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[House Report 115-409]
[From the U.S. Government Publishing Office]

   115th Congress }                                       { Report
                       HOUSE OF REPRESENTATIVES
    1st Session   }                                       { 115-409
                                                 
_______________________________________________________________________

                         TAX CUTS AND JOBS ACT

                               ----------                              

                              R E P O R T

                                 of the

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                                   ON

                                 H.R. 1

                             together with

                    DISSENTING AND ADDITIONAL VIEWS

      [Including cost estimate of the Congressional Budget Office]

            [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

 November 13, 2017.--Committed to the Committee of the Whole House on 
            the State of the Union and ordered to be printed
            

                                 ____________
                       
                       U.S. GOVERNMENT PUBLISHING OFFICE
                
27-533                        WASHINGTON: 2017

 
                            C O N T E N T S

                              ----------                              
                                                                   Page
  I. SUMMARY AND BACKGROUND.........................................112
          A. Purpose and Summary.................................   112
          B. Background and Need for Legislation.................   112
          C. Legislative History.................................   112
 II. EXPLANATION OF THE BILL........................................115
TITLE I--TAX REFORM FOR INDIVIDUALS..............................   115
          A. Simplification and Reform of Rates, Standard 
              Deductions, and Exemptions.........................   115
              1. Reduction and simplification of individual 
                  income tax rates (secs. 1001 and 1005 of the 
                  bill and sec. 1 of the Code)...................   115
              2. Enhancement of standard deduction (sec. 1002 of 
                  the bill and sec. 63 of the Code)..............   123
              3. Repeal of deduction for personal exemptions 
                  (sec. 1003 of the bill and secs. 151-153 of the 
                  Code)..........................................   124
              4. Maximum rate on business income of individuals 
                  (sec. 1004 of the bill and new sec. 4 of the 
                  Code)..........................................   126
          B. Simplification and Reform of Family and Individual 
              Tax................................................   135
              1. Enhancement of child tax credit and new family 
                  tax credit (sec. 1101 of the bill and sec. 24 
                  of the Code)...................................   135
              2. Repeal of credit for the elderly and permanently 
                  disabled (sec. 1102(a) of the bill and sec. 22 
                  of the Code)...................................   137
              3. Termination of credit for interest on certain 
                  home mortgages (sec. 1102(b) of the bill and 
                  sec. 25 of the Code)...........................   138
              4. Repeal of credit for plug-in electric drive 
                  motor vehicles (sec. 1102(c) of the bill and 
                  sec. 30D of the Code)..........................   138
              5. Modification of taxpayer identification number 
                  requirements for the child tax credit, earned 
                  income credit, and American Opportunity credit 
                  (sec. 1103 of the bill and secs. 24, 25A and 32 
                  of the Code)...................................   139
              6. Procedures to reduce improper claims of earned 
                  income credit (sec. 1104 of the bill and new 
                  secs. 32(c)(2)(B)(vii) and 6011(i) of the Code)   142
              7. Certain income disallowed for purposes of the 
                  earned income tax credit (sec. 1105 of the 
                  bill, new secs. 32(n) and 32(c)(2)(C) of the 
                  Code, and secs. 6051, 6052, 6041(a), and 
                  6050(w) of the Code)...........................   144
          C. Simplification and Reform of Education Incentives...   147
              1. Reform of American opportunity tax credit and 
                  repeal of lifetime learning credit (sec. 1201 
                  of the bill and sec. 25A of the Code)..........   147
              2. Consolidation and modification of education 
                  savings rules (sec. 1202 of the bill and secs. 
                  529 and 530 of the Code).......................   149
              3. Reforms to discharge of certain student loan 
                  indebtedness (sec. 1203 of the bill and sec. 
                  108(f) of the Code)............................   153
              4. Repeal of deduction for student loan interest 
                  (sec. 1204 of the bill and sec. 221 of the 
                  Code)..........................................   154
              5. Repeal of deduction for qualified tuition and 
                  related expenses (sec. 1204 of the bill and 
                  sec. 222 of the Code)..........................   155
              6. Repeal of exclusion for educational assistance 
                  programs (sec. 1204 of the bill and sec. 127 of 
                  the Code)......................................   156
              7. Repeal of exclusion for interest on United 
                  States savings bonds used for higher education 
                  expenses (sec. 1204 of the bill and sec. 135 of 
                  the Code)......................................   157
              8. Repeal of exclusion for qualified tuition 
                  reductions (sec. 1204 of the bill and sec. 
                  117(d) of the Code)............................   158
              9. Rollovers between qualified tuition programs and 
                  qualified ABLE programs (sec. 1205 of the bill 
                  and secs. 529 and 529A of the Code)............   159
          D. Simplification and Reform of Deductions.............   162
              1. Repeal of overall limitation on itemized 
                  deductions (sec. 1301 of the bill and sec. 68 
                  of the Code)...................................   162
              2. Modification of deduction for home mortgage 
                  interest (sec. 1302 of the bill and sec. 163(h) 
                  of the Code)...................................   163
              3. Modification of deduction for taxes not paid or 
                  accrued in a trade or business (sec. 1303 of 
                  the bill and sec. 164(b) of the Code)..........   165
              4. Repeal of deduction for personal casualty and 
                  theft losses (sec. 1304 of the bill and sec. 
                  165 of the Code)...............................   166
              5. Limitation on wagering losses (sec. 1305 of the 
                  bill and sec. 165 of the Code).................   167
              6. Modifications to the deduction for charitable 
                  contributions (sec. 1306 of the bill and sec. 
                  170 of the Code)...............................   168
              7. Repeal of deduction for tax preparation expenses 
                  (sec. 1307 of the bill and sec. 212 of the 
                  Code)..........................................   178
              8. Repeal of deduction for medical expenses (sec. 
                  1308 of the bill and sec. 213 of the Code).....   179
              9. Repeal of deduction for alimony payments and 
                  corresponding inclusion in gross income (sec. 
                  1309 of the bill and secs. 61, 71, and 215 of 
                  the Code)......................................   179
              10. Repeal of deduction for moving expenses (sec. 
                  1310 of the bill and secs. 134 and 217 of the 
                  Code)..........................................   180
              11. Termination of deduction and exclusions for 
                  contributions to medical savings accounts (sec. 
                  1311 of the bill and secs. 106(b) and 220 of 
                  the Code)......................................   181
              12. Denial of deduction for expenses attributable 
                  to the trade or business of being an employee, 
                  expenses of teachers, performing artists and 
                  certain officials (sec. 1312 of the bill and 
                  secs. 62, 67, and new sec. 262A of the Code)...   184
          E. Simplification and Reform of Exclusions and Taxable 
              Compensation.......................................   186
              1. Limitation on exclusion for employer-provided 
                  housing (sec. 1401 of the bill and sec. 119 of 
                  the Code)......................................   186
              2. Modification of exclusion of gain on sale of a 
                  principal residence (sec. 1402 of the bill and 
                  sec. 121 of the Code)..........................   187
              3. Repeal of exclusion, etc., for employee 
                  achievement awards (sec. 1403 of the bill and 
                  secs. 74(c) and 274(j) of the Code)............   188
              4. Sunset of exclusion for dependent care 
                  assistance programs (sec. 1404 of the bill and 
                  sec. 129 of the Code)..........................   188
              5. Repeal of exclusion for qualified moving expense 
                  reimbursement (sec. 1405 of the bill and sec. 
                  132(g) of the Code)............................   189
              6. Repeal of exclusion for adoption assistance 
                  programs (sec. 1406 of the bill and sec. 137 of 
                  the Code)......................................   190
          F. Simplification and Reform of Savings, Pensions, 
              Retirement.........................................   191
              1. Repeal of special rule permitting 
                  recharacterization of IRA contributions (sec. 
                  1501 of the bill and sec. 408A of the Code)....   191
              2. Reduction in minimum age for allowable in-
                  service distributions (sec. 1502 of the bill 
                  and secs. 401 and 457 of the Code).............   194
              3. Modification of rules governing hardship 
                  distributions (sec. 1503 of the bill and secs. 
                  401 and 403 of the Code).......................   195
              4. Modification of rules relating to hardship 
                  withdrawals from cash or deferred arrangements 
                  (sec. 1504 of the bill and sec. 401 of the 
                  Code)..........................................   196
              5. Extended rollover period for the rollover of 
                  plan loan offset amounts in certain cases (sec. 
                  1505 of the bill and sec. 402 of the Code).....   198
              6. Modification of nondiscrimination rules for 
                  certain plans providing benefits or 
                  contributions to older, longer service 
                  participants (sec. 1506 of the bill and sec. 
                  401 of the Code)...............................   199
          G. Estate, Gift, and Generation-Skipping Transfer Taxes   209
              1. Increase in estate and gift tax exemption, 
                  followed by repeal of estate and generation-
                  skipping transfer taxes and reduction in gift 
                  tax rate (secs. 1601 and 1602 of the bill, 
                  secs. 2010, 2056A, 2502, and 2505 of the Code, 
                  and new secs. 2210 and 2664 of the Code).......   209
TITLE II--ALTERNATIVE MINIMUM TAX REPEAL.........................   219
              1. Repeal of alternative minimum tax (sec. 2001 of 
                  the bill and sec. 55 of the Code)..............   219
TITLE III--BUSINESS TAX REFORM...................................   225
          A. Tax Rates...........................................   225
              1. Reduction in corporate tax rate (sec. 3001 of 
                  the bill and sec. 11 of the Code)..............   225
          B. Cost Recovery.......................................   227
              1. Increased expensing (sec. 3101 of the bill and 
                  sec. 168(k) of the Code).......................   227
          C. Small Business Reforms..............................   234
              1. Expansion of section 179 expensing (sec. 3201 of 
                  the bill and sec. 179 of the Code).............   234
              2. Small business accounting method reform and 
                  simplification (sec. 3202 of the bill and secs. 
                  263A, 448, 460, and 471 of the Code)...........   236
              3. Small business exception from limitation on 
                  deduction of business interest (sec. 3203 of 
                  the bill and sec. 163(j) of the Code)..........   243
              4. Modification of treatment of S corporation 
                  conversions to C corporations (sec. 3204 of the 
                  bill and secs. 481 and 1371 of the Code).......   243
          D. Reform of Business-related Exclusions, Deductions, 
              etc................................................   246
              1. Interest (sec. 3301 of the bill and sec. 163(j) 
                  of the Code)...................................   246
              2. Modification of net operating loss deduction 
                  (sec. 3302 of the bill and sec. 172 of the 
                  Code)..........................................   252
              3. Like-kind exchanges of real property (sec. 3303 
                  of the bill and sec. 1031 of the Code).........   253
              4. Revision of treatment of contributions to 
                  capital (sec. 3304 of the bill and sec. 118 of 
                  the Code)......................................   255
              5. Repeal of deduction for local lobbying expenses 
                  (sec. 3305 of the bill and sec. 162(e) of the 
                  Code)..........................................   257
              6. Repeal of deduction for income attributable to 
                  domestic production activities (sec. 3306 of 
                  the bill and sec. 199 of the Code).............   259
              7. Entertainment, etc. expenses (sec. 3307 of the 
                  bill and sec. 274 of the Code).................   261
              8. Unrelated business taxable income increased by 
                  amount of certain fringe benefit expenses for 
                  which deduction is disallowed (sec. 3308 of the 
                  bill and sec. 512 of the Code).................   265
              9. Limitation on deduction for FDIC premiums (sec. 
                  3309 of the bill and sec. 162 of the Code).....   266
              10. Repeal of rollover of publicly traded 
                  securities gain into specialized small business 
                  investment companies (sec. 3310 of the bill and 
                  sec. 1044 of the Code).........................   269
              11. Certain self-created property not treated as a 
                  capital asset (sec. 3311 of the bill and sec. 
                  1221 of the Code)..............................   270
              12. Repeal of special rule for sale or exchange of 
                  patents (sec. 3312 of the bill and sec. 1235 of 
                  the Code)......................................   272
              13. Repeal of technical termination of partnerships 
                  (sec. 3313 of the bill and sec. 708(b) of the 
                  Code)..........................................   272
              14. Recharacterization of certain gains in the case 
                  of partnership profits interests held in 
                  connection with performance of investment 
                  services (sec. 3314 of the bill and secs. 1 and 
                  83 of the Code)................................   274
              15. Amortization of research and experimental 
                  expenditures (sec. 3315 of the bill and sec. 
                  174 of the Code)...............................   280
              16. Uniform treatment of expenses in contingency 
                  fee cases (sec. 3316 of the bill and new sec. 
                  162(q) of the Code)............................   283
          E. Reform of Business Credits..........................   284
              1. Repeal of credit for clinical testing expenses 
                  for certain drugs for rare diseases or 
                  conditions (sec. 3401 of the bill and sec. 45C 
                  of the Code)...................................   284
              2. Repeal of employer-provided child care credit 
                  (sec. 3402 of the bill and sec. 45F of the 
                  Code)..........................................   285
              3. Repeal of rehabilitation credit (sec. 3403 of 
                  the bill and sec. 47 of the Code)..............   286
              4. Repeal of work opportunity tax credit (sec. 3404 
                  of the bill and sec. 51 of the Code)...........   287
              5. Repeal of deduction for certain unused business 
                  credits (sec. 3405 of the bill and sec. 196 of 
                  the Code)......................................   289
              6. Termination of new markets tax credit (sec. 3406 
                  of the bill and sec. 45D of the Code)..........   290
              7. Repeal of credit for expenditures to provide 
                  access to disabled individuals (sec. 3407 of 
                  the bill and sec. 44 of the Code)..............   292
              8. Modification of credit for portion of employer 
                  social security taxes paid with respect to 
                  employee tips (sec. 3408 of the bill and sec. 
                  45B of the Code)...............................   293
          F. Energy Credits......................................   295
              1. Modifications to credit for electricity produced 
                  from certain renewable resources (sec. 3501 of 
                  the bill and sec. 45 of the Code)..............   295
              2. Modification of the energy investment tax credit 
                  (sec. 3502 of the bill and sec. 48 of the Code)   297
              3. Extension and phaseout of residential energy 
                  efficient property credit (sec. 3503 of the 
                  bill and sec. 25D of the Code).................   300
              4. Repeal of enhanced oil recovery credit (sec. 
                  3504 of the bill and sec. 43 of the Code)......   301
              5. Repeal of credit for producing oil and gas from 
                  marginal wells (sec. 3505 of the bill and sec. 
                  45I of the Code)...............................   302
              6. Modification of credit for production from 
                  advanced nuclear power facilities (sec. 3506 of 
                  the bill and sec. 45J of the Code).............   303
          G. Bond Reforms........................................   305
              1. Termination of private activity bonds (sec. 3601 
                  of the bill and sec. 103 of the Code)..........   305
              2. Repeal of advance refunding bonds (sec. 3602 of 
                  the bill and sec. 149(d) of the Code)..........   307
              3. Repeal of tax credit bonds (sec. 3603 of the 
                  bill and secs. 54A, 54B, 54C, 54D, 54E, 54F and 
                  6431 of the Code)..............................   309
              4. No tax-exempt bonds for professional stadiums 
                  (sec. 3604 of the bill and sec. 103 of the 
                  Code)..........................................   312
          H. Insurance...........................................   314
              1. Net operating losses of life insurance companies 
                  (sec. 3701 of the bill and sec. 810 of the 
                  Code)..........................................   314
              2. Repeal of small life insurance company deduction 
                  (sec. 3702 of the bill and sec. 806 of the 
                  Code)..........................................   315
              3. Surtax on life insurance company taxable income 
                  (sec. 3703 of the bill and sec. 801 of the 
                  Code)..........................................   316
              4. Adjustment for change in computing reserves 
                  (sec. 3704 of the bill and sec. 807 of the 
                  Code)..........................................   319
              5. Repeal of special rule for distributions to 
                  shareholders from pre-1984 policyholders 
                  surplus account (sec. 3705 of the bill and sec. 
                  815 of the Code)...............................   320
              6. Modification of proration rules for property and 
                  casualty insurance companies (sec. 3706 of the 
                  bill and sec. 832 of the Code).................   322
              7. Modification of discounting rules for property 
                  and casualty insurance companies (sec. 3707 of 
                  the bill and sec. 832 of the Code).............   323
              8. Repeal of special estimated tax payments (sec. 
                  3708 of the bill and sec. 847 of the Code).....   326
          I. Compensation........................................   328
              1. Modification of limitation on excessive employee 
                  remuneration (sec. 3801 of the bill and sec. 
                  162(m) of the Code)............................   328
              2. Excise tax on excess tax-exempt organization 
                  executive compensation (sec. 3802 of the bill 
                  and sec. 4960 of the Code).....................   332
              3. Treatment of qualified equity grants (sec. 3803 
                  of the bill and secs. 83, 3401, and 6051 of the 
                  Code)..........................................   335
TITLE IV--TAXATION OF FOREIGN INCOME AND FOREIGN PERSONS.........   343
PRESENT LAW......................................................   343
          A. Principles Common to Inbound and Outbound Taxation..   343
              1. Residence.......................................   344
              2. Entity classification...........................   345
              3. Source of income rules..........................   346
              4. Intercompany transfers..........................   350
          B. U.S. Tax Rules Applicable to Nonresident Aliens and 
              Foreign Corporations (Inbound).....................   351
              1. Gross-basis taxation of U.S.-source income......   351
              2. Net-basis taxation of U.S.-source income........   355
              3. Special rules...................................   359
          C. U.S. Tax Rules Applicable to Foreign Activities of 
              U.S. Persons (Outbound)............................   361
              1. In general......................................   361
              2. Anti-deferral regimes...........................   361
              3. Foreign tax credit..............................   366
              4. Special rules...................................   368
TAXATION OF FOREIGN INCOME AND FOREIGN PERSONS...................   370
          A. Establishment of Participation Exemption System for 
              Taxation of Foreign Income.........................   370
              1. Deduction for foreign-source portion of 
                  dividends received by domestic corporations 
                  from specified 10-percent owned foreign 
                  corporations (sec. 4001 of the bill and new 
                  sec. 245A of the Code).........................   370
              2. Application of participation exemption to 
                  investments in United States property (sec. 
                  4002 of the bill sec. 956 of the Code).........   373
              3. Limitation on losses with respect to specified 
                  10-percent owned foreign corporations (sec. 
                  4003 of the bill secs. 367(a)(3)(C) and 961 of 
                  the Code, and new sec. 91 of the Code).........   373
              4. Treatment of deferred foreign income upon 
                  transition to participation exemption system of 
                  taxation (sec. 4004 of the bill and secs. 78, 
                  904, 907, and 965 of the Code).................   375
          B. Modifications Related to Foreign Tax Credit System..   383
              1. Repeal of section 902 indirect foreign tax 
                  credits; determination of section 960 credit on 
                  current year basis (sec. 4101 of the bill and 
                  secs. 78, 902 and 960 of the Code).............   383
              2. Source of income from sales of inventory 
                  determined solely on basis of production 
                  activities (sec. 4102 of the bill and sec. 863 
                  of the Code)...................................   384
          C. Modifications of Subpart F Provisions...............   384
              1. Repeal of inclusion based on withdrawal of 
                  previously excluded subpart F income from 
                  qualified investment (sec. 4201 of the bill and 
                  sec. 955 of the Code)..........................   384
              2. Repeal of treatment of foreign base company oil 
                  related income as subpart F income (sec. 4202 
                  of the bill and sec. 954(a) of the Code).......   385
              3. Inflation adjustment of de minimis exception for 
                  foreign base company income (sec. 4203 of the 
                  bill and sec. 954(b)(3) of the Code)...........   386
              4. Look-thru rule for related controlled foreign 
                  corporations made permanent (sec. 4204 of the 
                  bill and sec. 954(c)(6) of the Code)...........   386
              5. Modification of stock attribution rules for 
                  determining status as a controlled foreign 
                  corporation (sec. 4205 of the bill secs. 318, 
                  958 and 6038 of the Code)......................   387
              6. Elimination of requirement that corporation must 
                  be controlled for 30 days before subpart F 
                  inclusions apply (sec. 4206 of the bill and 
                  951(a)(1) of the Code).........................   387
          D. Prevention of Base Erosion..........................   388
              1. Current year inclusion by United States 
                  shareholders with foreign high returns (sec. 
                  4301 of the bill and secs. 78 and 960 and new 
                  sec. 951A of the Code).........................   388
              2. Limitation on deduction of interest by domestic 
                  corporations which are members of an 
                  international financial reporting group (sec. 
                  4302 of the bill and sec. 163 of the Code).....   397
              3. Excise tax on certain payments from domestic 
                  corporations to related foreign corporations; 
                  election to treat such payments as effectively 
                  connected income (sec. 4303 of the bill and 
                  secs. 882, 4491, 6038C, and 6038E of the Code).   400
          E. Provisions Related to Possessions of the United 
              States.............................................   405
              1. Extension of deduction allowable with respect to 
                  income attributable to domestic production 
                  activities in Puerto Rico (sec. 4401 of the 
                  bill and sec. 199 of the Code).................   405
              2. Extension of temporary increase in limit on 
                  cover over of rum excise taxes to Puerto Rico 
                  and the Virgin Islands (sec. 4402 of the bill 
                  and sec. 119(d) of the Code)...................   406
              3. Extension of American Samoa economic development 
                  credit (sec. 4403 of the bill and sec. 119 of 
                  Pub. L. No. 109-432)...........................   407
          F. Other International Reforms.........................   409
              1. Restriction on insurance business exception to 
                  the passive foreign investment company rules 
                  (sec. 4501 of the bill and sec. 1297 of the 
                  Code)..........................................   409
          TITLE V--EXEMPT ORGANIZATIONS..........................   412
          A. Unrelated Business Income Tax.......................   412
              1. Clarification of unrelated business income tax 
                  treatment of entities exempt from tax under 
                  section 501(a) (sec. 5001 of the bill and sec. 
                  511 of the Code)...............................   412
              2. Exclusion of research income from unrelated 
                  business taxable income limited to publicly 
                  available research (sec. 5002 of the bill and 
                  sec. 512(b)(9) of the Code)....................   414
          B. Excise Taxes........................................   416
              1. Simplification of excise tax on private 
                  foundation investment income (sec. 5101 of the 
                  bill and sec. 4940 of the Code)................   416
              2. Private operating foundation requirements 
                  relating to operation of an art museum (sec. 
                  5102 of the bill and sec. 4942(j) of the Code).   417
              3. Excise tax based on investment income of private 
                  colleges and universities (sec. 5103 of the 
                  bill and new sec. 4969 of the Code)............   420
              4. Provide an exception to the private foundation 
                  excess business holdings rules for 
                  philanthropic business holdings (sec. 5104 of 
                  the bill and sec. 4943 of the Code)............   423
          C. Requirements for Organizations Exempt From Tax......   426
              1. Section 501(c)(3) organizations permitted to 
                  make statements relating to political campaign 
                  in ordinary course of activities in carrying 
                  out exempt purpose (sec. 5201 of the bill and 
                  sec. 501 of the Code)..........................   426
              2. Additional reporting requirements for donor 
                  advised fund sponsoring organizations (sec. 
                  5202 of the bill and sec. 6033 of the Code)....   428
III. VOTES OF THE COMMITTEE.........................................430
 IV. BUDGET EFFECTS OF THE BILL.....................................449
          A. Committee Estimate of Budgetary Effects.............   449
          B. Statement Regarding New Budget Authority and Tax 
              Expenditures Budget Authority......................   461
          C. Cost Estimate Prepared by the Congressional Budget 
              Office.............................................   461
  V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE.....470
          A. Committee Oversight Findings and Recommendations....   470
          B. Statement of General Performance Goals and 
              Objectives.........................................   470
          C. Information Relating to Unfunded Mandates...........   470
          D. Tax Complexity Analysis.............................   470
          E. Congressional Earmarks, Limited Tax Benefits, and 
              Limited Tariff Benefits............................   475
          F. Duplication of Federal Programs.....................   475
          G. Disclosure of Directed Rule Makings.................   476
 VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED..........476
VII. DISSENTING VIEWS AND ADDITIONAL VIEWS..........................477

115th Congress }                                            { Report
                        HOUSE OF REPRESENTATIVES
 1st Session   }                                            { 115-409

======================================================================

 
                         TAX CUTS AND JOBS ACT

                                _______
                                

 November 13, 2017.--Committed to the Committee of the Whole House on 
            the State of the Union and ordered to be printed

                                _______
                                

Mr. Brady of Texas, from the Committee on Ways and Means, submitted the 
                               following

                              R E P O R T

                             together with

                    DISSENTING AND ADDITIONAL VIEWS

                         [To accompany H.R. 1]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Ways and Means, to whom was referred the bill 
(H.R. 1) to provide for reconciliation pursuant to title II of the 
concurrent resolution on the budget for fiscal year 2018, having 
considered the same, report favorably thereon with amendments and 
recommend that the bill as amended do pass.
    The amendments are as follows:
  Strike all after the enacting clause and insert the following:

SECTION 1. SHORT TITLE; ETC.

  (a) Short Title.--This Act may be cited as the ``Tax Cuts and Jobs 
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.--The table of contents for this Act is as 
follows:

Sec. 1. Short title; etc.

                  TITLE I--TAX REFORM FOR INDIVIDUALS

Subtitle A--Simplification and Reform of Rates, Standard Deduction, and 
                               Exemptions

Sec. 1001. Reduction and simplification of individual income tax rates.
Sec. 1002. Enhancement of standard deduction.
Sec. 1003. Repeal of deduction for personal exemptions.
Sec. 1004. Maximum rate on business income of individuals.
Sec. 1005. Conforming amendments related to simplification of 
individual income tax rates.

  Subtitle B--Simplification and Reform of Family and Individual Tax 
                                Credits

Sec. 1101. Enhancement of child tax credit and new family tax credit.
Sec. 1102. Repeal of nonrefundable credits.
Sec. 1103. Refundable credit program integrity.
Sec. 1104. Procedures to reduce improper claims of earned income 
credit.
Sec. 1105. Certain income disallowed for purposes of the earned income 
tax credit.

     Subtitle C--Simplification and Reform of Education Incentives

Sec. 1201. American opportunity tax credit.
Sec. 1202. Consolidation of education savings rules.
Sec. 1203. Reforms to discharge of certain student loan indebtedness.
Sec. 1204. Repeal of other provisions relating to education.
Sec. 1205. Rollovers between qualified tuition programs and qualified 
ABLE programs.

          Subtitle D--Simplification and Reform of Deductions

Sec. 1301. Repeal of overall limitation on itemized deductions.
Sec. 1302. Mortgage interest.
Sec. 1303. Repeal of deduction for certain taxes not paid or accrued in 
a trade or business.
Sec. 1304. Repeal of deduction for personal casualty losses.
Sec. 1305. Limitation on wagering losses.
Sec. 1306. Charitable contributions.
Sec. 1307. Repeal of deduction for tax preparation expenses.
Sec. 1308. Repeal of medical expense deduction.
Sec. 1309. Repeal of deduction for alimony payments.
Sec. 1310. Repeal of deduction for moving expenses.
Sec. 1311. Termination of deduction and exclusions for contributions to 
medical savings accounts.
Sec. 1312. Denial of deduction for expenses attributable to the trade 
or business of being an employee.

    Subtitle E--Simplification and Reform of Exclusions and Taxable 
                              Compensation

Sec. 1401. Limitation on exclusion for employer-provided housing.
Sec. 1402. Exclusion of gain from sale of a principal residence.
Sec. 1403. Repeal of exclusion, etc., for employee achievement awards.
Sec. 1404. Sunset of exclusion for dependent care assistance programs.
Sec. 1405. Repeal of exclusion for qualified moving expense 
reimbursement.
Sec. 1406. Repeal of exclusion for adoption assistance programs.

 Subtitle F--Simplification and Reform of Savings, Pensions, Retirement

Sec. 1501. Repeal of special rule permitting recharacterization of Roth 
IRA contributions as traditional IRA contributions.
Sec. 1502. Reduction in minimum age for allowable in-service 
distributions.
Sec. 1503. Modification of rules governing hardship distributions.
Sec. 1504. Modification of rules relating to hardship withdrawals from 
cash or deferred arrangements.
Sec. 1505. Extended rollover period for the rollover of plan loan 
offset amounts in certain cases.
Sec. 1506. Modification of nondiscrimination rules to protect older, 
longer service participants.

    Subtitle G--Estate, Gift, and Generation-skipping Transfer Taxes

Sec. 1601. Increase in credit against estate, gift, and generation-
skipping transfer tax.
Sec. 1602. Repeal of estate and generation-skipping transfer taxes.

                TITLE II--ALTERNATIVE MINIMUM TAX REPEAL

Sec. 2001. Repeal of alternative minimum tax.

                     TITLE III--BUSINESS TAX REFORM

                         Subtitle A--Tax Rates

Sec. 3001. Reduction in corporate tax rate.

                       Subtitle B--Cost Recovery

Sec. 3101. Increased expensing.

                   Subtitle C--Small Business Reforms

Sec. 3201. Expansion of section 179 expensing.
Sec. 3202. Small business accounting method reform and simplification.
Sec. 3203. Small business exception from limitation on deduction of 
business interest.
Sec. 3204. Modification of treatment of S corporation conversions to C 
corporations.

  Subtitle D--Reform of Business-related Exclusions, Deductions, etc.

Sec. 3301. Interest.
Sec. 3302. Modification of net operating loss deduction.
Sec. 3303. Like-kind exchanges of real property.
Sec. 3304. Revision of treatment of contributions to capital.
Sec. 3305. Repeal of deduction for local lobbying expenses.
Sec. 3306. Repeal of deduction for income attributable to domestic 
production activities.
Sec. 3307. Entertainment, etc. expenses.
Sec. 3308. Unrelated business taxable income increased by amount of 
certain fringe benefit expenses for which deduction is disallowed.
Sec. 3309. Limitation on deduction for FDIC premiums.
Sec. 3310. Repeal of rollover of publicly traded securities gain into 
specialized small business investment companies.
Sec. 3311. Certain self-created property not treated as a capital 
asset.
Sec. 3312. Repeal of special rule for sale or exchange of patents.
Sec. 3313. Repeal of technical termination of partnerships.
Sec. 3314. Recharacterization of certain gains in the case of 
partnership profits interests held in connection with performance of 
investment services.
Sec. 3315. Amortization of research and experimental expenditures.
Sec. 3316. Uniform treatment of expenses in contingency fee cases.

                 Subtitle E--Reform of Business Credits

Sec. 3401. Repeal of credit for clinical testing expenses for certain 
drugs for rare diseases or conditions.
Sec. 3402. Repeal of employer-provided child care credit.
Sec. 3403. Repeal of rehabilitation credit.
Sec. 3404. Repeal of work opportunity tax credit.
Sec. 3405. Repeal of deduction for certain unused business credits.
Sec. 3406. Termination of new markets tax credit.
Sec. 3407. Repeal of credit for expenditures to provide access to 
disabled individuals.
Sec. 3408. Modification of credit for portion of employer social 
security taxes paid with respect to employee tips.

                       Subtitle F--Energy Credits

Sec. 3501. Modifications to credit for electricity produced from 
certain renewable resources.
Sec. 3502. Modification of the energy investment tax credit.
Sec. 3503. Extension and phaseout of residential energy efficient 
property.
Sec. 3504. Repeal of enhanced oil recovery credit.
Sec. 3505. Repeal of credit for producing oil and gas from marginal 
wells.
Sec. 3506. Modifications of credit for production from advanced nuclear 
power facilities.

                        Subtitle G--Bond Reforms

Sec. 3601. Termination of private activity bonds.
Sec. 3602. Repeal of advance refunding bonds.
Sec. 3603. Repeal of tax credit bonds.
Sec. 3604. No tax exempt bonds for professional stadiums.

                         Subtitle H--Insurance

Sec. 3701. Net operating losses of life insurance companies.
Sec. 3702. Repeal of small life insurance company deduction.
Sec. 3703. Surtax on life insurance company taxable income.
Sec. 3704. Adjustment for change in computing reserves.
Sec. 3705. Repeal of special rule for distributions to shareholders 
from pre-1984 policyholders surplus account.
Sec. 3706. Modification of proration rules for property and casualty 
insurance companies.
Sec. 3707. Modification of discounting rules for property and casualty 
insurance companies.
Sec. 3708. Repeal of special estimated tax payments.

                        Subtitle I--Compensation

Sec. 3801. Modification of limitation on excessive employee 
remuneration.
Sec. 3802. Excise tax on excess tax-exempt organization executive 
compensation.
Sec. 3803. Treatment of qualified equity grants.

        TITLE IV--TAXATION OF FOREIGN INCOME AND FOREIGN PERSONS

    Subtitle A--Establishment of Participation Exemption System for 
                       Taxation of Foreign Income

Sec. 4001. Deduction for foreign-source portion of dividends received 
by domestic corporations from specified 10-percent owned foreign 
corporations.
Sec. 4002. Application of participation exemption to investments in 
United States property.
Sec. 4003. Limitation on losses with respect to specified 10-percent 
owned foreign corporations.
Sec. 4004. Treatment of deferred foreign income upon transition to 
participation exemption system of taxation.

     Subtitle B--Modifications Related to Foreign Tax Credit System

Sec. 4101. Repeal of section 902 indirect foreign tax credits; 
determination of section 960 credit on current year basis.
Sec. 4102. Source of income from sales of inventory determined solely 
on basis of production activities.

            Subtitle C--Modification of Subpart F Provisions

Sec. 4201. Repeal of inclusion based on withdrawal of previously 
excluded subpart F income from qualified investment.
Sec. 4202. Repeal of treatment of foreign base company oil related 
income as subpart F income.
Sec. 4203. Inflation adjustment of de minimis exception for foreign 
base company income.
Sec. 4204. Look-thru rule for related controlled foreign corporations 
made permanent.
Sec. 4205. Modification of stock attribution rules for determining 
status as a controlled foreign corporation.
Sec. 4206. Elimination of requirement that corporation must be 
controlled for 30 days before subpart F inclusions apply.

                 Subtitle D--Prevention of Base Erosion

Sec. 4301. Current year inclusion by United States shareholders with 
foreign high returns.
Sec. 4302. Limitation on deduction of interest by domestic corporations 
which are members of an international financial reporting group.
Sec. 4303. Excise tax on certain payments from domestic corporations to 
related foreign corporations; election to treat such payments as 
effectively connected income.

   Subtitle E--Provisions Related to Possessions of the United States

Sec. 4401. Extension of deduction allowable with respect to income 
attributable to domestic production activities in Puerto Rico.
Sec. 4402. Extension of temporary increase in limit on cover over of 
rum excise taxes to Puerto Rico and the Virgin Islands.
Sec. 4403. Extension of American Samoa economic development credit.

                Subtitle F--Other International Reforms

Sec. 4501. Restriction on insurance business exception to passive 
foreign investment company rules.

                     TITLE V--EXEMPT ORGANIZATIONS

               Subtitle A--Unrelated Business Income Tax

Sec. 5001. Clarification of unrelated business income tax treatment of 
entities treated as exempt from taxation under section 501(a).
Sec. 5002. Exclusion of research income limited to publicly available 
research.

                        Subtitle B--Excise Taxes

Sec. 5101. Simplification of excise tax on private foundation 
investment income.
Sec. 5102. Private operating foundation requirements relating to 
operation of art museum.
Sec. 5103. Excise tax based on investment income of private colleges 
and universities.
Sec. 5104. Exception from private foundation excess business holding 
tax for independently-operated philanthropic business holdings.

       Subtitle C--Requirements for Organizations Exempt From Tax

Sec. 5201. 501(c)(3) organizations permitted to make statements 
relating to political campaign in ordinary course of activities.
Sec. 5202. Additional reporting requirements for donor advised fund 
sponsoring organizations.

                  TITLE I--TAX REFORM FOR INDIVIDUALS

Subtitle A--Simplification and Reform of Rates, Standard Deduction, and 
                               Exemptions

SEC. 1001. REDUCTION AND SIMPLIFICATION OF INDIVIDUAL INCOME TAX RATES.

  (a) In General.--Section 1 is amended by striking subsection (i) and 
by striking all that precedes subsection (h) and inserting the 
following:

``SEC. 1. TAX IMPOSED.

