To amend the Internal Revenue Code of 1986 to provide tax relief for farmers and fishermen, and for other purposes.

September 29, 2004

Mr. NUSSLE (for himself, Mr. KING of Iowa, Mr. LATHAM, and Mr. LEACH) introduced the following bill; which was referred to the Committee on Ways and Means

To amend the Internal Revenue Code of 1986 to provide tax relief for farmers and fishermen, and for other purposes.

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

SECTION 1. SHORT TITLE; ETC.

(a) SHORT TITLE- This Act may be cited as the `Tax Empowerment and Relief for Farmers and Fishermen (TERFF) Act'.

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

(c) TABLE OF CONTENTS-

Sec. 1. Short title; etc.

Sec. 2. Farm, fishing, and ranch risk management accounts.

Sec. 3. Exclusion of rental income from self-employment tax.

Sec. 4. Exclusion of conservation reserve program payments from self-employment tax.

Sec. 5. Exemption of agricultural bonds from private activity bond volume limits.

Sec. 6. Modifications to section 512(b)(13).

Sec. 7. Charitable deduction for contributions of food inventory.

Sec. 8. Coordinate farmers and fishermen income averaging and the alternative minimum tax.

Sec. 9. Modification to cooperative marketing rules to include value added processing involving animals.

Sec. 10. Extension of declaratory judgment procedures to farmers' cooperative organizations.

Sec. 11. Small ethanol producer credit.

Sec. 12. Payment of dividends on stock of cooperatives without reducing patronage dividends.

Sec. 13. Special rules for livestock sold on account of weather-related conditions.

SEC. 2. FARM, FISHING, AND RANCH RISK MANAGEMENT ACCOUNTS.

(a) IN GENERAL- Subpart C of part II of subchapter E of chapter 1 (relating to taxable year for which deductions taken) is amended by inserting after section 468B the following new section:

`SEC. 468C. FARM, FISHING, AND RANCH RISK MANAGEMENT ACCOUNTS.

`(a) DEDUCTION ALLOWED- In the case of an individual engaged in an eligible farming business or commercial fishing, there shall be allowed as a deduction for any taxable year the amount paid in cash by the taxpayer during the taxable year to a Farm, Fishing, and Ranch Risk Management Account (hereinafter referred to as the `FFARRM Account').

`(b) LIMITATION-

`(1) CONTRIBUTIONS- The amount which a taxpayer may pay into the FFARRM Account for any taxable year shall not exceed 20 percent of so much of the taxable income of the taxpayer (determined without regard to this section) which is attributable (determined in the manner applicable under section 1301) to any eligible farming business or commercial fishing.

`(2) DISTRIBUTIONS- Distributions from a FFARRM Account may not be used to purchase, lease, or finance any new fishing vessel, add capacity to any fishery, or otherwise contribute to the overcapitalization of any fishery. The Secretary of Commerce shall implement regulations to enforce this paragraph.

`(c) ELIGIBLE BUSINESSES- For purposes of this section--

`(1) ELIGIBLE FARMING BUSINESS- The term `eligible farming business' means any farming business (as defined in section 263A(e)(4)) which is not a passive activity (within the meaning of section 469(c)) of the taxpayer.

`(2) COMMERCIAL FISHING- The term `commercial fishing' has the meaning given such term by section (3) of the Magnuson-Stevens Fishery Conservation and Management Act (16 U.S.C. 1802) but only if such fishing is not a passive activity (within the meaning of section 469(c)) of the taxpayer.

`(d) FFARRM ACCOUNT- For purposes of this section--

`(1) IN GENERAL- The term `FFARRM Account' means a trust created or organized in the United States for the exclusive benefit of the taxpayer, but only if the written governing instrument creating the trust meets the following requirements:

`(A) No contribution will be accepted for any taxable year in excess of the amount allowed as a deduction under subsection (a) for such year.

