond’ means any bond the interest of which is not excludable from gross income.” (B) Paragraph (5) of section 1016(a) of the 1986 Code is amended by striking out “allowable pursuant to section 171(a)(1)” and inserting in lieu thereof “allowable pursuant to section 171(a)(1) (or the amount applied to reduce interest payments under section 171(e)(2))”. (C) The amendments made by this paragraph shall apply in the case of obligations acquired after December 31, 1987; except that the taxpayer may elect to have such amendment apply to obligations acquired after October 22, 1986. (2) Paragraph (2) of section 643(b) of the Reform Act is amended by striking out “issued after” and inserting in lieu thereof “acquired after”. (k) Amendments Related to Section 646 of the Reform Act.— (1) Paragraph (2) of section 646(b) of the Reform Act is amended to read as follows: (2) such entity is exclusively engaged in the leasing of mineral property and activities incidental thereto, and”. (2) Paragraph (3) of section 646(b) of the Reform Act is amended by inserting “as of October 22, 1986,” after “publicly traded”. (3) Subparagraph (A) of section 646(c)(1) of the Reform Act is amended by inserting “before January 1, 1991” after “entity”. (4) Paragraph (2) of section 646(c) of the Reform Act is amended to read as follows: “(2) Agreement.— “(A) In general.—The agreement described in this paragraph is a written agreement signed by the board of trustees of the entity which provides that the entity will not acquire any additional property other than property described in subparagraph (B). “(B) Permissible acquisitions.—Property is described in this paragraph if it is— 102 STAT. 3412 (i) surface rights to property the acquisition of which— “(I) is necessary to mine mineral rights held on October 22, 1986, and “(II) is required by a written binding agreement between the entity and an unrelated person entered into on or before October 22, 1986, “(ii) surface rights to property which are not described in clause (i) and which— “(I) are acquired in an exchange to which section 1031 applies, and “(II) are necessary to mine mineral rights held on October 22, 1986, “(iii) tangible personal property incidental to the leasing of mineral property and activities incidental thereto, or “(iv) part of any required reserves of the entity.” (5) Paragraph (1) of section 646(d) of the Reform Act is amended by striking out subparagraph (B) and inserting in lieu thereof: “(B) for purposes of section 333 of such Code (as so in effect)— “(i) any person holding an income interest in such entity as of such time shall be treated as a qualified electing shareholder, and “(ii) the earnings and profits, and the value of money or stock or securities, of such entity shall be apportioned ratably among persons described in clause (i). The amendments made by subtitle D of this title and section 1804 of this Act shall not apply to any liquidation under this paragraph.” (6) (A) Paragraph (2) of section 646(d) of the Reform Act is amended to read as follows: “(2) Termination of election.— If an entity ceases to be described in subsection (b) or violates any term of the agreement described in subsection (c)(2), the entity shall, for purposes of the Internal Revenue Code of 1986, be treated as a corporation for the taxable year in which such cessation or violation occurs and for all subsequent taxable years.” (B) Paragraph (3) of section 646(c) of the Reform Act is amended to read as follows: “(3) Beginning of period for which election is in effect.—The period during which an election is in effect under this subsection shall begin on the 1st day of the 1st taxable year beginning after the date of the enactment of this Act and following the taxable year in which the election is made.” (7) (A) Subsection (e) of section 646 of the Reform Act is amended to read as follows: “(e) Special Rule for Persons Holding Income Interests.—In applying subpart E of part I of subchapter J of chapter 1 of the Internal Revenue Code of 1986 to any entity to which this section applies— “(1) a reversionary interest shall not be taken into account until it comes into possession, and “(2) all items of income, gain, loss, deduction, and credit shall be allocated to persons holding income interests for the period of the allocation.” 102 STAT. 3413 (B) Section 646(d)(3) of the Reform Act is amended by striking out “or by reason of subsection (e)”. (l) Amendments Related to Section 651 of the Reform Act.— (1) (A) Paragraph (6) of section 852(b) of the 1986 Code (as added by section 651(b)(1)(A) of the Reform Act) is redesignated as paragraph (7). (B) Subsection (b) of section 855 of the 1986 Code is amended by striking out “section 852(b)(6)” and inserting in lieu thereof “section 852(b)(7)”. (2) Paragraph (2) of section 4982(e) of the 1986 Code is amended to read as follows: “(2) Capital gain net income.— “(A) In general.—Except as provided in subparagraph (B), the term ‘capital gain net income’ has the meaning given such term by section 1222(9) (determined by treating the 1-year period ending on October 31 of any calendar year as the company’s taxable year). “(B) Reduction by net ordinary loss for calendar year.—The amount determined under subparagraph (A) shall be reduced (but not below the net capital gain) by the amount of the company’s net ordinary loss for the calendar year. “(C) Definitions.—For purposes of this paragraph— “(i) Net capital gain.—The term ‘net capital gain’ has the meaning given such term by section 1222(11) (determined by treating the 1-year period ending on October 31 of the calendar year as the company’s taxable year). “(ii) Net ordinary loss.—The net ordinary loss for the calendar year is the amount which would be the net operating loss of the company for the calendar year if the amount of such loss were determined in the same manner as ordinary income is determined under paragraph (1).” (3) Paragraph (2) of section 852(c) of the 1986 Code is amended to read as follows: “(2) Coordination with tax on undistributed income.