  ``(a) In General.--There is hereby imposed on the income of every 
individual a tax equal to the sum of--
          ``(1) 12 percent bracket.--12 percent of so much of the 
        taxable income as does not exceed the 25-percent bracket 
        threshold amount,
          ``(2) 25 percent bracket.--25 percent of so much of the 
        taxable income as exceeds the 25-percent bracket threshold 
        amount but does not exceed the 35-percent bracket threshold 
        amount, plus
          ``(3) 35 percent bracket.--35 percent of so much of taxable 
        income as exceeds the 35-percent bracket threshold amount but 
        does not exceed the 39.6 percent bracket threshold amount.
          ``(4) 39.6 percent bracket.--39.6 percent of so much of 
        taxable income as exceeds the 39.6-percent bracket threshold 
        amount.
  ``(b) Bracket Threshold Amounts.--For purposes of this section--
          ``(1) 25-percent bracket threshold amount.--The term `25-
        percent bracket threshold amount' means--
                  ``(A) in the case of a joint return or surviving 
                spouse, $90,000,
                  ``(B) in the case of an individual who is the head of 
                a household (as defined in section 2(b)), $67,500,
                  ``(C) in the case of any other individual (other than 
                an estate or trust), an amount equal to \1/2\ of the 
                amount in effect for the taxable year under 
                subparagraph (A), and
                  ``(D) in the case of an estate or trust, $2,550.
          ``(2) 35-percent bracket threshold amount.--The term `35-
        percent bracket threshold amount' means--
                  ``(A) in the case of a joint return or surviving 
                spouse, $260,000,
                  ``(B) in the case of a married individual filing a 
                separate return, an amount equal to \1/2\ of the amount 
                in effect for the taxable year under subparagraph (A), 
                and
                  ``(C) in the case of any other individual (other than 
                an estate or trust), $200,000, and
                  ``(D) in the case of an estate or trust, $9,150.
          ``(3) 39.6-percent bracket threshold amount.--The term `39.6-
        percent bracket threshold amount' means--
                  ``(A) in the case of a joint return or surviving 
                spouse, $1,000,000,
                  ``(B) in the case of any other individual (other than 
                an estate or trust), an amount equal to \1/2\ of the 
                amount in effect for the taxable year under 
                subparagraph (A), and
                  ``(C) in the case of an estate or trust, $12,500.
  ``(c) Inflation Adjustment.--
          ``(1) In general.--In the case of any taxable year beginning 
        after 2018, each dollar amount in subsections (b) and (e)(3) 
        (other than any amount determined by reference to such a dollar 
        amount) shall be increased by an amount equal to--
                  ``(A) such dollar amount, multiplied by
                  ``(B) the cost-of-living adjustment determined under 
                this subsection for the calendar year in which the 
                taxable year begins by substituting `2017' for `2016' 
                in paragraph (2)(A)(ii).
        If any increase determined under the preceding sentence is not 
        a multiple of $100, such increase shall be rounded to the next 
        lowest multiple of $100.
          ``(2) Cost-of-living adjustment.--For purposes of this 
        subsection--
                  ``(A) In general.--The cost-of-living adjustment for 
                any calendar year is the percentage (if any) by which--
                          ``(i) the C-CPI-U for the preceding calendar 
                        year, exceeds
                          ``(ii) the normalized CPI for calendar year 
                        2016.
                  ``(B) Special rule for adjustments with a base year 
                after 2016.--For purposes of any provision which 
                provides for the substitution of a year after 2016 for 
                `2016' in subparagraph (A)(ii), subparagraph (A) shall 
                be applied by substituting `C-CPI-U' for `normalized 
                CPI' in clause (ii).
          ``(3) Normalized cpi.--For purposes of this subsection, the 
        normalized CPI for any calendar year is the product of--
                  ``(A) the CPI for such calendar year, multiplied by
                  ``(B) the C-CPI-U transition multiple.
          ``(4) C-CPI-U transition multiple.--For purposes of this 
        subsection, the term `C-CPI-U transition multiple' means the 
        amount obtained by dividing--
                  ``(A) the C-CPI-U for calendar year 2016, by
                  ``(B) the CPI for calendar year 2016.
          ``(5) C-CPI-U.--For purposes of this subsection--
                  ``(A) In general.--The term `C-CPI-U' means the 
                Chained Consumer Price Index for All Urban Consumers 
                (as published by the Bureau of Labor Statistics of the 
                Department of Labor). The values of the Chained 
                Consumer Price Index for All Urban Consumers taken into 
                account for purposes of determining the cost-of-living 
                adjustment for any calendar year under this subsection 
                shall be the latest values so published as of the date 
                on which such Bureau publishes the initial value of the 
                Chained Consumer Price Index for All Urban Consumers 
                for the month of August for the preceding calendar 
                year.
                  ``(B) Determination for calendar year.--The C-CPI-U 
                for any calendar year is the average of the C-CPI-U as 
                of the close of the 12-month period ending on August 31 
                of such calendar year.
          ``(6) CPI.--For purposes of this subsection--
                  ``(A) In general.--The term `Consumer Price Index' 
                means the last Consumer Price Index for All Urban 
                Consumers published by the Department of Labor. For 
                purposes of the preceding sentence, the revision of the 
                Consumer Price Index which is most consistent with the 
                Consumer Price Index for calendar year 1986 shall be 
                used.
                  ``(B) Determination for calendar year.--The CPI for 
                any calendar year is the average of the Consumer Price 
                Index as of the close of the 12-month period ending on 
                August 31 of such calendar year.
  ``(d) Special Rules for Certain Children With Unearned Income.--
          ``(1) In general.--In the case of any child to whom this 
        subsection applies for any taxable year--
                  ``(A) the 25-percent bracket threshold amount shall 
                not be more than the taxable income of such child for 
                the taxable year reduced by the net unearned income of 
                such child, and
                  ``(B) the 35-percent bracket threshold amount shall 
                not be more than the sum of--
                          ``(i) the taxable income of such child for 
                        the taxable year reduced by the net unearned 
                        income of such child, plus
                          ``(ii) the dollar amount in effect under 
                        subsection (b)(2)(D) for the taxable year.
                  ``(C) the 39.6-percent bracket threshold amount shall 
                not be more than the sum of--
                          ``(i) the taxable income of such child for 
                        the taxable year reduced by the net unearned 
                        income of such child, plus
                          ``(ii) the dollar amount in effect under 
                        subsection (b)(3)(C).
          ``(2) Child to whom subsection applies.--This subsection 
        shall apply to any child for any taxable year if--
                  ``(A) such child--
                          ``(i) has not attained age 18 before the 
                        close of the taxable year, or
                          ``(ii) has attained age 18 before the close 
                        of the taxable year and is described in 
                        paragraph (3),
                  ``(B) either parent of such child is alive at the 
                close of the taxable year, and
                  ``(C) such child does not file a joint return for the 
                taxable year.
          ``(3) Certain children whose earned income does not exceed 
        one-half of individual's support.--A child is described in this 
        paragraph if--
                  ``(A) such child--
                          ``(i) has not attained age 19 before the 
                        close of the taxable year, or
                          ``(ii) is a student (within the meaning of 
                        section 7706(f)(2)) who has not attained age 24 
                        before the close of the taxable year, and
                  ``(B) such child's earned income (as defined in 
                section 911(d)(2)) for such taxable year does not 
                exceed one-half of the amount of the individual's 
                support (within the meaning of section 7706(c)(1)(D) 
                after the application of section 7706(f)(5) (without 
                regard to subparagraph (A) thereof)) for such taxable 
                year.
          ``(4) Net unearned income.--For purposes of this subsection--
                  ``(A) In general.--The term `net unearned income' 
                means the excess of--
                          ``(i) the portion of the adjusted gross 
                        income for the taxable year which is not 
                        attributable to earned income (as defined in 
                        section 911(d)(2)), over
                          ``(ii) the sum of--
                                  ``(I) the amount in effect for the 
                                taxable year under section 63(c)(2)(A) 
                                (relating to limitation on standard 
                                deduction in the case of certain 
                                dependents), plus
                                  ``(II) The greater of the amount 
                                described in subclause (I) or, if the 
                                child itemizes his deductions for the 
                                taxable year, the amount of the 
                                itemized deductions allowed by this 
                                chapter for the taxable year which are 
                                directly connected with the production 
                                of the portion of adjusted gross income 
                                referred to in clause (i).
                  ``(B) Limitation based on taxable income.--The amount 
                of the net unearned income for any taxable year shall 
                not exceed the individual's taxable income for such 
                taxable year.
  ``(e) Phaseout of 12-percent Rate.--
          ``(1) In general.--The amount of tax imposed by this section 
        (determined without regard to this subsection) shall be 
        increased by 6 percent of the excess (if any) of--
                  ``(A) adjusted gross income, over
                  ``(B) the applicable dollar amount.
          ``(2) Limitation.--The increase determined under paragraph 
        (1) with respect to any taxpayer for any taxable year shall not 
        exceed 27.6 percent of the lesser of--
                  ``(A) the taxpayer's taxable income for such taxable 
                year, or
                  ``(B) the 25-percent bracket threshold amount in 
                effect with respect to the taxpayer for such taxable 
                year.
          ``(3) Applicable dollar amount.--For purposes of this 
        subsection, the term `applicable dollar amount' means--
                  ``(A) in the case of a joint return or a surviving 
                spouse, $1,200,000,
                  ``(B) in the case of a married individual filing a 
                separate return, an amount equal to \1/2\ of the amount 
                in effect for the taxable year under subparagraph (A), 
                and
                  ``(C) in the case of any other individual, 
                $1,000,000.
          ``(4) Estates and trusts.--Paragraph (1) shall not apply in 
        the case of an estate or trust.''.
  (b) Application of Current Income Tax Brackets to Capital Gains 
Brackets.--
          (1) In general.--
                  (A) 0-percent capital gains bracket.--Section 1(h)(1) 
                is amended by striking ``which would (without regard to 
                this paragraph) be taxed at a rate below 25 percent'' 
                in subparagraph (B)(i) and inserting ``below the 15-
                percent rate threshold''.
                  (B) 15-percent capital gains bracket.--Section 
                1(h)(1)(C)(ii)(I) is amended by striking ``which would 
                (without regard to this paragraph) be taxed at a rate 
                below 39.6 percent'' and inserting ``below the 20-
                percent rate threshold''.
          (2) Rate thresholds defined.--Section 1(h) is amended by 
        adding at the end the following new paragraph:
          ``(12) Rate thresholds defined.--For purposes of this 
        subsection--
                  ``(A) 15-percent rate threshold.--The 15-percent rate 
                threshold shall be--
                          ``(i) in the case of a joint return or 
                        surviving spouse, $77,200 (\1/2\ such amount in 
                        the case of a married individual filing a 
                        separate return),
                          ``(ii) in the case of an individual who is 
                        the head of a household (as defined in section 
                        2(b)), $51,700,
                          ``(iii) in the case of any other individual 
                        (other than an estate or trust), an amount 
                        equal to \1/2\ of the amount in effect for the 
                        taxable year under clause (i), and
                          ``(iv) in the case of an estate or trust, 
                        $2,600.
                  ``(B) 20-percent rate threshold.--The 20-percent rate 
                threshold shall be--
                          ``(i) in the case of a joint return or 
                        surviving spouse, $479,000 (\1/2\ such amount 
                        in the case of a married individual filing a 
                        separate return),
                          ``(ii) in the case of an individual who is 
                        the head of a household (as defined in section 
                        2(b)), $452,400,
                          ``(iii) in the case of any other individual 
                        (other than an estate or trust), $425,800, and
                          ``(iv) in the case of an estate or trust, 
                        $12,700.
                  ``(C) Inflation adjustment.--In the case of any 
                taxable year beginning after 2018, each of the dollar 
                amounts in subparagraphs (A) and (B) shall be increased 
                by an amount equal to--
                          ``(i) such dollar amount, multiplied by
                          ``(ii) the cost-of-living adjustment 
                        determined under subsection (c)(2)(A) for the 
                        calendar year in which the taxable year begins, 
                        determined by substituting `calendar year 2017' 
                        for `calendar year 2016' in clause (ii) 
                        thereof.''.
  (c) Application of Section 15.--
          (1) In general.--Subsection (a) of section 15 is amended by 
        striking ``by this chapter'' and inserting ``by section 11 (or 
        by reference to any such rates)''.
          (2) Conforming amendments.--
                  (A) Section 15 is amended by striking subsections (d) 
                and (f) and by redesignating subsection (e) as 
                subsection (d).
                  (B) Section 15(d), as redesignated by subparagraph 
                (A), is amended by striking ``section 1 or 11(b)'' and 
                inserting ``section 11(b)''.
                  (C) Section 6013(c) is amended by striking ``sections 
                15, 443, and 7851(a)(1)(A)'' and inserting ``sections 
                443 and 7851(a)(1)(A)''.
          (3) Application to this act.--Section 15 of the Internal 
        Revenue Code of 1986 shall not apply to any change in a rate of 
        tax imposed by chapter 1 of such Code which occurs by reason of 
        any amendment made by this Act (other than the amendments made 
        by section 3001).
  (d) Effective Date.--
          (1) In general.--The amendments made by this section shall 
        apply to taxable years beginning after December 31, 2017.
          (2) Subsection (c).--The amendments made by subsection (c) 
        shall take effect on the date of the enactment of this Act.

SEC. 1002. ENHANCEMENT OF STANDARD DEDUCTION.

  (a) Increase in Standard Deduction.--Section 63(c) is amended to read 
as follows:
  ``(c) Standard Deduction.--For purposes of this subtitle--
          ``(1) In general.--Except as otherwise provided in this 
        subsection, the term `standard deduction' means--
                  ``(A) $24,400, in the case of a joint return (or a 
                surviving spouse (as defined in section 2(a)),
                  ``(B) three-quarters of the amount in effect under 
                subparagraph (A) for the taxable year, in the case of 
                the head of a household (as defined in section 2(b)), 
                and
                  ``(C) one-half of the amount in effect under 
                subparagraph (A) for the taxable year, in any other 
                case.
          ``(2) Limitation on standard deduction in the case of certain 
        dependents.--In the case of an individual who is a dependent of 
        another taxpayer for a taxable year beginning in the calendar 
        year in which the individual's taxable year begins, the 
        standard deduction applicable to such individual for such 
        individual's taxable year shall not exceed the greater of--
                  ``(A) $500, or
                  ``(B) the sum of $250 and such individual's earned 
                income (within the means of section 32).
          ``(3) Certain individuals, etc., not eligible for standard 
        deduction.--In the case of--
                  ``(A) a married individual filing a separate return 
                where either spouse itemizes deductions,
                  ``(B) a nonresident alien individual,
                  ``(C) an individual making a return under section 
                443(a)(1) for a period of less than 12 months on 
                account of a change in his annual accounting period, or
                  ``(D) an estate or trust, common trust fund, or 
                partnership,
        the standard deduction shall be zero.
          ``(4) Unmarried individual.--For purposes of this section, 
        the term `unmarried individual' means any individual who--
                  ``(A) is not married as of the close of the taxable 
                year (as determined by applying section 7703),
                  ``(B) is not a surviving spouse (as defined in 
                section 2(a)) for the taxable year, and
                  ``(C) is not a dependent of another taxpayer for a 
                taxable year beginning in the calendar year in which 
                the individual's taxable year begins.
          ``(5) Inflation adjustments.--
                  ``(A) Standard deduction amount.--In the case of any 
                taxable year beginning after 2019, the dollar amount in 
                paragraph (1)(A) shall be increased by an amount equal 
                to--
                          ``(i) such dollar amount, multiplied by
                          ``(ii) the cost-of-living adjustment 
                        determined under section 1(c)(2)(A) for the 
                        calendar year in which the taxable year begins, 
                        determined by substituting `calendar year 2018' 
                        for `calendar year 2016' in clause (ii) 
                        thereof.
                  ``(B) Limitation amount in case of certain 
                dependents.--In the case of any taxable year beginning 
                after 2017, each of the dollar amounts in paragraph (2) 
                shall be increased by an amount equal to--
                          ``(i) such dollar amount, multiplied by
                          ``(ii)(I) in the case of the dollar amount in 
                        paragraph (2)(A), under section 1(c)(2)(A) for 
                        the calendar year in which the taxable year 
                        begins determined by substituting `calendar 
                        year 1987' for `calendar year 2016' in clause 
                        (ii) thereof, and
                          ``(II) in the case of the dollar amount in 
                        paragraph (2)(B), under section 1(c)(2)(A) for 
                        the calendar year in which the taxable year 
                        begins determined by substituting `calendar 
                        year 1997' for `calendar year 2016' in clause 
                        (ii) thereof.
        If any increase determined under this paragraph is not a 
        multiple of $100, such increase shall be rounded to the next 
        lowest multiple of $100.''.
  (b) Conforming Amendments.--
          (1) Section 63(b) is amended by striking ``, minus--'' and 
        all that follows and inserting ``minus the standard 
        deduction''.
          (2) Section 63 is amended by striking subsections (f) and 
        (g).
          (3) Section 1398(c) is amended--
                  (A) by striking ``Basic'' in the heading thereof,
                  (B) by striking ``Basic standard'' in the heading of 
                paragraph (3) and inserting ``Standard'', and
                  (C) by striking ``basic'' in paragraph (3).
          (4) Section 3402(m)(3) is amended by striking ``(including 
        the additional standard deduction under section 63(c)(3) for 
        the aged and blind)''.
          (5) Section 6014(b)(4) is amended by striking ``section 
        63(c)(5)'' and inserting ``section 63(c)(2)''.
  (c) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 1003. REPEAL OF DEDUCTION FOR PERSONAL EXEMPTIONS.

  (a) In General.--Part V of subchapter B of chapter 1 is hereby 
repealed.
  (b) Definition of Dependent Retained.--Section 152, prior to repeal 
by subsection (a), is hereby redesignated as section 7706 and moved to 
the end of chapter 79.
  (c) Application to Estates and Trusts.--Subsection (b) of section 642 
is amended--
          (1) by striking paragraph (2)(C),
          (2) by striking paragraph (3), and
          (3) by striking ``Deduction for Personal Exemption'' in the 
        heading thereof and inserting ``Basic Deduction''.
  (d) Application to Nonresident Aliens.--Section 873(b) is amended by 
striking paragraph (3).
  (e) Modification of Wage Withholding Rules.--
          (1) In general.--Section 3402(a) is amended by striking 
        paragraph (2).
          (2) Conforming amendment.--Section 3402(a) is amended--
                  (A) by redesignating subparagraphs (A) and (B) of 
                paragraph (1) as paragraphs (1) and (2) and moving such 
                redesignated paragraphs 2 ems to the left, and
                  (B) by striking all that precedes ``otherwise 
                provided in this section'' and inserting the following:
  ``(a) Requirement of Withholding.--Except as''.
          (3) Number of exemptions.--Section 3402(f)(1) is amended--
                  (A) in subparagraph (A), by striking ``an individual 
                described in section 151(d)(2)'' and inserting ``a 
                dependent of any other taxpayer'', and
                  (B) in subparagraph (C), by striking ``with respect 
                to whom, on the basis of facts existing at the 
                beginning of such day, there may reasonably be expected 
                to be allowable an exemption under section 151(c)'' and 
                inserting ``who, on the basis of facts existing at the 
                beginning of such day, is reasonably expected to be a 
                dependent of the employee''.
  (f) Modification of Return Requirement.--
          (1) In general.--Paragraph (1) of section 6012(a) is amended 
        to read as follows:
          ``(1) Every individual who has gross income for the taxable 
        year, except that a return shall not be required of--
                  ``(A) an individual who is not married (determined by 
                applying section 7703) and who has gross income for the 
                taxable year which does not exceed the standard 
                deduction applicable to such individual for such 
                taxable year under section 63, or
                  ``(B) an individual entitled to make a joint return 
                if--
                          ``(i) the gross income of such individual, 
                        when combined with the gross income of such 
                        individual's spouse, for the taxable year does 
                        not exceed the standard deduction which would 
                        be applicable to the taxpayer for such taxable 
                        year under section 63 if such individual and 
                        such individual's spouse made a joint return,
                          ``(ii) such individual and such individual's 
                        spouse have the same household as their home at 
                        the close of the taxable year,
                          ``(iii) such individual's spouse does not 
                        make a separate return, and
                          ``(iv) neither such individual nor such 
                        individual's spouse is an individual described 
                        in section 63(c)(2) who has income (other than 
                        earned income) in excess of the amount in 
                        effect under section 63(c)(2)(A).''.
          (2) Bankruptcy estates.--Paragraph (8) of section 6012(a) is 
        amended by striking ``the sum of the exemption amount plus the 
        basic standard deduction under section 63(c)(2)(D)'' and 
        inserting ``the standard deduction in effect under section 
        63(c)(1)(B)''.
  (g) Conforming Amendments.--
          (1) Section 2(a)(1)(B) is amended by striking ``a dependent'' 
        and all that follows through ``section 151'' and inserting ``a 
        dependent who (within the meaning of section 7706, determined 
        without regard to subsections (b)(1), (b)(2) and (d)(1)(B) 
        thereof) is a son, stepson, daughter, or stepdaughter of the 
        taxpayer''.
          (2) Section 36B(b)(2)(A) is amended by striking ``section 
        152'' and inserting ``section 7706''.
          (3) Section 36B(b)(3)(B) is amended by striking ``unless a 
        deduction is allowed under section 151 for the taxable year 
        with respect to a dependent'' in the flush matter at the end 
        and inserting ``unless the taxpayer has a dependent for the 
        taxable year''.
          (4) Section 36B(c)(1)(D) is amended by striking ``with 
        respect to whom a deduction under section 151 is allowable to 
        another taxpayer'' and inserting ``who is a dependent of 
        another taxpayer''.
          (5) Section 36B(d)(1) is amended by striking ``equal to the 
        number of individuals for whom the taxpayer is allowed a 
        deduction under section 151 (relating to allowance of deduction 
        for personal exemptions) for the taxable year'' and inserting 
        ``the sum of 1 (2 in the case of a joint return) plus the 
        number of the taxpayer's dependents for the taxable year''.
          (6) Section 36B(e)(1) is amended by striking ``1 or more 
        individuals for whom a taxpayer is allowed a deduction under 
        section 151 (relating to allowance of deduction for personal 
        exemptions) for the taxable year (including the taxpayer or his 
        spouse)'' and inserting ``1 or more of the taxpayer, the 
        taxpayer's spouse, or any dependent of the taxpayer''.
          (7) Section 42(i)(3)(D)(ii)(I) is amended--
                  (A) by striking ``section 152'' and inserting 
                ``section 7706'', and
                  (B) by striking the period at the end and inserting a 
                comma.
          (8) Section 72(t)(2)(D)(i)(III) is amended by striking 
        ``section 152'' and inserting ``section 7706''.
          (9) Section 72(t)(7)(A)(iii) is amended by striking ``section 
        152(f)(1)'' and inserting ``section 7706(f)(1)''.
          (10) Section 105(b) is amended--
                  (A) by striking ``as defined in section 152'' and 
                inserting ``as defined in section 7706'',
                  (B) by striking ``section 152(f)(1)'' and inserting 
                ``section 7706(f)(1)'' and
                  (C) by striking ``section 152(e)'' and inserting 
                ``section 7706(e)''.
          (11) Section 105(c)(1) is amended by striking ``section 152'' 
        and inserting ``section 7706''.
          (12) Section 125(e)(1)(D) is amended by striking ``section 
        152'' and inserting ``section 7706''.
          (13) Section 132(h)(2)(B) is amended--
                  (A) by striking ``section 152(f)(1)'' and inserting 
                ``section 7706(f)(1)'', and
                  (B) by striking ``section 152(e)'' and inserting 
                ``section 7706(e)''.
          (14) Section 139D(c)(5) is amended by striking ``section 
        152'' and inserting ``section 7706''.
          (15) Section 162(l)(1)(D) is amended by striking ``section 
        152(f)(1)'' and inserting ``section 7706(f)(1)''.
          (16) Section 170(g)(1) is amended by striking ``section 152'' 
        and inserting ``section 7706''.
          (17) Section 170(g)(3) is amended by striking ``section 
        152(d)(2)'' and inserting ``section 7706(d)(2)''.
          (18) Section 172(d) is amended by striking paragraph (3).
          (19) Section 220(b)(6) is amended by striking ``with respect 
        to whom a deduction under section 151 is allowable to'' and 
        inserting ``who is a dependent of''.
          (20) Section 220(d)(2)(A) is amended by striking ``section 
        152'' and inserting ``section 7706''.
          (21) Section 223(b)(6) is amended by striking ``with respect 
        to whom a deduction under section 151 is allowable to'' and 
        inserting ``who is a dependent of''.
          (22) Section 223(d)(2)(A) is amended by striking ``section 
        152'' and inserting ``section 7706''.
          (23) Section 401(h) is amended by striking ``section 
        152(f)(1)'' in the last sentence and inserting ``section 
        7706(f)(1)''.
          (24) Section 402(l)(4)(D) is amended by striking ``section 
        152'' and inserting ``section 7706''.
          (25) Section 409A(a)(2)(B)(ii)(I) is amended by striking 
        ``section 152(a)'' and inserting ``section 7706(a)''.
          (26) Section 501(c)(9) is amended by striking ``section 
        152(f)(1)'' and inserting ``section 7706(f)(1)''.
          (27) Section 529(e)(2)(B) is amended by striking ``section 
        152(d)(2)'' and inserting ``section 7706(d)(2)''.
          (28) Section 703(a)(2) is amended by striking subparagraph 
        (A) and by redesignating subparagraphs (B) through (F) as 
        subparagraphs (A) through (E), respectively.
          (29) Section 874 is amended by striking subsection (b) and by 
        redesignating subsection (c) as subsection (b).
          (30) Section 891 is amended by striking ``under section 151 
        and''.
          (31) Section 904(b) is amended by striking paragraph (1).
          (32) Section 931(b)(1) is amended by striking ``(other than 
        the deduction under section 151, relating to personal 
        exemptions)''.
          (33) Section 933 is amended--
                  (A) by striking ``(other than the deduction under 
                section 151, relating to personal exemptions)'' in 
                paragraph (1), and
                  (B) by striking ``(other than the deduction for 
                personal exemptions under section 151)'' in paragraph 
                (2).
          (34) Section 1212(b)(2)(B)(ii) is amended to read as follows:
                          ``(ii) in the case of an estate or trust, the 
                        deduction allowed for such year under section 
                        642(b).''.
          (35) Section 1361(c)(1)(C) is amended by striking ``section 
        152(f)(1)(C)'' and inserting ``section 7706(f)(1)(C)''.
          (36) Section 1402(a) is amended by striking paragraph (7).
          (37) Section 2032A(c)(7)(D) is amended by striking ``section 
        152(f)(2)'' and inserting ``section 7706(f)(2)''.
          (38) Section 3402(m)(1) is amended by striking ``other than 
        the deductions referred to in section 151 and''.
          (39) Section 3402(r)(2) is amended by striking ``the sum of--
        '' and all that follows and inserting ``the standard deduction 
        in effect under section 63(c)(1)(B).''.
          (40) Section 5000A(b)(3)(A) is amended by striking ``section 
        152'' and inserting ``section 7706''.
          (41) Section 5000A(c)(4)(A) is amended by striking ``the 
        number of individuals for whom the taxpayer is allowed a 
        deduction under section 151 (relating to allowance of deduction 
        for personal exemptions) for the taxable year'' and inserting 
        ``the sum of 1 (2 in the case of a joint return) plus the 
        number of the taxpayer's dependents for the taxable year''.
          (42) Section 6013(b)(3)(A) is amended--
                  (A) by striking ``had less than the exemption amount 
                of gross income'' in clause (ii) and inserting ``had no 
                gross income'',
                  (B) by striking ``had gross income of the exemption 
                amount or more'' in clause (iii) and inserting ``had 
                any gross income'', and
                  (C) by striking the flush language following clause 
                (iii).
          (43) Section 6103(l)(21)(A)(iii) is amended to read as 
        follows:
                          ``(iii) the number of the taxpayer's 
                        dependents,''.
          (44) Section 6213(g)(2) is amended by striking subparagraph 
        (H).
          (45) Section 6334(d)(2) is amended to read as follows:
          ``(2) Exempt amount.--
                  ``(A) In general.--For purposes of paragraph (1), the 
                term `exempt amount' means an amount equal to--
                          ``(i) the standard deduction, divided by
                          ``(ii) 52.
                  ``(B) Verified statement.--Unless the taxpayer 
                submits to the Secretary a written and properly 
                verified statement specifying the facts necessary to 
                determine the proper amount under subparagraph (A), 
                subparagraph (A) shall be applied as if the taxpayer 
                were a married individual filing a separate return with 
                no dependents.''.
          (46) Section 7702B(f)(2)(C)(iii) is amended by striking 
        ``section 152(d)(2)'' and inserting ``section 7706(d)(2)''.
          (47) Section 7703(a) is amended by striking ``part V of 
        subchapter B of chapter 1 and''.
          (48) Section 7703(b)(1) is amended by striking ``section 
        152(f)(1)'' and all that follows and inserting ``section 
        7706(f)(1),''.
          (49) Section 7706(a), as redesignated by this section, is 
        amended by striking ``this subtitle'' and inserting ``subtitle 
        A''.
          (50)(A) Section 7706(d)(1)(B), as redesignated by this 
        section, is amended by striking ``the exemption amount (as 
        defined in section 151(d))'' and inserting ``$4,150''.
          (B) Section 7706(d), as redesignated by this section, is 
        amended by adding at the end the following new paragraph:
          ``(6) Inflation adjustment.--In the case of any calendar year 
        beginning after 2018, the $4,150 amount in paragraph (1)(B) 
        shall be increased by an amount equal to--
                  ``(A) such dollar amount, multiplied by
                  ``(B) the cost-of-living adjustment determined under 
                section 1(c)(2)(A) for such calendar year, determined 
                by substituting `calendar year 2017' for `calendar year 
                2016' in clause (ii) thereof.
        If any increase determined under the preceding sentence is not 
        a multiple of $100, such increase shall be rounded to the next 
        lowest multiple of $100.''.
          (51) The table of sections for chapter 79 is amended by 
        adding at the end the following new item:

``Sec. 7706. Dependent defined.''.

  (h) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 1004. MAXIMUM RATE ON BUSINESS INCOME OF INDIVIDUALS.

  (a) In General.--Part I of subchapter A of chapter 1 is amended by 
inserting after section 3 the following new section:

``SEC. 4. 25 PERCENT MAXIMUM RATE ON BUSINESS INCOME OF INDIVIDUALS.

  ``(a) Reduction in Tax to Achieve 25 Percent Maximum Rate.--The tax 
imposed by section 1 shall be reduced by the sum of--
          ``(1) 10 percent of the lesser of--
                  ``(A) qualified business income, or
                  ``(B) the excess (if any) of--
                          ``(i) taxable income reduced by net capital 
                        gain (as defined in section 1(h)(11)(A)), over
                          ``(ii) the maximum dollar amount for the 25-
                        percent rate bracket which applies to the 
                        taxpayer under section 1 for the taxable year, 
                        and
          ``(2) 4.6 percent of the excess (if any) of--
                  ``(A) the lesser of--
                          ``(i) qualified business income, or
                          ``(ii) the excess (if any) determined under 
                        paragraph (1)(B), over
                  ``(B) the excess of--
                          ``(i) the maximum dollar amount for the 35-
                        percent rate bracket which applies to the 
                        taxpayer under section 1 for the taxable year, 
                        over
                          ``(ii) the maximum dollar amount for the 25-
                        percent rate bracket which applies to the 
                        taxpayer under section 1 for the taxable year.
  ``(b) Qualified Business Income.--For purposes of this section, the 
term `qualified business income' means the excess (if any) of--
          ``(1) the sum of--
                  ``(A) 100 percent of any net business income derived 
                from any passive business activity, plus
                  ``(B) the capital percentage of any net business 
                income derived from any active business activity, over
          ``(2) the sum of--
                  ``(A) 100 percent of any net business loss derived 
                from any passive business activity,
                  ``(B) except as provided in subsection (e)(3)(A), 30 
                percent of any net business loss derived from any 
                active business activity, plus
                  ``(C) any carryover business loss determined for the 
                preceding taxable year.
  ``(c) Determination of Net Business Income or Loss.--For purposes of 
this section--
          ``(1) In general.--Net business income or loss shall be 
        determined with respect to any business activity by 
        appropriately netting items of income, gain, deduction, and 
        loss with respect to such business activity.
          ``(2) Wages, etc.--Any wages (as defined in section 3401), 
        payments described in subsection (a) or (c) of section 707, or 
        directors' fees received by the taxpayer which are properly 
        attributable to any business activity shall be taken into 
        account under paragraph (1) as an item of income with respect 
        to such business activity.
          ``(3) Exception for certain investment-related items.--There 
        shall not be taken into account under paragraph (1)--
                  ``(A) any item of short-term capital gain, short-term 
                capital loss, long-term capital gain, or long-term 
                capital loss,
                  ``(B) any dividend, income equivalent to a dividend, 
                or payment in lieu of dividends described in section 
                954(c)(1)(G),
                  ``(C) any interest income other than interest income 
                which is properly allocable to a trade or business,
                  ``(D) any item of gain or loss described in 
                subparagraph (C) or (D) of section 954(c)(1) (applied 
                by substituting `business activity' for `controlled 
                foreign corporation'),
                  ``(E) any item of income, gain, deduction, or loss 
                taken into account under section 954(c)(1)(F) 
                (determined without regard to clause (ii) thereof and 
                other than items attributable to notional principal 
                contracts entered into in transactions qualifying under 
                section 1221(a)(7)),
                  ``(F) any amount received from an annuity which is 
                not received in connection with the trade or business 
                of the business activity, and
                  ``(G) any item of deduction or loss properly 
                allocable to an amount described in any of the 
                preceding subparagraphs.
          ``(4) Application of restrictions applicable to determining 
        taxable income.--Net business income or loss shall be 
        appropriately adjusted so as only to take into account any 
        amount of income, gain, deduction, or loss to the extent such 
        amount affects the determination of taxable income for the 
        taxable year.
          ``(5) Carryover business loss.--For purposes of subsection 
        (b)(2)(C), the carryover business loss determined for any 
        taxable year is the excess (if any) of the sum described in 
        subsection (b)(2) over the sum described in subsection (b)(1) 
        for such taxable year.
  ``(d) Passive and Active Business Activity.--For purposes of this 
section--
          ``(1) Passive business activity.--The term `passive business 
        activity' means any passive activity as defined in section 
        469(c) determined without regard to paragraphs (3) and (6)(B) 
        thereof.
          ``(2) Active business activity.--The term `active business 
        activity' means any business activity which is not a passive 
        business activity.
          ``(3) Business activity.--The term `business activity' means 
        any activity (within the meaning of section 469) which involves 
        the conduct of any trade or business.
  ``(e) Capital Percentage.--For purposes of this section--
          ``(1) In general.--Except as otherwise provided in this 
        section, the term `capital percentage' means 30 percent.
          ``(2) Increased percentage for capital-intensive business 
        activities.--In the case of a taxpayer who elects the 
        application of this paragraph with respect to any active 
        business activity (other than a specified service activity), 
        the capital percentage shall be equal to the applicable 
        percentage (as defined in subsection (f)) for each taxable year 
        with respect to which such election applies. Any election made 
        under this paragraph shall apply to the taxable year for which 
        such election is made and each of the 4 subsequent taxable 
        years. Such election shall be made not later than the due date 
        (including extensions) for the return of tax for the taxable 
        year for which such election is made, and, once made, may not 
        be revoked.
          ``(3) Treatment of specified service activities.--
                  ``(A) In general.--In the case of any active business 
                activity which is a specified service activity--
                          ``(i) the capital percentage shall be 0 
                        percent, and
                          ``(ii) subsection (b)(2)(B) shall be applied 
                        by substituting `0 percent' for `30 percent'.
                  ``(B) Exception for capital-intensive specified 
                service activities.--If--
                          ``(i) the taxpayer elects the application of 
                        this subparagraph with respect to such activity 
                        for any taxable year, and
                          ``(ii) the applicable percentage (as defined 
                        in subsection (f)) with respect to such 
                        activity for such taxable year is at least 10 
                        percent,
                then subparagraph (A) shall not apply and the capital 
                percentage with respect to such activity shall be equal 
                to such applicable percentage.
                  ``(C) Specified service activity.--The term 
                `specified service activity' means any activity 
                involving the performance of services described in 
                section 1202(e)(3)(A), including investing, trading, or 
                dealing in securities (as defined in section 
                475(c)(2)), partnership interests, or commodities (as 
                defined in section 475(e)(2)).
          ``(4) Reduction in capital percentage in certain cases.--The 
        capital percentage (determined after the application of 
        paragraphs (2) and (3)) with respect to any active business 
        activity shall not exceed 1 minus the quotient (not greater 
        than 1) of--
                  ``(A) any amounts described in subsection (c)(2) 
                which are taken into account in determining the net 
                business income derived from such activity, divided by
                  ``(B) such net business income.
  ``(f) Applicable Percentage.--For purposes of this section--
          ``(1) In general.--The term `applicable percentage' means, 
        with respect to any active business activity for any taxable 
        year, the quotient (not greater than 1) of--
                  ``(A) the specified return on capital with respect to 
                such activity for such taxable year, divided by
                  ``(B) the taxpayer's net business income derived from 
                such activity for such taxable year.
          ``(2) Specified return on capital.--The term `specified 
        return on capital' means, with respect to any active business 
        activity referred to in paragraph (1), the excess of--
                  ``(A) the product of--
                          ``(i) the deemed rate of return for the 
                        taxable year, multiplied by
                          ``(ii) the asset balance with respect to such 
                        activity for such taxable year, over
                  ``(B) an amount equal to the interest which is paid 
                or accrued, and for which a deduction is allowed under 
                this chapter, with respect to such activity for such 
                taxable year.
          ``(3) Deemed rate of return.--The term `deemed rate of 
        return' means, with respect to any taxable year, the Federal 
        short-term rate (determined under section 1274(d) for the month 
        in which or with which such taxable year ends) plus 7 
        percentage points.
          ``(4) Asset balance.--
                  ``(A) In general.--The asset balance with respect to 
                any active business activity referred to in paragraph 
                (1) for any taxable year equals the taxpayer's adjusted 
                basis of any property described in section 1221(a)(2) 
                which is used in connection with such activity as of 
                the end of the taxable year (determined without regard 
                to sections 168(k) and 179).
                  ``(B) Application to activities carried on through 
                partnerships and s corporations.--In the case of any 
                active business activity carried on through a 
                partnership or S corporation, the taxpayer shall take 
                into account such taxpayer's distributive or pro rata 
                share (as the case may be) of the asset balance with 
                respect to such activity as determined with respect to 
                such partnership or S corporation under subparagraph 
                (A) (applied by substituting `the partnership's or S 
                corporation's adjusted basis' for `the taxpayer's 
                adjusted basis').
  ``(g) Reduced Rate for Small Businesses With Net Active Business 
Income.--
          ``(1) In general.--The tax imposed by section 1 shall be 
        reduced by 3 percent of the excess (if any) of--
                  ``(A) the least of--
                          ``(i) qualified active business income,
                          ``(ii) taxable income reduced by net capital 
                        gain (as defined in section 1(h)(11)(A)), or
                          ``(iii) the 9-percent bracket threshold 
                        amount, over
                  ``(B) the excess (if any) of taxable income over the 
                applicable threshold amount.
          ``(2) Phase-in of rate reduction.--In the case of any taxable 
        year beginning before January 1, 2022, paragraph (1) shall be 
        applied by substituting for `3 percent'--
                  ``(A) in the case of any taxable year beginning after 
                December 31, 2017, and before January 1, 2020, `1 
                percent', and
                  ``(B) in the case of any taxable year beginning after 
                December 31, 2019, and before January 1, 2022, `2 
                percent'.
          ``(3) Qualified active business income.--For purposes of this 
        subsection, the term `qualified active business income' means 
        the excess (if any) of--
                  ``(A) any net business income derived from any active 
                business activity, over
                  ``(B) any net business loss derived from any active 
                business activity.
          ``(4) 9-percent bracket threshold amount.--For purposes of 
        this subsection, the term `9-percent bracket threshold amount' 
        means--
                  ``(A) in the case of a joint return or surviving 
                spouse, $75,000,
                  ``(B) in the case of an individual who is the head of 
                a household (as defined in section 2(b)), \3/4\ of the 
                amount in effect for the taxable year under 
                subparagraph (A), and
                  ``(C) in the case of any other individual, \1/2\ of 
                the amount in effect for the taxable year under 
                subparagraph (A).
          ``(5) Applicable threshold amount.--For purposes of this 
        subsection, the term `applicable threshold amount' means--
                  ``(A) in the case of a joint return or surviving 
                spouse, $150,000,
                  ``(B) in the case of an individual who is the head of 
                a household (as defined in section 2(b)), \3/4\ of the 
                amount in effect for the taxable year under 
                subparagraph (A), and
                  ``(C) in the case of any other individual, \1/2\ of 
                the amount in effect for the taxable year under 
                subparagraph (A).
          ``(6) Estates and trusts.--Paragraph (1) shall not apply to 
        any estate or trust.
          ``(7) Inflation adjustment.--In the case of any taxable year 
        beginning after 2018, the dollar amounts in paragraphs (4)(A) 
        and (5)(A) shall each be increased by an amount equal to--
                  ``(A) such dollar amount, multiplied by
                  ``(B) the cost-of-living adjustment determined under 
                subsection (c)(2)(A) for the calendar year in which the 
                taxable year begins, determined by substituting 
                `calendar year 2017' for `calendar year 2016' in clause 
                (ii) thereof.
        If any increase determined under the preceding sentence is not 
        a multiple of $100, such increase shall be rounded to the next 
        lowest multiple of $100.
  ``(h) Regulations.--The Secretary may issue such regulations or other 
guidance as may be necessary or appropriate to carry out the purposes 
of this section, including regulations or other guidance--
          ``(1) which ensures that no amount is taken into account 
        under subsection (f)(4) with respect to more than one activity, 
        and
          ``(2) which treats all specified service activities of the 
        taxpayer as a single business activity for purposes of this 
        section to the extent that such activities would be treated as 
        a single employer under subsection (a) or (b) of section 52 or 
        subsection (m) or (o) of section 414.
  ``(i) References.--Any reference in this title to section 1 shall be 
treated as including a reference to this section unless the context of 
such reference clearly indicates otherwise.''.
  (b) 25 Percent Rate for Certain Dividends of Real Estate Investment 
Trusts and Cooperatives.--Section 1(h), as amended by the preceding 
provisions of this Act, is amended by adding at the end the following 
new paragraph:
          ``(13) 25 percent rate for certain dividends of real estate 
        investment trusts and cooperatives.--
                  ``(A) In general.--For purposes of this subsection, 
                net capital gain (as defined in paragraph (11)) and 
                unrecaptured section 1250 gain (as defined in paragraph 
                (6)) shall each be increased by specified dividend 
                income.
                  ``(B) Specified dividend income.--For purposes of 
                this paragraph, the term `specified dividend income' 
                means--
                          ``(i) in the case of any dividend received 
                        from a real estate investment trust, the 
                        portion of such dividend which is neither--
                                  ``(I) a capital gain dividend (as 
                                defined in section 852(b)(3)), nor
                                  ``(II) taken into account in 
                                determining qualified dividend income 
                                (as defined in paragraph (11)), and
                          ``(ii) any dividend which is includible in 
                        gross income and which is received from an 
                        organization or corporation described in 
                        section 501(c)(12) or 1381(a).''.
  (c) Clerical Amendment.--The table of sections for part I of 
subchapter A of chapter 1 is amended by inserting after the item 
relating to section 3 the following new item:

``Sec. 4. 25 percent maximum rate on business income of individuals.''.

  (d) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.
  (e) Transition Rule.--In the case of any taxable year which includes 
December 31, 2017, the amendment made by subsection (a) shall apply 
with respect to such taxable year adjusted--
          (1) so as to apply with respect to the rates of tax in effect 
        under section 1 of the Internal Revenue Code of 1986 with 
        respect to such taxable year (and so as to achieve a 25 percent 
        effective rate of tax on the business income (determined 
        without regard to paragraph (2)) in the same manner as such 
        amendment applies to taxable years beginning after such date 
        with respect to the rates of tax in effect for such years), and
          (2) by reducing the amount of the reduction in tax (as 
        otherwise determined under paragraph (1)) by the amount which 
        bears the same proportion to the amount of such reduction as 
        the number of days in the taxable year which are before January 
        1, 2018, bears to the number of days in the entire taxable 
        year.

SEC. 1005. CONFORMING AMENDMENTS RELATED TO SIMPLIFICATION OF 
                    INDIVIDUAL INCOME TAX RATES.