`(B) The trustee is a bank (as defined in section 408(n)) or another person who demonstrates to the satisfaction of the Secretary that the manner in which such person will administer the trust will be consistent with the requirements of this section.

`(C) The assets of the trust consist entirely of cash or of obligations which have adequate stated interest (as defined in section 1274(c)(2)) and which pay such interest not less often than annually.

`(D) All income of the trust is distributed currently to the grantor.

`(E) The assets of the trust will not be commingled with other property except in a common trust fund or common investment fund.

`(2) ACCOUNT TAXED AS GRANTOR TRUST- The grantor of a FFARRM Account shall be treated for purposes of this title as the owner of such Account and shall be subject to tax thereon in accordance with subpart E of part I of subchapter J of this chapter (relating to grantors and others treated as substantial owners).

`(e) INCLUSION OF AMOUNTS DISTRIBUTED-

`(1) IN GENERAL- Except as provided in paragraph (2), there shall be includible in the gross income of the taxpayer for any taxable year--

`(A) any amount distributed from a FFARRM Account of the taxpayer during such taxable year, and

`(B) any deemed distribution under--

`(i) subsection (f)(1) (relating to deposits not distributed within 5 years),

`(ii) subsection (f)(2) (relating to cessation in eligible farming business), and

`(iii) subparagraph (B) or (C) of subsection (f)(3) (relating to prohibited transactions and pledging account as security).

`(2) EXCEPTIONS- Paragraph (1)(A) shall not apply to--

`(A) any distribution to the extent attributable to income of the Account, and

`(B) the distribution of any contribution paid during a taxable year to a FFARRM Account to the extent that such contribution exceeds the limitation applicable under subsection (b) if requirements similar to the requirements of section 408(d)(4) are met.

For purposes of subparagraph (A), distributions shall be treated as first attributable to income and then to other amounts.

`(f) SPECIAL RULES-

`(1) TAX ON DEPOSITS IN ACCOUNT WHICH ARE NOT DISTRIBUTED WITHIN 5 YEARS-

`(A) IN GENERAL- If, at the close of any taxable year, there is a nonqualified balance in any FFARRM Account--

`(i) there shall be deemed distributed from such Account during such taxable year an amount equal to such balance, and

`(ii) the taxpayer's tax imposed by this chapter for such taxable year shall be increased by 10 percent of such deemed distribution.

The preceding sentence shall not apply if an amount equal to such nonqualified balance is distributed from such Account to the taxpayer before the due date (including extensions) for filing the return of tax imposed by this chapter for such year (or, if earlier, the date the taxpayer files such return for such year).

`(B) NONQUALIFIED BALANCE- For purposes of subparagraph (A), the term `nonqualified balance' means any balance in the Account on the last day of the taxable year which is attributable to amounts deposited in such Account before the 4th preceding taxable year.

`(C) ORDERING RULE- For purposes of this paragraph, distributions from a FFARRM Account (other than distributions of current income) shall be treated as made from deposits in the order in which such deposits were made, beginning with the earliest deposits.

`(2) CESSATION IN ELIGIBLE BUSINESS- At the close of the first disqualification period after a period for which the taxpayer was engaged in an eligible farming business or commercial fishing, there shall be deemed distributed from the FFARRM Account of the taxpayer an amount equal to the balance in such Account (if any) at the close of such disqualification period. For purposes of the preceding sentence, the term `disqualification period' means any period of 2 consecutive taxable years for which the taxpayer is not engaged in an eligible farming business or commercial fishing.

`(3) CERTAIN RULES TO APPLY- Rules similar to the following rules shall apply for purposes of this section:

`(A) Section 220(f)(8) (relating to treatment after death of account holder).

`(B) Section 408(e)(2) (relating to loss of exemption of account where individual engages in prohibited transaction).

`(C) Section 408(e)(4) (relating to effect of pledging account as security).

`(D) Section 408(g) (relating to community property laws).

`(E) Section 408(h) (relating to custodial accounts).