—For purposes of applying this chapter to distributions made by a regulated investment company with respect to any calendar year, the earnings and profits of such company shall be determined without regard to any net capital loss (or net foreign currency loss) attributable to transactions after October 31 of such year and with such other adjustments as the Secretary may by regulations prescribe. The preceding sentence shall apply— “(A) only to the extent that the amount distributed by the company with respect to the calendar year does not exceed the required distribution for such calendar year (as determined under section 4982 by substituting ‘100 percent’ for each percentage set forth in section 4982(b)(1), and “(B) except as provided in regulations, only if an election under section 4982(e)(4) is not in effect with respect to such company.” (4) Subparagraph (C) of section 852(b)(3) of the 1986 Code is amended— 102 STAT. 3414 (A) by striking out “net capital loss” each place it appears in the 3rd sentence and inserting in lieu thereof “net capital loss or net long-term capital loss”, and (B) by striking out “regulated investment company tax-able income” in the last sentence and inserting in lieu thereof “the taxable income of the regulated investment company”. (5) Subsection (e) of section 4982 of the 1936 Code is amended by adding at the end thereof the following new paragraph: “(5) Treatment of foreign currency gains and losses after October 31 of calendar year.—Any foreign currency gain or loss which is attributable to a section 988 transaction and which is properly taken into account for the portion of the calendar year after October 31 shall not be taken into account in determining the amount of the ordinary income of the regulated investment company for such calendar year but shall be taken into account in determining the ordinary income of the investment company for the following calendar year. In the case of any company making an election under paragraph (4), the preceding sentence shall be applied by substituting the last day of the company’s taxable year for October 31.” (6) Section 4982 of the 1986 Code is amended by adding at the end thereof the following new subsection: “(f) Exception for Certain Regulated Investment Companies.—This section shall not apply to any regulated investment company for any calendar year if at all times during such calendar year each shareholder in such company was either— “(1) a trust described in section 401(a) and exempt from tax under section 501(a), or “(2) a segregated asset account of a life insurance company held in connection with variable contracts (as defined in section 817(d)). For purposes of the preceding sentence, any shares attributable to an investment in the regulated investment company (not exceeding $250,000) made in connection with the organization of such company shall not be taken into account”. (7) Subsection (b) of section 852 of the 1986 Code is amended by adding at the end thereof the following new paragraph: “(8) Special rule for treatment of certain foreign currency losses.—To the extent provided in regulations, the tax-able income of a regulated investment company (other than a company to which an election under section 4982(e)(4) applies) shall be computed without regard to any net foreign currency loss attributable to transactions after October 31 of such year, and any such net foreign currency loss shall be treated as arising on the 1st day of the following taxable year.” (8) Subsection (a) of section 852 of the 1986 Code is amended by adding at the end thereof the following new sentence: “The Secretary may waive the requirements of paragraph (1) for any taxable year if the regulated investment company establishes to the satisfaction of the Secretary that it was unable to meet such requirements by reason of distributions previously made to meet the requirements of section 4982.” (9) Effective with respect to dividends declared in 1988 and subsequent calendar years, paragraph (7) of section 852(b) of the 1986 Code (as redesignated by paragraph (1)) is amended— 102 STAT. 3415 (A) by striking out “in December” and inserting in lieu thereof “in October, November, or December”, (B) by striking out “in such month” and inserting in lieu thereof “in such a month”, (C) by striking out “on such date” in subparagraphs (A) and (B) and inserting in lieu thereof “on December 31 of such calendar year”, and (D) by striking out “before February 1” and inserting in lieu thereof “during January”. (10) Paragraph (1) of section 852(e) of the 1986 Code is amended by striking out “subsection (a)(3)” and inserting in lieu thereof “subsection (a)(2)”. (m) Amendments Related to Section 652 of the Reform Act.— (1) Paragraph (1) of section 851(a) of the 1986 Code is amended to read as follows: “(1) which, at all times during the taxable year— “(A) is registered under the Investment Company Act of 1940, as amended (15 U.S.C. 80a–1 to 80b–2) as a management company or unit investment trust, or “(B) has in effect an election under such Act to be treated as a business development company, or”. (2) Paragraph (1) of section 851(e) of the 1986 Code is amended by striking out “a registered management company or registered business development company” and inserting in lieu thereof “a management company or a business development company described in subsection (a)(1)”. (n) Amendments Related to Section 653 OF the Reform Act.