  (a) Amendments Related to Modification of Inflation Adjustment.--
          (1) Section 32(b)(2)(B)(ii)(II) is amended by striking 
        ``section 1(f)(3) for the calendar year in which the taxable 
        year begins determined by substituting `calendar year 2008' for 
        `calendar year 1992' in subparagraph (B) thereof'' and 
        inserting ``section 1(c)(2)(A) for the calendar year in which 
        the taxable year begins determined by substituting `calendar 
        year 2008' for `calendar year 2016' in clause (ii) thereof''.
          (2) Section 32(j)(1)(B) is amended--
                  (A) in the matter preceding clause (i), by striking 
                ``section 1(f)(3)'' and inserting ``section 
                1(c)(2)(A)'',
                  (B) in clause (i), by striking ``for `calendar year 
                1992' in subparagraph (B) thereof'' and inserting ``for 
                `calendar year 2016' in clause (ii) thereof'', and
                  (C) in clause (ii), by striking ``for `calendar year 
                1992' in subparagraph (B) of such section 1'' and 
                inserting ``for `calendar year 2016' in clause (ii) 
                thereof''.
          (3) Section 36B(b)(3)(A)(ii)(II) is amended by striking 
        ``consumer price index'' and inserting ``C-CPI-U (as defined in 
        section 1(c))''.
          (4) Section 41(e)(5)(C) is amended to read as follows:
                  ``(C) Cost-of-living adjustment defined.--
                          ``(i) In general.--The cost-of-living 
                        adjustment for any calendar year is the cost-
                        of-living adjustment for such calendar year 
                        determined under section 1(c)(2)(A), by 
                        substituting `calendar year 1987' for `calendar 
                        year 2016' in clause (ii) thereof.
                          ``(ii) Special rule where base period ends in 
                        a calendar year other than 1983 or 1984.--If 
                        the base period of any taxpayer does not end in 
                        1983 or 1984, clause (i) shall be applied by 
                        substituting the calendar year in which such 
                        base period ends for 1987.''.
          (5) Section 42(e)(3)(D)(ii) is amended by striking ``section 
        1(f)(3) for such calendar year by substituting `calendar year 
        2008' for `calendar year 1992' in subparagraph (B) thereof'' 
        and inserting ``section 1(c)(2)(A) for such calendar year by 
        substituting `calendar year 2008' for `calendar year 2016' in 
        clause (ii) thereof''.
          (6) Section 42(h)(3)(H)(i)(II) is amended by striking 
        ``section 1(f)(3) for such calendar year by substituting 
        `calendar year 2001' for `calendar year 1992' in subparagraph 
        (B) thereof'' and inserting ``section 1(c)(2)(A) for such 
        calendar year by substituting `calendar year 2001' for 
        `calendar year 2016' in clause (ii) thereof''.
          (7) Section 45R(d)(3)(B)(ii) is amended by striking ``section 
        1(f)(3) for the calendar year, determined by substituting 
        `calendar year 2012' for `calendar year 1992' in subparagraph 
        (B) thereof'' and inserting ```section 1(c)(2)(A) for such 
        calendar year, determined by substituting ``calendar year 
        2012'' for ``calendar year 2016'' in clause (ii) thereof'''.
          (8) Section 125(i)(2) is amended--
                  (A) by striking ``section 1(f)(3) for the calendar 
                year in which the taxable year begins by substituting 
                `calendar year 2012' for `calendar year 1992' in 
                subparagraph (B) thereof'' in subparagraph (B) and 
                inserting ``section 1(c)(2)(A) for the calendar year in 
                which the taxable year begins'', and
                  (B) by striking ``$50'' both places it appears in the 
                last sentence and inserting ``$100''.
          (9) Section 162(o)(3) is amended by inserting ``as in effect 
        before enactment of the Tax Cuts and Jobs Act'' after ``section 
        1(f)(5)''.
          (10) Section 220(g)(2) is amended by striking ``section 
        1(f)(3) for the calendar year in which the taxable year begins 
        by substituting `calendar year 1997' for `calendar year 1992' 
        in subparagraph (B) thereof'' and inserting ``section 
        1(c)(2)(A) for the calendar year in which the taxable year 
        begins, determined by substituting `calendar year 1997' for 
        `calendar year 2016' in clause (ii) thereof''.
          (11) Section 223(g)(1) is amended by striking all that 
        follows subparagraph (A) and inserting the following:
                  ``(B) the cost-of-living adjustment determined under 
                section 1(c)(2)(A) for the calendar year in which the 
                taxable year begins, determined--
                          ``(i) by substituting for `calendar year 
                        2016' in clause (ii) thereof--
                                  ``(I) except as provided in clause 
                                (ii), `calendar year 1997', and
                                  ``(II) in the case of each dollar 
                                amount in subsection (c)(2)(A), 
                                `calendar year 2003', and
                          ``(ii) by substituting `March 31' for `August 
                        31' in paragraphs (5)(B) and (6)(B) of section 
                        1(c).
                The Secretary shall publish the dollar amounts as 
                adjusted under this subsection for taxable years 
                beginning in any calendar year no later than June 1 of 
                the preceding calendar year.''.
          (12) Section 430(c)(7)(D)(vii)(II) is amended by striking 
        ``section 1(f)(3) for the calendar year, determined by 
        substituting `calendar year 2009' for `calendar year 1992' in 
        subparagraph (B) thereof'' and inserting ``section 1(c)(2)(A) 
        for the calendar year, determined by substituting `calendar 
        year 2009' for `calendar year 2016' in clause (ii) thereof''.
          (13) Section 512(d)(2)(B) is amended by striking ``section 
        1(f)(3) for the calendar year in which the taxable year begins, 
        by substituting `calendar year 1994' for `calendar year 1992' 
        in subparagraph (B) thereof''and inserting ``section 1(c)(2)(A) 
        for the calendar year in which the taxable year begins, 
        determined by substituting `calendar year 1994' for `calendar 
        year 2016' in clause (ii) thereof''.
          (14) Section 513(h)(2)(C)(ii) is amended by striking 
        ``section 1(f)(3) for the calendar year in which the taxable 
        year begins by substituting `calendar year 1987' for `calendar 
        year 1992' in subparagraph (B) thereof'' and inserting 
        ``section 1(c)(2)(A) for the calendar year in which the taxable 
        year begins, determined by substituting `calendar year 1987' 
        for `calendar year 2016' in clause (ii) thereof''.
          (15) Section 831(b)(2)(D)(ii) is amended by striking 
        ``section 1(f)(3) for such calendar year by substituting 
        `calendar year 2013' for `calendar year 1992' in subparagraph 
        (B) thereof'' and inserting ``section 1(c)(2)(A) for such 
        calendar year by substituting `calendar year 2013' for 
        `calendar year 2016' in clause (ii) thereof''.
          (16) Section 877A(a)(3)(B)(i)(II) is amended by striking 
        ``section 1(f)(3) for the calendar year in which the taxable 
        year begins, by substituting `calendar year 2007' for `calendar 
        year 1992' in subparagraph (B) thereof'' and inserting 
        ``section 1(c)(2)(A) for the calendar year in which the taxable 
        year begins, determined by substituting `calendar year 2007' 
        for `calendar year 2016' in clause (ii) thereof''.
          (17) Section 911(b)(2)(D)(ii)(II) is amended by striking 
        ``section 1(f)(3) for the calendar year in which the taxable 
        year begins, determined by substituting `2004' for `1992' in 
        subparagraph (B) thereof'' and inserting ``section 1(c)(2)(A) 
        for the calendar year in which the taxable year begins, 
        determined by substituting `calendar year 2004' for `calendar 
        year 2016' in clause (ii) thereof''.
          (18) Section 1274A(d)(2) is amended to read as follows:
          ``(2) Inflation adjustment.--
                  ``(A) In general.--In the case of any debt instrument 
                arising out of a sale or exchange during any calendar 
                year after 2018, each adjusted dollar amount shall be 
                increased by an amount equal to--
                          ``(i) such adjusted dollar amount, multiplied 
                        by
                          ``(ii) the cost-of-living adjustment 
                        determined under section 1(c)(2)(A) for such 
                        calendar year, determined by substituting 
                        `calendar year 2017' for `calendar year 2016' 
                        in clause (ii) thereof.
                  ``(B) Adjusted dollar amounts.--For purposes of this 
                paragraph, the term `adjusted dollar amount' means the 
                dollar amounts in subsections (b) and (c), in each case 
                as in effect for calendar year 2018.
                  ``(C) Rounding.--Any increase under subparagraph (A) 
                shall be rounded to the nearest multiple of $100.''.
          (19) Section 2010(c)(3)(B)(ii) is amended by striking 
        ``section 1(f)(3) for such calendar year by substituting 
        `calendar year 2010' for `calendar year 1992' in subparagraph 
        (B) thereof'' and inserting ``section 1(c)(2)(A) for such 
        calendar year, determined by substituting `calendar year 2010' 
        for `calendar year 2016' in clause (ii) thereof''.
          (20) Section 2032A(a)(3)(B) is amended by striking ``section 
        1(f)(3) for such calendar year by substituting `calendar year 
        1997' for `calendar year 1992' in subparagraph (B) thereof'' 
        and inserting ``section 1(c)(2)(A) for such calendar year, 
        determined by substituting `calendar year 1997' for `calendar 
        year 2016' in clause (ii) thereof''.
          (21) Section 2503(b)(2)(B) is amended by striking ``section 
        1(f)(3) for such calendar year by substituting `calendar year 
        1997' for `calendar year 1992' in subparagraph (B) thereof'' 
        and inserting ``section 1(c)(2)(A) for the calendar year, 
        determined by substituting `calendar year 1997' for `calendar 
        year 2016' in clause (ii) thereof''.
          (22) Section 4161(b)(2)(C)(i)(II) is amended by striking 
        ``section 1(f)(3) for such calendar year, determined by 
        substituting `2004' for `1992' in subparagraph (B) thereof'' 
        and inserting ``section 1(c)(2)(A) for such calendar year, 
        determined by substituting `calendar year 2004' for `calendar 
        year 2016' in clause (ii) thereof''.
          (23) Section 4261(e)(4)(A)(ii) is amended by striking 
        ``section 1(f)(3) for such calendar year by substituting the 
        year before the last nonindexed year for `calendar year 1992' 
        in subparagraph (B) thereof'' and inserting ``section 
        1(c)(2)(A) for such calendar year, determined by substituting 
        the year before the last nonindexed year for `calendar year 
        2016' in clause (ii) thereof''.
          (24) Section 4980I(b)(3)(C)(v)(II) is amended--
                  (A) by striking ``section 1(f)(3)'' and inserting 
                ``section 1(c)(2)(A)'',
                  (B) by striking ``subparagraph (B)'' and inserting 
                ``clause (ii)'', and
                  (C) by striking ``1992'' and inserting ``2016''.
          (25) Section 5000A(c)(3)(D)(ii) is amended--
                  (A) by striking ``section 1(f)(3)'' and inserting 
                ``section 1(c)(2)(A)'',
                  (B) by striking ``subparagraph (B)'' and inserting 
                ``clause (ii)'', and
                  (C) by striking ``1992'' and inserting ``2016''.
          (26) Section 6039F(d) is amended by striking ``section 
        1(f)(3), except that subparagraph (B) thereof'' and inserting 
        ``section 1(c)(2)(A), except that clause (ii) thereof''.
          (27) Section 6323(i)(4)(B) is amended by striking ``section 
        1(f)(3) for the calendar year, determined by substituting 
        `calendar year 1996' for `calendar year 1992' in subparagraph 
        (B) thereof'' and inserting ``section 1(c)(2)(A) for the 
        calendar year, determined by substituting `calendar year 1996' 
        for `calendar year 2016' in clause (ii) thereof''.
          (28) Section 6334(g)(1)(B) is amended by striking ``section 
        1(f)(3) for such calendar year, by substituting `calendar year 
        1998' for `calendar year 1992' in subparagraph (B) thereof'' 
        and inserting ``section 1(c)(2)(A) for such calendar year, 
        determined by substituting `calendar year 1999' for `calendar 
        year 2016' in clause (ii) thereof''.
          (29) Section 6601(j)(3)(B) is amended by striking ``section 
        1(f)(3) for such calendar year by substituting `calendar year 
        1997' for `calendar year 1992' in subparagraph (B) thereof'' 
        and inserting ``section 1(c)(2)(A) for such calendar year by 
        substituting `calendar year 1997' for `calendar year 2016' in 
        clause (ii) thereof''.
          (30) Section 6651(i)(1) is amended by striking ``section 
        1(f)(3) determined by substituting `calendar year 2013' for 
        `calendar year 1992' in subparagraph (B) thereof'' and 
        inserting ``section 1(c)(2)(A) determined by substituting 
        `calendar year 2013' for `calendar year 2016' in clause (ii) 
        thereof''.
          (31) Section 6721(f)(1) is amended--
                  (A) by striking ``section 1(f)(3)'' and inserting 
                ``section 1(c)(2)(A)'',
                  (B) by striking ``subparagraph (B)'' and inserting 
                ``clause (ii)'', and
                  (C) by striking ``1992'' and inserting ``2016''.
          (32) Section 6722(f)(1) is amended--
                  (A) by striking ``section 1(f)(3)'' and inserting 
                ``section 1(c)(2)(A)'',
                  (B) by striking ``subparagraph (B)'' and inserting 
                ``clause (ii)'', and
                  (C) by striking ``1992'' and inserting ``2016''.
          (33) Section 6652(c)(7)(A) is amended by striking ``section 
        1(f)(3) determined by substituting `calendar year 2013' for 
        `calendar year 1992' in subparagraph (B) thereof'' and 
        inserting ``section 1(c)(2)(A) determined by substituting 
        `calendar year 2013' for `calendar year 2016' in clause (ii) 
        thereof''.
          (34) Section 6695(h)(1) is amended by striking ``section 
        1(f)(3) determined by substituting `calendar year 2013' for 
        `calendar year 1992' in subparagraph (B) thereof'' and 
        inserting ``section 1(c)(2)(A) determined by substituting 
        `calendar year 2013' for `calendar year 2016' in clause (ii) 
        thereof''.
          (35) Section 6698(e)(1) is amended by striking ``section 
        1(f)(3) determined by substituting `calendar year 2013' for 
        `calendar year 1992' in subparagraph (B) thereof'' and 
        inserting ``section 1(c)(2)(A) determined by substituting 
        `calendar year 2013' for `calendar year 2016' in clause (ii) 
        thereof''.
          (36) Section 6699(e)(1) is amended by striking ``section 
        1(f)(3) determined by substituting `calendar year 2013' for 
        `calendar year 1992' in subparagraph (B) thereof'' and 
        inserting ``section 1(c)(2)(A) determined by substituting 
        `calendar year 2013' for `calendar year 2016' in clause (ii) 
        thereof''.
          (37) Section 7345(f)(2) is amended by striking ``section 
        1(f)(3) for the calendar year, determined by substituting 
        `calendar year 2015' for `calendar year 1992' in subparagraph 
        (B) thereof'' and inserting ``section 1(c)(2)(A) for the 
        calendar year, determined by substituting `calendar year 2015' 
        for `calendar year 2016' in clause (ii) thereof''.
          (38) Section 7430(c)(1) is amended by striking ``section 
        1(f)(3) for such calendar year, by substituting `calendar year 
        1995' for `calendar year 1992' in subparagraph (B) thereof'' in 
        the flush text at the end and inserting ``section 1(c)(2)(A) 
        for such calendar year, determined by substituting `calendar 
        year 1995' for `calendar year 2016' in clause (ii) thereof''.
          (39) Section 7872(g)(5) is amended to read as follows:
          ``(5) Inflation adjustment.--
                  ``(A) In general.--In the case of any loan made 
                during any calendar year after 2018 to which paragraph 
                (1) applies, the adjusted dollar amount shall be 
                increased by an amount equal to--
                          ``(i) such adjusted dollar amount, multiplied 
                        by
                          ``(ii) the cost-of-living adjustment 
                        determined under section 1(c)(2)(A) for such 
                        calendar year, determined by substituting 
                        `calendar year 2017' for `calendar year 2016' 
                        in clause (ii) thereof.
                  ``(B) Adjusted dollar amount.--For purposes of this 
                paragraph, the term `adjusted dollar amount' means the 
                dollar amount in paragraph (2) as in effect for 
                calendar year 2018.
                  ``(C) Rounding.--Any increase under subparagraph (A) 
                shall be rounded to the nearest multiple of $100.''.
          (40) Section 219(b)(5)(C)(i)(II) is amended by striking 
        ``section 1(f)(3) for the calendar year in which the taxable 
        year begins, determined by substituting `calendar year 2007' 
        for `calendar year 1992' in subparagraph (B) thereof'' and 
        inserting ``section 1(c)(2)(A) for the calendar year in which 
        the taxable year begins, determined by substituting `calendar 
        year 2007' for `calendar year 2016' in clause (ii) thereof''.
          (41) Section 219(g)(8)(B) is amended by striking ``section 
        1(f)(3) for the calendar year in which the taxable year begins, 
        determined by substituting `calendar year 2005' for `calendar 
        year 1992' in subparagraph (B) thereof'' and inserting 
        ``section 1(c)(2)(A) for the calendar year in which the taxable 
        year begins, determined by substituting `calendar year 2005' 
        for `calendar year 2016' in clause (ii) thereof''.
  (b) Other Conforming Amendments.--
          (1) Section 36B(b)(3)(B)(ii)(I)(aa) is amended to read as 
        follows:
                                          ``(aa) who is described in 
                                        section 1(b)(1)(B) and who does 
                                        not have any dependents for the 
                                        taxable year,''.
          (2) Section 486B(b)(1) is amended--
                  (A) by striking ``maximum rate in effect'' and 
                inserting ``highest rate specified'', and
                  (B) by striking ``section 1(e)'' and inserting 
                ``section 1''.
          (3) Section 511(b)(1) is amended by striking ``section 1(e)'' 
        and inserting ``section 1''.
          (4) Section 641(a) is amended by striking ``section 1(e) 
        shall apply to the taxable income'' and inserting ``section 1 
        shall apply to the taxable income''.
          (5) Section 641(c)(2)(A) is amended to read as follows:
                  ``(A) Except to the extent provided in section 1(h), 
                the rate of tax shall be treated as being the highest 
                rate of tax set forth in section 1(a).''.
          (6) Section 646(b) is amended to read as follows:
  ``(b) Taxation of Income of Trust.--Except as provided in subsection 
(f)(1)(B)(ii), there is hereby imposed on the taxable income of an 
electing Settlement Trust a tax at the rate specified in section 
1(a)(1). Such tax shall be in lieu of the income tax otherwise imposed 
by this chapter on such income.''.
          (7) Section 685(c) is amended by striking ``Section 1(e)'' 
        and inserting ``Section 1''.
          (8) Section 904(b)(3)(E)(ii)(I) is amended by striking ``set 
        forth in subsection (a), (b), (c), (d), or (e) of section 1 
        (whichever applies)'' and inserting ``the highest rate of tax 
        specified in section 1''.
          (9) Section 1398(c)(2) is amended by striking ``subsection 
        (d) of''.
          (10) Section 3402(p)(1)(B) is amended by striking ``any 
        percentage applicable to any of the 3 lowest income brackets in 
        the table under section 1(c),'' and inserting ``12 percent, 25 
        percent,''.
          (11) Section 3402(q)(1) is amended by striking ``the product 
        of third lowest rate of tax applicable under section 1(c) and'' 
        and inserting ``25 percent of''.
          (12) Section 3402(r)(3) is amended by striking ``the amount 
        of tax which would be imposed by section 1(c) (determined 
        without regard to any rate of tax in excess of the fourth 
        lowest rate of tax applicable under section 1(c)) on an amount 
        of taxable income equal to'' and inserting ``an amount equal to 
        the product of 25 percent multiplied by''.
          (13) Section 3406(a)(1) is amended by striking ``the product 
        of the fourth lowest rate of tax applicable under section 1(c) 
        and'' and inserting ``25 percent of''.
          (14) Section 6103(e)(1)(A)(iii) is amended by inserting ``(as 
        in effect on the day before the date of the enactment of the 
        Tax Cuts and Jobs Act)'' after ``section 1(g)''.
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

  Subtitle B--Simplification and Reform of Family and Individual Tax 
                                Credits

SEC. 1101. ENHANCEMENT OF CHILD TAX CREDIT AND NEW FAMILY TAX CREDIT.

  (a) Increase in Credit Amount and Addition of Other Dependents.--
  (1) In General.--Section 24(a) is amended to read as follows:
  ``(a) Allowance of Credit.--There shall be allowed as a credit 
against the tax imposed by this chapter for the taxable year an amount 
equal to the sum of--
          ``(1) with respect to each qualifying child of the taxpayer, 
        $1,600, and
          ``(2) for taxable years beginning before January 1, 2023, 
        with respect to the taxpayer (each spouse in the case of a 
        joint return) and each dependent of the taxpayer to whom 
        paragraph (1) does not apply, $300.''.
  (2) Conforming Amendments.--
          (A) Section 24(c) is amended--
                  (i) by redesignating paragraphs (1) and (2) as 
                paragraphs (2) and (3), respectively,
                  (ii) by striking ``152(c)'' in paragraph (2) (as so 
                redesignated) and inserting ``7706(c)'',
                  (iii) by inserting before paragraph (2) (as so 
                redesignated) the following new paragraph:
          ``(1) Dependent.--
                  ``(A) In general.--The term `dependent' shall have 
                the meaning given such term by section 7706.
                  ``(B) Certain individuals not treated as 
                dependents.--In the case of an individual with respect 
                to whom a credit under this section is allowable to 
                another taxpayer for a taxable year beginning in the 
                calendar year in which the individual's taxable year 
                begins, the amount applicable to such individual under 
                subsection (a) for such individual's taxable year shall 
                be zero.'',
                  (iv) in paragraph (3) (as so redesignated)--
                          (I) by striking ``term `qualifying child''' 
                        and inserting ``terms `qualifying child' and 
                        `dependent''', and
                          (II) by striking ``152(b)(3)'' and inserting 
                        ``7706(b)(3)'', and
                  (v) in the heading by striking ``Qualifying'' and 
                inserting ``Dependent; Qualifying''.
          (B) The heading for section 24 is amended by inserting ``and 
        family'' after ``child''.
          (C) The table of sections for subpart A of part IV of 
        subchapter A of chapter 1 is amended by striking the item 
        relating to section 24 and inserting the following new item:

``Sec. 24. Child and family tax credit.''.

  (b) Elimination of Marriage Penalty.--Section 24(b)(2) is amended--
  (1) by striking ``$110,000'' in subparagraph (A) and inserting 
``$230,000'',
  (2) by inserting ``and'' at the end of subparagraph (A),
  (3) by striking ``$75,000 in the case of an individual who is not 
married'' and all that follows through the period at the end and 
inserting ``one-half of the amount in effect under subparagraph (A) for 
the taxable year in the case of any other individual.''.
  (c) Credit Refundable up to $1,000 Per Child.--
  (1) In General.--Section 24(d)(1)(A) is amended by striking all that 
follows ``under this section'' and inserting the following: 
``determined--
                          ``(i) without regard to this subsection and 
                        the limitation under section 26(a),
                          ``(ii) without regard to subsection (a)(2), 
                        and
                          ``(iii) by substituting `$1,000' for `$1,600' 
                        in subsection (a)(1), or''.
  (2) Inflation Adjustment.--Section 24(d) is amended by inserting 
after paragraph (2) the following new paragraph:
          ``(3) Inflation adjustment.--In the case of any taxable year 
        beginning in a calendar year after 2017, the $1,000 amount in 
        paragraph (1)(A)(iii) shall be increased by an amount equal 
        to--
                  ``(A) such dollar amount, multiplied by
                  ``(B) the cost-of-living adjustment under section 
                1(c)(2)(A) for such calendar year.
        Any increase determined under the preceding sentence shall be 
        rounded to the next highest multiple of $100 and shall not 
        exceed the amount in effect under subsection (a)(2).''.
  (d) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 1102. REPEAL OF NONREFUNDABLE CREDITS.

  (a) Repeal of Section 22.--
          (1) In general.--Subpart A of part IV of subchapter A of 
        chapter 1 is amended by striking section 22 (and by striking 
        the item relating to such section in the table of sections for 
        such subpart).
          (2) Conforming amendment.--
                  (A) Section 86(f) is amended by striking paragraph 
                (1) and by redesignating paragraphs (2), (3), and (4) 
                as paragraphs (1), (2), and (3), respectively.
                  (B)(i) Subsections (c)(3)(B) and (d)(4)(A) of section 
                7706, as redesignated by this Act, are each amended by 
                striking ``(as defined in section 22(e)(3)''.
                  (ii) Section 7706(f), as redesignated by this Act, is 
                amended by redesignating paragraph (7) as paragraph (8) 
                and by inserting after paragraph (6) the following new 
                paragraph:
          ``(7) Permanent and total disability defined.--An individual 
        is permanently and totally disabled if he is unable to engage 
        in any substantial gainful activity by reason of any medically 
        determinable physical or mental impairment which can be 
        expected to result in death or which has lasted or can be 
        expected to last for a continuous period of not less than 12 
        months. An individual shall not be considered to be permanently 
        and totally disabled unless he furnishes proof of the existence 
        thereof in such form and manner, and at such times, as the 
        Secretary may require.''.
                  (iii) Section 415(c)(3)(C)(i) is amended by striking 
                ``22(e)(3)'' and inserting ``7706(f)(7)''.
                  (iv) Section 422(c)(6) is amended by striking 
                ``22(e)(3)'' and inserting ``7706(f)(7)''.
  (b) Termination of Section 25.--Section 25, as amended by section 
3601, is amended by adding at the end the following new subsection:
  ``(k) Termination.--No credit shall be allowed under this section 
with respect to any mortgage credit certificate issued after December 
31, 2017.''.
  (c) Repeal of Section 30D.--
          (1) In general.--Subpart B of part IV of subchapter A of 
        chapter 1 is amended by striking section 30D (and by striking 
        the item relating to such section in the table of sections for 
        such subpart).
          (2) Conforming amendments.--
                  (A) Section 38(b) is amended by striking paragraph 
                (35).
                  (B) Section 1016(a) is amended by striking paragraph 
                (37).
                  (C) Section 6501(m) is amended by striking 
                ``30D(e)(4),''.
  (d) Effective Date.--
          (1) In general.--Except as provided in paragraphs (2) and 
        (3), the amendments made by this section shall apply to taxable 
        years beginning after December 31, 2017.
          (2) Subsection (b).--The amendment made by subsection (c) 
        shall apply to taxable years ending after December 31, 2017.
          (3) Subsection (c).--The amendments made by subsection (d) 
        shall apply to vehicles placed in service in taxable years 
        beginning after December 31, 2017.

SEC. 1103. REFUNDABLE CREDIT PROGRAM INTEGRITY.

  (a) Identification Requirements for Child and Family Tax Credit.--
          (1) In general.--Section 24(e) is amended to read as follows:
  ``(e) Identification Requirements.--
          ``(1) Requirements for qualifying child.--No credit shall be 
        allowed under this section to a taxpayer with respect to any 
        qualifying child unless the taxpayer includes the name and 
        social security number of such qualifying child on the return 
        of tax for the taxable year. The preceding sentence shall not 
        prevent a qualifying child from being treated as a dependent 
        described in subsection (a)(2).
          ``(2) Other identification requirements.--No credit shall be 
        allowed under this section with respect to any individual 
        unless the taxpayer identification number of such individual is 
        included on the return of tax for the taxable year and such 
        identifying number was issued before the due date for filing 
        the return for the taxable year.
          ``(3) Social security number.--For purposes of this 
        subsection, the term `social security number' means a social 
        security number issued by the Social Security Administration 
        (but only if the social security number is issued to a citizen 
        of the United States or pursuant to subclause (I) (or that 
        portion of subclause (III) that relates to subclause (I)) of 
        section 205(c)(2)(B)(i) of the Social Security Act)).''.
          (2) Omissions treated as mathematical or clerical error.--
                  (A) In general.--Section 6213(g)(2)(I) is amended to 
                read as follows:
                  ``(I) an omission of a correct social security 
                number, or a correct TIN, required under section 24(e) 
                (relating to child tax credit), to be included on a 
                return,''.
  (b) Social Security Number Must Be Provided.--
          (1) In general.--Section 25A(f)(1)(A), as amended by section 
        1201 of this Act, is amended by striking ``taxpayer 
        identification number'' each place it appears and inserting 
        ``social security number''.
          (2) Omission treated as mathematical or clerical error.--
        Section 6213(g)(2)(J) is amended by striking ``TIN'' and 
        inserting ``social security number and employer identification 
        number''.
  (c) Individuals Prohibited From Engaging in Employment in United 
States Not Eligible for Earned Income Tax Credit.--Section 32(m) is 
amended--
          (1) by striking ``(other than:'' and all that follows through 
        ``of the Social Security Act)'', and
          (2) by inserting before the period at the end the following: 
        ``, but only if, in the case of subsection (c)(1)(E), the 
        social security number is issued to a citizen of the United 
        States or pursuant to subclause (I) (or that portion of 
        subclause (III) that relates to subclause (I)) of section 
        205(c)(2)(B)(i) of the Social Security Act''.
  (d) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 1104. PROCEDURES TO REDUCE IMPROPER CLAIMS OF EARNED INCOME 
                    CREDIT.

  (a) Clarification Regarding Determination of Self-employment Income 
Which Is Treated as Earned Income.--Section 32(c)(2)(B) is amended by 
striking ``and'' at the end of clause (v), by striking the period at 
the end of clause (vi) and inserting ``, and'', and by adding at the 
end the following new clause:
                          ``(vii) in determining the taxpayer's net 
                        earnings from self-employment under 
                        subparagraph (A)(ii) there shall not fail to be 
                        taken into account any deduction which is 
                        allowable to the taxpayer under this 
                        subtitle.''.
  (b) Required Quarterly Reporting of Wages of Employees.--Section 6011 
is amended by adding at the end the following new subsection:
  ``(i) Employer Reporting of Wages.--Every person required to deduct 
and withhold from an employee a tax under section 3101 or 3402 shall 
include on each return or statement submitted with respect to such tax, 
the name and address of such employee and the amount of wages for such 
employee on which such tax was withheld.''.
  (c) Effective Date.--
          (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to taxable years 
        ending after the date of the enactment of this Act.
          (2) Reporting.--The Secretary of the Treasury, or his 
        designee, may delay the application of the amendment made by 
        subsection (b) for such period as such Secretary (or designee) 
        determines to be reasonable to allow persons adequate time to 
        modify electronic (or other) systems to permit such person to 
        comply with the requirements of such amendment.

SEC. 1105. CERTAIN INCOME DISALLOWED FOR PURPOSES OF THE EARNED INCOME 
                    TAX CREDIT.

  (a) Substantiation Requirement.--Section 32 is amended by adding at 
the end the following new subsection:
  ``(n) Inconsistent Income Reporting.--If the earned income of a 
taxpayer claimed on a return for purposes of this section is not 
substantiated by statements or returns under sections 6051, 6052, 
6041(a), or 6050W with respect to such taxpayer, the Secretary may 
require such taxpayer to provide books and records to substantiate such 
income, including for the purpose of preventing fraud.''.
  (b) Exclusion of Unsubstantiated Amount From Earned Income.--Section 
32(c)(2) is amended by adding at the end the following new 
subparagraph:
                  ``(C) Exclusion.--In the case of a taxpayer with 
                respect to which there is an inconsistency described in 
                subsection (n) who fails to substantiate such 
                inconsistency to the satisfaction of the Secretary, the 
                term `earned income' shall not include amounts to the 
                extent of such inconsistency.''.
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years ending after the date of the enactment of this Act.

     Subtitle C--Simplification and Reform of Education Incentives

SEC. 1201. AMERICAN OPPORTUNITY TAX CREDIT.

  (a) In General.--Section 25A is amended to read as follows:

``SEC. 25A. AMERICAN OPPORTUNITY TAX CREDIT.

  ``(a) In General.--In the case of an individual, there shall be 
allowed as a credit against the tax imposed by this chapter for the 
taxable year an amount equal to the sum of--
          ``(1) 100 percent of so much of the qualified tuition and 
        related expenses paid by the taxpayer during the taxable year 
        (for education furnished to any eligible student for whom an 
        election is in effect under this section for such taxable year 
        during any academic period beginning in such taxable year) as 
        does not exceed $2,000, plus
          ``(2) 25 percent of so much of such expenses so paid as 
        exceeds the dollar amount in effect under paragraph (1) but 
        does not exceed twice such dollar amount.
  ``(b) Portion of Credit Refundable.--40 percent of the credit 
allowable under subsection (a)(1) (determined without regard to this 
subsection and section 26(a) and after application of all other 
provisions of this section) shall be treated as a credit allowable 
under subpart C (and not under this part). The preceding sentence shall 
not apply to any taxpayer for any taxable year if such taxpayer is a 
child to whom section 1(d) applies for such taxable year.
  ``(c) Limitation Based on Modified Adjusted Gross Income.--
          ``(1) In general.--The amount allowable as a credit under 
        subsection (a) for any taxable year shall be reduced (but not 
        below zero) by an amount which bears the same ratio to the 
        amount so allowable (determined without regard to this 
        subsection and subsection (b) but after application of all 
        other provisions of this section) as--
                  ``(A) the excess of--
                          ``(i) the taxpayer's modified adjusted gross 
                        income for such taxable year, over
                          ``(ii) $80,000 (twice such amount in the case 
                        of a joint return), bears to
                  ``(B) $10,000 (twice such amount in the case of a 
                joint return).
          ``(2) Modified adjusted gross income.--For purposes of this 
        subsection, the term `modified adjusted gross income' means the 
        adjusted gross income of the taxpayer for the taxable year 
        increased by any amount excluded from gross income under 
        section 911, 931, or 933.
  ``(d) Other Limitations.--
          ``(1) Credit allowed only for 5 taxable years.--An election 
        to have this section apply may not be made for any taxable year 
        if such an election (by the taxpayer or any other individual) 
        is in effect with respect to such student for any 5 prior 
        taxable years.
          ``(2) Credit allowed only for first 5 years of postsecondary 
        education.--
                  ``(A) In general.--No credit shall be allowed under 
                subsection (a) for a taxable year with respect to the 
                qualified tuition and related expenses of an eligible 
                student if the student has completed (before the 
                beginning of such taxable year) the first 5 years of 
                postsecondary education at an eligible educational 
                institution.
                  ``(B) Fifth year limitations.--In the case of an 
                eligible student with respect to whom an election has 
                been in effect for 4 preceding taxable years for 
                purposes of the fifth taxable year--
                          ``(i) the amount of the credit allowed under 
                        this section for the taxable year shall not 
                        exceed an amount equal to 50 percent of the 
                        credit otherwise determined with respect to 
                        such student under this section (without regard 
                        to this subparagraph), and
                          ``(ii) the amount of the credit determined 
                        under subsection (b) and allowable under 
                        subpart C shall not exceed an amount equal to 
                        40 percent of the amount determined with 
                        respect to such student under clause (i).
  ``(e) Definitions.--For purposes of this section--
          ``(1) Eligible student.-- The term `eligible student' means, 
        with respect to any academic period, a student who--
                  ``(A) meets the requirements of section 484(a)(1) of 
                the Higher Education Act of 1965 (20 U.S.C. 
                1091(a)(1)), as in effect on August 5, 1997, and
                  ``(B) is carrying at least \1/2\ the normal full-time 
                work load for the course of study the student is 
                pursuing.
          ``(2) Qualified tuition and related expenses.--
                  ``(A) In general.--The term `qualified tuition and 
                related expenses' means tuition, fees, and course 
                materials, required for enrollment or attendance of--
                          ``(i) the taxpayer,
                          ``(ii) the taxpayer's spouse, or
                          ``(iii) any dependent of the taxpayer,
                at an eligible educational institution for courses of 
                instruction of such individual at such institution.
                  ``(B) Exception for education involving sports, 
                etc.--Such term does not include expenses with respect 
                to any course or other education involving sports, 
                games, or hobbies, unless such course or other 
                education is part of the individual's degree program.
                  ``(C) Exception for nonacademic fees.--Such term does 
                not include student activity fees, athletic fees, 
                insurance expenses, or other expenses unrelated to an 
                individual's academic course of instruction.
          ``(3) Eligible educational institution.--The term `eligible 
        educational institution' means an institution--
                  ``(A) which is described in section 481 of the Higher 
                Education Act of 1965 (20 U.S.C. 1088), as in effect on 
                August 5, 1997, and
                  ``(B) which is eligible to participate in a program 
                under title IV of such Act.
  ``(f) Special Rules.--
          ``(1) Identification requirements.--
                  ``(A) Student.--No credit shall be allowed under 
                subsection (a) to a taxpayer with respect to the 
                qualified tuition and related expenses of an individual 
                unless the taxpayer includes the name and taxpayer 
                identification number of such individual on the return 
                of tax for the taxable year, and such taxpayer 
                identification number was issued on or before the due 
                date for filing such return.
                  ``(B) Taxpayer.--No credit shall be allowed under 
                this section if the identifying number of the taxpayer 
                was issued after the due date for filing the return for 
                the taxable year.
                  ``(C) Institution.--No credit shall be allowed under 
                this section unless the taxpayer includes the employer 
                identification number of any institution to which 
                qualified tuition and related expenses were paid with 
                respect to the individual.
          ``(2) Adjustment for certain scholarships, etc.--The amount 
        of qualified tuition and related expenses otherwise taken into 
        account under subsection (a) with respect to an individual for 
        an academic period shall be reduced (before the application of 
        subsection (c)) by the sum of any amounts paid for the benefit 
        of such individual which are allocable to such period as--
                  ``(A) a qualified scholarship which is excludable 
                from gross income under section 117,
                  ``(B) an educational assistance allowance under 
                chapter 30, 31, 32, 34, or 35 of title 38, United 
                States Code, or under chapter 1606 of title 10, United 
                States Code, and
                  ``(C) a payment (other than a gift, bequest, devise, 
                or inheritance within the meaning of section 102(a)) 
                for such individual's educational expenses, or 
                attributable to such individual's enrollment at an 
                eligible educational institution, which is excludable 
                from gross income under any law of the United States.
          ``(3) Treatment of expenses paid by dependent.--If an 
        individual is a dependent of another taxpayer for a taxable 
        year beginning in the calendar year in which such individuals 
        taxable year begins--
                  ``(A) no credit shall be allowed under subsection (a) 
                to such individual for such individual's taxable year, 
                and
                  ``(B) qualified tuition and related expenses paid by 
                such individual during such individual's taxable year 
                shall be treated for purposes of this section as paid 
                by such other taxpayer.
          ``(4) Treatment of certain prepayments.--If qualified tuition 
        and related expenses are paid by the taxpayer during a taxable 
        year for an academic period which begins during the first 3 
        months following such taxable year, such academic period shall 
        be treated for purposes of this section as beginning during 
        such taxable year.
          ``(5) Denial of double benefit.--No credit shall be allowed 
        under this section for any amount for which a deduction is 
        allowed under any other provision of this chapter.
          ``(6) No credit for married individuals filing separate 
        returns.--If the taxpayer is a married individual (within the 
        meaning of section 7703), this section shall apply only if the 
        taxpayer and the taxpayer's spouse file a joint return for the 
        taxable year.
          ``(7) Nonresident aliens.--If the taxpayer is a nonresident 
        alien individual for any portion of the taxable year, this 
        section shall apply only if such individual is treated as a 
        resident alien of the United States for purposes of this 
        chapter by reason of an election under subsection (g) or (h) of 
        section 6013.
          ``(8) Restrictions on taxpayers who improperly claimed credit 
        in prior year.--
                  ``(A) Taxpayers making prior fraudulent or reckless 
                claims.--
                          ``(i) In general.--No credit shall be allowed 
                        under this section for any taxable year in the 
                        disallowance period.
                          ``(ii) Disallowance period.--For purposes of 
                        clause (i), the disallowance period is--
                                  ``(I) the period of 10 taxable years 
                                after the most recent taxable year for 
                                which there was a final determination 
                                that the taxpayer's claim of credit 
                                under this section was due to fraud, 
                                and
                                  ``(II) the period of 2 taxable years 
                                after the most recent taxable year for 
                                which there was a final determination 
                                that the taxpayer's claim of credit 
                                under this section was due to reckless 
                                or intentional disregard of rules and 
                                regulations (but not due to fraud).
                  ``(B) Taxpayers making improper prior claims.--In the 
                case of a taxpayer who is denied credit under this 
                section for any taxable year as a result of the 
                deficiency procedures under subchapter B of chapter 63, 
                no credit shall be allowed under this section for any 
                subsequent taxable year unless the taxpayer provides 
                such information as the Secretary may require to 
                demonstrate eligibility for such credit.
  ``(g) Inflation Adjustment.--
          ``(1) In general.--In the case of a taxable year beginning 
        after 2018, the $80,000 amount in subsection (c)(1)(A)(ii) 
        shall each be increased by an amount equal to--
                  ``(A) such dollar amount, multiplied by
                  ``(B) the cost-of-living adjustment determined under 
                section 1(c)(2)(A) for the calendar year in which the 
                taxable year begins, determined by substituting 
                `calendar year 2017' for `calendar year 2016' in clause 
                (ii) thereof.
          ``(2) Rounding.--If any amount as adjusted under paragraph 
        (1) is not a multiple of $1,000, such amount shall be rounded 
        to the next lowest multiple of $1,000.
  ``(h) Regulations.--The Secretary may prescribe such regulations or 
other guidance as may be necessary or appropriate to carry out this 
section, including regulations providing for a recapture of the credit 
allowed under this section in cases where there is a refund in a 
subsequent taxable year of any amount which was taken into account in 
determining the amount of such credit.''.
  (b) Conforming Amendments.--
          (1) Section 72(t)(7)(B) is amended by striking ``section 
        25A(g)(2)'' and inserting ``section 25A(f)(2)''.
          (2) Section 529(c)(3)(B)(v)(I) is amended by striking 
        ``section 25A(g)(2)'' and inserting ``section 25A(f)(2)''.
          (3) Section 529(e)(3)(B)(i) is amended by striking ``section 
        25A(b)(3)'' and inserting ``section 25A(d)''.
          (4) Section 530(d)(2)(C) is amended--
                  (A) by striking ``section 25A(g)(2)'' in clause 
                (i)(I) and inserting ``section 25A(f)(2)'', and
                  (B) by striking ``Hope and lifetime learning 
                credits'' in the heading and inserting ``American 
                opportunity tax credit''.
          (5) Section 530(d)(4)(B)(iii) is amended by striking 
        ``section 25A(g)(2)'' and inserting ``section 25A(d)(4)(B)''.
          (6) Section 6050S(e) is amended by striking ``subsection 
        (g)(2)'' and inserting ``subsection (f)(2)''.
          (7) Section 6211(b)(4)(A) is amended by striking ``subsection 
        (i)(6)'' and inserting ``subsection (b)''.
          (8) Section 6213(g)(2)(J) is amended by striking ``TIN 
        required under section 25A(g)(1)'' and inserting ``TIN, and 
        employer identification number, required under section 
        25A(f)(1)''.
          (9) Section 6213(g)(2)(Q) is amended to read as follows:
                  ``(Q) an omission of information required by section 
                25A(f)(8)(B) or an entry on the return claiming the 
                credit determined under section 25A(a) for a taxable 
                year for which the credit is disallowed under section 
                25A(f)(8)(A).''.
          (10) Section 1004(c) of division B of the American Recovery 
        and Reinvestment Tax Act of 2009 is amended--
                  (A) in paragraph (1)--
                          (i) by striking ``section 25A(i)(6)'' each 
                        place it appears and inserting ``section 
                        25A(b)'', and
                          (ii) by striking ``with respect to taxable 
                        years beginning after 2008 and before 2018'' 
                        each place it appears and inserting ``with 
                        respect to each taxable year'',
                  (B) in paragraph (2), by striking ``Section 
                25A(i)(6)'' and inserting ``Section 25A(b)'', and
                  (C) in paragraph (3)(C), by striking ``subsection 
                (i)(6)'' and inserting ``subsection (b)''.
          (11) The table of sections for subpart A of part IV of 
        subchapter A of chapter 1 is amended by striking the item 
        relating to section 25A and inserting the following new item:

``Sec. 25A. American opportunity tax credit.''.