`(4) TIME WHEN PAYMENTS DEEMED MADE- For purposes of this section, a taxpayer shall be deemed to have made a payment to a FFARRM Account on the last day of a taxable year if such payment is made on account of such taxable year and is made on or before the due date (without regard to extensions) for filing the return of tax for such taxable year.

`(5) INDIVIDUAL- For purposes of this section, the term `individual' shall not include an estate or trust.

`(6) DEDUCTION NOT ALLOWED FOR SELF-EMPLOYMENT TAX- The deduction allowable by reason of subsection (a) shall not be taken into account in determining an individual's net earnings from self-employment (within the meaning of section 1402(a)) for purposes of chapter 2.

`(g) REPORTS- The trustee of a FFARRM Account shall make such reports regarding such Account to the Secretary and to the person for whose benefit the Account is maintained with respect to contributions, distributions, and such other matters as the Secretary may require under regulations. The reports required by this subsection shall be filed at such time and in such manner and furnished to such persons at such time and in such manner as may be required by such regulations.'.

(b) TAX ON EXCESS CONTRIBUTIONS-

(1) Subsection (a) of section 4973 (relating to tax on excess contributions to certain tax-favored accounts and annuities) is amended by striking `or' at the end of paragraph (4), by redesignating paragraph (5) as paragraph (6), and by inserting after paragraph (4) the following new paragraph:

`(5) a FFARRM Account (within the meaning of section 468C(d)), or'.

(2) Section 4973 is amended by adding at the end the following new subsection:

`(h) EXCESS CONTRIBUTIONS TO FFARRM ACCOUNTS- For purposes of this section, in the case of a

FFARRM Account (within the meaning of section 468C(d)), the term `excess contributions' means the amount by which the amount contributed for the taxable year to the Account exceeds the amount which may be contributed to the Account under section 468C(b) for such taxable year. For purposes of this subsection, any contribution which is distributed out of the FFARRM Account in a distribution to which section 468C(e)(2)(B) applies shall be treated as an amount not contributed.'.

(3) The section heading for section 4973 is amended to read as follows:

`SEC. 4973. EXCESS CONTRIBUTIONS TO CERTAIN ACCOUNTS, ANNUITIES, ETC.'.

(4) The table of sections for chapter 43 is amended by striking the item relating to section 4973 and inserting the following new item:

`Sec. 4973. Excess contributions to certain accounts, annuities, etc.'.

(c) TAX ON PROHIBITED TRANSACTIONS-

(1) Subsection (c) of section 4975 (relating to tax on prohibited transactions) is amended by adding at the end the following new paragraph:

`(7) SPECIAL RULE FOR FFARRM ACCOUNTS- A person for whose benefit a FFARRM Account (within the meaning of section 468C(d)) is established shall be exempt from the tax imposed by this section with respect to any transaction concerning such account (which would otherwise be taxable under this section) if, with respect to such transaction, the account ceases to be a FFARRM Account by reason of the application of section 468C(f)(3)(A) to such account.'.

(2) Paragraph (1) of section 4975(e) is amended by redesignating subparagraphs (F) and (G) as subparagraphs (G) and (H), respectively, and by inserting after subparagraph (E) the following new subparagraph:

`(F) a FFARRM Account described in section 468C(d),'.

(d) FAILURE TO PROVIDE REPORTS ON FFARRM ACCOUNTS- Paragraph (2) of section 6693(a) (relating to failure to provide reports on certain tax-favored accounts or annuities) is amended by redesignating subparagraphs (D) and (E) as subparagraphs (E) and (F), respectively, and by inserting after subparagraph (C) the following new subparagraph:

`(D) section 468C(g) (relating to FFARRM Accounts),'.

(e) CLERICAL AMENDMENT- The table of sections for subpart C of part II of subchapter E of chapter 1 is amended by inserting after the item relating to section 468B the following new item:

`Sec. 468C. Farm, Fishing and Ranch Risk Management Accounts.'.