— (1) Subsection (b) of section 851 of the 1986 Code is amended by adding at the end thereof the following new sentence: “Income derived from a partnership or trust shall be treated as described in paragraph (2) only to the extent such income is attributable to items of income of the partnership or trust (as the case may be) which would be described in paragraph (2) if realized by the regulated investment company in the same manner as realized by the partnership or trust.” (2) (A) Paragraph (3) of section 851(b) of the 1986 Code is amended to read as follows: “(3) less than 30 percent of its gross income is derived from the sale or disposition of any of the following which was held for less than 3 months: “(A) stock or securities (as defined in section 2(a)(36) of the Investment Company Act of 1940, as amended), “(B) options, futures, or forward contracts (other than options, futures, or forward contracts on foreign currencies), or “(C) foreign currencies (or options, futures, or forward contracts on foreign currencies) but only if such currencies (or options, futures, or forward contracts) are not directly related to the company’s principal business of investing in stock or securities (or options and futures with respect to stocks or securities), and”. (B) Subsection (b) of section 851 of the 1986 Code is amended by striking out “which are not ancillary” in the material following paragraph (4), and inserting in lieu thereof “which are not directly reflated.”. (C) Subparagraph (C) of section 851(b)(3) of the 1986 Code (as amended by subparagraph (A)), and the amendment made by 102 STAT. 3416subparagraph (B), shall apply to taxable years beginning after the date of the enactment of this Act. (4) Clause (i) of section 851(g)(2)(A) of the 1986 Code (defining designated hedge) is amended by striking out “contractual option” and inserting in lieu thereof “contractual obligation” (5) Subsection (b) of section 851 of the 1986 Code is amended by adding at the end thereof the following new sentence: “In the case of the taxable year in which a regulated investment company is completely liquidated, there shall not be taken into account under paragraph (3) any gain from the sale, exchange, or distribution of any property after the adoption of the plan of complete liquidation.” (o) Amendments Related to Section 654 of the Reform Act.—Subsection (q) of section 851 of the 1986 Code (as added by section 654 of the Reform Act)— (1) is redesignated as subsection (h), and (2) is amended by adding at the end thereof the following new paragraph: “(3) Special rule for abnormal redemptions.— “(A) In general.— Any fund treated as a separate corporation under paragraph (1) shall not be disqualified under subsection (b)(3) for any taxable year by reason of sales resulting from abnormal redemptions on any day and occurring before the close of the 5th business day after such day if— “(i) the sum of the percentages determined under subparagraph (B) for the abnormal redemptions on such day and for abnormal redemptions on prior days during such taxable year exceeds 30 percent; and “(ii) the regulated investment company of which such fund is a part would meet the requirements of subsection (b)(3) for such taxable year if all the funds which are part of such company were treated as a single company. “(B) Abnormal redemptions.—For purposes of subparagraph (A), the term ‘abnormal redemptions’ means redemptions occurring on any day if the net redemptions on such day exceed 1 percent of the fund’s net asset value. “(C) Determination of net asset value.—For purposes of this paragraph, net asset value for any day shall be determined as of the close of the preceding day. “(D) Limitation.—For purposes of subparagraph (A), any sale or other disposition of stock or securities held less than 3 months occurring during any day shall be deemed to result from abnormal redemptions until the cumulative proceeds from such sales or dispositions occurring during such day, plus the cumulative net positive cash flow of the fund for preceding business days (if any) following the day with abnormal redemptions, exceed the amount of net redemptions on the day with abnormal redemptions.” (p) Amendments Rented to Section 662 of the Reform Act.— (1) Subclause (I) of section 856(c)(6)(D)(i) of the 1986 Code (as added by section 662 of the Reform Act) is amended by striking out “debt instrument” and inserting in lieu thereof “debt instrument (within the meaning of section 1275(a)(1))”. (2) Notwithstanding section 669 of the Reform Act, the amendment made by section 662(c) of the Reform Act shall 102 STAT. 3417apply to taxable years beginning after December 31, 1986, but only in the case of obligations acquired after October 22, 1986. (3) Subsection (c) of section 856 of the 1986 Code is amended by adding at the end thereof the following new paragraph: “(8) Treatment of liquidating gains.—In the case of the taxable year in which a real estate investment trust is completely liquidated, there shall not be taken into account under paragraph (4) any gain from the sale, exchange, or distribution of any property after the adoption of the plan of complete liquidation. (4) (A) Paragraph (6) of section 856(c) of the 1986 Code is amended by adding at the end thereof the following new subparagraph: “(G) Treatment of certain interest rate agreements.— Except to the extent provided by regulations, any— “(i) payment to a real estate investment trust under a bona fide interest rate swap or cap agreement entered into by the real estate investment trust to hedge any variable rate indebtedness of such trust incurred or to be incurred to acquire or carry real estate assets, and “(ii) any gain from the sale or other disposition of such agreement, shall be treated as income qualifying under paragraph (2) and such agreement shall be treated as a security for purposes of paragraph (4)(A).” (B) The amendment made by subparagraph (A) shall apply to taxable years ending after the date of the enactment of this Act. (5) Subclause (I) of section 856(c)(6)(DXii) of the 1986 Code (as added by section 662 of the Reform Act) is amended by striking out “stock in” and inserting in lieu thereof “stock (or certificates of beneficial interests) in”. (q) Amendments Related to Section 663 of the Reform Act.— (1) Subparagraph (A) of section 856(d)(6) of the 1986 Code is amended to read as follows: “(A) In general.