(1) IN GENERAL.-Subsection (d) of section 704 is amended by striking out the last 2 sentences.

(2) TRANSITIONAL RULE.-In the case of a loss which was not allowed for any taxable year by reason of the last 2 sentences of section 704(d) of the Internal Revenue Code of 1954 (as in effect before the date of the enactment of this Act), such loss shall be treated as a deduction (subject to section 465(a) of such Code) for the first taxable year beginning after December 31, 1978. Section 465(a) of such Code (as amended by this section) shall not apply with respect to partnership liabilities to which the last 2 sentences of section 704(d) of such Code (as in effect on the day before the date of enactment of this Act) did not apply because of the provisions of section 213(f)(2) of the Tax Reform Act of 1976. (c) CLERICAL AMENDMENTS.

(1) The heading of section 465 is amended to read as follows: "SEC. 465. DEDUCTIONS LIMITED TO AMOUNT AT RISK."

(2) The table of sections for subpart C of part II of subchapter E of chapter 1 is amended by striking out "in case of certain activities" in the item relating to section 465.

SEC. 202. EXTENSION OF AT RISK PROVISIONS TO CLOSELY HELD CORPORATIONS.

Subsection (a) of section 465 (relating to deductions limited to amount at risk) is amended to read as follows:

"(a) LIMITATION TO AMOUNT AT RISK.

"(1) IN GENERAL.-In the case of

"(A) an individual,

"(B) an electing small business corporation (as defined in section 1371(b)), and

"(C) a corporation with respect to which the stock ownership requirement of paragraph (2) of section 542(a) (determined by reference to the rules contained in section 318 rather than under section 544) is met,

engaged in an activity to which this section applies, any loss from such activity for the taxable year shall be allowed only to the extent of the aggregate amount with respect to which the taxpayer is at risk (within the meaning of subsection (b)) for such activity at the close of the taxable year.

"(2) DEDUCTION IN SUCCEEDING YEAR.-Any loss from an activity to which this section applies not allowed under this section for the taxable year shall be treated as a deduction allocable to such activity in the first succeeding taxable year."

SEC. 203. RECAPTURE OF LOSSES WHERE AMOUNT AT RISK IS LESS THAN ZERO.

Section 465 (relating to deductions limited to amount at risk) is amended by adding at the end thereof the following new subsection: "(e) RECAPTURE OF LOSSES WHERE AMOUNT AT RISK IS LESS THAN ZERO.

"(1) IN GENERAL.- If zero exceeds the amount for which the taxpayer is at risk in any activity at the close of any taxable year

"(A) the taxpayer shall include in his gross income for such taxable year (as income from such activity) an amount equal to such excess, and

"(B) an amount equal to the amount so included in gross income shall be treated as a deduction allocable to such activity for the first succeeding taxable year.

"(2) LIMITATION.-The excess referred to in paragraph (1) shall not exceed

"(A) the aggregate amount of the reductions required by subsection (b)(5) with respect to the activity for all prior taxable years beginning after December 31, 1978, reduced by "(B) the amounts previously included in gross income with respect to such activity under this subsection."

SEC. 204. EFFECTIVE DATES.

(a) IN GENERAL.-The amendments made by this subtitle shall apply to taxable years beginning after December 31, 1978. (b) TRANSITIONAL RULES.

(1) RECAPTURE PROVISIONS.-If the amount for which the taxpayer is at risk in any activity as of the close of the taxpayer's last taxable year beginning before January 1, 1979, is less than zero, section 465(e)(1) of the Internal Revenue Code of 1954 (as added by section 203 of this Act) shall be applied with respect to such activity of the taxpayer by substituting such negative amount for zero.

(2) SPECIAL TRANSITIONAL RULES FOR LEASING ACTIVITIES.— (A) RULE FOR LEASES.-In the case of any activity described in section 465(c)(1)(C) of such Code in which a corporation described in section 465(a)(1)(C) of such Code is engaged, the amendments made by this section shall not apply with respect to

(i) leases entered into before November 1, 1978, and (ii) leases where the property was ordered by the lessor or lessee before November 1, 1978.