(f) EFFECTIVE DATE- The amendments made by this section shall apply to taxable years beginning after the date of the enactment of this Act.

SEC. 3. EXCLUSION OF RENTAL INCOME FROM SELF-EMPLOYMENT TAX.

(a) INTERNAL REVENUE CODE- Section 1402(a)(1)(A) (relating to net earnings from self-employment) is amended by striking `an arrangement' and inserting `a written lease agreement'.

(b) SOCIAL SECURITY ACT- Section 211(a)(1)(A) of the Social Security Act is amended by striking `an arrangement' and inserting `a written lease agreement'.

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

SEC. 4. EXCLUSION OF CONSERVATION RESERVE PROGRAM PAYMENTS FROM SELF-EMPLOYMENT TAX.

(a) INTERNAL REVENUE CODE- Section 1402(a)(1) (relating to net earnings from self-employment) is amended by inserting `and including payments under section 1233(2) of the Food Security Act of 1985 (16 U.S.C. 3833(2))' after `crop shares'.

(b) SOCIAL SECURITY ACT- Section 211(a)(1) of the Social Security Act is amended by inserting `and including payments under section 1233(2) of the Food Security Act of 1985 (16 U.S.C. 3833(2))' after `crop shares'.

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

SEC. 5. EXEMPTION OF AGRICULTURAL BONDS FROM PRIVATE ACTIVITY BOND VOLUME LIMITS.

(a) IN GENERAL- Section 146(g) (relating to exception for certain bonds) is amended by striking `and' at the end of paragraph (3), by striking the period at the end of paragraph (4) and inserting `, and', and by inserting after paragraph (4) the following new paragraph:

`(5) any qualified small issue bond described in section 144(a)(12)(B)(ii).'.

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

SEC. 6. MODIFICATIONS TO SECTION 512(b)(13).

(a) IN GENERAL- Paragraph (13) of section 512(b) (relating to special rules for certain amounts received from controlled entities) is amended by redesignating subparagraph (E) as subparagraph (F) and by inserting after subparagraph (D) the following new subparagraph:

`(E) PARAGRAPH TO APPLY ONLY TO EXCESS PAYMENTS-

`(i) IN GENERAL- Subparagraph (A) shall apply only to the portion of a specified payment received or accrued by the controlling organization that exceeds the amount which would have been paid or accrued if such payment met the requirements prescribed under section 482.

`(ii) ADDITION TO TAX FOR VALUATION MISSTATEMENTS- The tax imposed by this chapter on the controlling organization shall be increased by an amount equal to 20 percent of the larger of--

`(I) such excess determined without regard to any amendment or supplement to a return of tax, or

`(II) such excess determined with regard to all such amendments and supplements.'.

(b) EFFECTIVE DATE-

(1) IN GENERAL- The amendment made by this section shall apply to payments received or accrued after December 31, 2000.

(2) PAYMENTS SUBJECT TO BINDING CONTRACT TRANSITION RULE- If the amendments made by section 1041 of the Taxpayer Relief Act of 1997 did not apply to any amount received or accrued in the first 2 taxable years beginning on or after the date of the enactment of the Taxpayer Relief Act of 1997 under any contract described in subsection (b)(2) of such section, such amendments also shall not apply to amounts received or accrued under such contract before January 1, 2001.

SEC. 7. CHARITABLE DEDUCTION FOR CONTRIBUTIONS OF FOOD INVENTORY.

(a) IN GENERAL- Subsection (e) of section 170 (relating to certain contributions of ordinary income and capital gain property) is amended by adding at the end the following new paragraph:

`(7) APPLICATION OF PARAGRAPH (3) TO CERTAIN CONTRIBUTIONS OF FOOD INVENTORY- For purposes of this section--

`(A) EXTENSION TO INDIVIDUALS- In the case of a charitable contribution of apparently wholesome food--

`(i) paragraph (3)(A) shall be applied without regard to whether the contribution is made by a C corporation, and

`(ii) in the case of a taxpayer other than a C corporation, the aggregate amount of such contributions from any trade or business (or interest therein) of the taxpayer for any taxable year which may be taken into account under this section shall not exceed 10 percent of the taxpayer's net income from any such trade or business, computed without regard to this section, for such taxable year.