  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 1202. CONSOLIDATION OF EDUCATION SAVINGS RULES.

  (a) No New Contributions to Coverdell Education Savings Account.--
Section 530(b)(1)(A) is amended to read as follows:
                  ``(A) Except in the case of rollover contributions, 
                no contribution will be accepted after December 31, 
                2017.''.
  (b) Limited Distribution Allowed for Elementary and Secondary 
Tuition.--
          (1) In general.--Section 529(c) is amended by adding at the 
        end the following new paragraph:
          ``(7) Treatment of elementary and secondary tuition.--Any 
        reference in this subsection to the term `qualified higher 
        education expense' shall include a reference to expenses for 
        tuition in connection with enrollment at an elementary or 
        secondary school.''.
          (2) Limitation.--Section 529(e)(3)(A) is amended by adding at 
        the end the following: ``The amount of cash distributions from 
        all qualified tuition programs described in subsection 
        (b)(1)(A)(ii) with respect to a beneficiary during any taxable 
        year, shall, in the aggregate, include not more than $10,000 in 
        expenses for tuition incurred during the taxable year in 
        connection with the enrollment or attendance of the beneficiary 
        as an elementary or secondary school student at a public, 
        private, or religious school.''.
  (c) Rollovers to Qualified Tuition Programs Permitted.--Section 
530(d)(5) is amended by inserting ``, or into (by purchase or 
contribution) a qualified tuition program (as defined in section 
529),'' after ``into another Coverdell education savings account''.
  (d) Distributions From Qualified Tuition Programs for Certain 
Expenses Associated With Registered Apprenticeship Programs.--Section 
529(e)(3) is amended by adding at the end the following new 
subparagraph:
                  ``(C) Certain expenses associated with registered 
                apprenticeship programs.--The term `qualified higher 
                education expenses' shall include books, supplies, and 
                equipment required for the enrollment or attendance of 
                a designated beneficiary in an apprenticeship program 
                registered and certified with the Secretary of Labor 
                under section 1 of the National Apprenticeship Act (29 
                U.S.C. 50).''.
  (e) Unborn Children Allowed as Account Beneficiaries.--Section 529(e) 
is amended by adding at the end the following new paragraph:
          ``(6) Treatment of unborn children.--
                  ``(A) In general.--Nothing shall prevent an unborn 
                child from being treated as a designated beneficiary or 
                an individual under this section.
                  ``(B) Unborn child.--For purposes of this paragraph--
                          ``(i) In general.--The term `unborn child' 
                        means a child in utero.
                          ``(ii) Child in utero.--The term `child in 
                        utero' means a member of the species homo 
                        sapiens, at any stage of development, who is 
                        carried in the womb.''.
  (f) Effective Dates.--
          (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        contributions made after December 31, 2017.
          (2) Rollovers to qualified tuition programs.--The amendments 
        made by subsection (b) shall apply to distributions after 
        December 31, 2017.

SEC. 1203. REFORMS TO DISCHARGE OF CERTAIN STUDENT LOAN INDEBTEDNESS.

  (a) Treatment of Student Loans Discharged on Account of Death or 
Disability.--Section 108(f) is amended by adding at the end the 
following new paragraph:
          ``(5) Discharges on account of death or disability.--
                  ``(A) In general.--In the case of an individual, 
                gross income does not include any amount which (but for 
                this subsection) would be includible in gross income by 
                reasons of the discharge (in whole or in part) of any 
                loan described in subparagraph (B) if such discharge 
                was--
                          ``(i) pursuant to subsection (a) or (d) of 
                        section 437 of the Higher Education Act of 1965 
                        or the parallel benefit under part D of title 
                        IV of such Act (relating to the repayment of 
                        loan liability),
                          ``(ii) pursuant to section 464(c)(1)(F) of 
                        such Act, or
                          ``(iii) otherwise discharged on account of 
                        the death or total and permanent disability of 
                        the student.
                  ``(B) Loans described.--A loan is described in this 
                subparagraph if such loan is--
                          ``(i) a student loan (as defined in paragraph 
                        (2)), or
                          ``(ii) a private education loan (as defined 
                        in section 140(7) of the Consumer Credit 
                        Protection Act (15 U.S.C. 1650(7))).''.
  (b) Exclusion From Gross Income for Payments Made Under Indian Health 
Service Loan Repayment Program.--
          (1) In general.--Section 108(f)(4) is amended by inserting 
        ``under section 108 of the Indian Health Care Improvement 
        Act,'' after ``338I of such Act,''.
          (2) Clerical amendment.--The heading for section 108(f)(4) is 
        amended by striking ``and certain'' and inserting ``, indian 
        health service loan repayment program, and certain''.
  (c) Effective Dates.--
          (1) Subsection (a).--The amendment made by subsection (a)(1) 
        shall apply to discharges of indebtedness after December 31, 
        2017.
          (2) Subsection (b).--The amendments made by subsection (b) 
        shall apply to amounts received in taxable years beginning 
        after December 31, 2017.

SEC. 1204. REPEAL OF OTHER PROVISIONS RELATING TO EDUCATION.

  (a) In General.--Subchapter B of chapter 1 is amended--
          (1) in part VII by striking sections 221 and 222 (and by 
        striking the items relating to such sections in the table of 
        sections for such part),
          (2) in part VII by striking sections 135 and 127 (and by 
        striking the items relating to such sections in the table of 
        sections for such part), and
          (3) by striking subsection (d) of section 117.
  (b) Conforming Amendment Relating to Section 221.--
          (1) Section 62(a) is amended by striking paragraph (17).
          (2) Section 74(d) is amended by striking ``221,''.
          (3) Section 86(b)(2)(A) is amended by striking ``221,''.
          (4) Section 219(g)(3)(A)(ii) is amended by striking ``221,''.
          (5) Section 163(h)(2) is amended by striking subparagraph 
        (F).
          (6) Section 6050S(a) is amended--
                  (A) by inserting ``or'' at the end of paragraph (1),
                  (B) by striking ``or'' at the end of paragraph (2), 
                and
                  (C) by striking paragraph (3).
          (7) Section 6050S(e) is amended by striking all that follows 
        ``thereof)'' and inserting a period.
  (c) Conforming Amendments Related to Section 222.--
          (1) Section 62(a) is amended by striking paragraph (18).
          (2) Section 74(d)(2)(B) is amended by striking ``222,''.
          (3) Section 86(b)(2)(A) is amended by striking ``222,''.
          (4) Section 219(g)(3)(A)(ii) is amended by striking ``222,''.
  (d) Conforming Amendments Relating to Section 127.--
          (1) Section 125(f)(1) is amended by striking ``127,''.
          (2) Section 132(j)(8) is amended by striking ``which are not 
        excludable from gross income under section 127''.
          (3) Section 414(n)(3)(C) is amended by striking ``127,''.
          (4) Section 414(t)(2) is amended by striking ``127,''.
          (5) Section 3121(a)(18) is amended by striking ``127,''.
          (6) Section 3231(e) is amended by striking paragraph (6).
          (7) Section 3306(b)(13) is amended by ``127,''.
          (8) Section 3401(a)(18) is amended by striking ``127,''.
          (9) Section 6039D(d)(1) is amended by striking ``, 127''.
  (e) Conforming Amendments Relating to Section 117(d).--
          (1) Section 117(c)(1) is amended--
                  (A) by striking ``subsections (a) and (d)'' and 
                inserting ``subsection (a)'', and
                  (B) by striking ``or qualified tuition reduction''.
          (2) Section 414(n)(3)(C) is amended by striking ``117(d),''.
          (3) Section 414(t)(2) is amended by striking ``117(d),''.
  (f) Conforming Amendments Related to Section 135.--
          (1) Section 74(d)(2)(B) is amended by striking ``135,''.
          (2) Section 86(b)(2)(A) is amended by striking ``135,''.
          (3) Section 219(g)(3)(A)(ii) is amended by striking ``135,''.
  (g) Effective Dates.--
          (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        taxable years beginning after December 31, 2017.
          (2) Amendments relating to section 117(d).--The amendments 
        made by subsections (a)(3) and (e) shall apply to amounts paid 
        or incurred after December 31, 2017.

SEC. 1205. ROLLOVERS BETWEEN QUALIFIED TUITION PROGRAMS AND QUALIFIED 
                    ABLE PROGRAMS.

  (a) Rollovers From Qualified Tuition Programs to Qualified ABLE 
Programs.--Section 529(c)(3)(C)(i) is amended by striking ``or'' at the 
end of subclause (I), by striking the period at the end of subclause 
(II) and inserting ``, or'', and by adding at the end the following new 
subclause:
                                  ``(III) to an ABLE account (as 
                                defined in section 529A(e)(6)) of the 
                                designated beneficiary or a member of 
                                the family of the designated 
                                beneficiary.
                        Subclause (III) shall not apply to so much of a 
                        distribution which, when added to all other 
                        contributions made to the ABLE account for the 
                        taxable year, exceeds the limitation under 
                        section 529A(b)(2)(B).''.
  (b) Effective Date.--The amendments made by this section shall apply 
to distributions after December 31, 2017.

          Subtitle D--Simplification and Reform of Deductions

SEC. 1301. REPEAL OF OVERALL LIMITATION ON ITEMIZED DEDUCTIONS.

  (a) In General.--Part 1 of subchapter B of chapter 1 is amended by 
striking section 68 (and the item relating to such section in the table 
of sections for such part).
  (b) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 1302. MORTGAGE INTEREST.

  (a) Modification of Limitations.--
          (1) In general.--Section 163(h)(3) is amended to read as 
        follows:
          ``(3) Qualified residence interest.--For purposes of this 
        subsection--
                  ``(A) In general.--The term `qualified residence 
                interest' means any interest which is paid or accrued 
                during the taxable year on indebtedness which--
                          ``(i) is incurred in acquiring, constructing, 
                        or substantially improving any qualified 
                        residence (determined as of the time the 
                        interest is accrued) of the taxpayer, and
                          ``(ii) is secured by such residence.
                Such term also includes interest on any indebtedness 
                secured by such residence resulting from the 
                refinancing of indebtedness meeting the requirements of 
                the preceding sentence (or this sentence); but only to 
                the extent the amount of the indebtedness resulting 
                from such refinancing does not exceed the amount of the 
                refinanced indebtedness.
                  ``(B) Limitation.--The aggregate amount of 
                indebtedness taken into account under subparagraph (A) 
                for any period shall not exceed $500,000 (half of such 
                amount in the case of a married individual filing a 
                separate return).
                  ``(C) Treatment of indebtedness incurred on or before 
                november 2, 2017.--
                          ``(i) In general.--In the case of any pre-
                        November 2, 2017, indebtedness, this paragraph 
                        shall apply as in effect immediately before the 
                        enactment of the Tax Cuts and Jobs Act.
                          ``(ii) Pre-november 2, 2017, indebtedness.--
                        For purposes of this subparagraph, the term 
                        `pre-November 2, 2017, indebtedness' means--
                                  ``(I) any principal residence 
                                acquisition indebtedness which was 
                                incurred on or before November 2, 2017, 
                                or
                                  ``(II) any principal residence 
                                acquisition indebtedness which is 
                                incurred after November 2, 2017, to 
                                refinance indebtedness described in 
                                clause (i) (or refinanced indebtedness 
                                meeting the requirements of this 
                                clause) to the extent (immediately 
                                after the refinancing) the principal 
                                amount of the indebtedness resulting 
                                from the refinancing does not exceed 
                                the principal amount of the refinanced 
                                indebtedness (immediately before the 
                                refinancing).
                          ``(iii) Limitation on period of 
                        refinancing.--clause (ii)(II) shall not apply 
                        to any indebtedness after--
                                  ``(I) the expiration of the term of 
                                the original indebtedness, or
                                  ``(II) if the principal of such 
                                original indebtedness is not amortized 
                                over its term, the expiration of the 
                                term of the 1st refinancing of such 
                                indebtedness (or if earlier, the date 
                                which is 30 years after the date of 
                                such 1st refinancing).
                          ``(iv) Binding contract exception.--In the 
                        case of a taxpayer who enters into a written 
                        binding contract before November 2, 2017, to 
                        close on the purchase of a principal residence 
                        before January 1, 2018, and who purchases such 
                        residence before April 1, 2018, subparagraphs 
                        (A) and (B) shall be applied by substituting 
                        `April 1, 2018' for `November 2, 2017'.''.
          (2) Conforming amendments.--
                  (A) Section 108(h)(2) is by striking ``for 
                `$1,000,000 ($500,000' in clause (ii) thereof'' and 
                inserting ``for `$500,000 ($250,000' in paragraph 
                (2)(A), and `$1,000,000' for `$500,000' in paragraph 
                (2)(B), thereof''.
                  (B) Section 163(h) is amended by striking 
                subparagraphs (E) and (F) in paragraph (4).
  (b) Taxpayers Limited to 1 Qualified Residence.--Section 
163(h)(4)(A)(i) is amended to read as follows:
                          ``(i) In general.--The term `qualified 
                        residence' means the principal residence 
                        (within the meaning of section 121) of the 
                        taxpayer.''.
  (c) Effective Dates.--
          (1) In general.--The amendments made by this section shall 
        apply to interest paid or accrued in taxable years beginning 
        after December 31, 2017, with respect to indebtedness incurred 
        before, on, or after such date.
          (2) Treatment of grandfathered indebtedness.--For application 
        of the amendments made by this section to grandfathered 
        indebtedness, see paragraph (3)(C) of section 163(h) of the 
        Internal Revenue Code of 1986, as amended by this section.

SEC. 1303. REPEAL OF DEDUCTION FOR CERTAIN TAXES NOT PAID OR ACCRUED IN 
                    A TRADE OR BUSINESS.

  (a) In General.--Section 164(b)(5) is amended to read as follows:
          ``(5) Limitation in case of individuals.--In the case of a 
        taxpayer other than a corporation--
                  ``(A) foreign real property taxes (other than taxes 
                which are paid or accrued in carrying on a trade or 
                business or an activity described in section 212) shall 
                not be taken into account under subsection (a)(1),
                  ``(B) the aggregate amount of taxes (other than taxes 
                which are paid or accrued in carrying on a trade or 
                business or an activity described in section 212) taken 
                into account under subsection (a)(1) for any taxable 
                year shall not exceed $10,000 ($5,000 in the case of a 
                married individual filing a separate return),
                  ``(C) subsection (a)(2) shall only apply to taxes 
                which are paid or accrued in carrying on a trade or 
                business or an activity described in section 212, and
                  ``(D) subsection (a)(3) shall not apply to State and 
                local taxes.''.
  (b) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 1304. REPEAL OF DEDUCTION FOR PERSONAL CASUALTY LOSSES.

  (a) In General.--Section 165(c) is amended by inserting ``and'' at 
the end of paragraph (1), by striking ``; and'' at the end of paragraph 
(2) and inserting a period, and by striking paragraph (3).
  (b) Conforming Amendments.--
          (1) Section 165(h) is amended to read as follows:
  ``(h) Special Rule Where Personal Casualty Gains Exceed Personal 
Casualty Losses.--
          ``(1) In general.--If the personal casualty gains for any 
        taxable year exceed the personal casualty losses for such 
        taxable year--
                  ``(A) all such gains shall be treated as gains from 
                sales or exchanges of capital assets, and
                  ``(B) all such losses shall be treated as losses from 
                sales or exchanges of capital assets.
          ``(2) Definitions of personal casualty gain and personal 
        casualty loss.--For purposes of this subsection--
                  ``(A) Personal casualty loss.--The term `personal 
                casualty loss' means any loss of property not connected 
                with a trade or business or a transaction entered into 
                for profit, if such loss arises from fire, storm, 
                shipwreck, or other casualty, or from theft.
                  ``(B) Personal casualty gain.--The term `personal 
                casualty gain' means the recognized gain from any 
                involuntary conversion of property which is described 
                in subparagraph (A) arising from fire, storm, 
                shipwreck, or other casualty, or from theft.''.
          (2) Section 165 is amended by striking subsection (k).
          (3)(A) Section 165(l)(1) is amended by striking ``a loss 
        described in subsection (c)(3)'' and inserting ``an ordinary 
        loss described in subsection (c)(2)''.
          (B) Section 165(l) is amended--
                  (i) by striking paragraph (5),
                  (ii) by redesignating paragraphs (2), (3), and (4) as 
                paragraphs (3), (4), and (5), respectively, and
                  (iii) by inserting after paragraph (1) the following 
                new paragraph:
          ``(2) Limitations.--
                  ``(A) Deposit may not be federally insured.--No 
                election may be made under paragraph (1) with respect 
                to any loss on a deposit in a qualified financial 
                institution if part or all of such deposit is insured 
                under Federal law.
                  ``(B) Dollar limitation.--With respect to each 
                financial institution, the aggregate amount of losses 
                attributable to deposits in such financial institution 
                to which an election under paragraph (1) may be made by 
                the taxpayer for any taxable year shall not exceed 
                $20,000 ($10,000 in the case of a separate return by a 
                married individual). The limitation of the preceding 
                sentence shall be reduced by the amount of any 
                insurance proceeds under any State law which can 
                reasonably be expected to be received with respect to 
                losses on deposits in such institution.''.
          (4) Section 172(b)(1)(E)(ii), prior to amendment under title 
        III, is amended by striking subclause (I) and by redesignating 
        subclauses (II) and (III) as subclauses (I) and (II), 
        respectively.
          (5) Section 172(d)(4)(C) is amended by striking ``paragraph 
        (2) or (3) of section 165(c)'' and inserting ``section 
        165(c)(2)''.
          (6) Section 274(f) is amended by striking ``Casualty 
        Losses,'' in the heading thereof.
          (7) Section 280A(b) is amended by striking ``Casualty 
        Losses,'' in the heading thereof.
          (8) Section 873(b), as amended by the preceding provisions of 
        this Act, is amended by striking paragraph (1) and by 
        redesignating paragraphs (2) and (3) as paragraphs (1) and (2), 
        respectively.
          (9) Section 504(b) of the Disaster Tax Relief and Airport and 
        Airway Extension Act of 2017 is amended by adding at the end 
        the following new paragraph:
          ``(4) Coordination with tax reform.--This subsection shall be 
        applied without regard to the amendments made by section 1304 
        of the Tax Cuts and Jobs Act.''.
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 1305. LIMITATION ON WAGERING LOSSES.

  (a) In General.--Section 165(d) is amended by adding at the end the 
following: ``For purposes of the preceding sentence, the term `losses 
from wagering transactions' includes any deduction otherwise allowable 
under this chapter incurred in carrying on any wagering transaction.''.
  (b) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 1306. CHARITABLE CONTRIBUTIONS.

  (a) Increased Limitation for Cash Contributions.--Section 170(b)(1) 
is amended by redesignating subparagraph (G) as subparagraph (H) and by 
inserting after subparagraph (F) the following new subparagraph:
                  ``(G) Increased limitation for cash contributions.--
                          ``(i) In general.--In the case of any 
                        contribution of cash to an organization 
                        described in subparagraph (A), the total amount 
                        of such contributions which may be taken into 
                        account under subsection (a) for any taxable 
                        year shall not exceed 60 percent of the 
                        taxpayer's contribution base for such year.
                          ``(ii) Carryover.--If the aggregate amount of 
                        contributions described in clause (i) exceeds 
                        the applicable limitation under clause (i), 
                        such excess shall be treated (in a manner 
                        consistent with the rules of subsection (d)(1)) 
                        as a charitable contribution to which clause 
                        (i) applies in each of the 5 succeeding years 
                        in order of time.
                          ``(iii) Coordination with subparagraphs (A) 
                        and (B).--
                                  ``(I) In general.--Contributions 
                                taken into account under this 
                                subparagraph shall not be taken into 
                                account under subparagraph (A).
                                  ``(II) Limitation reduction.--
                                Subparagraphs (A) and (B) shall be 
                                applied by reducing (but not below 
                                zero) the aggregate contribution 
                                limitation allowed for the taxable year 
                                under each such subparagraph by the 
                                aggregate contributions allowed under 
                                this subparagraph for such taxable 
                                year.''.
  (b) Denial of Deduction for College Athletic Event Seating Rights.--
Section 170(l)(1) is amended to read as follows:
          ``(1) In general.--No deduction shall be allowed under this 
        section for any amount described in paragraph (2).''.
  (c) Charitable Mileage Rate Adjusted for Inflation.--Section 170(i) 
is amended by striking ``shall be 14 cents per mile'' and inserting 
``shall be a rate which takes into account the variable cost of 
operating an automobile''.
  (d) Repeal of Substantiation Exception in Case of Contributions 
Reported by Donee.--Section 170(f)(8) is amended by striking 
subparagraph (D) and by redesignating subparagraph (E) as subparagraph 
(D).
  (e) Effective Date.--The amendments made by this section shall apply 
to contributions made in taxable years beginning after December 31, 
2017.

SEC. 1307. REPEAL OF DEDUCTION FOR TAX PREPARATION EXPENSES.

  (a) In General.--Section 212 is amended by adding ``or'' at the end 
of paragraph (1), by striking ``; or'' at the end of paragraph (2) and 
inserting a period, and by striking paragraph (3).
  (b) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 1308. REPEAL OF MEDICAL EXPENSE DEDUCTION.

  (a) In General.--Part VII of subchapter B is amended by striking by 
striking section 213 (and by striking the item relating to such section 
in the table of sections for such subpart).
  (b) Conforming Amendments.--
          (1)(A) Section 105(f) is amended to read as follows:
  ``(f) Medical Care.--For purposes of this section--
          ``(1) In general.--The term `medical care' means amounts 
        paid--
                  ``(A) for the diagnosis, cure, mitigation, treatment, 
                or prevention of disease, or for the purpose of 
                affecting any structure or function of the body,
                  ``(B) for transportation primarily for and essential 
                to medical care referred to in subparagraph (A),
                  ``(C) for qualified long-term care services (as 
                defined in section 7702B(c)), or
                  ``(D) for insurance (including amounts paid as 
                premiums under part B of title XVIII of the Social 
                Security Act, relating to supplementary medical 
                insurance for the aged) covering medical care referred 
                to in subparagraphs (A) and (B) or for any qualified 
                long-term care insurance contract (as defined in 
                section 7702B(b)).
        In the case of a qualified long-term care insurance contract 
        (as defined in section 7702B(b)), only eligible long-term care 
        premiums (as defined in paragraph (7)) shall be taken into 
        account under subparagraph (D).
          ``(2) Amounts paid for certain lodging away from home treated 
        as paid for medical care.--Amounts paid for lodging (not lavish 
        or extravagant under the circumstances) while away from home 
        primarily for and essential to medical care referred to in 
        paragraph (1)(A) shall be treated as amounts paid for medical 
        care if--
                  ``(A) the medical care referred to in paragraph 
                (1)(A) is provided by a physician in a licensed 
                hospital (or in a medical care facility which is 
                related to, or the equivalent of, a licensed hospital), 
                and
                  ``(B) there is no significant element of personal 
                pleasure, recreation, or vacation in the travel away 
                from home.
        The amount taken into account under the preceding sentence 
        shall not exceed $50 for each night for each individual.
          ``(3) Physician.--The term `physician' has the meaning given 
        to such term by section 1861(r) of the Social Security Act (42 
        U.S.C. 1395x(r)).
          ``(4) Contracts covering other than medical care.--In the 
        case of an insurance contract under which amounts are payable 
        for other than medical care referred to in subparagraphs (A), 
        (B) and (C) of paragraph (1)--
                  ``(A) no amount shall be treated as paid for 
                insurance to which paragraph (1)(D) applies unless the 
                charge for such insurance is either separately stated 
                in the contract, or furnished to the policyholder by 
                the insurance company in a separate statement,
                  ``(B) the amount taken into account as the amount 
                paid for such insurance shall not exceed such charge, 
                and
                  ``(C) no amount shall be treated as paid for such 
                insurance if the amount specified in the contract (or 
                furnished to the policyholder by the insurance company 
                in a separate statement) as the charge for such 
                insurance is unreasonably large in relation to the 
                total charges under the contract.
          ``(5) Certain pre-paid contracts.--Subject to the limitations 
        of paragraph (4), premiums paid during the taxable year by a 
        taxpayer before he attains the age of 65 for insurance covering 
        medical care (within the meaning of subparagraphs (A), (B), and 
        (C) of paragraph (1)) for the taxpayer, his spouse, or a 
        dependent after the taxpayer attains the age of 65 shall be 
        treated as expenses paid during the taxable year for insurance 
        which constitutes medical care if premiums for such insurance 
        are payable (on a level payment basis) under the contract for a 
        period of 10 years or more or until the year in which the 
        taxpayer attains the age of 65 (but in no case for a period of 
        less than 5 years).
          ``(6) Cosmetic surgery.--
                  ``(A) In general.--The term `medical care' does not 
                include cosmetic surgery or other similar procedures, 
                unless the surgery or procedure is necessary to 
                ameliorate a deformity arising from, or directly 
                related to, a congenital abnormality, a personal injury 
                resulting from an accident or trauma, or disfiguring 
                disease.
                  ``(B) Cosmetic surgery defined .--For purposes of 
                this paragraph, the term `cosmetic surgery' means any 
                procedure which is directed at improving the patient's 
                appearance and does not meaningfully promote the proper 
                function of the body or prevent or treat illness or 
                disease.
          ``(7) Eligible long-term care premiums.--
                  ``(A) In general.--For purposes of this section, the 
                term `eligible long-term care premiums' means the 
                amount paid during a taxable year for any qualified 
                long-term care insurance contract (as defined in 
                section 7702B(b)) covering an individual, to the extent 
                such amount does not exceed the limitation determined 
                under the following table:

------------------------------------------------------------------------
``In the case of an individual with
an attained age before the close of           The limitation is:
        the taxable year of:
------------------------------------------------------------------------
40 or less                           $200
More than 40 but not more than 50    $375
More than 50 but not more than 60    $750
More than 60 but not more than 70    $2,000
More than 70                         $2,500
------------------------------------------------------------------------

                  ``(B) Indexing.--
                          ``(i) In general.--In the case of any taxable 
                        year beginning after 1997, each dollar amount 
                        in subparagraph (A) shall be increased by the 
                        medical care cost adjustment of such amount for 
                        such calendar year. Any increase determined 
                        under the preceding sentence shall be rounded 
                        to the nearest multiple of $10.
                          ``(ii) Medical care cost adjustment.--For 
                        purposes of clause (i), the medical care cost 
                        adjustment for any calendar year is the 
                        adjustment prescribed by the Secretary, in 
                        consultation with the Secretary of Health and 
                        Human Services, for purposes of such clause. To 
                        the extent that CPI (as defined section 1(c)), 
                        or any component thereof, is taken into account 
                        in determining such adjustment, such adjustment 
                        shall be determined by taking into account C-
                        CPI-U (as so defined), or the corresponding 
                        component thereof, in lieu of such CPI (or 
                        component thereof), but only with respect to 
                        the portion of such adjustment which relates to 
                        periods after December 31, 2017.
          ``(8) Certain payments to relatives treated as not paid for 
        medical care.--An amount paid for a qualified long-term care 
        service (as defined in section 7702B(c)) provided to an 
        individual shall be treated as not paid for medical care if 
        such service is provided--
                  ``(A) by the spouse of the individual or by a 
                relative (directly or through a partnership, 
                corporation, or other entity) unless the service is 
                provided by a licensed professional with respect to 
                such service, or
                  ``(B) by a corporation or partnership which is 
                related (within the meaning of section 267(b) or 
                707(b)) to the individual.
        For purposes of this paragraph, the term `relative' means an 
        individual bearing a relationship to the individual which is 
        described in any of subparagraphs (A) through (G) of section 
        7706(d)(2). This paragraph shall not apply for purposes of 
        subsection (b) with respect to reimbursements through 
        insurance.''.
          (B) Section 72(t)(2)(D)(i)(III) is amended by striking 
        ``section 213(d)(1)(D)'' and inserting ``section 
        105(f)(1)(D)''.
          (C) Section 104(a) is amended by striking ``section 
        213(d)(1)'' in the last sentence and inserting ``section 
        105(f)(1)''.
          (D) Section 105(b) is amended by striking ``section 213(d)'' 
        and inserting ``section 105(f)''.
          (E) Section 139D is amended by striking ``section 213'' and 
        inserting ``section 223''.
          (F) Section 162(l)(2) is amended by striking ``section 
        213(d)(10)'' and inserting ``section 105(f)(7)''.
          (G) Section 220(d)(2)(A) is amended by striking ``section 
        213(d)'' and inserting ``section 105(f)''.
          (H) Section 223(d)(2)(A) is amended by striking ``section 
        213(d)'' and inserting ``section 105(f)''.
          (I) Section 419A(f)(2) is amended by striking ``section 
        213(d)'' and inserting ``section 105(f)''.
          (J) Section 501(c)(26)(A) is amended by striking ``section 
        213(d)'' and inserting ``section 105(f)''.
          (K) Section 2503(e) is amended by striking ``section 213(d)'' 
        and inserting ``section 105(f)''.
          (L) Section 4980B(c)(4)(B)(i)(I) is amended by striking 
        ``section 213(d)'' and inserting ``section 105(f)''.
          (M) Section 6041(f) is amended by striking ``section 213(d)'' 
        and inserting ``section 105(f)''.
          (N) Section 7702B(a)(2) is amended by striking ``section 
        213(d)'' and inserting ``section 105(f)''.
          (O) Section 7702B(a)(4) is amended by striking ``section 
        213(d)(1)(D)'' and inserting ``section 105(f)(1)(D)''.
          (P) Section 7702B(d)(5) is amended by striking ``section 
        213(d)(10)'' and inserting ``section 105(f)(7)''.
          (Q) Section 9832(d)(3) is amended by striking ``section 
        213(d)'' and inserting ``section 105(f)''.
          (2) Section 72(t)(2)(B) is amended to read as follows:
                  ``(B) Medical expenses.--Distributions made to an 
                individual (other than distributions described in 
                subparagraph (A), (C), or (D) to the extent such 
                distributions do not exceed the excess of--
                          ``(i) the expenses paid by the taxpayer 
                        during the taxable year, not compensated for by 
                        insurance or otherwise, for medical care (as 
                        defined in 105(f)) of the taxpayer, his spouse, 
                        or a dependent (as defined in section 7706, 
                        determined without regard to subsections 
                        (b)(1), (b)(2), and (d)(1)(B) thereof), over
                          ``(ii) 10 percent of the taxpayer's adjusted 
                        gross income.''.
          (3) Section 162(l) is amended by striking paragraph (3).
          (4) Section 402(l) is amended by striking paragraph (7) and 
        redesignating paragraph (8) as paragraph (7).
          (5) Section 220(f) is amended by striking paragraph (6).
          (6) Section 223(f) is amended by striking paragraph (6).
          (7) Section 7702B(e) is amended by striking paragraph (2).
          (8) Section 7706(f)(7), as redesignated by this Act, is 
        amended by striking ``sections 105(b), 132(h)(2)(B), and 
        213(d)(5)'' and inserting ``sections 105(b) and 132(h)(2)(B)''.
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 1309. REPEAL OF DEDUCTION FOR ALIMONY PAYMENTS.

  (a) In General.--Part VII of subchapter B is amended by striking by 
striking section 215 (and by striking the item relating to such section 
in the table of sections for such subpart).
  (b) Conforming Amendments.--
          (1) Corresponding repeal of provisions providing for 
        inclusion of alimony in gross income.--
                  (A) Subsection (a) of section 61 is amended by 
                striking paragraph (8) and by redesignating paragraphs 
                (9) through (15) as paragraphs (8) through (14), 
                respectively.
                  (B) Part II of subchapter B of chapter 1 is amended 
                by striking section 71 (and by striking the item 
                relating to such section in the table of sections for 
                such part).
                  (C) Subpart F of part I of subchapter J of chapter 1 
                is amended by striking section 682 (and by striking the 
                item relating to such section in the table of sections 
                for such subpart).
          (2) Related to repeal of section 215.--
                  (A) Section 62(a) is amended by striking paragraph 
                (10).
                  (B) Section 3402(m)(1) is amended by striking 
                ``(other than paragraph (10) thereof)''.
          (3) Related to repeal of section 71.--
                  (A) Section 121(d)(3) is amended--
                          (i) by striking ``(as defined in section 
                        71(b)(2))'' in subparagraph (B), and
                          (ii) by adding at the end the following new 
                        subparagraph:
                  ``(C) Divorce or separation instrument.--For purposes 
                of this paragraph, the term `divorce or separation 
                instrument' means--
                          ``(i) a decree of divorce or separate 
                        maintenance or a written instrument incident to 
                        such a decree,
                          ``(ii) a written separation agreement, or
                          ``(iii) a decree (not described in clause 
                        (i)) requiring a spouse to make payments for 
                        the support or maintenance of the other 
                        spouse.''.
                  (B) Section 220(f)(7) is amended by striking 
                ``subparagraph (A) of section 71(b)(2)'' and inserting 
                ``clause (i) of section 121(d)(3)(C)''.
                  (C) Section 223(f)(7) is amended by striking 
                ``subparagraph (A) of section 71(b)(2)'' and inserting 
                ``clause (i) of section 121(d)(3)(C)''.
                  (D) Section 382(l)(3)(B)(iii) is amended by striking 
                ``section 71(b)(2)'' and inserting ``section 
                121(d)(3)(C)''.
                  (E) Section 408(d)(6) is amended by striking 
                ``subparagraph (A) of section 71(b)(2)'' and inserting 
                ``clause (i) of section 121(d)(3)(C)''.
  (c) Effective Date.--The amendments made by this section shall apply 
to--
          (1) any divorce or separation instrument (as defined in 
        section 71(b)(2) of the Internal Revenue Code of 1986 as in 
        effect before the date of the enactment of this Act) executed 
        after December 31, 2017, and
          (2) any divorce or separation instrument (as so defined) 
        executed on or before such date and modified after such date if 
        the modification expressly provides that the amendments made by 
        this section apply to such modification.

SEC. 1310. REPEAL OF DEDUCTION FOR MOVING EXPENSES.

  (a) In General.--Part VII of subchapter B is amended by striking by 
striking section 217 (and by striking the item relating to such section 
in the table of sections for such subpart).
  (b) Retention of Moving Expenses for Members of Armed Forces.--
Section 134(b) is amended by adding at the end the following new 
paragraph:
          ``(7) Moving expenses.--The term `qualified military benefit' 
        includes any benefit described in section 217(g) (as in effect 
        before the enactment of the Tax Cuts And Jobs Act).''.
  (c) Conforming Amendments.--
          (1) Section 62(a) is amended by striking paragraph (15).
          (2) Section 274(m)(3) is amended by striking ``(other than 
        section 217)''.
          (3) Section 3121(a) is amended by striking paragraph (11).
          (4) Section 3306(b) is amended by striking paragraph (9).
          (5) Section 3401(a) is amended by striking paragraph (15).
          (6) Section 7872(f) is amended by striking paragraph (11).
  (d) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 1311. TERMINATION OF DEDUCTION AND EXCLUSIONS FOR CONTRIBUTIONS TO 
                    MEDICAL SAVINGS ACCOUNTS.

  (a) Termination of Income Tax Deduction.--Section 220 is amended by 
adding at the end the following new subsection:
  ``(k) Termination.--No deduction shall be allowed under subsection 
(a) with respect to any taxable year beginning after December 31, 
2017.''.
  (b) Termination of Exclusion for Employer-Provided Contributions.--
Section 106 is amended by striking subsection (b).
  (c) Conforming Amendments.--
          (1) Section 62(a) is amended by striking paragraph (16).
          (2) Section 106(d) is amended by striking paragraph (2), by 
        redesignating paragraph (3) as paragraph (6), and by inserting 
        after paragraph (1) the following new paragraphs:
          ``(2) No constructive receipt.--No amount shall be included 
        in the gross income of any employee solely because the employee 
        may choose between the contributions referred to in paragraph 
        (1) and employer contributions to another health plan of the 
        employer.
          ``(3) Special rule for deduction of employer contributions.--
        Any employer contribution to a health savings account (as so 
        defined), if otherwise allowable as a deduction under this 
        chapter, shall be allowed only for the taxable year in which 
        paid.
          ``(4) Employer health savings account contribution required 
        to be shown on return.--Every individual required to file a 
        return under section 6012 for the taxable year shall include on 
        such return the aggregate amount contributed by employers to 
        the health savings accounts (as so defined) of such individual 
        or such individual's spouse for such taxable year.
          ``(5) Health savings account contributions not part of cobra 
        coverage.--Paragraph (1) shall not apply for purposes of 
        section 4980B.''.
          (3) Section 223(b)(4) is amended by striking subparagraph 
        (A), by redesignating subparagraphs (B) and (C) as 
        subparagraphs (A) and (B), respectively, and by striking the 
        second sentence thereof.
          (4) Section 223(b)(5) is amended by striking ``under 
        paragraph (3))'' and all that follows through ``shall be 
        divided equally between them'' and inserting the following: 
        ``under paragraph (3)) shall be divided equally between the 
        spouses''.
          (5) Section 223(c) is amended by striking paragraph (5).
          (6) Section 3231(e) is amended by striking paragraph (10).
          (7) Section 3306(b) is amended by striking paragraph (17).
          (8) Section 3401(a) is amended by striking paragraph (21).
          (9) Chapter 43 is amended by striking section 4980E (and by 
        striking the item relating to such section in the table of 
        sections for such chapter).
          (10) Section 4980G is amended to read as follows:

``SEC. 4980G. FAILURE OF EMPLOYER TO MAKE COMPARABLE HEALTH SAVINGS 
                    ACCOUNT CONTRIBUTIONS.

  ``(a) In General.--In the case of an employer who makes a 
contribution to the health savings account of any employee during a 
calendar year, there is hereby imposed a tax on the failure of such 
employer to meet the requirements of subsection (d) for such calendar 
year.
  ``(b) Amount of Tax.--The amount of the tax imposed by subsection (a) 
on any failure for any calendar year is the amount equal to 35 percent 
of the aggregate amount contributed by the employer to health savings 
accounts of employees for taxable years of such employees ending with 
or within such calendar year.
  ``(c) Waiver by Secretary.--In the case of a failure which is due to 
reasonable cause and not to willful neglect, the Secretary may waive 
part or all of the tax imposed by subsection (a) to the extent that the 
payment of such tax would be excessive relative to the failure 
involved.
  ``(d) Employer Required To Make Comparable Health Savings Account 
Contributions for All Participating Employees.--
          ``(1) In general.--An employer meets the requirements of this 
        subsection for any calendar year if the employer makes 
        available comparable contributions to the health savings 
        accounts of all comparable participating employees for each 
        coverage period during such calendar year.
          ``(2) Comparable contributions.--
                  ``(A) In general.--For purposes of paragraph (1), the 
                term `comparable contributions' means contributions--
                          ``(i) which are the same amount, or
                          ``(ii) which are the same percentage of the 
                        annual deductible limit under the high 
                        deductible health plan covering the employees.
                  ``(B) Part-year employees.--In the case of an 
                employee who is employed by the employer for only a 
                portion of the calendar year, a contribution to the 
                health savings account of such employee shall be 
                treated as comparable if it is an amount which bears 
                the same ratio to the comparable amount (determined 
                without regard to this subparagraph) as such portion 
                bears to the entire calendar year.
          ``(3) Comparable participating employees.--
                  ``(A) In general.--For purposes of paragraph (1), the 
                term `comparable participating employees' means all 
                employees--
                          ``(i) who are eligible individuals covered 
                        under any high deductible health plan of the 
                        employer, and
                          ``(ii) who have the same category of 
                        coverage.
                  ``(B) Categories of coverage.--For purposes of 
                subparagraph (B), the categories of coverage are self-
                only and family coverage.
          ``(4) Part-time employees.--
                  ``(A) In general .--Paragraph (3) shall be applied 
                separately with respect to part-time employees and 
                other employees.
                  ``(B) Part-time employee.--For purposes of 
                subparagraph (A), the term `part-time employee' means 
                any employee who is customarily employed for fewer than 
                30 hours per week.
          ``(5) Special rule for non-highly compensated employees.--For 
        purposes of applying this section to a contribution to a health 
        savings account of an employee who is not a highly compensated 
        employee (as defined in section 414(q)), highly compensated 
        employees shall not be treated as comparable participating 
        employees.
  ``(e) Controlled Groups.--For purposes of this section, all persons 
treated as a single employer under subsection (b), (c), (m), or (o) of 
section 414 shall be treated as 1 employer.
  ``(f) Definitions.--Terms used in this section which are also used in 
section 223 have the respective meanings given such terms in section 
223.
  ``(g) Regulations.--The Secretary shall issue regulations to carry 
out the purposes of this section.''.
          (11) Section 6051(a) is amended by striking paragraph (11).
          (12) Section 6051(a)(14)(A) is amended by striking 
        ``paragraphs (11) and (12)'' and inserting ``paragraph (12)''.
  (d) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 1312. DENIAL OF DEDUCTION FOR EXPENSES ATTRIBUTABLE TO THE TRADE 
                    OR BUSINESS OF BEING AN EMPLOYEE.