— If— “(i) a real estate investment trust receives or accrues, with respect to real or personal property, amounts from a tenant which derives substantially all of its income with respect to such property from the subleasing of substantially all of such property, and “(ii) a portion of the amount such tenant receives or accrues, directly or indirectly, from subtenants consists of qualified rents, then the amounts which the trust receives or accrues from the tenant shall not be excluded from the term ‘rents from real property’ by reason of being based on the income or profits of such tenant to the extent the amounts so received or accrued are attributable to qualified rents received or accrued by such tenant.” (2) Subsection (f) of section 856 of the 1986 Code is amended to read as follows: “(f) Interest.— “(1) In general.— For purposes of paragraphs (2)(B) and (3)(B) of subsection (c), the term ‘interest’ does not include any amount received or accrued, directly or indirectly, if the deter-102 STAT. 3418mination of such amount depends in whole or in part on the income or profits of any person except that— “(A) any amount so received or accrued shall not be excluded from the term ‘interest’ solely by reason of being based on a fixed percentage or percentages of receipts or sales, and “(B) where a real estate investment trust receives any amount which would be excluded from the term ‘interest’ solely because the debtor of the real estate investment trust receives or accrues any amount the determination of which depends in whole or in part on the income or profits of any person, only a proportionate part (determined pursuant to regulations prescribed by the Secretary) of the amount received or accrued by the real estate investment trust from the debtor will be excluded from the term ‘interest’. “(2) Special rule.—If— “(A) a real estate investment trust receives or accrues with respect to an obligation secured by a mortgage on real property or an interest in real property amounts from a debtor which derives substantially all of its gross income with respect to such property (not taking into account any gain on any disposition) from the leasing of substantially all of its interests in such property to tenants, and “(B) a portion of the amount which such debtor receives or accrues, directly or indirectly, from tenants consists of qualified rents (as defined in subsection (d)(6)(B)), then the amounts which the trust receives or accrues from such debtor shall not be excluded from the term ‘interest’ by reason of being based on the income or profits of such debtor to the extent the amounts so received are attributable to qualified rents received or accrued by such debtor” (r) Amendment Related to Section 664 of the Reform Act.—Clause (i) of section 857(e)(2)(B) of the 1986 Code is amended by striking out “as original issue discount on instruments” and inserting “with respect to instruments” (s) Amendments Related to Section 668 of the Reform Act.— (1) Paragraph (2) of section 4981(e) of the 1986 Code is amended to read as follows: “(2) Capital gain net income.— “(A) In general.—The term ‘capital gain net income’ has the meaning given such term by section 1222(9) (determined by treating the calendar year as the trust’s taxable year). “(B) Reduction for net ordinary loss.—The amount determined under subparagraph (A) shall be reduced by the amount of the trust’s net ordinary loss for the taxable year. “(C) Net ordinary loss.—For purposes of this paragraph, the net ordinary loss for the calendar year is the amount which would be net operating loss of the trust for the calendar year if the amount of such loss were determined in the same manner as ordinary income is determined under paragraph (1).” (2) Subparagraph (C) of section 857(b)(3) of the 1986 Code is amended by striking out “real estate investment trust taxable income” in the last sentence and inserting in lieu thereof “the taxable income of the real estate investment trust”. (3) Subparagraph (A) of section 4981(c)(1) of the 1986 Code is amended by striking out “such calendar year” and inserting in 102 STAT. 3419lieu thereof “such calendar year (but computed without regard to that portion of such deduction which is attributable to the amount excluded under section 857(b)(2)(D))”. (4) Subsection (a) of section 857 of the 1986 Code is amended by adding at the end thereof the folio wing new sentence: “The Secretary may waive the requirements of paragraph (1) for any taxable year if the real estate investment trust establishes to the satisfaction of the Secretary that it was unable to meet such requirements by reason of distributions previously made to meet the requirements of section 4981.” (5) Effective with respect to dividends declared in 1988 and subsequent calendar years, paragraph (8) of section 857(b) of the 1986 Code is amended— (A) fay striking out “in December” and inserting in lieu thereof “in October, November, or December”, (B) by striking out “in such month” and inserting in lieu thereof “in such a month”, (C) by striking out “on such date” in subparagraphs (A) and (B) and inserting in lieu thereof “on December 31 of such calendar year”, and (D) by striking out “before February 1” and inserting in lieu thereof “during January”. (t) Amendments Related to Section 671 of the Reform Act.— (1) Paragraph (1) of section 8600(e) of the 1986 Code is amended to read as follows: “(1) Amounts treated as ordinary.—Any amount taken into account under subsection (a) by any holder of a residual interest in a REMIC shall be treated as ordinary income or ordinary loss, as the case may be.” (2) (A) Paragraph (4) of section 860D(a) of the 1986 Code is amended— (i) by striking out “4th month ending after” and inserting in lieu thereof “3rd month beginning after”, and (ii) by striking out “and each quarter ending thereafter” and inserting in lieu thereof “and at all times thereafter”. (B) The amendment made by subparagraph (A)(ii) shall take effect on January 1, 1988. (3) (A) Clause (i) of section 860F(a)(2)(A) of the 1986 Code is amended to read as follows: “(i) the substitution of a qualified replacement mortgage for a qualified mortgage (or the repurchase in lieu of substitution of a defective obligation),”. (B) (i) Paragraph (2) of section 860F(a) of the 1986 Code is amended by striking out the last sentence of subparagraph (A). (ii) Subsection (a) of section 860F of the 1986 Code is amended by adding at the end thereof the following new paragraph: “(5) Exceptions.