`(B) LIMITATION ON REDUCTION- In the case of a charitable contribution of apparently wholesome food, notwithstanding paragraph (3)(B), the amount of the reduction determined under paragraph (1)(A) shall not exceed the amount by which the fair market value of such property exceeds twice the basis of such property.

`(C) DETERMINATION OF BASIS- If a taxpayer--

`(i) does not account for inventories under section 471, and

`(ii) is not required to capitalize indirect costs under section 263A,

the taxpayer may elect, solely for purposes of paragraph (3)(B), to treat the basis of any apparently wholesome food as being equal to 25 percent of the fair market value of such food.

`(D) DETERMINATION OF FAIR MARKET VALUE- In the case of a charitable contribution of apparently wholesome food which is a qualified contribution (within the meaning of paragraph (3), as modified by subparagraph (A) of this paragraph) and which, solely by reason of internal standards of the taxpayer or lack of market, cannot or will not be sold, the fair market value of such contribution shall be determined--

`(i) without regard to such internal standards or such lack of market and

`(ii) by taking into account the price at which the same or substantially the same food items (as to both type and quality) are sold by the taxpayer at the time of the contribution (or, if not so sold at such time, in the recent past).

`(E) APPARENTLY WHOLESOME FOOD- For purposes of this paragraph, the term `apparently wholesome food' has the meaning given such term by section 22(b)(2) of the Bill Emerson Good Samaritan Food Donation Act (42 U.S.C. 1791(b)(2)), as in effect on the date of the enactment of this paragraph.'.

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

SEC. 8. COORDINATE FARMERS AND FISHERMEN INCOME AVERAGING AND THE ALTERNATIVE MINIMUM TAX.

(a) IN GENERAL- Section 55(c) (defining regular tax) is amended by redesignating paragraph (2) as paragraph (3) and by inserting after paragraph (1) the following new paragraph:

`(2) COORDINATION WITH INCOME AVERAGING FOR FARMERS AND FISHERMEN- Solely for purposes of this section, section 1301 (relating to averaging of farm and fishing income) shall not apply in computing the regular tax.'.

(b) ALLOWING INCOME AVERAGING FOR FISHERMEN-

(1) IN GENERAL- Section 1301(a) is amended by striking `farming business' and inserting `farming business or fishing business'.

(2) DEFINITION OF ELECTED FARM INCOME-

(A) IN GENERAL- Clause (i) of section 1301(b)(1)(A) is amended by inserting `or fishing business' before the semicolon.

(B) CONFORMING AMENDMENT- Subparagraph (B) of section 1301(b)(1) is amended by inserting `or fishing business' after `farming business' both places it occurs.

(3) DEFINITION OF FISHING BUSINESS- Section 1301(b) is amended by adding at the end the following new paragraph:

`(4) FISHING BUSINESS- The term `fishing business' means the conduct of commercial fishing as defined in section 3 of the Magnuson-Stevens Fishery Conservation and Management Act (16 U.S.C. 1802).'.

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

SEC. 9. MODIFICATION TO COOPERATIVE MARKETING RULES TO INCLUDE VALUE ADDED PROCESSING INVOLVING ANIMALS.

(a) IN GENERAL- Section 1388 (relating to definitions and special rules) is amended by adding at the end the following new subsection:

`(k) COOPERATIVE MARKETING INCLUDES VALUE-ADDED PROCESSING INVOLVING ANIMALS- For purposes of section 521 and this subchapter, the term `marketing the products of members or other producers' includes feeding the products of members or other producers to cattle, hogs, fish, chickens, or other animals and selling the resulting animals or animal products.'.