  (a) In General.--Part IX of subchapter B of chapter 1 is amended by 
inserting after the item relating to section 262 the following new 
item:

``SEC. 262A. EXPENSES ATTRIBUTABLE TO BEING AN EMPLOYEE.

  ``(a) In General.--Except as otherwise provided in this section, no 
deduction shall be allowed with respect to any trade or business of the 
taxpayer which consists of the performance of services by the taxpayer 
as an employee.
  ``(b) Exception for Above-the-line Deductions.--Subsection (a) shall 
not apply to any deduction allowable (determined without regard to 
subsection (a)) in determining adjusted gross income.''.
  (b) Repeal of Certain Above-the-line Trade and Business Deductions of 
Employees.--
          (1) In general.--Section 62(a)(2) is amended--
                  (A) by striking subparagraphs (B), (C), and (D), and
                  (B) by redesignating subparagraph (E) as subparagraph 
                (B).
          (2) Conforming amendments.--
                  (A) Section 62 is amended by striking subsections (b) 
                and (d) and by redesignating subsections (c) and (e) as 
                subsections (b) and (c), respectively.
                  (B) Section 62(a)(20) is amended by striking 
                ``subsection (e)'' and inserting ``subsection (c)''.
  (c) Continued Exclusion of Working Condition Fringe Benefits.--
Section 132(d) is amended by inserting ``(determined without regard to 
section 262A)'' after ``section 162''.
  (d) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

    Subtitle E--Simplification and Reform of Exclusions and Taxable 
                              Compensation

SEC. 1401. LIMITATION ON EXCLUSION FOR EMPLOYER-PROVIDED HOUSING.

  (a) In General.--Section 119 is amended by adding at the end the 
following new subsection:
  ``(e) Limitation on Exclusion of Lodging.--
          ``(1) In general.--The aggregate amount excluded from gross 
        income of the taxpayer under subsections (a) and (d) with 
        respect to lodging for any taxable year shall not exceed 
        $50,000 (half such amount in the case of a married individual 
        filing a separate return).
          ``(2) Limitation to 1 home.--Subsections (a) and (d) 
        (separately and in combination) shall not apply with respect to 
        more than 1 residence of the taxpayer at any given time. In the 
        case of a joint return, the preceding sentence shall apply 
        separately to each spouse for any period during which each 
        spouse resides separate from the other spouse in a residence 
        which is provided in connection with the employment of each 
        spouse, respectively.
          ``(3) Limitation for highly compensated employees.--
                  ``(A) Reduced for excess compensation.--In the case 
                of an individual whose compensation for the taxable 
                year exceeds the amount in effect under section 
                414(q)(1)(B)(i) for the calendar in which such taxable 
                year begins, the $50,000 amount under paragraph (1) 
                shall be reduced (but not below zero) by an amount 
                equal to 50 percent of such excess. For purposes of the 
                preceding sentence, the term `compensation' means wages 
                (as defined in section 3121(a) (without regard to the 
                contribution and benefit base limitation in section 
                3121(a)(1)).
                  ``(B) Exclusion denied for 5-percent owners.--In the 
                case of an individual who is a 5-percent owner (as 
                defined in section 416(i)(1)(B)(i)) of the employer at 
                any time during the taxable year, the amount under 
                paragraph (1) shall be zero.''.
  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 1402. EXCLUSION OF GAIN FROM SALE OF A PRINCIPAL RESIDENCE.

  (a) Requirement That Residence Be Principal Residence for 5 Years 
During 8-year Period.--Subsection (a) of section 121 is amended--
          (1) by striking ``5-year period'' and inserting ``8-year 
        period'', and
          (2) by striking ``2 years'' and inserting ``5 years''.
  (b) Application to Only 1 Sale or Exchange Every 5 Years.--Paragraph 
(3) of section 121(b) is amended to read as follows:
          ``(3) Application to only 1 sale or exchange every 5 years.--
        Subsection (a) shall not apply to any sale or exchange by the 
        taxpayer if, during the 5-year period ending on the date of 
        such sale or exchange, there was any other sale or exchange by 
        the taxpayer to which subsection (a) applied.''.
  (c) Phaseout Based on Modified Adjusted Gross Income.--Section 121 is 
amended by adding at the end the following new subsection:
  ``(h) Phaseout Based on Modified Adjusted Gross Income.--
          ``(1) In general.--If the average modified adjusted gross 
        income of the taxpayer for the taxable year and the 2 preceding 
        taxable years exceeds $250,000 (twice such amount in the case 
        of a joint return), the amount which would (but for this 
        subsection) be excluded from gross income under subsection (a) 
        for such taxable year shall be reduced (but not below zero) by 
        the amount of such excess.
          ``(2) Modified adjusted gross income.--For purposes of this 
        subsection, the term `modified adjusted gross income' means, 
        with respect to any taxable year, adjusted gross income 
        determined after application of this section (but without 
        regard to subsection (b)(1) and this subsection).
          ``(3) Special rule for joint returns.--In the case of a joint 
        return, the average modified adjusted gross income of the 
        taxpayer shall be determined without regard to any taxable year 
        with respect to which the taxpayer did not file a joint 
        return.''.
  (d) Conforming Amendments.--
          (1) The following provisions of section 121 are each amended 
        by striking ``5-year period'' each place it appears therein and 
        inserting ``8-year period'':
                  (A) Subsection (b)(5)(C)(ii)(I).
                  (B) Subsection (c)(1)(B)(i)(I).
                  (C) Subsection (d)(7)(B).
                  (D) Subparagraphs (A) and (B) of subsection (d)(9).
                  (E) Subsection (d)(10).
                  (F) Subsection (d)(12)(A).
          (2) Section 121(c)(1)(B)(ii) is amended by striking ``2 
        years'' and inserting ``5 years'':
  (e) Effective Date.--The amendments made by this section shall apply 
to sales and exchanges after December 31, 2017.

SEC. 1403. REPEAL OF EXCLUSION, ETC., FOR EMPLOYEE ACHIEVEMENT AWARDS.

  (a) In General.--Section 74 is amended by striking subsection (c).
  (b) Repeal of Limitation on Deduction.--Section 274 is amended by 
striking subsection (j).
  (c) Conforming Amendments.--
          (1) Section 102(c)(2) is amended by striking the first 
        sentence.
          (2) Section 414(n)(3)(C) is amended by striking ``274(j),''.
          (3) Section 414(t)(2) is amended by striking ``274(j),''.
          (4) Section 3121(a)(20) is amended by striking ``74(c)''.
          (5) Section 3231(e)(5) is amended by striking ``74(c),''.
          (6) Section 3306(b)(16) is amended by striking ``74(c),''.
          (7) Section 3401(a)(19) is amended by striking ``74(c),''.
  (d) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 1404. SUNSET OF EXCLUSION FOR DEPENDENT CARE ASSISTANCE PROGRAMS.

  (a) In General.--Section 129 is amended by adding at the end the 
following new subsection:
  ``(f) Termination.--Subsection (a) shall not apply to taxable years 
beginning after December 31, 2022.''.
  (b) Effective Date.--The amendment made by this section shall take 
effect on the date of the enactment of this Act.

SEC. 1405. REPEAL OF EXCLUSION FOR QUALIFIED MOVING EXPENSE 
                    REIMBURSEMENT.

  (a) In General.--Section 132(a) is amended by striking paragraph (6).
  (b) Conforming Amendments.--
          (1) Section 82 is amended by striking ``Except as provided in 
        section 132(a)(6), there'' and inserting ``There''.
          (2) Section 132 is amended by striking subsection (g).
          (3) Section 132(l) is amended by striking by striking 
        ``subsections (e) and (g)'' and inserting ``subsection (e)''.
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 1406. REPEAL OF EXCLUSION FOR ADOPTION ASSISTANCE PROGRAMS.

  (a) In General.--Part III of subchapter B of chapter 1 is amended by 
striking section 137 (and by striking the item relating to such section 
in the table of sections for such part).
  (b) Conforming Amendments.--
          (1) Sections 414(n)(3)(C), 414(t)(2), 74(d)(2)(B), 
        86(b)(2)(A), 219(g)(3)(A)(ii) are each amended by striking ``, 
        137''.
          (2) Section 1016(a), as amended by the preceding provision of 
        this Act, is amended by striking paragraph (26).
          (3) Section 6039D(d)(1), as amended by the preceding 
        provisions of this Act, is amended--
                  (A) by striking ``, or 137'', and
                  (B) by inserting ``or'' before ``125''.
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

 Subtitle F--Simplification and Reform of Savings, Pensions, Retirement

SEC. 1501. REPEAL OF SPECIAL RULE PERMITTING RECHARACTERIZATION OF ROTH 
                    IRA CONTRIBUTIONS AS TRADITIONAL IRA CONTRIBUTIONS.

  (a) In General.--Section 408A(d) is amended by striking paragraph (6) 
and by redesignating paragraph (7) as paragraph (6).
  (b) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 1502. REDUCTION IN MINIMUM AGE FOR ALLOWABLE IN-SERVICE 
                    DISTRIBUTIONS.

  (a) In General.--Section 401(a)(36) is amended by striking ``age 62'' 
and inserting ``age 59 \1/2\''.
  (b) Application to Governmental Section 457(b) Plans.--Clause (i) of 
section 457(d)(1)(A) is amended by inserting ``(in the case of a plan 
maintained by an employer described in subsection (e)(1)(A), age 59 \1/
2\)'' before the comma at the end.
  (c) Effective Date.--The amendments made by this section shall apply 
to plan years beginning after December 31, 2017.

SEC. 1503. MODIFICATION OF RULES GOVERNING HARDSHIP DISTRIBUTIONS.

  (a) In General.--Not later than 1 year after the date of the 
enactment of this Act, the Secretary of the Treasury shall modify 
Treasury Regulation section 1.401(k)-1(d)(3)(iv)(E) to--
          (1) delete the 6-month prohibition on contributions imposed 
        by paragraph (2) thereof, and
          (2) make any other modifications necessary to carry out the 
        purposes of section 401(k)(2)(B)(i)(IV) of the Internal Revenue 
        Code of 1986.
  (b) Effective Date.--The revised regulations under this section shall 
apply to plan years beginning after December 31, 2017.

SEC. 1504. MODIFICATION OF RULES RELATING TO HARDSHIP WITHDRAWALS FROM 
                    CASH OR DEFERRED ARRANGEMENTS.

  (a) In General.--Section 401(k) is amended by adding at the end the 
following:
          ``(14) Special rules relating to hardship withdrawals.--For 
        purposes of paragraph (2)(B)(i)(IV)--
                  ``(A) Amounts which may be withdrawn.--The following 
                amounts may be distributed upon hardship of the 
                employee:
                          ``(i) Contributions to a profit-sharing or 
                        stock bonus plan to which section 402(e)(3) 
                        applies.
                          ``(ii) Qualified nonelective contributions 
                        (as defined in subsection (m)(4)(C)).
                          ``(iii) Qualified matching contributions 
                        described in paragraph (3)(D)(ii)(I).
                          ``(iv) Earnings on any contributions 
                        described in clause (i), (ii), or (iii).
                  ``(B) No requirement to take available loan.--A 
                distribution shall not be treated as failing to be made 
                upon the hardship of an employee solely because the 
                employee does not take any available loan under the 
                plan.".''.
  (b) Conforming Amendment.--Section 401(k)(2)(B)(i)(IV) is amended to 
read as follows:
                                  ``(IV) subject to the provisions of 
                                paragraph (14), upon hardship of the 
                                employee, or".''.
  (c) Effective Date.--The amendments made by this section shall apply 
to plan years beginning after December 31, 2017.

SEC. 1505. EXTENDED ROLLOVER PERIOD FOR THE ROLLOVER OF PLAN LOAN 
                    OFFSET AMOUNTS IN CERTAIN CASES.

  (a) In General.--Paragraph (3) of section 402(c) is amended by adding 
at the end the following new subparagraph:
                  ``(C) Rollover of certain plan loan offset amounts.--
                          ``(i) In general.--In the case of a qualified 
                        plan loan offset amount, paragraph (1) shall 
                        not apply to any transfer of such amount made 
                        after the due date (including extensions) for 
                        filing the return of tax for the taxable year 
                        in which such amount is treated as distributed 
                        from a qualified employer plan.
                          ``(ii) Qualified plan loan offset amount.--
                        For purposes of this subparagraph, the term 
                        `qualified plan loan offset amount' means a 
                        plan loan offset amount which is treated as 
                        distributed from a qualified employer plan to a 
                        participant or beneficiary solely by reason 
                        of--
                                  ``(I) the termination of the 
                                qualified employer plan, or
                                  ``(II) the failure to meet the 
                                repayment terms of the loan from such 
                                plan because of the separation from 
                                service of the participant (whether due 
                                to layoff, cessation of business, 
                                termination of employment, or 
                                otherwise).
                          ``(iii) Plan loan offset amount.--For 
                        purposes of clause (ii), the term `plan loan 
                        offset amount' means the amount by which the 
                        participant's accrued benefit under the plan is 
                        reduced in order to repay a loan from the plan.
                          ``(iv) Limitation.--This subparagraph shall 
                        not apply to any plan loan offset amount unless 
                        such plan loan offset amount relates to a loan 
                        to which section 72(p)(1) does not apply by 
                        reason of section 72(p)(2).
                          ``(v) Qualified employer plan.--For purposes 
                        of this subsection, the term `qualified 
                        employer plan' has the meaning given such term 
                        by section 72(p)(4).''.
  (b) Conforming Amendment.--Subparagraph (A) of section 402(c)(3) is 
amended by striking ``subparagraph (B)'' and inserting ``subparagraphs 
(B) and (C)''.
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 1506. MODIFICATION OF NONDISCRIMINATION RULES TO PROTECT OLDER, 
                    LONGER SERVICE PARTICIPANTS.

  (a) In General.--Section 401 is amended--
          (1) by redesignating subsection (o) as subsection (p), and
          (2) by inserting after subsection (n) the following new 
        subsection:
  ``(o) Special Rules for Applying Nondiscrimination Rules to Protect 
Older, Longer Service and Grandfathered Participants.--
          ``(1) Testing of defined benefit plans with closed classes of 
        participants.--
                  ``(A) Benefits, rights, or features provided to 
                closed classes.--A defined benefit plan which provides 
                benefits, rights, or features to a closed class of 
                participants shall not fail to satisfy the requirements 
                of subsection (a)(4) by reason of the composition of 
                such closed class or the benefits, rights, or features 
                provided to such closed class, if--
                          ``(i) for the plan year as of which the class 
                        closes and the 2 succeeding plan years, such 
                        benefits, rights, and features satisfy the 
                        requirements of subsection (a)(4) (without 
                        regard to this subparagraph but taking into 
                        account the rules of subparagraph (I)),
                          ``(ii) after the date as of which the class 
                        was closed, any plan amendment which modifies 
                        the closed class or the benefits, rights, and 
                        features provided to such closed class does not 
                        discriminate significantly in favor of highly 
                        compensated employees, and
                          ``(iii) the class was closed before April 5, 
                        2017, or the plan is described in subparagraph 
                        (C).
                  ``(B) Aggregate testing with defined contribution 
                plans permitted on a benefits basis.--
                          ``(i) In general.--For purposes of 
                        determining compliance with subsection (a)(4) 
                        and section 410(b), a defined benefit plan 
                        described in clause (iii) may be aggregated and 
                        tested on a benefits basis with 1 or more 
                        defined contribution plans, including with the 
                        portion of 1 or more defined contribution plans 
                        which--
                                  ``(I) provides matching contributions 
                                (as defined in subsection (m)(4)(A)),
                                  ``(II) provides annuity contracts 
                                described in section 403(b) which are 
                                purchased with matching contributions 
                                or nonelective contributions, or
                                  ``(III) consists of an employee stock 
                                ownership plan (within the meaning of 
                                section 4975(e)(7)) or a tax credit 
                                employee stock ownership plan (within 
                                the meaning of section 409(a)).
                          ``(ii) Special rules for matching 
                        contributions.--For purposes of clause (i), if 
                        a defined benefit plan is aggregated with a 
                        portion of a defined contribution plan 
                        providing matching contributions--
                                  ``(I) such defined benefit plan must 
                                also be aggregated with any portion of 
                                such defined contribution plan which 
                                provides elective deferrals described 
                                in subparagraph (A) or (C) of section 
                                402(g)(3), and
                                  ``(II) such matching contributions 
                                shall be treated in the same manner as 
                                nonelective contributions, including 
                                for purposes of applying the rules of 
                                subsection (l).
                          ``(iii) Plans described.--A defined benefit 
                        plan is described in this clause if--
                                  ``(I) the plan provides benefits to a 
                                closed class of participants,
                                  ``(II) for the plan year as of which 
                                the class closes and the 2 succeeding 
                                plan years, the plan satisfies the 
                                requirements of section 410(b) and 
                                subsection (a)(4) (without regard to 
                                this subparagraph but taking into 
                                account the rules of subparagraph (I)),
                                  ``(III) after the date as of which 
                                the class was closed, any plan 
                                amendment which modifies the closed 
                                class or the benefits provided to such 
                                closed class does not discriminate 
                                significantly in favor of highly 
                                compensated employees, and
                                  ``(IV) the class was closed before 
                                April 5, 2017, or the plan is described 
                                in subparagraph (C).
                  ``(C) Plans described.--A plan is described in this 
                subparagraph if, taking into account any predecessor 
                plan--
                          ``(i) such plan has been in effect for at 
                        least 5 years as of the date the class is 
                        closed, and
                          ``(ii) during the 5-year period preceding the 
                        date the class is closed, there has not been a 
                        substantial increase in the coverage or value 
                        of the benefits, rights, or features described 
                        in subparagraph (A) or in the coverage or 
                        benefits under the plan described in 
                        subparagraph (B)(iii) (whichever is 
                        applicable).
                  ``(D) Determination of substantial increase for 
                benefits, rights, and features.--In applying 
                subparagraph (C)(ii) for purposes of subparagraph 
                (A)(iii), a plan shall be treated as having had a 
                substantial increase in coverage or value of the 
                benefits, rights, or features described in subparagraph 
                (A) during the applicable 5-year period only if, during 
                such period--
                          ``(i) the number of participants covered by 
                        such benefits, rights, or features on the date 
                        such period ends is more than 50 percent 
                        greater than the number of such participants on 
                        the first day of the plan year in which such 
                        period began, or
                          ``(ii) such benefits, rights, and features 
                        have been modified by 1 or more plan amendments 
                        in such a way that, as of the date the class is 
                        closed, the value of such benefits, rights, and 
                        features to the closed class as a whole is 
                        substantially greater than the value as of the 
                        first day of such 5-year period, solely as a 
                        result of such amendments.
                  ``(E) Determination of substantial increase for 
                aggregate testing on benefits basis.--In applying 
                subparagraph (C)(ii) for purposes of subparagraph 
                (B)(iii)(IV), a plan shall be treated as having had a 
                substantial increase in coverage or benefits during the 
                applicable 5-year period only if, during such period--
                          ``(i) the number of participants benefitting 
                        under the plan on the date such period ends is 
                        more than 50 percent greater than the number of 
                        such participants on the first day of the plan 
                        year in which such period began, or
                          ``(ii) the average benefit provided to such 
                        participants on the date such period ends is 
                        more than 50 percent greater than the average 
                        benefit provided on the first day of the plan 
                        year in which such period began.
                  ``(F) Certain employees disregarded.--For purposes of 
                subparagraphs (D) and (E), any increase in coverage or 
                value or in coverage or benefits, whichever is 
                applicable, which is attributable to such coverage and 
                value or coverage and benefits provided to employees--
                          ``(i) who became participants as a result of 
                        a merger, acquisition, or similar event which 
                        occurred during the 7-year period preceding the 
                        date the class is closed, or
                          ``(ii) who became participants by reason of a 
                        merger of the plan with another plan which had 
                        been in effect for at least 5 years as of the 
                        date of the merger,
                shall be disregarded, except that clause (ii) shall 
                apply for purposes of subparagraph (D) only if, under 
                the merger, the benefits, rights, or features under 1 
                plan are conformed to the benefits, rights, or features 
                of the other plan prospectively.
                  ``(G) Rules relating to average benefit.--For 
                purposes of subparagraph (E)--
                          ``(i) the average benefit provided to 
                        participants under the plan will be treated as 
                        having remained the same between the 2 dates 
                        described in subparagraph (E)(ii) if the 
                        benefit formula applicable to such participants 
                        has not changed between such dates, and
                          ``(ii) if the benefit formula applicable to 1 
                        or more participants under the plan has changed 
                        between such 2 dates, then the average benefit 
                        under the plan shall be considered to have 
                        increased by more than 50 percent only if--
                                  ``(I) the total amount determined 
                                under section 430(b)(1)(A)(i) for all 
                                participants benefitting under the plan 
                                for the plan year in which the 5-year 
                                period described in subparagraph (E) 
                                ends, exceeds
                                  ``(II) the total amount determined 
                                under section 430(b)(1)(A)(i) for all 
                                such participants for such plan year, 
                                by using the benefit formula in effect 
                                for each such participant for the first 
                                plan year in such 5-year period, by 
                                more than 50 percent.
                        In the case of a CSEC plan (as defined in 
                        section 414(y)), the normal cost of the plan 
                        (as determined under section 433(j)(1)(B)) 
                        shall be used in lieu of the amount determined 
                        under section 430(b)(1)(A)(i).
                  ``(H) Treatment as single plan.--For purposes of 
                subparagraphs (E) and (G), a plan described in section 
                413(c) shall be treated as a single plan rather than as 
                separate plans maintained by each participating 
                employer.
                  ``(I) Special rules.--For purposes of subparagraphs 
                (A)(i) and (B)(iii)(II), the following rules shall 
                apply:
                          ``(i) In applying section 410(b)(6)(C), the 
                        closing of the class of participants shall not 
                        be treated as a significant change in coverage 
                        under section 410(b)(6)(C)(i)(II).
                          ``(ii) 2 or more plans shall not fail to be 
                        eligible to be aggregated and treated as a 
                        single plan solely by reason of having 
                        different plan years.
                          ``(iii) Changes in the employee population 
                        shall be disregarded to the extent attributable 
                        to individuals who become employees or cease to 
                        be employees, after the date the class is 
                        closed, by reason of a merger, acquisition, 
                        divestiture, or similar event.
                          ``(iv) Aggregation and all other testing 
                        methodologies otherwise applicable under 
                        subsection (a)(4) and section 410(b) may be 
                        taken into account.
                The rule of clause (ii) shall also apply for purposes 
                of determining whether plans to which subparagraph 
                (B)(i) applies may be aggregated and treated as 1 plan 
                for purposes of determining whether such plans meet the 
                requirements of subsection (a)(4) and section 410(b).
                  ``(J) Spun-off plans.--For purposes of this 
                paragraph, if a portion of a defined benefit plan 
                described in subparagraph (A) or (B)(iii) is spun off 
                to another employer and the spun-off plan continues to 
                satisfy the requirements of--
                          ``(i) subparagraph (A)(i) or (B)(iii)(II), 
                        whichever is applicable, if the original plan 
                        was still within the 3-year period described in 
                        such subparagraph at the time of the spin off, 
                        and
                          ``(ii) subparagraph (A)(ii) or (B)(iii)(III), 
                        whichever is applicable,
                the treatment under subparagraph (A) or (B) of the 
                spun-off plan shall continue with respect to such other 
                employer.
          ``(2) Testing of defined contribution plans.--
                  ``(A) Testing on a benefits basis.--A defined 
                contribution plan shall be permitted to be tested on a 
                benefits basis if--
                          ``(i) such defined contribution plan provides 
                        make-whole contributions to a closed class of 
                        participants whose accruals under a defined 
                        benefit plan have been reduced or eliminated,
                          ``(ii) for the plan year of the defined 
                        contribution plan as of which the class 
                        eligible to receive such make-whole 
                        contributions closes and the 2 succeeding plan 
                        years, such closed class of participants 
                        satisfies the requirements of section 
                        410(b)(2)(A)(i) (determined by applying the 
                        rules of paragraph (1)(I)),
                          ``(iii) after the date as of which the class 
                        was closed, any plan amendment to the defined 
                        contribution plan which modifies the closed 
                        class or the allocations, benefits, rights, and 
                        features provided to such closed class does not 
                        discriminate significantly in favor of highly 
                        compensated employees, and
                          ``(iv) the class was closed before April 5, 
                        2017, or the defined benefit plan under clause 
                        (i) is described in paragraph (1)(C) (as 
                        applied for purposes of paragraph 
                        (1)(B)(iii)(IV)).
                  ``(B) Aggregation with plans including matching 
                contributions.--
                          ``(i) In general.--With respect to 1 or more 
                        defined contribution plans described in 
                        subparagraph (A), for purposes of determining 
                        compliance with subsection (a)(4) and section 
                        410(b), the portion of such plans which 
                        provides make-whole contributions or other 
                        nonelective contributions may be aggregated and 
                        tested on a benefits basis with the portion of 
                        1 or more other defined contribution plans 
                        which--
                                  ``(I) provides matching contributions 
                                (as defined in subsection (m)(4)(A)),
                                  ``(II) provides annuity contracts 
                                described in section 403(b) which are 
                                purchased with matching contributions 
                                or nonelective contributions, or
                                  ``(III) consists of an employee stock 
                                ownership plan (within the meaning of 
                                section 4975(e)(7)) or a tax credit 
                                employee stock ownership plan (within 
                                the meaning of section 409(a)).
                          ``(ii) Special rules for matching 
                        contributions.--Rules similar to the rules of 
                        paragraph (1)(B)(ii) shall apply for purposes 
                        of clause (i).
                  ``(C) Special rules for testing defined contribution 
                plan features providing matching contributions to 
                certain older, longer service participants.--In the 
                case of a defined contribution plan which provides 
                benefits, rights, or features to a closed class of 
                participants whose accruals under a defined benefit 
                plan have been reduced or eliminated, the plan shall 
                not fail to satisfy the requirements of subsection 
                (a)(4) solely by reason of the composition of the 
                closed class or the benefits, rights, or features 
                provided to such closed class if the defined 
                contribution plan and defined benefit plan otherwise 
                meet the requirements of subparagraph (A) but for the 
                fact that the make-whole contributions under the 
                defined contribution plan are made in whole or in part 
                through matching contributions.
                  ``(D) Spun-off plans.--For purposes of this 
                paragraph, if a portion of a defined contribution plan 
                described in subparagraph (A) or (C) is spun off to 
                another employer, the treatment under subparagraph (A) 
                or (C) of the spun-off plan shall continue with respect 
                to the other employer if such plan continues to comply 
                with the requirements of clauses (ii) (if the original 
                plan was still within the 3-year period described in 
                such clause at the time of the spin off) and (iii) of 
                subparagraph (A), as determined for purposes of 
                subparagraph (A) or (C), whichever is applicable.
          ``(3) Definitions.--For purposes of this subsection--
                  ``(A) Make-whole contributions.--Except as otherwise 
                provided in paragraph (2)(C), the term `make-whole 
                contributions' means nonelective allocations for each 
                employee in the class which are reasonably calculated, 
                in a consistent manner, to replace some or all of the 
                retirement benefits which the employee would have 
                received under the defined benefit plan and any other 
                plan or qualified cash or deferred arrangement under 
                subsection (k)(2) if no change had been made to such 
                defined benefit plan and such other plan or 
                arrangement. For purposes of the preceding sentence, 
                consistency shall not be required with respect to 
                employees who were subject to different benefit 
                formulas under the defined benefit plan.
                  ``(B) References to closed class of participants.--
                References to a closed class of participants and 
                similar references to a closed class shall include 
                arrangements under which 1 or more classes of 
                participants are closed, except that 1 or more classes 
                of participants closed on different dates shall not be 
                aggregated for purposes of determining the date any 
                such class was closed.
                  ``(C) Highly compensated employee.--The term `highly 
                compensated employee' has the meaning given such term 
                in section 414(q).".''.
  (b) Participation Requirements.--Paragraph (26) of section 401(a) is 
amended by adding at the end the following new subparagraph:
                  ``(I) Protected participants.--
                          ``(i) In general.--A plan shall be deemed to 
                        satisfy the requirements of subparagraph (A) 
                        if--
                                  ``(I) the plan is amended--
                                          ``(aa) to cease all benefit 
                                        accruals, or
                                          ``(bb) to provide future 
                                        benefit accruals only to a 
                                        closed class of participants,
                                  ``(II) the plan satisfies 
                                subparagraph (A) (without regard to 
                                this subparagraph) as of the effective 
                                date of the amendment, and
                                  ``(III) the amendment was adopted 
                                before April 5, 2017, or the plan is 
                                described in clause (ii).
                          ``(ii) Plans described.--A plan is described 
                        in this clause if the plan would be described 
                        in subsection (o)(1)(C), as applied for 
                        purposes of subsection (o)(1)(B)(iii)(IV) and 
                        by treating the effective date of the amendment 
                        as the date the class was closed for purposes 
                        of subsection (o)(1)(C).
                          ``(iii) Special rules.--For purposes of 
                        clause (i)(II), in applying section 
                        410(b)(6)(C), the amendments described in 
                        clause (i) shall not be treated as a 
                        significant change in coverage under section 
                        410(b)(6)(C)(i)(II).
                          ``(iv) Spun-off plans.--For purposes of this 
                        subparagraph, if a portion of a plan described 
                        in clause (i) is spun off to another employer, 
                        the treatment under clause (i) of the spun-off 
                        plan shall continue with respect to the other 
                        employer.''.
  (c) Effective Date.--
          (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall take effect on the date 
        of the enactment of this Act, without regard to whether any 
        plan modifications referred to in such amendments are adopted 
        or effective before, on, or after such date of enactment.
          (2) Special rules.--
                  (A) Election of earlier application.--At the election 
                of the plan sponsor, the amendments made by this 
                section shall apply to plan years beginning after 
                December 31, 2013.
                  (B) Closed classes of participants.--For purposes of 
                paragraphs (1)(A)(iii), (1)(B)(iii)(IV), and (2)(A)(iv) 
                of section 401(o) of the Internal Revenue Code of 1986 
                (as added by this section), a closed class of 
                participants shall be treated as being closed before 
                April 5, 2017, if the plan sponsor's intention to 
                create such closed class is reflected in formal written 
                documents and communicated to participants before such 
                date.
                  (C) Certain post-enactment plan amendments.--A plan 
                shall not be treated as failing to be eligible for the 
                application of section 401(o)(1)(A), 401(o)(1)(B)(iii), 
                or 401(a)(26) of such Code (as added by this section) 
                to such plan solely because in the case of--
                          (i) such section 401(o)(1)(A), the plan was 
                        amended before the date of the enactment of 
                        this Act to eliminate 1 or more benefits, 
                        rights, or features, and is further amended 
                        after such date of enactment to provide such 
                        previously eliminated benefits, rights, or 
                        features to a closed class of participants, or
                          (ii) such section 401(o)(1)(B)(iii) or 
                        section 401(a)(26), the plan was amended before 
                        the date of the enactment of this Act to cease 
                        all benefit accruals, and is further amended 
                        after such date of enactment to provide benefit 
                        accruals to a closed class of participants. Any 
                        such section shall only apply if the plan 
                        otherwise meets the requirements of such 
                        section and in applying such section, the date 
                        the class of participants is closed shall be 
                        the effective date of the later amendment.

    Subtitle G--Estate, Gift, and Generation-skipping Transfer Taxes

SEC. 1601. INCREASE IN CREDIT AGAINST ESTATE, GIFT, AND GENERATION-
                    SKIPPING TRANSFER TAX.

  (a) In General.--Section 2010(c)(3) is amended by striking 
``$5,000,000'' and inserting ``$10,000,000''.
  (b) Effective Date.--The amendments made by this section shall apply 
to estates of decedents dying, generation-skipping transfers, and gifts 
made, after December 31, 2017.

SEC. 1602. REPEAL OF ESTATE AND GENERATION-SKIPPING TRANSFER TAXES.

  (a) Estate Tax Repeal.--
          (1) In general.--Subchapter C of chapter 11 is amended by 
        adding at the end the following new section:

``SEC. 2210. TERMINATION.

  ``(a) In General.--Except as provided in subsection (b), this chapter 
shall not apply to the estates of decedents dying after December 31, 
2024.
  ``(b) Certain Distributions From Qualified Domestic Trusts.--In 
applying section 2056A with respect to the surviving spouse of a 
decedent dying on or before December 31, 2024--
          ``(1) section 2056A(b)(1)(A) shall not apply to distributions 
        made after the 10-year period beginning on such date, and
          ``(2) section 2056A(b)(1)(B) shall not apply after such 
        date.''.
          (2) Conforming amendments.--Section 1014(b) is amended--
                  (A) in paragraph (6), by striking ``was includible in 
                determining'' and all that follows through the end and 
                inserting ``was includible (or would have been 
                includible without regard to section 2210) in 
                determining the value of the decedent's gross estate 
                under chapter 11 of subtitle B'' ,
                  (B) in paragraph (9), by striking ``required to be 
                included'' through ``Code of 1939'' and inserting 
                ``required to be included (or would have been required 
                to be included without regard to section 2210) in 
                determining the value of the decedent's gross estate 
                under chapter 11 of subtitle B'', and
                  (C) in paragraph (10), by striking ``Property 
                includible in the gross estate'' and inserting 
                ``Property includible (or which would have been 
                includible without regard to section 2210) in the gross 
                estate''.
          (3) Clerical amendment.--The table of sections for subchapter 
        C of chapter 11 is amended by adding at the end the following 
        new item:

``Sec. 2210. Termination.''.

  (b) Generation-skipping Transfer Tax Repeal.--
          (1) In general.--Subchapter G of chapter 13 of subtitle B of 
        such Code is amended by adding at the end the following new 
        section:

``SEC. 2664. TERMINATION.

  ``This chapter shall not apply to generation-skipping transfers after 
December 31, 2024.''.
          (2) Clerical amendment.--The table of sections for subchapter 
        G of chapter 13 of such Code is amended by adding at the end 
        the following new item:

``Sec. 2664. Termination.''.

  (c) Conforming Amendments Related to Gift Tax.--
          (1) Computation of gift tax.--Section 2502 is amended by 
        adding at the end the following new subsection:
  ``(d) Gifts Made After 2024.--
          ``(1) In general.--In the case of a gift made after December 
        31, 2024, subsection (a) shall be applied by substituting 
        `subsection (d)(2)' for `section 2001(c)' and `such subsection' 
        for `such section'.
          ``(2) Rate schedule.--

``If the amount with respect to which    The tentative tax is:
 the tentative tax to be computed is:.
Not over $10,000.......................  18% of such amount.
Over $10,000 but not over $20,000......  $1,800, plus 20% of the excess
                                          over $10,000.
Over $20,000 but not over $40,000......  $3,800, plus 22% of the excess
                                          over $20,000.
Over $40,000 but not over $60,000......  $8,200, plus 24% of the excess
                                          over $40,000.
Over $60,000 but not over $80,000......  $13,000, plus 26% of the excess
                                          over $60,000.
Over $80,000 but not over $100,000.....  $18,200, plus 28% of the excess
                                          over $80,000.
Over $100,000 but not over $150,000....  $23,800, plus 30% of the excess
                                          over $100,000.
Over $150,000 but not over $250,000....  $38,800, plus 32% of the excess
                                          of $150,000.
Over $250,000 but not over $500,000....  $70,800, plus 34% of the excess
                                          over $250,000.
Over $500,000..........................  $155,800, plus 35% of the
                                          excess of $500,000.''.
 

          (2) Lifetime gift exemption.--Section 2505 is amended by 
        adding at the end the following new subsection:
  ``(d) Gifts Made After 2024.--
          ``(1) In general.--In the case of a gift made after December 
        31, 2024, subsection (a)(1) shall be applied by substituting 
        `the amount of the tentative tax which would be determined 
        under the rate schedule set forth in section 2502(a)(2) if the 
        amount with respect to which such tentative tax is to be 
        computed were $10,000,000' for `the applicable credit amount in 
        effect under section 2010(c) which would apply if the donor 
        died as of the end of the calendar year'.
          ``(2) Inflation adjustment.--
                  ``(A) In general.--In the case of any calendar year 
                after 2024, the dollar amount in subsection (a)(1) 
                (after application of this subsection) shall be 
                increased by an amount equal to--
                          ``(i) such dollar amount, multiplied by
                          ``(ii) the cost-of-living adjustment 
                        determined under section 1(c)(2)(A) of such 
                        calendar year by substituting `calendar year 
                        2011' for `calendar year 2016' in clause (ii) 
                        thereof.
                  ``(B) Rounding.--If any amount as adjusted under 
                paragraph (1) is not a multiple of $10,000, such amount 
                shall be rounded to the nearest multiple of $10,000.''.
          (3) Other conforming amendments related to gift tax.--Section 
        2801 is amended by adding at the end the following new 
        subsection:
  ``(g) Gifts Received After 2024.--In the case of a gift received 
after December 31, 2024, subsection (a)(1) shall be applied by 
substituting `section 2502(a)(2)' for `section 2001(c) as in effect on 
the date of such receipt'.''.
  (d) Effective Date.--The amendments made by this section shall apply 
to estates of decedents dying, generation-skipping transfers, and gifts 
made, after December 31, 2024.

                TITLE II--ALTERNATIVE MINIMUM TAX REPEAL

SEC. 2001. REPEAL OF ALTERNATIVE MINIMUM TAX.