— Notwithstanding subparagraphs (A) and (D) of paragraph (1), the term ‘prohibited transaction’ shall not include any disposition— “(A) required to prevent default on a regular interest where the threatened default resulted from a default on 1 or more qualified mortgages, or “(B) to facilitate a clean-up call (as defined in regulations).” (C) Subparagraph (D) of section 860F(a)(2) of the 1986 Code is amended by striking out “described in subsection (b)”. 102 STAT. 3420 (4) Subparagraph (A) of section 860F(b)(1) of the 1986 Code is amended by striking out “the transfer of any property to a REMIC” and inserting in lieu thereof “the transfer of any property to a REMIC in exchange for regular or residual interests in such REMIC”. (5) (A) Paragraph (1) of section 860G(a) of the 1986 Code is amended to read as follows: “(1) Regular interest.— The term ‘regular interest’ means any interest in a REMIC which is issued on the startup day with fixed terms and which is designated as a regular interest if— “(A) such interest unconditionally entitles the holder to receive a specified principal amount (or other similar amount), and “(B) interest payments (or other similar amount), if any, with respect to such interest at or before maturity— “(i) are payable based on a fixed rate (or to the extent provided in regulations, at a variable rate), or “(ii) consist of a specified portion of the interest payments on qualified mortgages and such portion does not vary during the period such interest is outstanding. The interest shall not fail to meet the requirements of subparagraph (A) merely because the timing (but not the amount) of the principal payments (or other similar amounts) may be contingent on the extent of prepayments on qualified mortgages and the amount of income from permitted investments.” (B) Paragraph (2) of section 860G(a) of the 1986 Code is amended to read as follows: “(2) Residual interest.— The term ‘residual interest’ means an interest in a REMIC which is issued on the startup day, which is not a regular interest, and which is designated as a residual interest.” (C) Paragraph (3) of section 860G(a) of the 1986 Code is amended— (i) by striking out “on or before the startup day” in subparagraph (A)(i) and inserting in lieu thereof “on the startup day in exchange for regular or residual interests in the REMIC”, (ii) by inserting “if, except as provided in regulations, such purchase is pursuant to a fixed-price contract in effect on the startup day” before the comma at the end of subparagraph (A)(ii), and (iii) by striking out “on or before the startup day” in subparagraph (C) and inserting in lieu thereof “on the startup day in exchange for regular or residual interests in the REMIC”. (D) Subparagraph (A) of section 860G(a)(4) of the 1986 Code is amended to read as follows: “(A) which would be a qualified mortgage if transferred on the startup day in exchange for regular or residual interests in the REMIC, and”. (E) Paragraph (9) of section 860G(a) of the 1986 Code is amended to read as follows: “(9) Startup day.— The term ‘startup day’ means the day on which the REMIC issues all of its regular and residual interests. To the extent provided in regulations, all interests issued (and all transfers to the REMIC) during any period (not exceeding 10 days) permitted in such regulations shall be treated as occur-102 STAT. 3421ring on the day during such period selected by the REMIC for purposes of this paragraph.” (F) The amendments made by this paragraph shall not apply to any REMIC where the startup day (as defined in section 860G(a)(9) of the 1986 Code as in effect on the day before the date of the enactment of this Act) is before July 1, 1987. (6) Paragraph (3) of section 860G(a) of the 1986 Code is amended— (A) by striking out “directly or indirectly,” in subparagraph (A), and (B) by adding at the end thereof the following new sentence: “For purposes of this subparagraph, any obligation secured by stock held by a person as a tenant-stockholder (as defined in section 216) in a cooperative housing corporation (as so defined) shall be treated as secured by an interest in real property.” (7) Subparagraph (B) of section 860G(a)(7) of the 1986 Code is amended by inserting before the period at the end of the 1st sentence the following: “or lower than expected returns on cash flow investments”. (8) (A) Paragraph (8) of section 860G(a) of the 1986 Code is amended— (i) by striking out “section 856(e)” in subparagraph (A) and inserting in lieu thereof “section 856(e) (without regard to paragraph (5) thereof)”, and (ii) by striking out the last sentence and inserting in lieu thereof the following: “Solely for purposes of section 860D(a), the determination of whether any property is foreclosure property shall be made without regard to section 856(e)(4).” (B) Section 860G of the 1986 Code is amended by redesignating subsection (c) as subsection (d) and by inserting after subsection (b) the following new subsection: “(c) Tax on Income From Foreclosure Property.— (1) In general.—A tax is hereby imposed for each taxable year on the net income from foreclosure property of each REMIC. Such tax shall be computed by multiplying the net income from foreclosure property by the highest rate of tax specified in section 11(b). (2) Net income from foreclosure property.— For purposes of this part, the term ‘net income from foreclosure property’ means the amount which would be the REMIC’s net income from foreclosure property under section 857(b)(4)(B) if the REMIC were a real estate investment trust.” (C) Paragraph (1) of section 860Ctb) of the 1986 Code is amended by striking out “and” at the end of subparagraph (C), by striking out the period at the end of subparagraph (D) and inserting in lieu thereof “, and”, and by adding at the end thereof the following new subparagraph: “(E) the amount of the net income from foreclosure property (if any) shall be reduced by the amount of the tax imposed by section 860G(c).” (9) (A) Section 860G of the 1986 Code (as amended by paragraph (8)) is amended by redesignating subsection (d) as subsection (e) and by inserting after subsection (c) the following new subsection: “(d) Tax on Contributions After Startup Date.