(b) CONFORMING AMENDMENT- Section 521(b) is amended by adding at the end the following new paragraph:

`(7) Cross Reference-

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

SEC. 10. EXTENSION OF DECLARATORY JUDGMENT PROCEDURES TO FARMERS' COOPERATIVE ORGANIZATIONS.

(a) IN GENERAL- Section 7428(a)(1) (relating to declaratory judgments of tax exempt organizations) is amended by striking `or' at the end of subparagraph (B) and by adding at the end the following new subparagraph:

`(D) with respect to the initial classification or continuing classification of a cooperative as described in section 521(b) which is exempt from tax under section 521(a), or'.

(b) EFFECTIVE DATE- The amendments made by this section shall apply with respect to pleadings filed after the date of the enactment of this Act.

SEC. 11. SMALL ETHANOL PRODUCER CREDIT.

(a) ALLOCATION OF ALCOHOL FUELS CREDIT TO PATRONS OF A COOPERATIVE- Section 40(g) (relating to alcohol used as fuel) is amended by adding at the end the following new paragraph:

`(6) ALLOCATION OF SMALL ETHANOL PRODUCER CREDIT TO PATRONS OF COOPERATIVE-

`(A) ELECTION TO ALLOCATE-

`(i) IN GENERAL- In the case of a cooperative organization described in section 1381(a), any portion of the credit determined under subsection (a)(3) for the taxable year may, at the election of the organization, be apportioned pro rata among patrons of the organization on the basis of the quantity or value of business done with or for such patrons for the taxable year.

`(ii) FORM AND EFFECT OF ELECTION- An election under clause (i) for any taxable year shall be made on a timely filed return for such year. Such election, once made, shall be irrevocable for such taxable year.

`(B) TREATMENT OF ORGANIZATIONS AND PATRONS- The amount of the credit apportioned to patrons under subparagraph (A)--

`(i) shall not be included in the amount determined under subsection (a) with respect to the organization for the taxable year,

`(ii) shall be included in the amount determined under subsection (a) for the taxable year of each patron for which the patronage dividends for the taxable year described in subparagraph (A) are included in gross income, and

`(iii) shall be included in gross income of such patrons for the taxable year in the manner and to the extent provided in section 87.

`(C) SPECIAL RULES FOR DECREASE IN CREDITS FOR TAXABLE YEAR- If the amount of the credit of a cooperative organization determined under subsection (a)(3) for a taxable year is less than the amount of such credit shown on the return of the cooperative organization for such year, an amount equal to the excess of--

`(i) such reduction, over

`(ii) the amount not apportioned to such patrons under subparagraph (A) for the taxable year,

shall be treated as an increase in tax imposed by this chapter on the organization. Such increase shall not be treated as tax imposed by this chapter for purposes of determining the amount of any credit under this chapter or for purposes of section 55.'.

(b) IMPROVEMENTS TO SMALL ETHANOL PRODUCER CREDIT-

(1) DEFINITION OF SMALL ETHANOL PRODUCER- Section 40(g) (relating to definitions and special rules for eligible small ethanol producer credit) is amended by striking `30,000,000' each place it appears and inserting `60,000,000'.

(2) SMALL ETHANOL PRODUCER CREDIT NOT A PASSIVE ACTIVITY CREDIT- Clause (i) of section 469(d)(2)(A) is amended by striking `subpart D' and inserting `subpart D, other than section 40(a)(3),'.

(3) ALLOWING CREDIT AGAINST ENTIRE REGULAR TAX AND MINIMUM TAX-

(A) IN GENERAL- Subsection (c) of section 38 (relating to limitation based on amount of tax) is amended by redesignating paragraph (4) as paragraph (5) and by inserting after paragraph (3) the following new paragraph:

`(4) SPECIAL RULES FOR SMALL ETHANOL PRODUCER CREDIT-

`(A) IN GENERAL- In the case of the small ethanol producer credit--

`(i) this section and section 39 shall be applied separately with respect to the credit, and

`(ii) in applying paragraph (1) to the credit--

`(I) the amounts in subparagraphs (A) and (B) thereof shall be treated as being zero, and

`(II) the limitation under paragraph (1) (as modified by subclause (I)) shall be reduced by the credit allowed under subsection (a) for the taxable year (other than the small ethanol producer credit).