  (a) In General.--Subchapter A of chapter 1 is amended by striking 
part VI (and by striking the item relating to such part in the table of 
parts for subchapter A).
  (b) Credit for Prior Year Minimum Tax Liability.--
          (1) Limitation.--Subsection (c) of section 53 is amended to 
        read as follows:
  ``(c) Limitation.--The credit allowable under subsection (a) shall 
not exceed the regular tax liability of the taxpayer reduced by the sum 
of the credits allowed under subparts A, B, and D.''.
          (2) Credits treated as refundable.--Section 53 is amended by 
        adding at the end the following new subsection:
  ``(e) Portion of Credit Treated as Refundable.--
          ``(1) In general.--In the case of any taxable year beginning 
        in 2019, 2020, 2021, or 2022, the limitation under subsection 
        (c) shall be increased by the AMT refundable credit amount for 
        such year.
          ``(2) AMT refundable credit amount.--For purposes of 
        paragraph (1), the AMT refundable credit amount is an amount 
        equal to 50 percent (100 percent in the case of a taxable year 
        beginning in 2022) of the excess (if any) of--
                  ``(A) the minimum tax credit determined under 
                subsection (b) for the taxable year, over
                  ``(B) the minimum tax credit allowed under subsection 
                (a) for such year (before the application of this 
                subsection for such year).
          ``(3) Credit refundable.--For purposes of this title (other 
        than this section), the credit allowed by reason of this 
        subsection shall be treated as a credit allowed under subpart C 
        (and not this subpart).
          ``(4) Short taxable years.--In the case of any taxable year 
        of less than 365 days, the AMT refundable credit amount 
        determined under paragraph (2) with respect to such taxable 
        year shall be the amount which bears the same ratio to such 
        amount determined without regard to this paragraph as the 
        number of days in such taxable year bears to 365.''.
          (3) Treatment of references.--Section 53(d) is amended by 
        adding at the end the following new paragraph:
          ``(3) AMT term references.--Any references in this subsection 
        to section 55, 56, or 57 shall be treated as a reference to 
        such section as in effect before its repeal by the Tax Cuts and 
        Jobs Act.''.
  (c) Conforming Amendments Related to AMT Repeal.--
          (1) Section 2(d) is amended by striking ``sections 1 and 55'' 
        and inserting ``section 1''.
          (2) Section 5(a) is amended by striking paragraph (4).
          (3) Section 11(d) is amended by striking ``the taxes imposed 
        by subsection (a) and section 55'' and inserting ``the tax 
        imposed by subsection (a)''.
          (4) Section 12 is amended by striking paragraph (7).
          (5) Section 26(a) is amended to read as follows:
  ``(a) Limitation Based on Amount of Tax.--The aggregate amount of 
credits allowed by this subpart for the taxable year shall not exceed 
the taxpayer's regular tax liability for the taxable year.''.
          (6) Section 26(b)(2) is amended by striking subparagraph (A).
          (7) Section 26 is amended by striking subsection (c).
          (8) Section 38(c) is amended--
                  (A) by striking paragraphs (1) through (5),
                  (B) by redesignating paragraph (6) as paragraph (2),
                  (C) by inserting before paragraph (2) (as so 
                redesignated) the following new paragraph:
          ``(1) In general.--The credit allowed under subsection (a) 
        for any taxable year shall not exceed the excess (if any) of--
                  ``(A) the sum of--
                          ``(i) so much of the regular tax liability as 
                        does not exceed $25,000, plus
                          ``(ii) 75 percent of so much of the regular 
                        tax liability as exceeds $25,000, over
                  ``(B) the sum of the credits allowable under subparts 
                A and B of this part.'', and
                  (D) by striking ``subparagraph (B) of paragraph (1)'' 
                each place it appears in paragraph (2) (as so 
                redesignated) and inserting ``clauses (i) and (ii) of 
                paragraph (1)(A)''.
          (9) Section 39(a) is amended--
                  (A) by striking ``or the eligible small business 
                credits'' in paragraph (3)(A), and
                  (B) by striking paragraph (4).
          (10) Section 45D(g)(4)(B) is amended by striking ``or for 
        purposes of section 55''.
          (11) Section 54(c)(1) is amended to read as follows:
          ``(1) regular tax liability (as defined in section 26(b)), 
        over''.
          (12) Section 54A(c)(1)(A) is amended to read as follows:
                  ``(A) regular tax liability (as defined in section 
                26(b)), over''.
          (13) Section 148(b)(3) is amended to read as follows:
          ``(3) Tax-exempt bonds not treated as investment property.--
        The term `investment property' does not include any tax-exempt 
        bond.''.
          (14) Section 168(k)(2) is amended by striking subparagraph 
        (G).
          (15) Section 168(k) is amended by striking paragraph (4).
          (16) Section 168(k)(5) is amended by striking subparagraph 
        (E).
          (17) Section 168(m)(2)(B)(i) is amended by striking 
        ``(determined without regard to paragraph (4) thereof)''.
          (18) Section 168(m)(2) is amended by striking subparagraph 
        (D).
          (19) Section 173 is amended by striking subsection (b).
          (20) Section 263(c) is amended by striking ``section 59(e) or 
        291'' and inserting ``section 291''.
          (21) Section 263A(c) is amended by striking paragraph (6) and 
        by redesignating paragraph (7) (as amended) as paragraph (6).
          (22) Section 382(l) is amended by striking paragraph (7) and 
        by redesignating paragraph (8) as paragraph (7).
          (23) Section 443 is amended by striking subsection (d) and by 
        redesignating subsection (e) as subsection (d).
          (24) Section 616 is amended by striking subsection (e).
          (25) Section 617 is amended by striking subsection (i).
          (26) Section 641(c) is amended--
                  (A) in paragraph (2) by striking subparagraph (B) and 
                by redesignating subparagraphs (C) and (D) as 
                subparagraphs (B) and (C), respectively, and
                  (B) in paragraph (3), by striking ``paragraph 
                (2)(C)'' and inserting ``paragraph (2)(B)''.
          (27) Subsections (b) and (c) of section 666 are each amended 
        by striking ``(other than the tax imposed by section 55)''.
          (28) Section 848 is amended by striking subsection (i).
          (29) Section 860E(a) is amended by striking paragraph (4).
          (30) Section 871(b)(1) is amended by striking ``or 55''.
          (31) Section 882(a)(1) is amended by striking ``55,''.
          (32) Section 897(a) is amended to read as follows:
  ``(a) Treatment as Effectively Connected With United States Trade or 
Business.--For purposes of this title, gain or loss of a nonresident 
alien individual or a foreign corporation from the disposition of a 
United States real property interest shall be taken into account--
          ``(1) in the case of a nonresident alien individual, under 
        section 871(b)(1), or
          ``(2) in the case of a foreign corporation, under section 
        882(a)(1),
as if the taxpayer were engaged in a trade or business within the 
United States during the taxable year and as if such gain or loss were 
effectively connected with such trade or business.''.
          (33) Section 904(k) is amended to read as follows:
  ``(k) Cross Reference.--For increase of limitation under subsection 
(a) for taxes paid with respect to amounts received which were included 
in the gross income of the taxpayer for a prior taxable year as a 
United States shareholder with respect to a controlled foreign 
corporation, see section 960(b).''.
          (34) Section 911(f) is amended to read as follows:
  ``(f) Determination of Tax Liability.--
          ``(1) In general.--If, for any taxable year, any amount is 
        excluded from gross income of a taxpayer under subsection (a), 
        then, notwithstanding section 1, if such taxpayer has taxable 
        income for such taxable year, the tax imposed by section 1 for 
        such taxable year shall be equal to the excess (if any) of--
                  ``(A) the tax which would be imposed by section 1 for 
                such taxable year if the taxpayer's taxable income were 
                increased by the amount excluded under subsection (a) 
                for such taxable year, over
                  ``(B) the tax which would be imposed by section 1 for 
                such taxable year if the taxpayer's taxable income were 
                equal to the amount excluded under subsection (a) for 
                such taxable year.
        For purposes of this paragraph, the amount excluded under 
        subsection (a) shall be reduced by the aggregate amount of any 
        deductions or exclusions disallowed under subsection (d)(6) 
        with respect to such excluded amount.
          ``(2) Treatment of capital gain excess.--
                  ``(A) In general.--In applying section 1(h) for 
                purposes of determining the tax under paragraph (1)(A) 
                for any taxable year in which, without regard to this 
                subsection, the taxpayer's net capital gain exceeds 
                taxable income (hereafter in this subparagraph referred 
                to as the capital gain excess)--
                          ``(i) the taxpayer's net capital gain 
                        (determined without regard to section 1(h)(11)) 
                        shall be reduced (but not below zero) by such 
                        capital gain excess,
                          ``(ii) the taxpayer's qualified dividend 
                        income shall be reduced by so much of such 
                        capital gain excess as exceeds the taxpayer's 
                        net capital gain (determined without regard to 
                        section 1(h)(11) and the reduction under clause 
                        (i)), and
                          ``(iii) adjusted net capital gain, 
                        unrecaptured section 1250 gain, and 28-percent 
                        rate gain shall each be determined after 
                        increasing the amount described in section 
                        1(h)(4)(B) by such capital gain excess.
                  ``(B) Definitions.--Terms used in this paragraph 
                which are also used in section 1(h) shall have the 
                respective meanings given such terms by section 
                1(h).''.
          (35) Section 962(a)(1) is amended--
                  (A) by striking ``sections 1 and 55'' and inserting 
                ``section 1'', and
                  (B) by striking ``sections 11 and 55'' and inserting 
                ``section 11''.
          (36) Section 1016(a) is amended by striking paragraph (20).
          (37) Section 1202(a)(4) is amended by inserting ``and'' at 
        the end of subparagraph (A), by striking ``, and'' and 
        inserting a period at the end of subparagraph (B), and by 
        striking subparagraph (C).
          (38) Section 1374(b)(3)(B) is amended by striking the last 
        sentence thereof.
          (39) Section 1561(a) is amended--
                  (A) by inserting ``and'' at the end of paragraph (1), 
                by striking ``, and'' at the end of paragraph (2) and 
                inserting a period, and by striking paragraph (3), and
                  (B) by striking the last sentence.
          (40) Section 6015(d)(2)(B) is amended by striking ``or 55''.
          (41) Section 6211(b)(4)(A) is amended by striking``, 
        168(k)(4)''.
          (42) Section 6425(c)(1)(A) is amended to read as follows:
                  ``(A) the tax imposed under section 11 or subchapter 
                L of chapter 1, whichever is applicable, over''.
          (43) Section 6654(d)(2) is amended--
                  (A) in clause (i) of subparagraph (B), by striking 
                ``, alternative minimum taxable income,'', and
                  (B) in clause (i) of subparagraph (C), by striking 
                ``, alternative minimum taxable income,''.
          (44) Section 6655(e)(2)(B)(i) is amended by striking ``The 
        taxable income and alternative minimum taxable income shall'' 
        and inserting ``Taxable income shall''.
          (45) Section 6655(g)(1)(A) is amended by adding ``plus'' at 
        the end of clause (i), by striking clause (ii), and by 
        redesignating clause (iii) as clause (ii).
          (46) Section 6662(e)(3)(C) is amended by striking ``the 
        regular tax (as defined in section 55(c))'' and inserting ``the 
        regular tax liability (as defined in section 26(b))''.
  (d) Effective Dates.--
          (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        taxable years beginning after December 31, 2017.
          (2) Prior elections with respect to certain tax 
        preferences.--So much of the amendment made by subsection (a) 
        as relates to the repeal of section 59(e) of the Internal 
        Revenue Code of 1986 shall apply to amounts paid or incurred 
        after December 31, 2017.
          (3) Treatment of net operating loss carrybacks.--For purposes 
        of section 56(d) of the Internal Revenue Code of 1986 (as in 
        effect before its repeal), the amount of any net operating loss 
        which may be carried back from a taxable year beginning after 
        December 31, 2017, to taxable years beginning before January 1, 
        2018, shall be determined without regard to any adjustments 
        under section 56(d)(2)(A) of such Code (as so in effect).

                     TITLE III--BUSINESS TAX REFORM

                         Subtitle A--Tax Rates

SEC. 3001. REDUCTION IN CORPORATE TAX RATE.

  (a) In General.--Section 11(b) is amended to read as follows:
  ``(b) Amount of Tax.--
          ``(1) In general.--Except as otherwise provided in this 
        subsection, the amount of the tax imposed by subsection (a) 
        shall be 20 percent of taxable income.
          ``(2) Special rule for personal service corporations.--
                  ``(A) In general.--In the case of a personal service 
                corporation (as defined in section 448(d)(2)), the 
                amount of the tax imposed by subsection (a) shall be 25 
                percent of taxable income.
                  ``(B) References to corporate rate.--Any reference to 
                the rate imposed under this section or to the highest 
                rate in effect under this section (or any similar 
                reference) shall be determined without regard to the 
                rate imposed with respect to personal service 
                corporations (as so defined).''.
  (b) Conforming Amendments.--
          (1)(A) Part I of subchapter P of chapter 1 is amended by 
        striking section 1201 (and by striking the item relating to 
        such section in the table of sections for such part).
          (B) Section 12 is amended by striking paragraph (4).
          (C) Section 527(b) is amended--
                  (i) by striking paragraph (2), and
                  (ii) by striking all that precedes ``is hereby 
                imposed'' and inserting:
  ``(b) Tax Imposed.--A tax''.
          (D) Section 594(a) is amended by striking ``taxes imposed by 
        section 11 or 1201(a)'' and inserting ``tax imposed by section 
        11''.
          (E) Section 691(c)(4) is amended by striking ``1201,''.
          (F) Section 801(a) is amended--
                  (i) by striking paragraph (2), and
                  (ii) by striking all that precedes ``is hereby 
                imposed'' and inserting:
  ``(a) Tax Imposed.--A tax''.
          (G) Section 831(e) is amended by striking paragraph (1) and 
        by redesignating paragraphs (2) and (3) as paragraphs (1) and 
        (2), respectively.
          (H) Sections 832(c)(5) and 834(b)(1)(D) are each amended by 
        striking ``sec. 1201 and following,''.
          (I) Section 852(b)(3)(A) is amended by striking ``section 
        1201(a)'' and inserting ``section 11(b)(1)''.
          (J) Section 857(b)(3) is amended--
                  (i) by striking subparagraph (A) and redesignating 
                subparagraphs (B) through (F) as subparagraphs (A) 
                through (E), respectively,
                  (ii) in subparagraph (C), as so redesignated--
                          (I) by striking ``subparagraph (A)(ii)'' in 
                        clause (i) thereof and inserting ``paragraph 
                        (1)'',
                          (II) by striking ``the tax imposed by 
                        subparagraph (A)(ii)'' in clauses (ii) and (iv) 
                        thereof and inserting ``the tax imposed by 
                        paragraph (1) on undistributed capital gain'',
                  (iii) in subparagraph (E), as so redesignated, by 
                striking ``subparagraph (B) or (D)'' and inserting 
                ``subparagraph (A) or (C)'', and
                  (iv) by adding at the end the following new 
                subparagraph:
                  ``(F) Undistributed capital gain.--For purposes of 
                this paragraph, the term `undistributed capital gain' 
                means the excess of the net capital gain over the 
                deduction for dividends paid (as defined in section 
                561) determined with reference to capital gain 
                dividends only.''.
          (K) Section 882(a)(1) is amended by striking ``, or 
        1201(a)''.
          (L) Section 1374(b) is amended by striking paragraph (4).
          (M) Section 1381(b) is amended by striking ``taxes imposed by 
        section 11 or 1201'' and inserting ``tax imposed by section 
        11''.
          (N) Section 6655(g)(1)(A)(i) is amended by striking ``or 
        1201(a),''.
          (O) Section 7518(g)(6)(A) is amended by striking ``or 
        1201(a)''.
          (2) Section 1445(e)(1) is amended by striking ``35 percent 
        (or, to the extent provided in regulations, 20 percent)'' and 
        inserting ``20 percent''.
          (3) Section 1445(e)(2) is amended by striking ``35 percent'' 
        and inserting ``20 percent''.
          (4) Section 1445(e)(6) is amended by striking ``35 percent 
        (or, to the extent provided in regulations, 20 percent)'' and 
        inserting ``20 percent''.
          (5)(A) Part I of subchapter B of chapter 5 is amended by 
        striking section 1551 (and by striking the item relating to 
        such section in the table of sections for such part).
          (B) Section 12 is amended by striking paragraph (6).
          (C) Section 535(c)(5) is amended to read as follows:
          ``(5) Cross reference.--For limitation on credit provided in 
        paragraph (2) or (3) in the case of certain controlled 
        corporations, see section 1561.''.
          (6)(A) Section 1561, as amended by the preceding provisions 
        of this Act, is amended to read as follows:

``SEC. 1561. LIMITATION ON ACCUMULATED EARNINGS CREDIT IN THE CASE OF 
                    CERTAIN CONTROLLED CORPORATIONS.

  ``(a) In General.--The component members of a controlled group of 
corporations on a December 31 shall, for their taxable years which 
include such December 31, be limited for purposes of this subtitle to 
one $250,000 ($150,000 if any component member is a corporation 
described in section 535(c)(2)(B)) amount for purposes of computing the 
accumulated earnings credit under section 535(c)(2) and (3). Such 
amount shall be divided equally among the component members of such 
group on such December 31 unless the Secretary prescribes regulations 
permitting an unequal allocation of such amount.
  ``(b) Certain Short Taxable Years.--If a corporation has a short 
taxable year which does not include a December 31 and is a component 
member of a controlled group of corporations with respect to such 
taxable year, then for purposes of this subtitle, the amount to be used 
in computing the accumulated earnings credit under section 535(c)(2) 
and (3) of such corporation for such taxable year shall be the amount 
specified in subsection (a) with respect to such group, divided by the 
number of corporations which are component members of such group on the 
last day of such taxable year. For purposes of the preceding sentence, 
section 1563(b) shall be applied as if such last day were substituted 
for December 31.''.
          (B) The table of sections for part II of subchapter B of 
        chapter 5 is amended by striking the item relating to section 
        1561 and inserting the following new item:

``Sec. 1561. Limitation on accumulated earnings credit in the case of 
certain controlled corporations.''.

          (7) Section 7518(g)(6)(A) is amended--
                  (A) by striking ``With respect to the portion'' and 
                inserting ``In the case of a taxpayer other than a 
                corporation, with respect to the portion'', and
                  (B) by striking ``(34 percent in the case of a 
                corporation)''.
  (c) Reduction in Dividend Received Deductions to Reflect Lower 
Corporate Income Tax Rates.--
          (1) Dividends received by corporations.--
                  (A) In general.--Section 243(a)(1) is amended by 
                striking ``70 percent'' and inserting ``50 percent''.
                  (B) Dividends from 20-percent owned corporations.--
                Section 243(c)(1) is amended--
                          (i) by striking ``80 percent'' and inserting 
                        ``65 percent'', and
                          (ii) by striking ``70 percent'' and inserting 
                        ``50 percent''.
                  (C) Conforming amendment.--The heading for section 
                243(c) is amended by striking ``Retention of 80-percent 
                Dividend Received Deduction'' and inserting ``Increased 
                Percentage''.
          (2) Dividends received from fsc.--Section 245(c)(1)(B) is 
        amended--
                  (A) by striking ``70 percent'' and inserting ``50 
                percent'', and
                  (B) by striking ``80 percent'' and inserting ``65 
                percent''.
          (3) Limitation on aggregate amount of deductions.--Section 
        246(b)(3) is amended--
                  (A) by striking ``80 percent'' in subparagraph (A) 
                and inserting ``65 percent'', and
                  (B) by striking ``70 percent'' in subparagraph (B) 
                and inserting ``50 percent''.
          (4) Reduction in deduction where portfolio stock is debt-
        financed.--Section 246A(a)(1) is amended--
                  (A) by striking ``70 percent'' and inserting ``50 
                percent'', and
                  (B) by striking ``80 percent'' and inserting ``65 
                percent''.
          (5) Income from sources within the united states.--Section 
        861(a)(2) is amended--
                  (A) by striking ``100/70th'' and inserting ``100/
                50th'' in subparagraph (B), and
                  (B) in the flush sentence at the end--
                          (i) by striking ``100/80th'' and inserting 
                        ``100/65th'', and
                          (ii) by striking ``100/70th'' and inserting 
                        ``100/50th''.
  (d) Effective Date.--
          (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        taxable years beginning after December 31, 2017.
          (2) Certain conforming amendments.--The amendments made by 
        paragraphs (2), (3), and (4) of subsection (b) shall apply to 
        distributions after December 31, 2017.
  (e) Normalization Requirements.--
          (1) In general.--A normalization method of accounting shall 
        not be treated as being used with respect to any public utility 
        property for purposes of section 167 or 168 of the Internal 
        Revenue Code of 1986 if the taxpayer, in computing its cost of 
        service for ratemaking purposes and reflecting operating 
        results in its regulated books of account, reduces the excess 
        tax reserve more rapidly or to a greater extent than such 
        reserve would be reduced under the average rate assumption 
        method.
          (2) Alternative method for certain taxpayers.--If, as of the 
        first day of the taxable year that includes the date of 
        enactment of this Act--
                  (A) the taxpayer was required by a regulatory agency 
                to compute depreciation for public utility property on 
                the basis of an average life or composite rate method, 
                and
                  (B) the taxpayer's books and underlying records did 
                not contain the vintage account data necessary to apply 
                the average rate assumption method,
        the taxpayer will be treated as using a normalization method of 
        accounting if, with respect to such jurisdiction, the taxpayer 
        uses the alternative method for public utility property that is 
        subject to the regulatory authority of that jurisdiction.
          (3) Definitions.--For purposes of this subsection--
                  (A) Excess tax reserve.--The term ``excess tax 
                reserve'' means the excess of--
                          (i) the reserve for deferred taxes (as 
                        described in section 168(i)(9)(A)(ii) of the 
                        Internal Revenue Code of 1986 as in effect on 
                        the day before the date of the enactment of 
                        this Act), over
                          (ii) the amount which would be the balance in 
                        such reserve if the amount of such reserve were 
                        determined by assuming that the corporate rate 
                        reductions provided in this Act were in effect 
                        for all prior periods.
                  (B) Average rate assumption method.--The average rate 
                assumption method is the method under which the excess 
                in the reserve for deferred taxes is reduced over the 
                remaining lives of the property as used in its 
                regulated books of account which gave rise to the 
                reserve for deferred taxes. Under such method, if 
                timing differences for the property reverse, the amount 
                of the adjustment to the reserve for the deferred taxes 
                is calculated by multiplying--
                          (i) the ratio of the aggregate deferred taxes 
                        for the property to the aggregate timing 
                        differences for the property as of the 
                        beginning of the period in question, by
                          (ii) the amount of the timing differences 
                        which reverse during such period.
                  (C) Alternative method.--The ``alternative method'' 
                is the method in which the taxpayer--
                          (i) computes the excess tax reserve on all 
                        public utility property included in the plant 
                        account on the basis of the weighted average 
                        life or composite rate used to compute 
                        depreciation for regulatory purposes, and
                          (ii) reduces the excess tax reserve ratably 
                        over the remaining regulatory life of the 
                        property.
          (4) Tax increased for normalization violation.--If, for any 
        taxable year ending after the date of the enactment of this 
        Act, the taxpayer does not use a normalization method of 
        accounting, the taxpayer's tax for the taxable year shall be 
        increased by the amount by which it reduces its excess tax 
        reserve more rapidly than permitted under a normalization 
        method of accounting.

                       Subtitle B--Cost Recovery

SEC. 3101. INCREASED EXPENSING.

  (a) 100 Percent Expensing.--Section 168(k)(1)(A) is amended by 
striking ``50 percent'' and inserting ``100 percent''.
  (b) Extension Through January 1, 2023.--Section 168(k)(2) is 
amended--
          (1) in subparagraph (A)(iii), by striking ``January 1, 2020'' 
        and inserting ``January 1, 2023'',
          (2) in subparagraph (B)(i)(II), by striking ``January 1, 
        2021'' and inserting ``January 1, 2024'',
          (3) in subparagraph (B)(i)(III), by striking ``January 1, 
        2020'' and inserting ``January 1, 2023'',
          (4) in subparagraph (B)(ii), by striking ``January 1, 2020'' 
        in each place it appears and inserting ``January 1, 2023'', and
          (5) in subparagraph (E)(i), by striking ``January 1, 2020'' 
        and replacing it with ``January 1, 2023''.
  (c) Application to Used Property.--
          (1) In general.--Section 168(k)(2)(A)(ii) is amended to read 
        as follows:
                          ``(ii) the original use of which begins with 
                        the taxpayer or the acquisition of which by the 
                        taxpayer meets the requirements of clause (ii) 
                        of subparagraph (E), and''.
          (2) Acquisition requirements.--Section 168(k)(2)(E)(ii) is 
        amended to read as follows:
                          ``(ii) Acquisition requirements.--An 
                        acquisition of property meets the requirements 
                        of this clause if--
                                  ``(I) such property was not used by 
                                the taxpayer at any time prior to such 
                                acquisition, and
                                  ``(II) the acquisition of such 
                                property meets the requirements of 
                                paragraphs (2)(A), (2)(B), (2)(C), and 
                                (3) of section 179(d).'',
          (3) Anti-abuse rules.--Section 168(k)(2)(E) is further 
        amended by amending clause (iii)(I) to read as follows:
                                  ``(I) property is used by a lessor of 
                                such property and such use is the 
                                lessor's first use of such property,''.
  (d) Exception for Certain Trades and Businesses Not Subject to 
Limitation on Interest Expense.--Section 168(k)(2), as amended by 
section 2001, is amended by inserting after subparagraph (F) the 
following new subparagraph:
                  ``(G) Exception for property of certain businesses 
                not subject to limitation on interest expense.--The 
                term `qualified property' shall not include any 
                property used in--
                          ``(i) a trade or business described in 
                        subparagraph (B) or (C) of section 163(j)(7), 
                        or
                          ``(ii) a trade or business that has had floor 
                        plan financing indebtedness (as defined in 
                        paragraph (9) of section 163(j)), if the floor 
                        plan financing interest related to such 
                        indebtedness was taken into account under 
                        paragraph (1)(C) of such section.''.
  (e) Coordination With Section 280F.--Section 168(k)(2)(F) is 
amended--
          (1) by striking ``$8,000'' in clauses (i) and (iii) and 
        inserting ``$16,000'', and
          (2) in clause (iii)--
                  (A) by striking ``placed in service by the taxpayer 
                after December 31, 2017'' and inserting ``acquired by 
                the taxpayer before September 28, 2017, and placed in 
                service by the taxpayer after September 27, 2017'', and
                  (B) by redesignating subclauses (I) and (II) as 
                subclauses (II) and (III) respectively, and inserting 
                before clause (II), as so redesignated, the following 
                new subclause:
                                  ``(I) in the case of a passenger 
                                automobile placed in service before 
                                January 1, 2018, `$8,000',''.
  (f) Conforming Amendments.--
          (1) Section 168(k)(2)(B)(i)(III), as amended, is amended by 
        inserting ``binding'' before ``contract''.
          (2) Section 168(k)(5) is amended by--
                  (A) by striking ``January 1, 2020'' in subparagraph 
                (A) and inserting ``January 1, 2023'',
                  (B) by striking ``50 percent'' in subparagraph (A)(i) 
                and inserting ``100 percent'', and
                  (C) by striking subparagraph (F).
          (3) Section 168(k)(6) is amended to read as follows:
          ``(6) Phase down.--In the case of qualified property acquired 
        by the taxpayer before September 28, 2017, and placed in 
        service by the taxpayer after September 27, 2017, paragraph 
        (1)(A) shall be applied by substituting for `100 percent'--
                  ``(A) `50 percent' in the case of--
                          ``(i) property placed in service before 
                        January 1, 2018, and
                          ``(ii) property described in subparagraph (B) 
                        or (C) of paragraph (2) which is placed in 
                        service in 2018,
                  ``(B) `40 percent' in the case of--
                          ``(i) property placed in service in 2018 
                        (other than property described in subparagraph 
                        (B) or (C) of paragraph (2)), and
                          ``(ii) property described in subparagraph (B) 
                        or (C) of paragraph (2) which is placed in 
                        service in 2019, and
                  ``(C) `30 percent' in the case of--
                          ``(i) property placed in service in 2019 
                        (other than property described in subparagraph 
                        (B) or (C) of paragraph (2)), and
                          ``(ii) property described in subparagraph (B) 
                        or (C) of paragraph (2) which is placed in 
                        service in 2020.''.
          (4) The heading of section 168(k) is amended by striking 
        ``Special Allowance for Certain Property Acquired After 
        December 31, 2007, and Before January 1, 2020'' and inserting 
        ``Full Expensing of Certain Property''.
          (5) Section 460(c)(6)(B)(ii) is amended by striking ``January 
        1, 2020 (January 1, 2021 in the case of property described in 
        section 168(k)(2)(B))'' and inserting ``January 1, 2023 
        (January 1, 2024 in the case of property described in section 
        168(k)(2)(B))''.
  (g) Effective Date.--
          (1) In general.--Except at provided by paragraph (2), the 
        amendments made by this section shall apply to property which--
                  (A) is acquired after September 27, 2017, and
                  (B) is placed in service after such date.
        For purposes of the preceding sentence, property shall not be 
        treated as acquired after the date on which a written binding 
        contract is entered into for such acquisition.
          (2) Specified plants.--The amendments made by subsection 
        (f)(2) shall apply to specified plants planted or grafted after 
        September 27, 2017.
          (3) Transition rule.--In the case of any taxpayer's first 
        taxable year ending after September 27, 2017, the taxpayer may 
        elect (at such time and in such form and manner as the 
        Secretary of the Treasury, or his designee, may provide) to 
        apply section 168 of the Internal Revenue Code of 1986 without 
        regard to the amendments made by this section.
          (4) Limitation on net operating loss carrybacks attributable 
        to full expensing.--In the case of any taxable year which 
        includes any portion of the period beginning on September 28, 
        2017, and ending on December 31, 2017, the amount of any net 
        operating loss for such taxable year which may be treated as a 
        net operating loss carryback (including any such carryback 
        attributable to any specified liability loss under section 
        172(b)(1)(C), any corporate equity reduction interest loss 
        under section 172(b)(1)(D), any eligible loss under section 
        172(b)(1)(E), and any farming loss under section 172(b)(1)(F)) 
        shall be determined without regard to the amendments made by 
        this section. For purposes of this paragraph, terms which are 
        used in section 172 of the Internal Revenue Code of 1986 
        (determined without regard to the amendments made by section 
        3302) shall have the same meaning as when used in such section.

                   Subtitle C--Small Business Reforms

SEC. 3201. EXPANSION OF SECTION 179 EXPENSING.

  (a) Increased Dollar Limitations.--
          (1) In general.--Section 179(b) is amended--
                  (A) by inserting ``($5,000,000, in the case of 
                taxable years beginning before January 1, 2023)'' after 
                ``$500,000'' in paragraph (1), and
                  (B) by inserting ``($20,000,000, in the case of 
                taxable years beginning before January 1, 2023)'' after 
                ``$2,000,000'' in paragraph (2).
          (2) Inflation adjustment.--Section 179(b)(6) is amended to 
        read as follows:
          ``(6) Inflation adjustment.--
                  ``(A) In general.--In the case of a taxable year 
                beginning after 2015 (2018 in the case of the 
                $5,000,000 and $20,000,000 amounts in subsection (b)), 
                each dollar amount in subsection (b) shall be increased 
                by an amount equal to such dollar amount multiplied 
                by--
                          ``(i) in the case of the $500,000 and 
                        $2,000,000 amounts in subsection (b), the cost-
                        of-living adjustment determined under section 
                        1(c)(2) for the calendar year in which the 
                        taxable year begins, determined by substituting 
                        `calendar year 2014' for `calendar year 2016' 
                        in subparagraph (A)(ii) thereof, and
                          ``(ii) in the case of the $5,000,000 and 
                        $20,000,000 amounts in subsection (b), the 
                        cost-of-living adjustment determined under 
                        section 1(c)(2) for the calendar year in which 
                        the taxable year begins, determined by 
                        substituting `calendar year 2017' for `calendar 
                        year 2016' in subparagraph (A)(ii) thereof.
                  ``(B) Rounding.--The amount of any increase under 
                subparagraph (A) shall be rounded to the nearest 
                multiple of $10,000 ($100,000 in the case of the 
                $5,000,000 and $20,000,000 amounts in subsection 
                (b)).''.
  (b) Application to Qualified Energy Efficient Heating and Air-
conditioning Property.--
          (1) In general.--Section 179(f)(2) is amended by striking 
        ``and'' at the end of subparagraph (B), by striking the period 
        at the end of subparagraph (C) and inserting ``, and'', and by 
        adding at the end the following new subparagraph:
                  ``(D) qualified energy efficient heating and air-
                conditioning property.''.
          (2) Qualified energy efficient heating and air-conditioning 
        property.--Section 179(f) is amended by adding at the end the 
        following new paragraph:
          ``(3) Qualified energy efficient heating and air-conditioning 
        property.--For purposes of this subsection--
                  ``(A) In general.--The term `qualified energy 
                efficient heating and air-conditioning property' means 
                any section 1250 property--
                          ``(i) with respect to which depreciation (or 
                        amortization in lieu of depreciation) is 
                        allowable,
                          ``(ii) which is installed as part of a 
                        building's heating, cooling, ventilation, or 
                        hot water system, and
                          ``(iii) which is within the scope of Standard 
                        90.1-2007 or any successor standard.
                  ``(B) Standard 90.1-2007.--The term `Standard 90.1-
                2007' means Standard 90.1-2007 of the American Society 
                of Heating, Refrigerating and Air-Conditioning 
                Engineers and the Illuminating Engineering Society of 
                North America (as in effect on the day before the date 
                of the adoption of Standard 90.1-2010 of such 
                Societies).''.
  (c) Effective Date.--
          (1) Increased dollar limitations.--The amendments made by 
        subsection (a) shall apply to taxable years beginning after 
        December 31, 2017.
          (2) Application to qualified energy efficient heating and 
        air-conditioning property.--The amendments made by subsection 
        (b) shall apply to property acquired and placed in service 
        after November 2, 2017. For purposes of the preceding sentence, 
        property shall not be treated as acquired after the date on 
        which a written binding contract is entered into for such 
        acquisition.

SEC. 3202. SMALL BUSINESS ACCOUNTING METHOD REFORM AND SIMPLIFICATION.

  (a) Modification of Limitation on Cash Method of Accounting.--
          (1) Increased limitation.--So much of section 448(c) as 
        precedes paragraph (2) is amended to read as follows:
  ``(c) Gross Receipts Test.--For purposes of this section--
          ``(1) In general.--A corporation or partnership meets the 
        gross receipts test of this subsection for any taxable year if 
        the average annual gross receipts of such entity for the 3-
        taxable-year period ending with the taxable year which precedes 
        such taxable year does not exceed $25,000,000.''.
          (2) Application of exception on annual basis.--Section 
        448(b)(3) is amended to read as follows:
          ``(3) Entities which meet gross receipts test.--Paragraphs 
        (1) and (2) of subsection (a) shall not apply to any 
        corporation or partnership for any taxable year if such entity 
        (or any predecessor) meets the gross receipts test of 
        subsection (c) for such taxable year.''.
          (3) Inflation adjustment.--Section 448(c) is amended by 
        adding at the end the following new paragraph:
          ``(4) Adjustment for inflation.--In the case of any taxable 
        year beginning after December 31, 2018, the dollar amount in 
        paragraph (1) shall be increased by an amount equal to--
                  ``(A) such dollar amount, multiplied by
                  ``(B) the cost-of-living adjustment determined under 
                section 1(c)(2) for the calendar year in which the 
                taxable year begins, by substituting `calendar year 
                2017' for `calendar year 2016' in subparagraph (A)(ii) 
                thereof.
        If any amount as increased under the preceding sentence is not 
        a multiple of $1,000,000, such amount shall be rounded to the 
        nearest multiple of $1,000,000.''.
          (4) Coordination with section 481.--Section 448(d)(7) is 
        amended to read as follows:
          ``(7) Coordination with section 481.--Any change in method of 
        accounting made pursuant to this section shall be treated for 
        purposes of section 481 as initiated by the taxpayer and made 
        with the consent of the Secretary.''.
          (5) Application of exception to corporations engaged in 
        farming.--
                  (A) In general.--Section 447(c) is amended--
                          (i) by inserting ``for any taxable year'' 
                        after ``not being a corporation'' in the matter 
                        preceding paragraph (1), and
                          (ii) by amending paragraph (2) to read as 
                        follows:
          ``(2) a corporation which meets the gross receipts test of 
        section 448(c) for such taxable year.''.
                  (B) Coordination with section 481.--Section 447(f) is 
                amended to read as follows:
  ``(f) Coordination With Section 481.--Any change in method of 
accounting made pursuant to this section shall be treated for purposes 
of section 481 as initiated by the taxpayer and made with the consent 
of the Secretary.''.
                  (C) Conforming amendments.--Section 447 is amended--
                          (i) by striking subsections (d), (e), (h), 
                        and (i), and
                          (ii) by redesignating subsections (f) and (g) 
                        (as amended by subparagraph (B)) as subsections 
                        (d) and (e), respectively.
  (b) Exemption From UNICAP Requirements.--
          (1) In general.--Section 263A is amended by redesignating 
        subsection (i) as subsection (j) and by inserting after 
        subsection (h) the following new subsection:
  ``(i) Exemption for Certain Small Businesses.--
          ``(1) In general.--In the case of any taxpayer (other than a 
        tax shelter prohibited from using the cash receipts and 
        disbursements method of accounting under section 448(a)(3)) 
        which meets the gross receipts test of section 448(c) for any 
        taxable year, this section shall not apply with respect to such 
        taxpayer for such taxable year.
          ``(2) Application of gross receipts test to individuals, 
        etc.-- In the case of any taxpayer which is not a corporation 
        or a partnership, the gross receipts test of section 448(c) 
        shall be applied in the same manner as if each trade or 
        business of such taxpayer were a corporation or partnership.
          ``(3) Coordination with section 481.--Any change in method of 
        accounting made pursuant to this subsection shall be treated 
        for purposes of section 481 as initiated by the taxpayer and 
        made with the consent of the Secretary.''.
          (2) Conforming amendment.--Section 263A(b)(2) is amended to 
        read as follows:
          ``(2) Property acquired for resale.--Real or personal 
        property described in section 1221(a)(1) which is acquired by 
        the taxpayer for resale.''.
  (c) Exemption From Inventories.--Section 471 is amended by 
redesignating subsection (c) as subsection (d) and by inserting after 
subsection (b) the following new subsection:
  ``(c) Exemption for Certain Small Businesses.--
          ``(1) In general.--In the case of any taxpayer (other than a 
        tax shelter prohibited from using the cash receipts and 
        disbursements method of accounting under section 448(a)(3)) 
        which meets the gross receipts test of section 448(c) for any 
        taxable year--
                  ``(A) subsection (a) shall not apply with respect to 
                such taxpayer for such taxable year, and
                  ``(B) the taxpayer's method of accounting for 
                inventory for such taxable year shall not be treated as 
                failing to clearly reflect income if such method 
                either--
                          ``(i) treats inventory as non-incidental 
                        materials and supplies, or
                          ``(ii) conforms to such taxpayer's method of 
                        accounting reflected in an applicable financial 
                        statement of the taxpayer with respect to such 
                        taxable year or, if the taxpayer does not have 
                        any applicable financial statement with respect 
                        to such taxable year, the books and records of 
                        the taxpayer prepared in accordance with the 
                        taxpayer's accounting procedures.
          ``(2) Applicable financial statement.--For purposes of this 
        subsection, the term `applicable financial statement' means--
                  ``(A) a financial statement which is certified as 
                being prepared in accordance with generally accepted 
                accounting principles and which is--
                          ``(i) a 10-K (or successor form), or annual 
                        statement to shareholders, required to be filed 
                        by the taxpayer with the United States 
                        Securities and Exchange Commission,
                          ``(ii) an audited financial statement of the 
                        taxpayer which is used for--
                                  ``(I) credit purposes,
                                  ``(II) reporting to shareholders, 
                                partners, or other proprietors, or to 
                                beneficiaries, or
                                  ``(III) any other substantial nontax 
                                purpose,
                        but only if there is no statement of the 
                        taxpayer described in clause (i), or
                          ``(iii) filed by the taxpayer with any other 
                        Federal or State agency for nontax purposes, 
                        but only if there is no statement of the 
                        taxpayer described in clause (i) or (ii), or
                  ``(B) a financial statement of the taxpayer which--
                          ``(i) is used for a purpose described in 
                        subclause (I), (II), or (III) of subparagraph 
                        (A)(ii), or
                          ``(ii) filed by the taxpayer with any 
                        regulatory or governmental body (whether 
                        domestic or foreign) specified by the 
                        Secretary,
                but only if there is no statement of the taxpayer 
                described in subparagraph (A).
          ``(3) Application of gross receipts test to individuals, 
        etc.--In the case of any taxpayer which is not a corporation or 
        a partnership, the gross receipts test of section 448(c) shall 
        be applied in the same manner as if each trade or business of 
        such taxpayer were a corporation or partnership.
          ``(4) Coordination with section 481.--Any change in method of 
        accounting made pursuant to this subsection shall be treated 
        for purposes of section 481 as initiated by the taxpayer and 
        made with the consent of the Secretary.''.
  (d) Exemption From Percentage Completion for Long-term Contracts.--
          (1) In general.--Section 460(e)(1)(B) is amended--
                  (A) by inserting ``(other than a tax shelter 
                prohibited from using the cash receipts and 
                disbursements method of accounting under section 
                448(a)(3))'' after ``taxpayer'' in the matter preceding 
                clause (i), and
                  (B) by amending clause (ii) to read as follows:
                          ``(ii) who meets the gross receipts test of 
                        section 448(c) for the taxable year in which 
                        such contract is entered into.''.
          (2) Conforming amendments.--Section 460(e) is amended by 
        striking paragraphs (2) and (3), by redesignating paragraphs 
        (4), (5), and (6) as paragraphs (3), (4), and (5), 
        respectively, and by inserting after paragraph (1) the 
        following new paragraph:
          ``(2) Rules related to gross receipts test.--
                  ``(A) Application of gross receipts test to 
                individuals, etc.-- For purposes of paragraph 
                (1)(B)(ii), in the case of any taxpayer which is not a 
                corporation or a partnership, the gross receipts test 
                of section 448(c) shall be applied in the same manner 
                as if each trade or business of such taxpayer were a 
                corporation or partnership.
                  ``(B) Coordination with section 481.--Any change in 
                method of accounting made pursuant to paragraph 
                (1)(B)(ii) shall be treated as initiated by the 
                taxpayer and made with the consent of the Secretary. 
                Such change shall be effected on a cut-off basis for 
                all similarly classified contracts entered into on or 
                after the year of change.''.
  (e) Effective Date.--
          (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        taxable years beginning after December 31, 2017.
          (2) Preservation of suspense account rules with respect to 
        any existing suspense accounts.--So much of the amendments made 
        by subsection (a)(5)(C) as relate to section 447(i) of the 
        Internal Revenue Code of 1986 shall not apply with respect to 
        any suspense account established under such section before the 
        date of the enactment of this Act.
          (3) Exemption from percentage completion for long-term 
        contracts.--The amendments made by subsection (d) shall apply 
        to contracts entered into after December 31, 2017, in taxable 
        years ending after such date.

SEC. 3203. SMALL BUSINESS EXCEPTION FROM LIMITATION ON DEDUCTION OF 
                    BUSINESS INTEREST.

  (a) In General.--Section 163(j)(2), as amended by section 3301, is 
amended to read as follows:
          ``(2) Exemption for certain small businesses.--In the case of 
        any taxpayer (other than a tax shelter prohibited from using 
        the cash receipts and disbursements method of accounting under 
        section 448(a)(3)) which meets the gross receipts test of 
        section 448(c) for any taxable year, paragraph (1) shall not 
        apply to such taxpayer for such taxable year. In the case of 
        any taxpayer which is not a corporation or a partnership, the 
        gross receipts test of section 448(c) shall be applied in the 
        same manner as if such taxpayer were a corporation or 
        partnership.''.
  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 3204. MODIFICATION OF TREATMENT OF S CORPORATION CONVERSIONS TO C 
                    CORPORATIONS.