— 102 STAT. 3422 “(1) In general.— Except as provided in paragraph (2), if any amount is contributed to a REMIC after the startup day, there is hereby imposed a tax for the taxable year of the REMIC in which the contribution is received equal to 100 percent of the amount of such contribution. “(2) Exceptions.—Paragraph (1) shall not apply to any contribution which is made in cash and is described in any of the following subparagraphs: “(A) Any contribution to facilitate a clean-up call (as defined in regulations) or a qualified liquidation. “(B) Any payment in the nature of a guarantee. “(C) Any contribution during the 3-month period beginning on the startup day. “(D) Any contribution to a qualified reserve fund by any holder of a residual interest in the REMIC. “(E) Any other contribution permitted in regulations.” (B) The amendment made by subparagraph (A) shall not apply to any REMIC where the startup day (as defined in section 860G(a)(9) of the 1986 Code as in effect on the day before the date of the enactment of this Act) is before July 1, 1987. (10) Subsection (e) of section 860G of the 1986 Code (as redesignated by paragraph (9)) is amended by striking out “and” at the end of paragraph (2), by striking out the period at the end of paragraph (3) and inserting in lieu thereof a comma, and by adding at the end thereof the following new paragraphs: “(4) providing appropriate rules for treatment of transfers of qualified replacement mortgages to the REMIC where the transferor holds any interest in the REMIC, and “(5) providing that a mortgage will be treated as a qualified replacement mortgage only if it is part of a bona fide replacement (and not part of a swap of mortgages).” (11) Paragraph (6) of section 856(c) of the 1986 Code is amended by redesignating the last subparagraph as subparagraph (F) and by striking out the subparagraph (D) added by section 671(b)(1) of the Reform Act and inserting in lieu thereof the following: “(E) A regular or residual interest in a REMIC shall be treated as a real estate asset, and any amount includible in gross income with respect to such an interest shall be treated as interest on an obligation secured by a mortgage on real property; except that, if less than 95 percent of the assets of such REMIC are real estate assets (determined as if the real estate investment trust held such assets), such real estate investment trust shall be treated as holding directly (and as receiving directly) its proportionate share of the assets and income of the REMIC. For purposes of determining whether any interest in a REMIC qualifies under the preceding sentence, any interest held by such REMIC in another REMIC shall be treated as a real estate asset under principles similar to the principles of the preceding sentence, except that, if such REMIC’s are part of a tiered structure, they shall be treated as one REMIC for purposes of this subparagraph.” (12) Clause (xi) of section 7701(a)(19)(C) of the 1986 Code is amended by striking out “are loans described” and inserting in lieu thereof “are assets described”. 102 STAT. 3423 (13) Subparagraph (B) of section 860E(c)(2) of the 1986 Code is amended by striking out “issue price of residual interest” and inserting in lieu thereof “issue price of the residual interest”. (14) Clause (ii) of section 860F(b)(1)(D) of the 1986 Code is amended by striking out “the real estate mortgage pool” and inserting in lieu thereof “the REMIC”. (15) Subsection (a) of section 860E of the 1986 Code is amended by adding at the end thereof the following new paragraphs: “(3) Special rule for affiliated groups.—All members of an affiliated group filing a consolidated return shall be treated as 1 taxpayer for purposes of this subsection, except that paragraph (2) shall be applied separately with respect to each corporation which is a member of such group and to which section 593 applies. “(4) Treatment of certain subsidiaries.— “(A) In general.—For purposes of this subsection, a corporation to which section 593 applies and each qualified subsidiary of such corporation shall be treated as a single corporation to which section 593 applies. “(B) Qualified subsidiary.— For purposes of this subsection, the term ‘qualified subsidiary’ means any corporation— “(i) all the stock of which, and substantially all the indebtedness of which, is held directly by the corporation to which section 593 applies, and “(ii) which is organized and operated exclusively in connection with the organization and operation of 1 or more REMIC’s.” (16) (A) Subsection (a) of section 860D of the 1986 Code is amended by striking out “and” at the end of paragraph (4), by striking out the period at the end of paragraph (5) and inserting in lieu thereof “, and”, and by adding at the end thereof the following new paragraph: “(6) with respect to which there are reasonable arrangements designed to ensure that— “(A) residua] interests in such entity are not held by disqualified organizations (as defined in section 860E(e)(5)), and “(B) information necessary for the application of section 860E(e) will be made available by the entity.” (B) Section 860E of the 1986 Code is amended by adding at the end thereof the following new subsection: “(e) Tax on Transfers of Residual Interests to Certain Organizations, Etc.— “(1) In general.—A tax is hereby imposed on any transfer of a residual interest in a REMIC to a disqualified organization. “(2) Amount of tax.— The amount of the tax imposed by paragraph (1) on any transfer of a residual interest shall be equal to the product of— “(A) the amount (determined under regulations) equal to the present value of the total anticipated excess inclusions with respect to such interest for periods after such transfer, multiplied by “(B) the highest rate of tax specified in section ll(b)(1) “(3) Liability.