`(B) SMALL ETHANOL PRODUCER CREDIT- For purposes of this subsection, the term `small ethanol producer credit' means the credit allowable under subsection (a) by reason of section 40(a)(3).'.

(B) CONFORMING AMENDMENTS- Subclause (II) of section 38(c)(2)(A)(ii) and subclause (II) of section 38(c)(3)(A)(ii) are each amended by inserting `or the small ethanol producer credit' after `employee credit'.

(4) SMALL ETHANOL PRODUCER CREDIT NOT ADDED BACK TO INCOME UNDER SECTION 87- Section 87 (relating to income inclusion of alcohol fuel credit) is amended to read as follows:

`SEC. 87. ALCOHOL FUEL CREDIT.

`Gross income includes an amount equal to the sum of--

`(1) the amount of the alcohol mixture credit determined with respect to the taxpayer for the taxable year under section 40(a)(1), and

`(2) the alcohol credit determined with respect to the taxpayer for the taxable year under section 40(a)(2).'.

(c) CONFORMING AMENDMENT- Section 1388 (relating to definitions and special rules for cooperative organizations) is amended by adding at the end the following new subsection:

`(k) CROSS REFERENCE- For provisions relating to the apportionment of the alcohol fuels credit between cooperative organizations and their patrons, see section 40(g)(6).'.

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

SEC. 12. PAYMENT OF DIVIDENDS ON STOCK OF COOPERATIVES WITHOUT REDUCING PATRONAGE DIVIDENDS.

(a) IN GENERAL- Subsection (a) of section 1388 (relating to patronage dividend defined) is amended by adding at the end the following new sentence: `For purposes of paragraph (3), net earnings shall not be reduced by amounts paid during the year as dividends on capital stock or other proprietary capital interests of the organization to the extent that the articles of incorporation or bylaws of such organization or other contract with patrons provide that such dividends are in addition to amounts otherwise payable to patrons which are derived from business done with or for patrons during the taxable year.'.

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

SEC. 13. SPECIAL RULES FOR LIVESTOCK SOLD ON ACCOUNT OF WEATHER-RELATED CONDITIONS.

(a) RULES FOR REPLACEMENT OF INVOLUNTARILY CONVERTED LIVESTOCK- Subsection (e) of section 1033 (relating to involuntary conversions) is amended--

(1) by striking `CONDITIONS- For purposes' and inserting `CONDITIONS-

`(1) IN GENERAL- For purposes', and

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

`(2) EXTENSION OF REPLACEMENT PERIOD-

`(A) IN GENERAL- In the case of drought, flood, or other weather-related conditions described in paragraph (1) which result in the area being designated as eligible for assistance by the Federal Government, subsection (a)(2)(B) shall be applied with respect to any converted property by substituting `4 years' for `2 years'.

`(B) FURTHER EXTENSION BY SECRETARY- The Secretary may extend on a regional basis the period for replacement under this section (after the application of subparagraph (A)) for such additional time as the Secretary determines appropriate if the weather-related conditions which resulted in such application continue for more than 3 years.'.

(b) INCOME INCLUSION RULES- Section 451(e) (relating to special rule for proceeds from livestock sold on account of drought, flood, or other weather-related conditions) is amended by adding at the end the following new paragraph:

`(3) SPECIAL ELECTION RULES- If section 1033(e)(2) applies to a sale or exchange of livestock described in paragraph (1), the election under paragraph (1) shall be deemed valid if made during the replacement period described in such section.'.

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

END