  (a) Adjustments Attributable to Conversion From S Corporation to C 
Corporation.--Section 481 is amended by adding at the end the following 
new subsection:
  ``(d) Adjustments Attributable to Conversion From S Corporation to C 
Corporation.--
          ``(1) In general.--In the case of an eligible terminated S 
        corporation, any adjustment required by subsection (a)(2) which 
        is attributable to such corporation's revocation described in 
        paragraph (2)(A)(ii) shall be taken into account ratably during 
        the 6-taxable year period beginning with the year of change.
          ``(2) Eligible terminated s corporation.--For purposes of 
        this subsection, the term `eligible terminated S corporation' 
        means any C corporation--
                  ``(A) which--
                          ``(i) was an S corporation on the day before 
                        the date of the enactment of the Tax Cuts and 
                        Jobs Act, and
                          ``(ii) during the 2-year period beginning on 
                        the date of such enactment makes a revocation 
                        of its election under section 1362(a), and
                  ``(B) the owners of the stock of which, determined on 
                the date such revocation is made, are the same owners 
                (and in identical proportions) as on the date of such 
                enactment.''.
  (b) Cash Distributions Following Post-termination Transition Period 
From S Corporation Status.--Section 1371 is amended by adding at the 
end the following new subsection:
  ``(f) Cash Distributions Following Post-termination Transition 
Period.--In the case of a distribution of money by an eligible 
terminated S corporation (as defined in section 481(d)) after the post-
termination transition period, the accumulated adjustments account 
shall be allocated to such distribution, and the distribution shall be 
chargeable to accumulated earnings and profits, in the same ratio as 
the amount of such accumulated adjustments account bears to the amount 
of such accumulated earnings and profits.''.

  Subtitle D--Reform of Business-related Exclusions, Deductions, etc.

SEC. 3301. INTEREST.

  (a) In General.--Section 163(j) is amended to read as follows:
  ``(j) Limitation on Business Interest.--
          ``(1) In general.--In the case of any taxpayer for any 
        taxable year, the amount allowed as a deduction under this 
        chapter for business interest shall not exceed the sum of--
                  ``(A) the business interest income of such taxpayer 
                for such taxable year,
                  ``(B) 30 percent of the adjusted taxable income of 
                such taxpayer for such taxable year, plus
                  ``(C) the floor plan financing interest of such 
                taxpayer for such taxable year.
        The amount determined under subparagraph (B) (after any 
        increases in such amount under paragraph (3)(A)(iii)) shall not 
        be less than zero.
          ``(2) Exemption for certain small businesses.--For exemption 
        for certain small businesses, see the amendment made by section 
        3203 of the Tax Cuts and Jobs Act.
          ``(3) Application to partnerships, etc.--
                  ``(A) In general.--In the case of any partnership--
                          ``(i) this subsection shall be applied at the 
                        partnership level and any deduction for 
                        business interest shall be taken into account 
                        in determining the non-separately stated 
                        taxable income or loss of the partnership,
                          ``(ii) the adjusted taxable income of each 
                        partner of such partnership shall be determined 
                        without regard to such partner's distributive 
                        share of the non-separately stated taxable 
                        income or loss of such partnership, and
                          ``(iii) the amount determined under paragraph 
                        (1)(B) with respect to each partner of such 
                        partnership shall be increased by such 
                        partner's distributive share of such 
                        partnership's excess amount.
                  ``(B) Excess amount.--The term `excess amount' means, 
                with respect to any partnership, the excess (if any) 
                of--
                          ``(i) 30 percent of the adjusted taxable 
                        income of the partnership, over
                          ``(ii) the amount (if any) by which the 
                        business interest of the partnership, reduced 
                        by floor plan financing interest, exceeds the 
                        business interest income of the partnership.
                  ``(C) Application to s corporations.--Rules similar 
                to the rules of subparagraphs (A) and (B) shall apply 
                with respect to any S corporation and its shareholders.
          ``(4) Business interest.--For purposes of this subsection, 
        the term `business interest' means any interest paid or accrued 
        on indebtedness properly allocable to a trade or business. Such 
        term shall not include investment interest (within the meaning 
        of subsection (d)).
          ``(5) Business interest income.--For purposes of this 
        subsection, the term `business interest income' means the 
        amount of interest includible in the gross income of the 
        taxpayer for the taxable year which is properly allocable to a 
        trade or business. Such term shall not include investment 
        income (within the meaning of subsection (d)).
          ``(6) Adjusted taxable income.--For purposes of this 
        subsection, the term `adjusted taxable income' means the 
        taxable income of the taxpayer--
                  ``(A) computed without regard to--
                          ``(i) any item of income, gain, deduction, or 
                        loss which is not properly allocable to a trade 
                        or business,
                          ``(ii) any business interest or business 
                        interest income,
                          ``(iii) the amount of any net operating loss 
                        deduction under section 172, and
                          ``(iv) any deduction allowable for 
                        depreciation, amortization, or depletion, and
                  ``(B) computed with such other adjustments as the 
                Secretary may provide.
          ``(7) Trade or business.--For purposes of this subsection, 
        the term `trade or business' shall not include--
                  ``(A) the trade or business of performing services as 
                an employee,
                  ``(B) a real property trade or business (as such term 
                is defined in section 469(c)(7)(C)), or
                  ``(C) the trade or business of the furnishing or sale 
                of--
                          ``(i) electrical energy, water, or sewage 
                        disposal services,
                          ``(ii) gas or steam through a local 
                        distribution system, or
                          ``(iii) transportation of gas or steam by 
                        pipeline,
                if the rates for such furnishing or sale, as the case 
                may be, have been established or approved by a State or 
                political subdivision thereof, by any agency or 
                instrumentality of the United States, or by a public 
                service or public utility commission or other similar 
                body of any State or political subdivision thereof.
          ``(8) Carryforward of disallowed interest.--For carryforward 
        of interest disallowed under paragraph (1), see subsection (o).
          ``(9) Floor plan financing interest defined.--For purposes of 
        this subsection--
                  ``(A) In general.--The term `floor plan financing 
                interest' means interest paid or accrued on floor plan 
                financing indebtedness.
                  ``(B) Floor plan financing indebtedness.--The term 
                `floor plan financing indebtedness' means 
                indebtedness--
                          ``(i) used to finance the acquisition of 
                        motor vehicles held for sale to retail 
                        customers, and
                          ``(ii) secured by the inventory so acquired.
                  ``(C) Motor vehicle.--The term `motor vehicle' means 
                a motor vehicle that is any of the following:
                          ``(i) An automobile.
                          ``(ii) A truck.
                          ``(iii) A recreational vehicle.
                          ``(iv) A motorcycle.
                          ``(v) A boat.
                          ``(vi) Farm machinery or equipment.
                          ``(vii) Construction machinery or 
                        equipment.''.
  (b) Carryforward of Disallowed Business Interest.--Section 163, after 
amendment by section 4302(a) and before amendment by section 4302(b), 
is amended by inserting after subsection (n) the following new 
subsection:
  ``(o) Carryforward of Disallowed Business Interest.--The amount of 
any business interest not allowed as a deduction for any taxable year 
by reason of subsection (j) shall be treated as business interest paid 
or accrued in the succeeding taxable year. Business interest paid or 
accrued in any taxable year (determined without regard to the preceding 
sentence) shall not be carried past the 5th taxable year following such 
taxable year, determined by treating business interest as allowed as a 
deduction on a first-in, first-out basis.''.
  (c) Treatment of Carryforward of Disallowed Business Interest in 
Certain Corporate Acquisitions.--
          (1) In general.--Section 381(c) is amended by inserting after 
        paragraph (19) the following new paragraph:
          ``(20) Carryforward of disallowed interest.--The carryover of 
        disallowed interest described in section 163(o) to taxable 
        years ending after the date of distribution or transfer.''.
          (2) Application of limitation.--Section 382(d) is amended by 
        adding at the end the following new paragraph:
          ``(3) Application to carryforward of disallowed interest.--
        The term `pre-change loss' shall include any carryover of 
        disallowed interest described in section 163(o) under rules 
        similar to the rules of paragraph (1).''.
          (3) Conforming amendment.--Section 382(k)(1) is amended by 
        inserting after the first sentence the following: ``Such term 
        shall include any corporation entitled to use a carryforward of 
        disallowed interest described in section 381(c)(20).''
  (d) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 3302. MODIFICATION OF NET OPERATING LOSS DEDUCTION.

  (a) Indefinite Carryforward of Net Operating Losses.--Section 
172(b)(1)(A)(ii) is amended by striking ``to each of the 20 taxable 
years'' and inserting ``to each taxable year''.
  (b) Repeal of Net Operating Loss Carrybacks Other Than 1-year 
Carryback of Eligible Disaster Losses.--
          (1) In general.--Section 172(b)(1)(A)(i) is amended to read 
        as follows:
                          ``(i) in the case of any portion of a net 
                        operating loss for the taxable year which is an 
                        eligible disaster loss with respect to the 
                        taxpayer, shall be a net operating loss 
                        carryback to the taxable year preceding the 
                        taxable year of such loss, and''.
          (2) Conforming amendments.--
                  (A) Section 172(b)(1) is amended by striking 
                subparagraphs (B) through (F) and inserting the 
                following:
                  ``(B) Eligible disaster loss.--
                          ``(i) In general.--For purposes of 
                        subparagraph (A)(i), the term `eligible 
                        disaster loss' means--
                                  ``(I) in the case of a taxpayer which 
                                is a small business, net operating 
                                losses attributable to federally 
                                declared disasters (as defined by 
                                section 165(i)(5)), and
                                  ``(II) in the case of a taxpayer 
                                engaged in the trade or business of 
                                farming, net operating losses 
                                attributable to such federally declared 
                                disasters.
                          ``(ii) Small business.--For purposes of this 
                        subparagraph, the term `small business' means a 
                        corporation or partnership which meets the 
                        gross receipts test of section 448(c) 
                        (determined by substituting `$5,000,000' for 
                        `$25,000,000' each place it appears therein) 
                        for the taxable year in which the loss arose 
                        (or, in the case of a sole proprietorship, 
                        which would meet such test if such 
                        proprietorship were a corporation).
                          ``(iii) Trade or business of farming.--For 
                        purposes of this subparagraph, the trade or 
                        business of farming shall include the trade or 
                        business of--
                                  ``(I) operating a nursery or sod 
                                farm, or
                                  ``(II) the raising or harvesting of 
                                trees bearing fruit, nuts, or other 
                                crops, or ornamental trees.
                        For purposes of subclause (II), an evergreen 
                        tree which is more than 6 years old at the time 
                        severed from the roots shall not be treated as 
                        an ornamental tree.''.
                  (B) Section 172 is amended by striking subsections 
                (f), (g), and (h).
  (c) Limitation of Net Operating Loss to 90 Percent of Taxable 
Income.--
          (1) In general.--Section 172(a) is amended to read as 
        follows:
  ``(a) Deduction Allowed.--There shall be allowed as a deduction for 
the taxable year an amount equal to the lesser of--
          ``(1) the aggregate of the net operating loss carryovers to 
        such year, plus the net operating loss carrybacks to such year, 
        or
          ``(2) 90 percent of taxable income computed without regard to 
        the deduction allowable under this section.
For purposes of this subtitle, the term `net operating loss deduction' 
means the deduction allowed by this subsection.''.
          (2) Coordination of limitation with carrybacks and 
        carryovers.--Section 172(b)(2) is amended by striking ``shall 
        be computed--'' and all that follows and inserting ``shall--
                  ``(A) be computed with the modifications specified in 
                subsection (d) other than paragraphs (1), (4), and (5) 
                thereof, and by determining the amount of the net 
                operating loss deduction without regard to the net 
                operating loss for the loss year or for any taxable 
                year thereafter,
                  ``(B) not be considered to be less than zero, and
                  ``(C) not exceed the amount determined under 
                subsection (a)(2) for such prior taxable year.''.
          (3) Conforming amendment.--Section 172(d)(6) is amended by 
        striking ``and'' at the end of subparagraph (A), by striking 
        the period at the end of subparagraph (B) and inserting ``; 
        and'', and by adding at the end the following new subparagraph:
                  ``(C) subsection (a)(2) shall be applied by 
                substituting `real estate investment trust taxable 
                income (as defined in section 857(b)(2) but without 
                regard to the deduction for dividends paid (as defined 
                in section 561))' for `taxable income'.''.
  (d) Annual Increase of Indefinite Carryover Amounts.--Section 172(b) 
is amended by redesignating paragraph (3) as paragraph (4) and by 
inserting after paragraph (2) the following new paragraph:
          ``(3) Annual increase of indefinite carryover amounts.--For 
        purposes of paragraph (2)--
                  ``(A) the amount of any indefinite net operating loss 
                which is carried to the next succeeding taxable year 
                after the loss year (within the meaning of paragraph 
                (2)) shall be increased by an amount equal to--
                          ``(i) the amount of the loss which may be so 
                        carried over to such succeeding taxable year 
                        (determined without regard to this paragraph), 
                        multiplied by
                          ``(ii) the sum of--
                                  ``(I) the annual Federal short-term 
                                rate (determined under section 1274(d)) 
                                for the last month ending before the 
                                beginning of such taxable year, plus
                                  ``(II) 4 percentage points, and
                  ``(B) the amount of any indefinite net operating loss 
                which is carried to any succeeding taxable year (after 
                such next succeeding taxable year) shall be an amount 
                equal to--
                          ``(i) the excess of--
                                  ``(I) the amount of the loss carried 
                                to the prior taxable year (after any 
                                increase under this paragraph with 
                                respect to such amount), over
                                  ``(II) the amount by which such loss 
                                was reduced under paragraph (2) by 
                                reason of the taxable income for such 
                                prior taxable year, multiplied by
                          ``(ii) a percentage equal to 100 percent plus 
                        the percentage determined under subparagraph 
                        (A)(ii) with respect to such succeeding taxable 
                        year.
                For purposes of the preceding sentence, the term 
                `indefinite net operating loss' means any net operating 
                loss arising in a taxable year beginning after December 
                31, 2017.''.
  (e) Effective Date.--
          (1) Carryforwards and carrybacks.--The amendments made by 
        subsections (a) and (b) shall apply to net operating losses 
        arising in taxable years beginning after December 31, 2017.
          (2) Net operating loss limited to 90 percent of taxable 
        income.--The amendments made by subsection (c) shall apply to 
        taxable years beginning after December 31, 2017.
          (3) Annual increase in carryover amounts.--The amendments 
        made by subsection (d) shall apply to amounts carried to 
        taxable years beginning after December 31, 2017.
          (4) Special rule for net disaster losses.--Notwithstanding 
        paragraph (1), the amendments made by subsection (b) shall not 
        apply to the portion of the net operating loss for any taxable 
        year which is a net disaster loss to which section 504(b) of 
        the Disaster Tax Relief and Airport and Airway Extension Act of 
        2017 applies.

SEC. 3303. LIKE-KIND EXCHANGES OF REAL PROPERTY.

  (a) In General.--Section 1031(a)(1) is amended by striking 
``property'' each place it appears and inserting ``real property''.
  (b) Conforming Amendments.--
          (1) Paragraph (2) of section 1031(a) is amended to read as 
        follows:
          ``(2) Exception for real property held for sale.--This 
        subsection shall not apply to any exchange of real property 
        held primarily for sale.''.
          (2) Section 1031 is amended by striking subsections (e) and 
        (i).
          (3) Section 1031, as amended by paragraph (2), is amended by 
        inserting after subsection (d) the following new subsection:
  ``(e) Application to Certain Partnerships.--For purposes of this 
section, an interest in a partnership which has in effect a valid 
election under section 761(a) to be excluded from the application of 
all of subchapter K shall be treated as an interest in each of the 
assets of such partnership and not as an interest in a partnership.''.
          (4) Section 1031(h) is amended to read as follows:
  ``(h) Special Rules for Foreign Real Property.--Real property located 
in the United States and real property located outside the United 
States are not property of a like kind.''.
          (5) The heading of section 1031 is amended by striking 
        ``property'' and inserting ``real property''.
          (6) The table of sections for part III of subchapter O of 
        chapter 1 is amended by striking the item relating to section 
        1031 and inserting the following new item:

``Sec. 1031. Exchange of real property held for productive use or 
investment.''.

  (c) Effective Date.--
          (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        exchanges completed after December 31, 2017.
          (2) Transition rule.--The amendments made by this section 
        shall not apply to any exchange if--
                  (A) the property disposed of by the taxpayer in the 
                exchange is disposed of on or before December 31 2017, 
                or
                  (B) the property received by the taxpayer in the 
                exchange is received on or before December 31, 2017.

SEC. 3304. REVISION OF TREATMENT OF CONTRIBUTIONS TO CAPITAL.

  (a) Inclusion of Contributions to Capital.--Part II of subchapter B 
of chapter 1 is amended by inserting after section 75 the following new 
section:

``SEC. 76. CONTRIBUTIONS TO CAPITAL.

  ``(a) In General.--Gross income includes any contribution to the 
capital of any entity.
  ``(b) Treatment of Contributions in Exchange for Stock, etc.--
          ``(1) In general.--In the case of any contribution of money 
        or other property to a corporation in exchange for stock of 
        such corporation--
                  ``(A) such contribution shall not be treated for 
                purposes of subsection (a) as a contribution to the 
                capital of such corporation (and shall not be 
                includible in the gross income of such corporation), 
                and
                  ``(B) no gain or loss shall be recognized to such 
                corporation upon the issuance of such stock.
          ``(2) Treatment limited to value of stock.--For purposes of 
        this subsection, a contribution of money or other property to a 
        corporation shall be treated as being in exchange for stock of 
        such corporation only to the extent that the fair market value 
        of such money and other property does not exceed the fair 
        market value of such stock.
          ``(3) Application to entities other than corporations.--In 
        the case of any entity other than a corporation, rules similar 
        to the rules of paragraphs (1) and (2) shall apply in the case 
        of any contribution of money or other property to such entity 
        in exchange for any interest in such entity.
  ``(c) Treasury Stock Treated as Stock.--Any reference in this section 
to stock shall be treated as including a reference to treasury 
stock.''.
  (b) Basis of Corporation in Contributed Property.--
          (1) Contributions to capital.--Subsection (c) of section 362 
        is amended to read as follows:
  ``(c) Contributions to Capital.--If property other than money is 
transferred to a corporation as a contribution to the capital of such 
corporation (within the meaning of section 76) then the basis of such 
property shall be the greater of--
          ``(1) the basis determined in the hands of the transferor, 
        increased by the amount of gain recognized to the transferor on 
        such transfer, or
          ``(2) the amount included in gross income by such corporation 
        under section 76 with respect to such contribution.''.
          (2) Contributions in exchange for stock.--Paragraph (2) of 
        section 362(a) is amended by striking ``contribution to 
        capital'' and inserting ``contribution in exchange for stock of 
        such corporation (determined under rules similar to the rules 
        of paragraphs (2) and (3) of section 76(b))''.
  (c) Conforming Amendments.--
          (1) Section 108(e) is amended by striking paragraph (6).
          (2) Part III of subchapter B of chapter 1 is amended by 
        striking section 118 (and by striking the item relating to such 
        section in the table of sections for such part).
          (3) The table of sections for part II of subchapter B of 
        chapter 1 is amended by inserting after the item relating to 
        section 75 the following new item:

``Sec. 76. Contributions to capital.''.

  (d) Effective Date.--The amendments made by this section shall apply 
to contributions made, and transactions entered into, after the date of 
the enactment of this Act.

SEC. 3305. REPEAL OF DEDUCTION FOR LOCAL LOBBYING EXPENSES.

  (a) In General.--Section 162(e) is amended by striking paragraphs (2) 
and (7) and by redesignating paragraphs (3), (4), (5), (6), and (8) as 
paragraphs (2), (3), (4), (5), and (6), respectively.
  (b) Conforming Amendment.--Section 6033(e)(1)(B)(ii) is amended by 
striking ``section 162(e)(5)(B)(ii)'' and inserting ``section 
162(e)(4)(B)(ii)''.
  (c) Effective Date.--The amendments made by this section shall apply 
to amounts paid or incurred after December 31, 2017.

SEC. 3306. REPEAL OF DEDUCTION FOR INCOME ATTRIBUTABLE TO DOMESTIC 
                    PRODUCTION ACTIVITIES.

  (a) In General.--Part VI of subchapter B of chapter 1 is amended by 
striking section 199 (and by striking the item relating to such section 
in the table of sections for such part).
  (b) Conforming Amendments.--
          (1) Sections 74(d)(2)(B), 86(b)(2)(A), 137(b)(3)(A), 
        219(g)(3)(A)(ii), and 246(b)(1) are each amended by striking 
        ``199,''.
          (2) Section 170(b)(2)(D), as amended by the preceding 
        provisions of this Act, is amended by striking clause (iv), by 
        redesignating clause (v) as clause (iv), and by inserting 
        ``and'' at the end of clause (iii).
          (3) Section 172(d) is amended by striking paragraph (7).
          (4) Section 613(a) is amended by striking ``and without the 
        deduction under section 199''.
          (5) Section 613A(d)(1) is amended by striking subparagraph 
        (B) and by redesignating subparagraphs (C), (D), and (E) as 
        subparagraphs (B), (C), and (D), respectively.
          (6) Section 1402(a) is amended by adding ``and'' at the end 
        of paragraph (15) and by striking paragraph (16).
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 3307. ENTERTAINMENT, ETC. EXPENSES.

  (a) Denial of Deduction.--Subsection (a) of section 274 is amended to 
read as follows:
  ``(a) Entertainment, Amusement, Recreation, and Other Fringe Benefits 
.--
          ``(1) In general.--No deduction otherwise allowable under 
        this chapter shall be allowed for amounts paid or incurred for 
        any of the following items:
                  ``(A) Activity.--With respect to an activity which is 
                of a type generally considered to constitute 
                entertainment, amusement, or recreation.
                  ``(B) Membership dues.--With respect to membership in 
                any club organized for business, pleasure, recreation 
                or other social purposes.
                  ``(C) Amenity.--With respect to a de minimis fringe 
                (as defined in section 132(e)(1)) that is primarily 
                personal in nature and involving property or services 
                that are not directly related to the taxpayer's trade 
                or business.
                  ``(D) Facility.--With respect to a facility or 
                portion thereof used in connection with an activity 
                referred to in subparagraph (A), membership dues or 
                similar amounts referred to in subparagraph (B), or an 
                amenity referred to in subparagraph (C).
                  ``(E) Qualified transportation fringe and parking 
                facility.--Which is a qualified transportation fringe 
                (as defined in section 132(f)) or which is a parking 
                facility used in connection with qualified parking (as 
                defined in section 132(f)(5)(C)).
                  ``(F) On-premises athletic facility.--Which is an on-
                premises athletic facility as defined in section 
                132(j)(4)(B).
          ``(2) Special rules.--For purposes of applying paragraph (1), 
        an activity described in section 212 shall be treated as a 
        trade or business.
          ``(3) Regulations.--Under the regulations prescribed to carry 
        out this section, the Secretary shall include regulations--
                  ``(A) defining entertainment, amenities, recreation, 
                amusement, and facilities for purposes of this 
                subsection,
                  ``(B) providing for the appropriate allocation of 
                depreciation and other costs with respect to facilities 
                used for parking or for on-premises athletic 
                facilities, and
                  ``(C) specifying arrangements a primary purpose of 
                which is the avoidance of this subsection.''.
  (b) Exception for Certain Expenses Includible in Income of 
Recipient.--
          (1) Expenses treated as compensation.--Paragraph (2) of 
        section 274(e) is amended to read as follows:
          ``(2) Expenses treated as compensation.--Expenses for goods, 
        services, and facilities, to the extent that the expenses do 
        not exceed the amount of the expenses which are treated by the 
        taxpayer, with respect to the recipient of the entertainment, 
        amusement, or recreation, as compensation to an employee on the 
        taxpayer's return of tax under this chapter and as wages to 
        such employee for purposes of chapter 24 (relating to 
        withholding of income tax at source on wages).''.
          (2) Expenses includible in income of persons who are not 
        employees.--Paragraph (9) of section 274(e) is amended by 
        striking ``to the extent that the expenses'' and inserting ``to 
        the extent that the expenses do not exceed the amount of the 
        expenses that''.
  (c) Exceptions for Reimbursed Expenses.--Paragraph (3) of section 
274(e) is amended to read as follows:
          ``(3) Reimbursed expenses.--
                  ``(A) In general.--Expenses paid or incurred by the 
                taxpayer, in connection with the performance by him of 
                services for another person (whether or not such other 
                person is the taxpayer's employer), under a 
                reimbursement or other expense allowance arrangement 
                with such other person, but this paragraph shall 
                apply--
                          ``(i) where the services are performed for an 
                        employer, only if the employer has not treated 
                        such expenses in the manner provided in 
                        paragraph (2), or
                          ``(ii) where the services are performed for a 
                        person other than an employer, only if the 
                        taxpayer accounts (to the extent provided by 
                        subsection (d)) to such person.
                  ``(B) Exception.--Except as provided by the 
                Secretary, subparagraph (A) shall not apply--
                          ``(i) in the case of an arrangement in which 
                        the person other than the employer is an entity 
                        described in section 168(h)(2)(A), or
                          ``(ii) to any other arrangement designated by 
                        the Secretary as having the effect of avoiding 
                        the limitation under subparagraph (A).''.
  (d) 50 Percent Limitation on Meals and Entertainment Expenses.--
Subsection (n) of section 274 is amended to read as follows:
  ``(n) Limitation on Certain Expenses.--
          ``(1) In general.--The amount allowable as a deduction under 
        this chapter for any expense for food or beverages (pursuant to 
        subsection (e)(1)) or business meals (pursuant to subsection 
        (k)(1)) shall not exceed 50 percent of the amount of such 
        expense or item which would (but for this paragraph) be 
        allowable as a deduction under this chapter.
          ``(2) Exceptions.--Paragraph (1) shall not apply to any 
        expense if--
                  ``(A) such expense is described in paragraph (2), 
                (3), (6), (7), or (8) of subsection (e),
                  ``(B) in the case of an expense for food or 
                beverages, such expense is excludable from the gross 
                income of the recipient under section 132 by reason of 
                subsection (e) thereof (relating to de minimis fringes) 
                or under section 119 (relating to meals and lodging 
                furnished for convenience of employer), or
                  ``(C) in the case of an employer who pays or 
                reimburses moving expenses of an employee, such 
                expenses are includible in the income of the employee 
                under section 82.
          ``(3) Special rule for individuals subject to federal hours 
        of service.--In the case of any expenses for food or beverages 
        consumed while away from home (within the meaning of section 
        162(a)(2)) by an individual during, or incident to, the period 
        of duty subject to the hours of service limitations of the 
        Department of Transportation, paragraph (1) shall be applied by 
        substituting `80 percent' for `50 percent'.''.
  (e) Conforming Amendments.--
          (1) Section 274(d) is amended--
                  (A) by striking paragraph (2) and redesignating 
                paragraphs (3) and (4) as paragraphs (2) and (3), 
                respectively, and
                  (B) in the flush material following paragraph (3) (as 
                so redesignated)--
                          (i) by striking ``, entertainment, amusement, 
                        recreation, or'' in item (B), and
                          (ii) by striking ``(D) the business 
                        relationship to the taxpayer of persons 
                        entertained, using the facility or property, or 
                        receiving the gift'' and inserting ``(D) the 
                        business relationship to the taxpayer of the 
                        person receiving the benefit''.
          (2) Section 274(e) is amended by striking paragraph (4) and 
        redesignating paragraphs (5), (6), (7), (8), and (9) as 
        paragraphs (4), (5), (6), (7), and (8), respectively.
          (3) Section 274(k)(2)(A) is amended by striking ``(4), (7), 
        (8), or (9)'' and inserting ``(6), (7), or (8)''.
          (4) Section 274 is amended by striking subsection (l).
          (5) Section 274(m)(1)(B)(ii) is amended by striking ``(4), 
        (7), (8), or (9)'' and inserting ``(6), (7), or (8)''.
  (f) Effective Date.--The amendments made by this section shall apply 
to amounts paid or incurred after December 31, 2017.

SEC. 3308. UNRELATED BUSINESS TAXABLE INCOME INCREASED BY AMOUNT OF 
                    CERTAIN FRINGE BENEFIT EXPENSES FOR WHICH DEDUCTION 
                    IS DISALLOWED.

  (a) In General.--Section 512(a) is amended by adding at the end the 
following new paragraph:
          ``(6) Increase in unrelated business taxable income by 
        disallowed fringe.--Unrelated business taxable income of an 
        organization shall be increased by any amount for which a 
        deduction is not allowable under this chapter by reason of 
        section 274 and which is paid or incurred by such organization 
        for any qualified transportation fringe (as defined in section 
        132(f)), any parking facility used in connection with qualified 
        parking (as defined in section 132(f)(5)(C)), or any on-
        premises athletic facility (as defined in section 
        132(j)(4)(B)). The preceding sentence shall not apply to the 
        extent the amount paid or incurred is directly connected with 
        an unrelated trade or business which is regularly carried on by 
        the organization. The Secretary may issue such regulations or 
        other guidance as may be necessary or appropriate to carry out 
        the purposes of this paragraph, including regulations or other 
        guidance providing for the appropriate allocation of 
        depreciation and other costs with respect to facilities used 
        for parking or for on-premises athletic facilities.
        ''.
  (b) Effective Date.--The amendment made by this section shall apply 
to amounts paid or incurred after December 31, 2017.

SEC. 3309. LIMITATION ON DEDUCTION FOR FDIC PREMIUMS.

  (a) In General.--Section 162 is amended by redesignating subsection 
(q) as subsection (r) and by inserting after subsection (p) the 
following new subsection:
  ``(q) Disallowance of FDIC Premiums Paid by Certain Large Financial 
Institutions.--
          ``(1) In general.--No deduction shall be allowed for the 
        applicable percentage of any FDIC premium paid or incurred by 
        the taxpayer.
          ``(2) Exception for small institutions.--Paragraph (1) shall 
        not apply to any taxpayer for any taxable year if the total 
        consolidated assets of such taxpayer (determined as of the 
        close of such taxable year) do not exceed $10,000,000,000.
          ``(3) Applicable percentage.--For purposes of this 
        subsection, the term `applicable percentage' means, with 
        respect to any taxpayer for any taxable year, the ratio 
        (expressed as a percentage but not greater than 100 percent) 
        which--
                  ``(A) the excess of--
                          ``(i) the total consolidated assets of such 
                        taxpayer (determined as of the close of such 
                        taxable year), over
                          ``(ii) $10,000,000,000, bears to
                  ``(B) $40,000,000,000.
          ``(4) FDIC premiums.--For purposes of this subsection, the 
        term `FDIC premium' means any assessment imposed under section 
        7(b) of the Federal Deposit Insurance Act (12 U.S.C. 1817(b)).
          ``(5) Total consolidated assets.--For purposes of this 
        subsection, the term `total consolidated assets' has the 
        meaning given such term under section 165 of the Dodd-Frank 
        Wall Street Reform and Consumer Protection Act (12 U.S.C. 
        5365).
          ``(6) Aggregation rule.--
                  ``(A) In general.--Members of an expanded affiliated 
                group shall be treated as a single taxpayer for 
                purposes of applying this subsection.
                  ``(B) Expanded affiliated group.--For purposes of 
                this paragraph, the term `expanded affiliated group' 
                means an affiliated group as defined in section 
                1504(a), determined--
                          ``(i) by substituting `more than 50 percent' 
                        for `at least 80 percent' each place it 
                        appears, and
                          ``(ii) without regard to paragraphs (2) and 
                        (3) of section 1504(b).
                A partnership or any other entity (other than a 
                corporation) shall be treated as a member of an 
                expanded affiliated group if such entity is controlled 
                (within the meaning of section 954(d)(3)) by members of 
                such group (including any entity treated as a member of 
                such group by reason of this sentence).''.
  (b) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 3310. REPEAL OF ROLLOVER OF PUBLICLY TRADED SECURITIES GAIN INTO 
                    SPECIALIZED SMALL BUSINESS INVESTMENT COMPANIES.

  (a) In General.--Part III of subchapter O of chapter 1 is amended by 
striking section 1044 (and by striking the item relating to such 
section in the table of sections of such part).
  (b) Conforming Amendments.--Section 1016(a)(23) is amended--
          (1) by striking ``1044,'', and
          (2) by striking ``1044(d),''.
  (c) Effective Date.--The amendments made by this section shall apply 
to sales after December 31, 2017.

SEC. 3311. CERTAIN SELF-CREATED PROPERTY NOT TREATED AS A CAPITAL 
                    ASSET.

  (a) Patents, etc.--Section 1221(a)(3) is amended by inserting ``a 
patent, invention, model or design (whether or not patented), a secret 
formula or process,'' before ``a copyright''.
  (b) Conforming Amendment.--Section 1231(b)(1)(C) is amended by 
inserting ``a patent, invention, model or design (whether or not 
patented), a secret formula or process,'' before ``a copyright''.
  (c) Effective Date.--The amendments made by this section shall apply 
to dispositions after December 31, 2017.

SEC. 3312. REPEAL OF SPECIAL RULE FOR SALE OR EXCHANGE OF PATENTS.

  (a) In General.--Part IV of subchapter P of chapter 1 is amended by 
striking section 1235 (and by striking the item relating to such 
section in the table of sections of such part).
  (b) Conforming Amendments.--
          (1) Section 483(d) is amended by striking paragraph (4).
          (2) Section 901(l)(5) is amended by striking ``without regard 
        to section 1235 or any similar rule'' and inserting ``without 
        regard to any provision which treats a disposition as a sale or 
        exchange of a capital asset held for more than 1 year or any 
        similar provision''.
          (3) Section 1274(c)(3) is amended by striking subparagraph 
        (E) and redesignating subparagraph (F) as subparagraph (E).
  (c) Effective Date.--The amendments made by this section shall apply 
to dispositions after December 31, 2017.

SEC. 3313. REPEAL OF TECHNICAL TERMINATION OF PARTNERSHIPS.

  (a) In General.--Paragraph (1) of section 708(b) is amended--
          (1) by striking ``, or'' at the end of subparagraph (A) and 
        all that follows and inserting a period, and
          (2) by striking ``only if--'' and all that follows through 
        ``no part of any business'' and inserting the following: ``only 
        if no part of any business''.
  (b) Effective Date.--The amendments made by this section shall apply 
to partnership taxable years beginning after December 31, 2017.

SEC. 3314. RECHARACTERIZATION OF CERTAIN GAINS IN THE CASE OF 
                    PARTNERSHIP PROFITS INTERESTS HELD IN CONNECTION 
                    WITH PERFORMANCE OF INVESTMENT SERVICES.

  (a) In General.--Part IV of subchapter O of chapter 1 is amended--
          (1) by redesignating section 1061 as section 1062, and
          (2) by inserting after section 1060 the following new 
        section:

``SEC. 1061. PARTNERSHIP INTERESTS HELD IN CONNECTION WITH PERFORMANCE 
                    OF SERVICES.

  ``(a) In General.--If one or more applicable partnership interests 
are held by a taxpayer at any time during the taxable year, the excess 
(if any) of--
          ``(1) the taxpayer's net long-term capital gain with respect 
        to such interests for such taxable year, over
          ``(2) the taxpayer's net long-term capital gain with respect 
        to such interests for such taxable year computed by applying 
        paragraphs (3) and (4) of sections 1222 by substituting `3 
        years' for `1 year',
shall be treated as short-term capital gain.
  ``(b) Special Rule.--To the extent provided by the Secretary, 
subsection (a) shall not apply to income or gain attributable to any 
asset not held for portfolio investment on behalf of third party 
investors.
  ``(c) Applicable Partnership Interest.--For purposes of this 
section--
          ``(1) In general.--Except as provided in this paragraph or 
        paragraph (4), the term `applicable partnership interest' means 
        any interest in a partnership which, directly or indirectly, is 
        transferred to (or is held by) the taxpayer in connection with 
        the performance of substantial services by the taxpayer, or any 
        other related person, in any applicable trade or business. The 
        previous sentence shall not apply to an interest held by a 
        person who is employed by another entity that is conducting a 
        trade or business (other than an applicable trade or business) 
        and only provides services to such other entity.
          ``(2) Applicable trade or business.--The term `applicable 
        trade or business' means any activity conducted on a regular, 
        continuous, and substantial basis which, regardless of whether 
        the activity is conducted in one or more entities, consists, in 
        whole or in part, of--
                  ``(A) raising or returning capital, and
                  ``(B) either--
                          ``(i) investing in (or disposing of) 
                        specified assets (or identifying specified 
                        assets for such investing or disposition), or
                          ``(ii) developing specified assets.
          ``(3) Specified asset.--The term `specified asset' means 
        securities (as defined in section 475(c)(2) without regard to 
        the last sentence thereof), commodities (as defined in section 
        475(e)(2)), real estate held for rental or investment, cash or 
        cash equivalents, options or derivative contracts with respect 
        to any of the foregoing, and an interest in a partnership to 
        the extent of the partnership's proportionate interest in any 
        of the foregoing.
          ``(4) Exceptions.--The term `applicable partnership interest' 
        shall not include--
                  ``(A) any interest in a partnership directly or 
                indirectly held by a corporation, or
                  ``(B) any capital interest in the partnership which 
                provides the taxpayer with a right to share in 
                partnership capital commensurate with--
                          ``(i) the amount of capital contributed 
                        (determined at the time of receipt of such 
                        partnership interest), or
                          ``(ii) the value of such interest subject to 
                        tax under section 83 upon the receipt or 
                        vesting of such interest.
          ``(5) Third party investor.--The term `third party investor' 
        means a person who--
                  ``(A) holds an interest in the partnership which does 
                not constitute property held in connection with an 
                applicable trade or business; and
                  ``(B) is not (and has not been) actively engaged, and 
                is (and was) not related to a person so engaged, in 
                (directly or indirectly) providing substantial services 
                described in paragraph (1) for such partnership or any 
                applicable trade or business.
  ``(d) Transfer of Applicable Partnership Interest to Related 
Person.--
          ``(1) In general.--If a taxpayer transfers any applicable 
        partnership interest, directly or indirectly, to a person 
        related to the taxpayer, the taxpayer shall include in gross 
        income (as short term capital gain) the excess (if any) of--
                  ``(A) so much of the taxpayer's long-term capital 
                gains with respect to such interest for such taxable 
                year attributable to the sale or exchange of any asset 
                held for not more than 3 years as is allocable to such 
                interest, over
                  ``(B) any amount treated as short term capital gain 
                under subsection (a) with respect to the transfer of 
                such interest.
          ``(2) Related person.--For purposes of this paragraph, a 
        person is related to the taxpayer if--
                  ``(A) the person is a member of the taxpayer's family 
                within the meaning of section 318(a)(1), or
                  ``(B) the person performed a service within the 
                current calendar year or the preceding three calendar 
                years in any applicable trade or business in which or 
                for which the taxpayer performed a service.
  ``(e) Reporting.--The Secretary shall require such reporting (at the 
time and in the manner prescribed by the Secretary) as is necessary to 
carry out the purposes of this section.
  ``(f) Regulations.--The Secretary shall issue such regulations or 
other guidance as is necessary or appropriate to carry out the purposes 
of this section''.
  (b) Coordination With Section 83.--Subsection (e) of section 83 is 
amended by striking ``or'' at the end of paragraph (4), by striking the 
period at the end of paragraph (5) and inserting ``, or'', and by 
adding at the end the following new paragraph:
          ``(6) a transfer of an applicable partnership interest to 
        which section 1061 applies.''.
  (c) Clerical Amendment.--The table of sections for part IV of 
subchapter O of chapter 1 is amended by striking the item relating to 
1061 and inserting the following new items:

``Sec. 1061. Partnership interests held in connection with performance 
of services.
``Sec. 1062. Cross references.''.

  (d) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 3315. AMORTIZATION OF RESEARCH AND EXPERIMENTAL EXPENDITURES.

  (a) In General.--Section 174 is amended to read as follows:

``SEC. 174. AMORTIZATION OF RESEARCH AND EXPERIMENTAL EXPENDITURES.

  ``(a) In General.--In the case of a taxpayer's specified research or 
experimental expenditures for any taxable year--
          ``(1) except as provided in paragraph (2), no deduction shall 
        be allowed for such expenditures, and
          ``(2) the taxpayer shall--
                  ``(A) charge such expenditures to capital account, 
                and
                  ``(B) be allowed an amortization deduction of such 
                expenditures ratably over the 5-year period (15-year 
                period in the case of any specified research or 
                experimental expenditures which are attributable to 
                foreign research (within the meaning of section 
                41(d)(4)(F))) beginning with the midpoint of the 
                taxable year in which such expenditures are paid or 
                incurred.
  ``(b) Specified Research or Experimental Expenditures.--For purposes 
of this section, the term `specified research or experimental 
expenditures' means, with respect to any taxable year, research or 
experimental expenditures which are paid or incurred by the taxpayer 
during such taxable year in connection with the taxpayer's trade or 
business.
  ``(c) Special Rules.--
          ``(1) Land and other property.--This section shall not apply 
        to any expenditure for the acquisition or improvement of land, 
        or for the acquisition or improvement of property to be used in 
        connection with the research or experimentation and of a 
        character which is subject to the allowance under section 167 
        (relating to allowance for depreciation, etc.) or section 611 
        (relating to allowance for depletion); but for purposes of this 
        section allowances under section 167, and allowances under 
        section 611, shall be considered as expenditures.
          ``(2) Exploration expenditures.--This section shall not apply 
        to any expenditure paid or incurred for the purpose of 
        ascertaining the existence, location, extent, or quality of any 
        deposit of ore or other mineral (including oil and gas).
          ``(3) Software development.--For purposes of this section, 
        any amount paid or incurred in connection with the development 
        of any software shall be treated as a research or experimental 
        expenditure.
  ``(d) Treatment Upon Disposition, Retirement, or Abandonment.--If any 
property with respect to which specified research or experimental 
expenditures are paid or incurred is disposed, retired, or abandoned 
during the period during which such expenditures are allowed as an 
amortization deduction under this section, no deduction shall be 
allowed with respect to such expenditures on account of such 
disposition, retirement, or abandonment and such amortization deduction 
shall continue with respect to such expenditures.''.
  (b) Clerical Amendment.--The table of sections for part VI of 
subchapter B of chapter 1 is amended by striking the item relating to 
section 174 and inserting the following new item:

``Sec. 174. Amortization of research and experimental expenditures.''.