—The tax imposed by paragraph (1) on any transfer shall be paid by the transferor; except that, where such 102 STAT. 3424transfer is through an agent for a disqualified organization, such tax shall be paid by such agent. “(4) Transferee furnishes affidavit.—The person (other-wise liable for any tax imposed by paragraph (1)) shall be relieved of liability for the tax imposed by paragraph (1) with respect to any transfer if— “(A) the transferee furnishes to such person an affidavit that the transferee is not a disqualified organization, and “(B) as of the time of the transfer, such person does not have actual knowledge that such affidavit is false. “(5) Disqualified organization.— For purposes of this section, the term ‘disqualified organization’ means— “(A) the United States, any State or political subdivision thereof, any foreign government, any international organization, or any agency or instrumentality of any of the foregoing, “(B) any organization (other than a cooperative described in section 521) which is exempt from tax imposed by this chapter unless such organization is subject to the tax imposed by section 511, and “(C) any organization described in section 1381(a)(2)(C). For purposes of subparagraph (A), the rules of section 168(h)(2)(1)) (relating to treatment of certain taxable instrumentalities) shall apply; except that, in the case of the Federal Home Loan Mortgage Corporation, clause (ii) of such section shall not apply. “(6) Treatment of pass-thru entities.— “(A) Imposition of tax.— If, at any time during any taxable year of a pass-thru entity, a disqualified organization is the record holder of an interest in such entity, there is hereby imposed on such entity for such taxable year a tax equal to the product of— “(i) the amount of excess inclusions for such taxable year allocable to the interest held by such disqualified organization, multiplied by “(ii) the highest rate of tax specified in section ll(b)(1). “(B) Pass-thru entity.— For purposes of this paragraph, the term ‘pass-thru entity’ means— “(i) any regulated investment company, real estate investment trust, or common trust fund, “(ii) any partnership, trust, or estate, and “(iii) any organization to which part I of subchapter T applies. Except as provided in regulations, a person holding an interest in a pass-thru entity as a nominee for another person shall, with respect to such interest, be treated as a pass-thru entity. “(C) Tax to be deductible.—Any tax imposed by this paragraph with respect to any excess inclusion of any pass-thru entity for any taxable year shall, for purposes of this title (other than this subsection), be applied against (and operate to reduce) the amount included in gross income with respect to the residual interest involved. “(D) Exception where holder furnishes affidavit.—No tax shall be imposed by subparagraph (A) with respect to any interest in a pass-thru entity for any period if— 102 STAT. 3425 “(i) the record holder of such interest furnishes to such pass-thru entity an affidavit that such record holder is not a disqualified organization, and “(ii) during such period, the pass-thru entity does not have actual knowledge that such affidavit is false. “(7) Waiver.— The Secretary may waive the tax imposed by paragraph (1) on any transfer if— “(A) within a reasonable time after discovery that the transfer was subject to tax under paragraph (1), steps are taken so that the interest is no longer held by the disqualified organization, and “(B) there is paid to the Secretary such amounts as the Secretary may require. “(8) Administrative Provisions.—For purposes of subtitle F, the taxes imposed by this subsection shall be treated as excise taxes with respect to which the deficiency procedures of such subtitle apply.” (C) Paragraph (2) of section 26(b) of the 1986 Code is amended by striking out “ “and” at the end of subparagraph (J), by striking out the period at the end of subparagraph (K) and inserting in lieu thereof “, and”, and by adding at the end thereof the following new subparagraph: “(L) section 860E(e) (relating to taxes with respect to certain residual interests).” (D) (i) The amendments made by subparagraph (A) shall apply in the case of any REMIC where the start-up day (as defined in section 860G(a)(9) of the 1986 Code, as in effect on the day before the date of the enactment of this Act) is after March 31, 1988; except that such amendments shall not apply in the case of a REMIC formed pursuant to a binding written contract in effect on such date. (ii) The amendments made by subparagraphs (B) and (C) (except to the extent they relate to paragraph (6) of section 860E(e) of the 1986 Code as added by such amendments) shall apply to transfers after March 31, 1988; except that such amendments shall not apply to any transfer pursuant to a binding written contract in effect on such date. (iii) Except as provided in clause (iv), the amendments made by subparagraphs (B) and (C) (to the extent they relate to paragraph (6) of section 860E(e) of the 1986 Code as so added) shall apply to excess inclusions for periods after March 31, 1988 but only to the extent such inclusions are— (I) allocable to an interest in a pass-thru entity acquired after March 31, 1988, or (II) allocable to an interest in a pass-thru entity acquired on or before March 31, 1988, but attributable to a residual interest acquired by the pass-thru entity after March 31, 1988. For purposes of the preceding sentence, any interest in a pass-thru entity (or residual interest) acquired after March 31, 1988, pursuant to a binding written contract in effect on such date shall be treated as acquired before such date. (iv) In the case of any real estate investment trust, regulated investment company, common trust fund, or publicly traded partnership, no tax shall be imposed under section 860E(e)(6) of the 1986 Code (as added by the amendment made by subpara-102 