(B) HOLDING OF INTERESTS FOR PURPOSES OF SUBPARAGRAPH (A). Subparagraph (A) shall apply only to taxpayers who held their interests in the property on October 31, 1978.

Subtitle B-Partnership Provisions

SEC. 211. PENALTY FOR FAILURE TO FILE PARTNERSHIP RETURN.

(a) GENERAL RULE.-Subchapter B of chapter 68 (relating to assessable penalties) is amended by adding at the end thereof the following new section:

"SEC. 6698. FAILURE TO FILE PARTNERSHIP RETURN.

"(a) GENERAL RULE.-In addition to the penalty imposed by section 7203 (relating to willful failure to file return, supply information, or pay tax), if any partnership required to file a return under section 6031 for any taxable year—

"(1) fails to file such return at the time prescribed therefor (determined with regard to any extension of time for filing), or "(2) files a return which fails to show the information required under section 6031,

such partnership shall be liable for a penalty determined under subsection (b) for each month (or fraction thereof) during which such failure continues (but not to exceed 5 months), unless it is shown that such failure is due to reasonable cause.

"(b) AMOUNT PER MONTH.-For purposes of subsection (a), the amount determined under this subsection for any month is the product of

"(1) $50, multiplied by

"(2) the number of persons who were partners in the partnership during any part of the taxable year

"(c) ASSESSMENT OF PENALTY.-The penalty imposed by subsection (a) shall be assessed against the partnership.

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

(b) CLERICAL AMENDMENT.-The table of sections for subchapter B of chapter 68 is amended by adding at the end thereof the following new item:

"Sec. 6698. Failure to file partnership return."

(c) EFFECTIVE DATE.-The amendments made by this section shall apply with respect to returns for taxable years beginning after December 31, 1978.

SEC. 212. EXTENSION OF STATUTE OF LIMITATIONS IN THE CASE OF PARTNERSHIP ITEMS.

(a) ASSESSMENT OF DEFICIENCIES.-Section 6501 (relating to limitations on assessment and collection) is amended by adding at the end thereof the following new subsection:

"(q) SPECIAL RULES FOR PARTNERSHIP ITEMS OF FEDERALLY REGISTERED PARTNERSHIPS.—

"(1) IN GENERAL.-In the case of any tax imposed by subtitle A with respect to any person, the period for assessing a deficiency attributable to any partnership item of a federally registered partnership shall not expire before the later of

"(A) the date which is 4 years after the date on which the partnership return of the federally registered partnership for the partnership taxable year in which the item arose was filed (or, later, if the date prescribed for filing the return), or "(B) if the name or address of such person does not appear on the partnership return, the date which is 1 year after the date on which such information is furnished to the Secretary in such manner and at such place as he may prescribe by regulations.

"(2) PARTNERSHIP ITEM DEFINED.-For purposes of this subsection, the term 'partnership item' means

"(A) any item required to be taken into account for the partnership taxable year under any provision of subchapter K of chapter 1 to the extent that regulations prescribed by the Secretary provide that for purposes of this subtitle such item is more appropriately determined at the partnership level than at the partner level, and

"(B) any other item to the extent affected by an item described in subparagraph (A).

"(3) EXTENSION BY AGREEMENT.-The extensions referred to in subsection (c)(4), insofar as they relate to partnership items, may, with respect to any person, be consented to

"(A) except to the extent the Secretary is otherwise notified by the partnership, by a general partner of the partnership, or

"(B) by any person authorized to do so by the partnership in writing.

"(4) FEDERALLY REGISTERED PARTNERSHIP.-For purposes of this subsection, the term 'federally registered partnership' means, with respect to any partnership taxable year, any partnership

"(A) interests in which have been offered for sale at any time during such taxable year or a prior taxable year in any offering required to be registered with the Securities and Exchange Commission, or

"(B) which, at any time during such taxable year or a prior taxable year, was subject to the annual reporting requirements of the Securities and Exchange Commission which relate to the protection of investors in the partnership." (b) CREDITS AND Refunds.—

(1) IN GENERAL.-Section 6511 (relating to limitations on credit or refund) is amended by redesignating subsection (g) as subsection (h) and by inserting after subsection (f) the following new subsection:

"(g) SPECIAL RULE FOR PARTNERSHIP ITEMS OF FEDERALLY REGISTERED PARTNERSHIPS.—

"(1) IN GENERAL.-In the case of any tax imposed by subtitle A with respect to any person, the period for filing a claim for credit or refund of any overpayment attributable to any partnership item of a federally registered partnership shall not expire before the later of

"(A) the date which is 4 years after the date prescribed by law (including extensions thereof) for filing the partnership return for the partnership taxable year in which the item arose, or

"(B) if an agreement under the provisions of section. 6501(c)(4) extending the period for the assessment of any deficiency attributable to such partnership item is made before the date specified in subparagraph (A), the date 6 months after the expiration of such extension.

In any case to which the preceding sentence applies, the amount of the credit or refund may exceed the portion of the tax paid within the period provided in subsection (b)(2) or (c), whichever is applicable.

"(2) DEFINITIONS.-For purposes of this subsection, the terms 'partnership item' and 'federally registered partnership' have the same meanings as such terms have when used in section 6501(q)."

(2) TECHNICAL Amendment.-Paragraph (2) of section 6512(b) (relating to overpayment determined by Tax Court) is amended by striking out "(c), or (d)" each place it appears and inserting in lieu thereof "(c), (d), or (g)".

(c) EFFECTIVE DATE.-The amendments made by this section shall apply to partnership items arising in partnership taxable years beginning after December 31, 1978.

TITLE III-PROVISIONS PRIMARILY
AFFECTING BUSINESS INCOME TAX

Subtitle A-Corporate Rate Reductions

SEC. 301. CORPORATE RATE REDUCTIONS.

(a) IN GENERAL.-Section 11 (relating to the tax imposed on corporations) is amended to read as follows:

"SEC. 11. TAX IMPOSED.

"(a) CORPORATIONS IN GENERAL.-A tax is hereby imposed for each taxable year on the taxable income of every corporation.

"(b) AMOUNT OF TAX.-The amount of the tax imposed by subsection (a) shall be the sum of—

"(1) 17 percent of so much of the taxable income as does not exceed $25,000;

"(2) 20 percent of so much of the taxable income as exceeds $25,000 but does not exceed $50,000;

"(3) 30 percent of so much of the taxable income as exceeds $50,000 but does not exceed $75,000;

"(4) 40 percent of so much of the taxable income as exceeds $75,000 but does not exceed $100,000; plus

"(5) 46 percent of so much of the taxable income as exceeds $100,000.

"(c) EXCEPTIONS.-Subsection (a) shall not apply to a corporation subject to a tax imposed by

"(1) section 594 (relating to mutual savings banks conducting life insurance business),

"(2) subchapter L (sec. 801 and following, relating to insurance companies), or

"(3) subchapter M (sec. 851 and following, relating to regulated investment companies and real estate investment trusts).

"(d) FOREIGN CORPORATIONS.-In the case of a foreign corporation, the tax imposed by subsection (a) shall apply only as provided by section 882."

(b) CONFORMING AMENDMENTS.

(1) CROSS REFERENCES RELATING TO CORPORATIONS.-Paragraph (7) of section 12 (relating to cross references relating to tax on corporations) is amended to read as follows:

"(7) For limitation on benefits of graduated rate schedule provided in section 11(b), see section 1551."

(2) MINIMUM TAX.-Subparagraph (B) of section 57(a) (9) (relating to capital gains preference for corporations) is amended by striking out "the sum of the normal tax rate and the surtax rate under section 11" each place it appears and inserting in lieu thereof "the highest rate of tax specified in section 11(b)". (3) DIVIDENDS RECEIVED ON CERTAIN PREFERRED STOCK.-Subparagraph (B) of section 244(a)(2) (relating to dividends received on certain preferred stock) is amended by striking out "the sum of the normal tax rate and the surtax rate for the taxable year prescribed by section 11" and inserting in lieu thereof "the highest rate of tax specified in section 11(b)".

(4) DIVIDENDS PAID ON CERTAIN PREFERRED STOCK OF PUBLIC UTILITIES.-Subparagraph (B) of section 247(a)(2) (relating to dividends paid on certain preferred stock of public utilities) is