STAT. 3426graph (B)) for any taxable year beginning before January 1, (17) Subparagraph (B) of section 860E(c)(2) of the 1986 Code is amended— (A) by inserting “(adjusted for contributions)” after “residual interest” the second place it appears, and (B) by striking “decreased by” in clause (ii) and inserting in lieu thereof “decreased (but not below zero) by”. (18) (A) Subsection (e) of section 860F of the 1986 Code is amended by adding at the end thereof the following new sentences: “Such return shall be filed by the REMIC. The determination of who may sign such return shall be made without regard to the first sentence of this subsection.” (B) Unless the REMIC otherwise elects, the amendment made by subparagraph (A) shall not apply to any REMIC where the start-up day (as defined in section 860G(a)(9) of the 1986 Code as in effect on the day before the date of the enactment of this Act) is before the date of the enactment of this Act. (19) Subsection (a) of section 860D of the 1986 Code is amended by adding at the end thereof the following new sentence: “In the case of a qualified liquidation (as defined in section 860F(a)(4)(A)), paragraph (4) shall not apply during the liquidation period (as defined in section 860F(a)(4)(B).” (20) Subsection (a) of section 860A of the 1986 Code is amended by striking out “this chapter” each place it appears and inserting in lieu thereof “this subtitle”. (21) Paragraph (1) of section 8600(b) of the 1986 Code is amended by striking out “and in the same manner” and inserting in lieu thereof “and, except as provided in regulations, in the same manner”. (22) The following sections of the 1986 Code are each amended by striking out “real estate mortgage pool” and inserting in lieu thereof “REMIC”: (A) Section 382(1)(4)(B)(ii). (B) Section 860F(a)(2)(A)(iii). (C) Section 860F(a)(2)(C). (D) Section 860F(b)(1)(C)(ii). (E) Section 860F(b)(1)(D)(ii). (23) Subsection (d) of section 860E of the 1986 Code is amended by adding at the end thereof the following new sentence: “Rules similar to the rules of the preceding sentence shall apply also in the case of regulated investment companies, common trust funds, and organizations to which part I of subchapter T applies.” (24) Subparagraph (C) of section 6049(d)(7) of the 1986 Code is amended by striking out “the issue price” and inserting in lieu thereof “the adjusted issue price”. (25) (A) Paragraph (19) of section 7701(a) of the 1986 Code is amended by adding at the end thereof the following new sentence: “For purposes of determining whether any interest in a REMIC qualifies under clause (xi), any regular interest in an-other REMIC held by such REMIC shall be treated as a loan described in a preceding clause under principles similar to the principles of clause (xi); except that, if such REMIC’s are part of a tiered structure, they shall be treated as 1 REMIC for purposes of clause (xi).” (B) Paragraph (4) of section 593(d) of the 1986 Code is amended by adding at the end thereof the following new sentence: “For102 STAT. 3427purposes of determining whether any interest in a REMIC qualifies under the preceding sentence, any interest in another REMIC held by such REMIC shall be treated as a qualifying real property loan under principles similar to the principles of the preceding sentence, except that if such REMIC’s are part of a tiered structure, they shall be treated as 1 REMIC for purposes of this paragraph.”. (26) Section 860E of the 1986 Code is amended by adding at the end thereof the following new subsection: “(f) Treatment of Variable Insurance Contracts.—Except as provided in regulations, with respect to any variable contract (as defined in section 817), there shall be no adjustment in the reserve to the extent of any excess inclusion.” (27) Subsection (a) of section 860E of the 1986 Code is amended by adding at the end thereof the following new paragraph: “(5) Coordination with section 172.—Any excess inclusion for any taxable year shall not be taken into account— “(A) in determining under section 172 the amount of any net operating loss for such taxable year, and “(B) in determining taxable income for such taxable year for purposes of the 2nd sentence of section 172(b)(2).” (u) Amendments Related to Section 672 of the Reform Act.— (1) Subparagraph (B) of section 163(e)(2) of the 1986 Code is amended by striking out “paragraph (6)” and inserting in lieu thereof “paragraph (7)”. (2) Subparagraph (B) of section 1278(a)(4) of the 1986 Code is amended by striking out “section 1272(a)(6)” and inserting in lieu thereof “section 1272(a)(7)”. (3) Section 1288(a) of the 1986 Code is amended by striking out “paragraph (6)” each place it appears and inserting in lieu thereof “paragraph (7)”. (4) Sections 1271(a)(2)(A)(ii) and 1275(a)(4)(B)(ii)(D of the 1986 Code are each amended by striking out “subsection (a)(6)” and inserting in lieu thereof “subsection (a)(7)”. (v) Amendment Related to Section 674 of the Reform Act — Subparagraph (A) of section 6049(d)(7) of the 1986 Code is amended by inserting “(and such amounts shall be treated as paid when includible in gross income under section 860B(b))” before the period at the end thereof. (w) Amendments Related to Section 675 of the Reform Act.— (1) Subsection (a) of section 675 of the Reform Act is amended to read as follows: “(a) General Rule.—Except as otherwise provided in this section, the amendments made by this subtitle shall take effect on January 1, 1987.” (2) Section 675 of the Reform Act is amended by adding at the end thereof the following new subsection: “(d) Study.—The Secretary of the Treasury or his delegate shall conduct a study of the operation of the amendments made by this part and their competitive impact on savings and loan institutions and similar financial institutions. Not later than January 1, 1990, the Secretary shall submit a report of such study to the Committee on Ways and Means of the House of Representatives and the Committee on Finance of the Senate (together with such recommendations as he may deem advisable).”