  (c) Effective Date.--The amendments made by this section shall apply 
to amounts paid or incurred in taxable years beginning after December 
31, 2022.

SEC. 3316. UNIFORM TREATMENT OF EXPENSES IN CONTINGENCY FEE CASES.

  (a) In General.--Section 162, as amended by the preceding provisions 
of this Act, is amended by redesignating subsection (r) as subsection 
(s) and by inserting after subsection (q) the following new subsection:
  ``(r) Expenses in Contingency Fee Cases.--No deduction shall be 
allowed under subsection (a) to a taxpayer for any expense--
          ``(1) paid or incurred in the course of the trade or business 
        of practicing law, and
          ``(2) resulting from a case for which the taxpayer is 
        compensated primarily on a contingent basis,
until such time as such contingency is resolved.''.
  (b) Effective Date.--The amendment made by this section shall apply 
to expenses and costs paid or incurred in taxable years beginning after 
the date of the enactment of this Act.

                 Subtitle E--Reform of Business Credits

SEC. 3401. REPEAL OF CREDIT FOR CLINICAL TESTING EXPENSES FOR CERTAIN 
                    DRUGS FOR RARE DISEASES OR CONDITIONS.

  (a) In General.--Subpart D of part IV of subchapter A of chapter 1 is 
amended by striking section 45C (and by striking the item relating to 
such section in the table of sections for such subpart).
  (b) Conforming Amendments.--
          (1) Section 38(b) is amended by striking paragraph (12).
          (2) Section 280C is amended by striking subsection (b).
          (3) Section 6501(m) is amended by striking ``45C(d)(4),''.
  (c) Effective Date.--The amendments made by this section shall apply 
to amounts paid or incurred in taxable years beginning after December 
31, 2017.

SEC. 3402. REPEAL OF EMPLOYER-PROVIDED CHILD CARE CREDIT.

  (a) In General.--Subpart D of part IV of subchapter A of chapter 1 is 
amended by striking section 45F (and by striking the item relating to 
such section in the table of sections for such subpart).
  (b) Conforming Amendments.--
          (1) Section 38(b) is amended by striking paragraph (15).
          (2) Section 1016(a) is amended by striking paragraph (28).
  (c) Effective Date.--
          (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        taxable years beginning after December 31, 2017.
          (2) Basis adjustments.--The amendment made by subsection 
        (b)(2) shall apply to credits determined for taxable years 
        beginning after December 31, 2017.

SEC. 3403. REPEAL OF REHABILITATION CREDIT.

  (a) In General.--Subpart E of part IV of subchapter A of chapter 1 is 
amended by striking section 47 (and by striking the item relating to 
such section in the table of sections for such subpart).
  (b) Conforming Amendments.--
          (1) Section 170(f)(14)(A) is amended by inserting ``(as in 
        effect before its repeal by the Tax Cuts and Jobs Act)'' after 
        ``section 47''.
          (2) Section 170(h)(4) is amended--
                  (A) by striking ``(as defined in section 
                47(c)(3)(B))'' in subparagraph (C)(ii), and
                  (B) by adding at the end the following new 
                subparagraph:
                  ``(D) Registered historic district.--The term 
                `registered historic district' means--
                          ``(i) any district listed in the National 
                        Register, and
                          ``(ii) any district--
                                  ``(I) which is designated under a 
                                statute of the appropriate State or 
                                local government, if such statute is 
                                certified by the Secretary of the 
                                Interior to the Secretary as containing 
                                criteria which will substantially 
                                achieve the purpose of preserving and 
                                rehabilitating buildings of historic 
                                significance to the district, and
                                  ``(II) which is certified by the 
                                Secretary of the Interior to the 
                                Secretary as meeting substantially all 
                                of the requirements for the listing of 
                                districts in the National Register.''.
          (3) Section 469(i)(3) is amended by striking subparagraph 
        (B).
          (4) Section 469(i)(6)(B) is amended--
                  (A) by striking ``in the case of--'' and all that 
                follows and inserting ``in the case of any credit 
                determined under section 42 for any taxable year.'', 
                and
                  (B) by striking ``, rehabilitation credit,'' in the 
                heading thereof.
          (5) Section 469(k)(1) is amended by striking ``, or any 
        rehabilitation credit determined under section 47,''.
  (c) Effective Date.--
          (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to amounts paid or 
        incurred after December 31, 2017.
          (2) Transition rule.--In the case of qualified rehabilitation 
        expenditures (within the meaning of section 47 of the Internal 
        Revenue Code of 1986 as in effect before its repeal) with 
        respect to any building--
                  (A) owned or leased (as permitted by section 47 of 
                the Internal Revenue Code of 1986 as in effect before 
                its repeal) by the taxpayer at all times after December 
                31, 2017, and
                  (B) with respect to which the 24-month period 
                selected by the taxpayer under section 47(c)(1)(C) of 
                such Code begins not later than the end of the 180-day 
                period beginning on the date of the enactment of this 
                Act,
         the amendments made by this section shall apply to such 
        expenditures paid or incurred after the end of the taxable year 
        in which the 24-month period referred to in subparagraph (B) 
        ends.

SEC. 3404. REPEAL OF WORK OPPORTUNITY TAX CREDIT.

  (a) In General.--Subpart F of part IV of subchapter A of chapter 1 is 
amended by striking section 51 (and by striking the item relating to 
such section in the table of sections for such subpart).
  (b) Clerical Amendment.--The heading of such subpart F (and the item 
relating to such subpart in the table of subparts for part IV of 
subchapter A of chapter 1) are each amended by striking ``Rules for 
Computing Work Opportunity Credit'' and inserting ``Special Rules''.
  (c) Effective Date.--The amendments made by this section shall apply 
to amounts paid or incurred to individuals who begin work for the 
employer after December 31, 2017.

SEC. 3405. REPEAL OF DEDUCTION FOR CERTAIN UNUSED BUSINESS CREDITS.

  (a) In General.--Part VI of subchapter B of chapter 1 is amended by 
striking section 196 (and by striking the item relating to such section 
in the table of sections for such part).
  (b) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 3406. TERMINATION OF NEW MARKETS TAX CREDIT.

  (a) In General.--Section 45D(f) is amended--
          (1) by striking ``2019'' in paragraph (1)(G) and inserting 
        ``2017'', and
          (2) by striking ``2024'' in paragraph (3) and inserting 
        ``2022''.
  (b) Effective Date.--The amendments made by this section shall apply 
to calendar years beginning after December 31, 2017.

SEC. 3407. REPEAL OF CREDIT FOR EXPENDITURES TO PROVIDE ACCESS TO 
                    DISABLED INDIVIDUALS.

  (a) In General.--Subpart D of part IV of subchapter A of chapter 1 is 
amended by striking section 44 (and by striking the item relating to 
such section in the table of sections for such subpart).
  (b) Conforming Amendment.--Section 38(b) is amended by striking 
paragraph (7).
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 3408. MODIFICATION OF CREDIT FOR PORTION OF EMPLOYER SOCIAL 
                    SECURITY TAXES PAID WITH RESPECT TO EMPLOYEE TIPS.

  (a) Credit Determined With Respect to Minimum Wage as in Effect.--
Section 45B(b)(1)(B) is amended by striking ``as in effect on January 
1, 2007, and''.
  (b) Information Return Requirement.--Section 45B is amended by 
redesignating subsections (c) and (d) as subsections (d) and (e), 
respectively, and by inserting after subsection (b) the following new 
subsection:
  ``(c) Information Return Requirement.--
          ``(1) In general.--No credit shall be determined under 
        subsection (a) with respect to any food or beverage 
        establishment of any taxpayer for any taxable year unless such 
        taxpayer has, with respect to the calendar year which ends in 
        or with such taxable year--
                  ``(A) made a report to the Secretary showing the 
                information described in section 6053(c)(1) with 
                respect to such food or beverage establishment, and
                  ``(B) furnished written statements to each employee 
                of such food or beverage establishment showing the 
                information described in section 6053(c)(2).
          ``(2) Allocation of 10 percent of gross receipts.--For 
        purposes of determining the information referred to in 
        subparagraphs (A) and (B), section 6053(c)(3)(A)(i) shall be 
        applied by substituting `10 percent' for `8 percent'. For 
        purposes of section 6053(c)(5), any reference to section 
        6053(c)(3)(B) contained therein shall be treated as including a 
        reference to this paragraph.
          ``(3) Food or beverage establishment.--For purposes of this 
        subsection, the term `food or beverage establishment' means any 
        trade or business (or portion thereof) which would be a large 
        food or beverage establishment (as defined in section 
        6053(c)(4)) if such section were applied without regard to 
        subparagraph (C) thereof.''.
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

                       Subtitle F--Energy Credits

SEC. 3501. MODIFICATIONS TO CREDIT FOR ELECTRICITY PRODUCED FROM 
                    CERTAIN RENEWABLE RESOURCES.

  (a) Termination of Inflation Adjustment.--Section 45(b)(2) is 
amended--
          (1) by striking ``The 1.5 cent amount'' and inserting the 
        following:
                  ``(A) In general.--The 1.5 cent amount'', and
          (2) by adding at the end the following new subparagraph:
                  ``(B) Termination.--Subparagraph (A) shall not apply 
                with respect to any electricity or refined coal 
                produced at a facility the construction of which begins 
                after the date of the enactment of this 
                subparagraph.''.
  (b) Special Rule for Determination of Beginning of Construction.--
Section 45(e) is amended by adding at the end the following new 
paragraph:
          ``(12) Special rule for determining beginning of 
        construction.--For purposes of subsection (d), the construction 
        of any facility, modification, improvement, addition, or other 
        property shall not be treated as beginning before any date 
        unless there is a continuous program of construction which 
        begins before such date and ends on the date that such property 
        is placed in service.''.
  (c) Effective Dates.--
          (1) Termination of inflation adjustment.--The amendments made 
        by subsection (a) shall apply to taxable years ending after the 
        date of the enactment of this Act.
          (2) Special rule for determination of beginning of 
        construction.--The amendment made by subsection (b) shall apply 
        to taxable years beginning before, on, or after the date of the 
        enactment of this Act.

SEC. 3502. MODIFICATION OF THE ENERGY INVESTMENT TAX CREDIT.

  (a) Extension of Solar Energy Property.--Section 48(a)(3)(A)(ii) is 
amended by striking ``periods ending before January 1, 2017'' and 
inserting ``property the construction of which begins before January 1, 
2022''.
  (b) Extension of Qualified Fuel Cell Property.--Section 48(c)(1)(D) 
is amended by striking ``for any period after December 31, 2016'' and 
inserting ``the construction of which does not begin before January 1, 
2022''.
  (c) Extension of Qualified Microturbine Property.--Section 
48(c)(2)(D) is amended by striking ``for any period after December 31, 
2016'' and inserting ``the construction of which does not begin before 
January 1, 2022''.
  (d) Extension of Combined Heat and Power System Property.--Section 
48(c)(3)(A)(iv) is amended by striking ``which is placed in service 
before January 1, 2017'' and inserting ``the construction of which 
begins before January 1, 2022''.
  (e) Extension of Qualified Small Wind Energy Property.--Section 
48(c)(4)(C) is amended by striking ``for any period after December 31, 
2016'' and inserting ``the construction of which does not begin before 
January 1, 2022''.
  (f) Extension of Thermal Energy Property.--Section 48(a)(3)(A)(vii) 
is amended by striking ``periods ending before January 1, 2017'' and 
inserting ``property the construction of which begins before January 1, 
2022''.
  (g) Phaseout of 30 Percent Credit Rate for Fuel Cell and Small Wind 
Energy Property.--Section 48(a) is amended by adding at the end the 
following new paragraph:
          ``(7) Phaseout for qualified fuel cell property and qualified 
        small wind energy property.--
                  ``(A) In general.--In the case of qualified fuel cell 
                property or qualified small wind energy property, the 
                construction of which begins before January 1, 2022, 
                the energy percentage determined under paragraph (2) 
                shall be equal to--
                          ``(i) in the case of any property the 
                        construction of which begins after December 31, 
                        2019, and before January 1, 2021, 26 percent, 
                        and
                          ``(ii) in the case of any property the 
                        construction of which begins after December 31, 
                        2020, and before January 1, 2022, 22 percent.
                  ``(B) Placed in service deadline.--In the case of any 
                qualified fuel cell property or qualified small wind 
                energy property, the construction of which begins 
                before January 1, 2022, and which is not placed in 
                service before January 1, 2024, the energy percentage 
                determined under paragraph (2) shall be equal to 10 
                percent.''.
  (h) Phaseout for Fiber-optic Solar Energy Property.--Subparagraphs 
(A) and (B) of section 48(a)(6) are each amended by inserting ``or 
(3)(A)(ii)'' after ``paragraph (3)(A)(i)''.
  (i) Termination of Solar Energy Property.--Section 48(a)(3)(A)(i) is 
amended by inserting ``, the construction of which begins before 
January 1, 2028, and'' after ``equipment''.
  (j) Termination of Geothermal Energy Property.--Section 
48(a)(3)(A)(iii) is amended by inserting ``, the construction of which 
begins before January 1, 2028, and'' after ``equipment''.
  (k) Special Rule for Determination of Beginning of Construction.--
Section 48(c) is amended by adding at the end the following new 
paragraph:
          ``(5) Special rule for determining beginning of 
        construction.--The construction of any facility, modification, 
        improvement, addition, or other property shall not be treated 
        as beginning before any date unless there is a continuous 
        program of construction which begins before such date and ends 
        on the date that such property is placed in service.''.
  (l) Effective Date.--
          (1) In general.--Except as otherwise provided in this 
        subsection, the amendments made by this section shall apply to 
        periods after December 31, 2016, under rules similar to the 
        rules of section 48(m) of the Internal Revenue Code of 1986 (as 
        in effect on the day before the date of the enactment of the 
        Revenue Reconciliation Act of 1990).
          (2) Extension of combined heat and power system property.--
        The amendment made by subsection (d) shall apply to property 
        placed in service after December 31, 2016.
          (3) Phaseouts and terminations.--The amendments made by 
        subsections (g), (h), (i), and (j) shall take effect on the 
        date of the enactment of this Act.
          (4) Special rule for determination of beginning of 
        construction.--The amendment made by subsection (k) shall apply 
        to taxable years beginning before, on, or after the date of the 
        enactment of this Act.

SEC. 3503. EXTENSION AND PHASEOUT OF RESIDENTIAL ENERGY EFFICIENT 
                    PROPERTY.

  (a) Extension.--Section 25D(h) is amended by striking ``December 31, 
2016 (December 31, 2021, in the case of any qualified solar electric 
property expenditures and qualified solar water heating property 
expenditures)'' and inserting ``December 31, 2021''.
  (b) Phaseout.--
          (1) In general.--Paragraphs (3), (4), and (5) of section 
        25D(a) are amended by striking ``30 percent'' each place it 
        appears and inserting ``the applicable percentage''.
          (2) Conforming amendment.--Section 25D(g) of such Code is 
        amended by striking ``paragraphs (1) and (2) of''.
  (c) Effective Date.--The amendments made by this section shall apply 
to property placed in service after December 31, 2016.

SEC. 3504. REPEAL OF ENHANCED OIL RECOVERY CREDIT.

  (a) In General.--Subpart D of part IV of subchapter A of chapter 1 is 
amended by striking section 43 (and by striking the item relating to 
such section in the table of sections for such subpart).
  (b) Conforming Amendments.--
          (1) Section 38(b) is amended by striking paragraph (6).
          (2) Section 6501(m) is amended by striking ``43,''.
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 3505. REPEAL OF CREDIT FOR PRODUCING OIL AND GAS FROM MARGINAL 
                    WELLS.

  (a) In General.--Subpart D of part IV of subchapter A of chapter 1 is 
amended by striking section 45I (and by striking the item relating to 
such section in the table of sections for such subpart).
  (b) Conforming Amendment.--Section 38(b) is amended by striking 
paragraph (19).
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 3506. MODIFICATIONS OF CREDIT FOR PRODUCTION FROM ADVANCED NUCLEAR 
                    POWER FACILITIES.

  (a) Treatment of Unutilized Limitation Amounts.--Section 45J(b) is 
amended--
          (1) in paragraph (4), by inserting ``or any amendment to'' 
        after ``enactment of''; and
          (2) by adding at the end the following new paragraph:
          ``(5) Allocation of unutilized limitation.--
                  ``(A) In general.--Any unutilized national megawatt 
                capacity limitation shall be allocated by the Secretary 
                under paragraph (3) as rapidly as is practicable after 
                December 31, 2020--
                          ``(i) first to facilities placed in service 
                        on or before such date to the extent that such 
                        facilities did not receive an allocation equal 
                        to their full nameplate capacity; and
                          ``(ii) then to facilities placed in service 
                        after such date in the order in which such 
                        facilities are placed in service.
                  ``(B) Unutilized national megawatt capacity 
                limitation.--The term `unutilized national megawatt 
                capacity limitation' means the excess (if any) of--
                          ``(i) 6,000 megawatts, over
                          ``(ii) the aggregate amount of national 
                        megawatt capacity limitation allocated by the 
                        Secretary before January 1, 2021, reduced by 
                        any amount of such limitation which was 
                        allocated to a facility which was not placed in 
                        service before such date.
                  ``(C) Coordination with other provisions.--In the 
                case of any unutilized national megawatt capacity 
                limitation allocated by the Secretary pursuant to this 
                paragraph--
                          ``(i) such allocation shall be treated for 
                        purposes of this section in the same manner as 
                        an allocation of national megawatt capacity 
                        limitation; and
                          ``(ii) subsection (d)(1)(B) shall not apply 
                        to any facility which receives such 
                        allocation.''.
  (b) Transfer of Credit by Certain Public Entities.--
          (1) In general.--Section 45J is amended--
                  (A) by redesignating subsection (e) as subsection 
                (f); and
                  (B) by inserting after subsection (d) the following 
                new subsection:
  ``(e) Transfer of Credit by Certain Public Entities.--
          ``(1) In general.--If, with respect to a credit under 
        subsection (a) for any taxable year--
                  ``(A) the taxpayer would be a qualified public 
                entity; and
                  ``(B) such entity elects the application of this 
                paragraph for such taxable year with respect to all (or 
                any portion specified in such election) of such credit,
        the eligible project partner specified in such election (and 
        not the qualified public entity) shall be treated as the 
        taxpayer for purposes of this title with respect to such credit 
        (or such portion thereof).
          ``(2) Definitions.--For purposes of this subsection--
                  ``(A) Qualified public entity.--The term `qualified 
                public entity' means--
                          ``(i) a Federal, State, or local government 
                        entity, or any political subdivision, agency, 
                        or instrumentality thereof;
                          ``(ii) a mutual or cooperative electric 
                        company described in section 501(c)(12) or 
                        section 1381(a)(2); or
                          ``(iii) a not-for-profit electric utility 
                        which has or had received a loan or loan 
                        guarantee under the Rural Electrification Act 
                        of 1936.
                  ``(B) Eligible project partner.--The term `eligible 
                project partner' means--
                          ``(i) any person responsible for, or 
                        participating in, the design or construction of 
                        the advanced nuclear power facility to which 
                        the credit under subsection (a) relates;
                          ``(ii) any person who participates in the 
                        provision of the nuclear steam supply system to 
                        the advanced nuclear power facility to which 
                        the credit under subsection (a) relates;
                          ``(iii) any person who participates in the 
                        provision of nuclear fuel to the advanced 
                        nuclear power facility to which the credit 
                        under subsection (a) relates; or
                          ``(iv) any person who has an ownership 
                        interest in such facility.
          ``(3) Special rules.--
                  ``(A) Application to partnerships.--In the case of a 
                credit under subsection (a) which is determined at the 
                partnership level--
                          ``(i) for purposes of paragraph (1)(A), a 
                        qualified public entity shall be treated as the 
                        taxpayer with respect to such entity's 
                        distributive share of such credit; and
                          ``(ii) the term `eligible project partner' 
                        shall include any partner of the partnership.
                  ``(B) Taxable year in which credit taken into 
                account.--In the case of any credit (or portion 
                thereof) with respect to which an election is made 
                under paragraph (1), such credit shall be taken into 
                account in the first taxable year of the eligible 
                project partner ending with, or after, the qualified 
                public entity's taxable year with respect to which the 
                credit was determined.
                  ``(C) Treatment of transfer under private use 
                rules.--For purposes of section 141(b)(1), any benefit 
                derived by an eligible project partner in connection 
                with an election under this subsection shall not be 
                taken into account as a private business use.''.
          (2) Special rule for proceeds of transfers for mutual or 
        cooperative electric companies.--Section 501(c)(12) of such 
        Code is amended by adding at the end the following new 
        subparagraph:
                  ``(I) In the case of a mutual or cooperative electric 
                company described in this paragraph or an organization 
                described in section 1381(a)(2), income received or 
                accrued in connection with an election under section 
                45J(e)(1) shall be treated as an amount collected from 
                members for the sole purpose of meeting losses and 
                expenses.''.
  (c) Effective Dates.--
          (1) Treatment of unutilized limitation amounts.--The 
        amendment made by subsection (a) shall take effect on the date 
        of the enactment of this Act.
          (2) Transfer of credit by certain public entities.--The 
        amendments made by subsection (b) shall apply to taxable years 
        beginning after the date of the enactment of this Act.

                        Subtitle G--Bond Reforms

SEC. 3601. TERMINATION OF PRIVATE ACTIVITY BONDS.

  (a) In General.--Paragraph (1) of section 103(b) is amended--
          (1) by striking ``which is not a qualified bond (within the 
        meaning of section 141)'', and
          (2) by striking ``which is not a qualified bond'' in the 
        heading thereof.
  (b) Conforming Amendments.--
          (1) Subpart A of part IV of subchapter B of chapter 1 is 
        amended by striking sections 142, 143, 144, 145, 146, and 147 
        (and by striking each of the items relating to such sections in 
        the table of sections for such subpart).
          (2) Section 25 is amended by adding at the end the following 
        new subsection:
  ``(j) Coordination With Repeal of Private Activity Bonds.--Any 
reference to section 143, 144, or 146 shall be treated as a reference 
to such section as in effect before its repeal by the Tax Cuts and Jobs 
Act.''.
          (3) Section 26(b)(2) is amended by striking subparagraph (D).
          (4) Section 141(b) is amended by striking paragraphs (5) and 
        (9).
          (5) Section 141(d) is amended by striking paragraph (5).
          (6) Section 141 is amended by striking subsection (e).
          (7) Section 148(f)(4) is amended--
                  (A) by striking ``(determined in accordance with 
                section 147(b)(2)(A))'' in the flush matter following 
                subparagraph (A)(ii) and inserting ``(determined by 
                taking into account the respective issue prices of the 
                bonds issued as part of the issue)'', and
                  (B) by striking the last sentence of subparagraph 
                (D)(v).
          (8) Clause (iv) of section 148(f)(4)(C) is amended to read as 
        follows:
                          ``(iv) Construction issue.--For purposes of 
                        this subparagraph--
                                  ``(I) In general.--The term 
                                `construction issue' means any issue if 
                                at least 75 percent of the available 
                                construction proceeds of such issue are 
                                to be used for construction 
                                expenditures.
                                  ``(II) Construction.--The term 
                                `construction' includes reconstruction 
                                and rehabilitation.''.
          (9) Section 149(b)(3) is amended by striking subparagraph 
        (C).
          (10) Section 149(e)(2) is amended--
                  (A) by striking subparagraphs (C), (D), and (F) and 
                by redesignating subparagraphs (E) and (G) as 
                subparagraphs (C) and (D), respectively, and
                  (B) by striking the second sentence.
          (11) Section 149(f)(6) is amended--
                  (A) by striking subparagraph (B), and
                  (B) by striking ``For purposes of this subsection'' 
                and all that follows through ``The term'' and inserting 
                the following: ``For purposes of this subsection, the 
                term''.
          (12) Section 150(e)(3) is amended to read as follows:
          ``(3) Public approval requirement.--A bond shall not be 
        treated as part of an issue which meets the requirements of 
        paragraph (1) unless such bond satisfies the requirements of 
        section 147(f)(2) (as in effect before its repeal by the Tax 
        Cuts and Jobs Act).''.
          (13) Section 269A(b)(3) is amended by striking ``144(a)(3)'' 
        and inserting ``414(n)(6)(A)''.
          (14) Section 414(m)(5) is amended by striking ``section 
        144(a)(3)'' and inserting ``subsection (n)(6)(A)''.
          (15) Section 414(n)(6)(A) is amended to read as follows:
                  ``(A) Related persons.--A person is a related person 
                to another person if--
                          ``(i) the relationship between such persons 
                        would result in a disallowance of losses under 
                        section 267 or 707(b), or
                          ``(ii) such persons are members of the same 
                        controlled group of corporations (as defined in 
                        section 1563(a), except that `more than 50 
                        percent' shall be substituted for `at least 80 
                        percent' each place it appears therein).''.
          (16) Section 6045(e)(4)(B) is amended by inserting ``(as in 
        effect before its repeal by the Tax Cuts and Jobs Act)'' after 
        ``section 143(m)(3)''.
          (17) Section 6654(f)(1) is amended by inserting ``(as in 
        effect before its repeal by the Tax Cuts and Jobs Act)'' after 
        ``section 143(m)''.
          (18) Section 7871(c) is amended--
                  (A) by striking paragraphs (2) and (3), and
                  (B) by striking ``Tax-exempt Bonds.--'' and all that 
                follows through ``Subsection (a) of section 103'' and 
                inserting the following: ``Tax-exempt Bonds.--
                Subsection (a) of section 103''.
  (c) Effective Date.--The amendments made by this section shall apply 
to bonds issued after December 31, 2017.

SEC. 3602. REPEAL OF ADVANCE REFUNDING BONDS.

  (a) In General.--Paragraph (1) of section 149(d) is amended by 
striking ``as part of an issue described in paragraph (2), (3), or 
(4).'' and inserting ``to advance refund another bond.''.
  (b) Conforming Amendments.--
          (1) Section 149(d) is amended by striking paragraphs (2), 
        (3), (4), and (6) and by redesignating paragraphs (5) and (7) 
        as paragraphs (2) and (3).
          (2) Section 148(f)(4)(C) is amended by striking clause (xiv) 
        and by redesignating clauses (xv) to (xvii) as clauses (xiv) to 
        (xvi).
  (c) Effective Date.--The amendments made by this section shall apply 
to advance refunding bonds issued after December 31, 2017.

SEC. 3603. REPEAL OF TAX CREDIT BONDS.

  (a) In General.--Part IV of subchapter A of chapter 1 is amended by 
striking subparts H, I, and J (and by striking the items relating to 
such subparts in the table of subparts for such part).
  (b) Payments to Issuers.--Subchapter B of chapter 65 is amended by 
striking section 6431 (and by striking the item relating to such 
section in the table of sections for such subchapter).
  (c) Conforming Amendments.--
          (1) Part IV of subchapter U of chapter 1 is amended by 
        striking section 1397E (and by striking the item relating to 
        such section in the table of sections for such part).
          (2) Section 54(l)(3)(B) is amended by inserting ``(as in 
        effect before its repeal by the Tax Cuts and Jobs Act)'' after 
        ``section 1397E(I)''.
          (3) Section 6211(b)(4)(A) is amended by striking ``, and 
        6431'' and inserting ``and'' before ``36B''.
          (4) Section 6401(b)(1) is amended by striking ``G, H, I, and 
        J'' and inserting ``and G''.
  (d) Effective Date.--The amendments made by this section shall apply 
to bonds issued after December 31, 2017.

SEC. 3604. NO TAX EXEMPT BONDS FOR PROFESSIONAL STADIUMS.

  (a) In General.--Section 103(b), as amended by this Act, is further 
amended by adding at the end the following new paragraph:
          ``(4) Professional stadium bond.--Any professional stadium 
        bond.''.
  (b) Professional Stadium Bond Defined.--Subsection (c) of section 103 
is amended by adding at the end the following new paragraph:
          ``(3) Professional stadium bond.--The term `professional 
        stadium bond' means any bond issued as part of an issue any 
        proceeds of which are used to finance or refinance capital 
        expenditures allocable to a facility (or appurtenant real 
        property) which, during at least 5 days during any calendar 
        year, is used as a stadium or arena for professional sports 
        exhibitions, games, or training.''.
  (c) Effective Date.--The amendments made by this section shall apply 
to bonds issued after November 2, 2017.

                         Subtitle H--Insurance

SEC. 3701. NET OPERATING LOSSES OF LIFE INSURANCE COMPANIES.

  (a) In General.--Section 805(b) is amended by striking paragraph (4) 
and by redesignating paragraph (5) as paragraph (4).
  (b) Conforming Amendments.--
          (1) Part I of subchapter L of chapter 1 is amended by 
        striking section 810 (and by striking the item relating to such 
        section in the table of sections for such part).
          (2) Part III of subchapter L of chapter 1 is amended by 
        striking section 844 (and by striking the item relating to such 
        section in the table of sections for such part).
          (3) Section 381 is amended by striking subsection (d).
          (4) Section 805(a)(4)(B)(ii) is amended to read as follows:
                          ``(ii) the deduction allowed under section 
                        172,''.
          (5) Section 805(a) is amended by striking paragraph (5).
          (6) Section 953(b)(1)(B) is amended to read as follows:
                  ``(B) So much of section 805(a)(8) as relates to the 
                deduction allowed under section 172.''.
  (c) Effective Date.--The amendments made by this section shall apply 
to losses arising in taxable years beginning after December 31, 2017.

SEC. 3702. REPEAL OF SMALL LIFE INSURANCE COMPANY DEDUCTION.

  (a) In General.--Part I of subchapter L of chapter 1 is amended by 
striking section 806 (and by striking the item relating to such section 
in the table of sections for such part).
  (b) Conforming Amendments.--
          (1) Section 453B(e) is amended--
                  (A) by striking ``(as defined in section 806(b)(3))'' 
                in paragraph (2)(B), and
                  (B) by adding at the end the following new paragraph:
          ``(3) Noninsurance business.--
                  ``(A) In general.--For purposes of this subsection, 
                the term `noninsurance business' means any activity 
                which is not an insurance business.
                  ``(B) Certain activities treated as insurance 
                businesses.--For purposes of subparagraph (A), any 
                activity which is not an insurance business shall be 
                treated as an insurance business if--
                          ``(i) it is of a type traditionally carried 
                        on by life insurance companies for investment 
                        purposes, but only if the carrying on of such 
                        activity (other than in the case of real 
                        estate) does not constitute the active conduct 
                        of a trade or business, or
                          ``(ii) it involves the performance of 
                        administrative services in connection with 
                        plans providing life insurance, pension, or 
                        accident and health benefits.''.
          (2) Section 465(c)(7)(D)(v)(II) is amended by striking 
        ``section 806(b)(3)'' and inserting ``section 453B(e)(3)''.
          (3) Section 801(a)(2) is amended by striking subparagraph 
        (C).
          (4) Section 804 is amended by striking ``means--'' and all 
        that follows and inserting ``means the general deductions 
        provided in section 805.''.
          (5) Section 805(a)(4)(B), as amended by section 3701, is 
        amended by striking clause (i) and by redesignating clauses 
        (ii), (iii), and (iv) as clauses (i), (ii), and (iii), 
        respectively.
          (6) Section 805(b)(2)(A) is amended by striking clause (iii) 
        and by redesignating clauses (iv) and (v) as clauses (iii) and 
        (iv), respectively.
          (7) Section 842(c) is amended by striking paragraph (1) and 
        by redesignating paragraphs (2) and (3) as paragraphs (1) and 
        (2), respectively.
          (8) Section 953(b)(1), as amended by section 3701, is amended 
        by striking subparagraph (A) and by redesignating subparagraphs 
        (B) and (C) as subparagraphs (A) and (B), respectively.
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 3703. SURTAX ON LIFE INSURANCE COMPANY TAXABLE INCOME.

  (a) In General.--Section 801(a)(1) is amended--
          (1) by striking ``consist of a tax'' and insert ``consist of 
        the sum of--
                  ``(A) a tax'', and
          (2) by striking the period at the end and inserting ``, 
        and'', and
          (3) by adding at the end the following new subparagraph:
                  ``(B) a tax equal to 8 percent of the life insurance 
                company taxable income.''.

SEC. 3704. ADJUSTMENT FOR CHANGE IN COMPUTING RESERVES.

  (a) In General.--Paragraph (1) of section 807(f) is amended to read 
as follows:
          ``(1) Treatment as change in method of accounting.--If the 
        basis for determining any item referred to in subsection (c) as 
        of the close of any taxable year differs from the basis for 
        such determination as of the close of the preceding taxable 
        year, then so much of the difference between--
                  ``(A) the amount of the item at the close of the 
                taxable year, computed on the new basis, and
                  ``(B) the amount of the item at the close of the 
                taxable year, computed on the old basis,
        as is attributable to contracts issued before the taxable year 
        shall be taken into account under section 481 as adjustments 
        attributable to a change in method of accounting initiated by 
        the taxpayer and made with the consent of the Secretary.''.
  (b) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 3705. REPEAL OF SPECIAL RULE FOR DISTRIBUTIONS TO SHAREHOLDERS 
                    FROM PRE-1984 POLICYHOLDERS SURPLUS ACCOUNT.

  (a) In General.--Subpart D of part I of subchapter L is amended by 
striking section 815 (and by striking the item relating to such section 
in the table of sections for such subpart).
  (b) Conforming Amendment.--Section 801 is amended by striking 
subsection (c).
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.
  (d) Phased Inclusion of Remaining Balance of Policyholders Surplus 
Accounts.--In the case of any stock life insurance company which has a 
balance (determined as of the close of such company's last taxable year 
beginning before January 1, 2018) in an existing policyholders surplus 
account (as defined in section 815 of the Internal Revenue Code of 
1986, as in effect before its repeal), the tax imposed by section 801 
of such Code for the first 8 taxable years beginning after December 31, 
2017, shall be the amount which would be imposed by such section for 
such year on the sum of--
          (1) life insurance company taxable income for such year 
        (within the meaning of such section 801 but not less than 
        zero), plus
          (2) \1/8\ of such balance.

SEC. 3706. MODIFICATION OF PRORATION RULES FOR PROPERTY AND CASUALTY 
                    INSURANCE COMPANIES.

  (a) In General.--Section 832(b)(5)(B) is amended by striking ``15 
percent'' and inserting ``26.25 percent''.
  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 3707. MODIFICATION OF DISCOUNTING RULES FOR PROPERTY AND CASUALTY 
                    INSURANCE COMPANIES.

  (a) Modification of Rate of Interest Used to Discount Unpaid 
Losses.--Paragraph (2) of section 846(c) is amended to read as follows:
          ``(2) Determination of annual rate.--The annual rate 
        determined by the Secretary under this paragraph for any 
        calendar year shall be a rate determined on the basis of the 
        corporate bond yield curve (as defined in section 
        430(h)(2)(D)(i)).''.
  (b) Modification of Computational Rules for Loss Payment Patterns.--
Section 846(d)(3) is amended by striking subparagraphs (B) through (G) 
and inserting the following new subparagraphs:
                  ``(B) Treatment of certain losses.--Losses which 
                would have been treated as paid in the last year of the 
                period applicable under subparagraph (A)(i) or (A)(ii) 
                shall be treated as paid in the following manner:
                          ``(i) 3-year loss payment pattern.--
                                  ``(I) In general.--The period taken 
                                into account under subparagraph (A)(i) 
                                shall be extended to the extent 
                                required under subclause (II).
                                  ``(II) Computation of extension.--The 
                                amount of losses which would have been 
                                treated as paid in the 3d year after 
                                the accident year shall be treated as 
                                paid in such 3d year and each 
                                subsequent year in an amount equal to 
                                the average of the losses treated as 
                                paid in the 1st and 2d years after the 
                                accident year (or, if lesser, the 
                                portion of the unpaid losses not 
                                theretofore taken into account). To the 
                                extent such unpaid losses have not been 
                                treated as paid before the 18th year 
                                after the accident year, they shall be 
                                treated as paid in such 18th year.
                          ``(ii) 10-year loss payment pattern.--
                                  ``(I) In general.--The period taken 
                                into account under subparagraph (A)(ii) 
                                shall be extended to the extent 
                                required under subclause (II).
                                  ``(II) Computation of extension.--The 
                                amount of losses which would have been 
                                treated as paid in the 10th year after 
                                the accident year shall be treated as 
                                paid in such 10th year and each 
                                subsequent year in an amount equal to 
                                the amount of the average of the losses 
                                treated as paid in the 7th, 8th, and 
                                9th years after the accident year (or, 
                                if lesser, the portion of the unpaid 
                                losses not theretofore taken into 
                                account). To the extent such unpaid 
                                losses have not been treated as paid 
                                before the 25th year after the accident 
                                year, they shall be treated as paid in 
                                such 25th year.''.
  (c) Repeal of Historical Payment Pattern Election.--Section 846 is 
amended by striking subsection (e) and by redesignating subsections (f) 
and (g) as subsections (e) and (f), respectively.
  (d) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.
  (e) Transitional Rule.--For the first taxable year beginning after 
December 31, 2017--
          (1) the unpaid losses and the expenses unpaid (as defined in 
        paragraphs (5)(B) and (6) of section 832(b) of the Internal 
        Revenue Code of 1986) at the end of the preceding taxable year, 
        and
          (2) the unpaid losses as defined in sections 807(c)(2) and 
        805(a)(1) of such Code at the end of the preceding taxable 
        year,
shall be determined as if the amendments made by this section had 
applied to such unpaid losses and expenses unpaid in the preceding 
taxable year and by using the interest rate and loss payment patterns 
applicable to accident years ending with calendar year 2018, and any 
adjustment shall be taken into account ratably in such first taxable 
year and the 7 succeeding taxable years. For subsequent taxable years, 
such amendments shall be applied with respect to such unpaid losses and 
expenses unpaid by using the interest rate and loss payment patterns 
applicable to accident years ending with calendar year 2018.

SEC. 3708. REPEAL OF SPECIAL ESTIMATED TAX PAYMENTS.

  (a) In General.--Part III of subchapter L of chapter 1 is amended by 
striking section 847 (and by striking the item relating to such section 
in the table of sections for such part).
  (b) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

                        Subtitle I--Compensation

SEC. 3801. MODIFICATION OF LIMITATION ON EXCESSIVE EMPLOYEE 
                    REMUNERATION.

  (a) Repeal of Performance-based Compensation and Commission 
Exceptions for Limitation on Excessive Employee Remuneration.--
          (1) In general.--Section 162(m)(4) is amended by striking 
        subparagraphs (B) and (C) and by redesignating subparagraphs 
        (D), (E), (F), and (G) as subparagraphs (B), (C), (D), and (E), 
        respectively.
          (2) Conforming amendments.--
                  (A) Paragraphs (5)(E) and (6)(D) of section 162(m) 
                are each amended by striking ``subparagraphs (B), (C), 
                and (D)'' and inserting ``subparagraph (B)''.
                  (B) Paragraphs (5)(G) and (6)(G) of section 162(m) 
                are each amended by striking ``(F) and (G)'' and 
                inserting ``(D) and (E)''.
  (b) Expansion of Applicable Employer.--Section 162(m)(2) is amended 
to read as follows:
          ``(2) Publicly held corporation.--For purposes of this 
        subsection, the term `publicly held corporation' means any 
        corporation which is an issuer (as defined in section 3 of the 
        Securities Exchange Act of 1934 (15 U.S.C. 78c))--
                  ``(A) the securities of which are required to be 
                registered under section 12 of such Act (15 U.S.C. 
                78l), or
                  ``(B) that is required to file reports under section 
                15(d) of such Act (15 U.S.C. 78o(d)).''.
  (c) Modification of Definition of Covered Employees.--Section 
162(m)(3) is amended--
          (1) in subparagraph (A), by striking ``as of the close of the 
        taxable year, such employee is the chief executive officer of 
        the taxpayer or is'' and inserting ``such employee is the 
        principal executive officer or principal financial officer of 
        the taxpayer at any time during the taxable year, or was'',
          (2) in subparagraph (B)--
                  (A) by striking ``4'' and inserting ``3'', and
                  (B) by striking ``(other than the chief executive 
                officer)'' and inserting ``(other than the principal 
                executive officer or principal financial officer)'', 
                and
          (3) by striking ``or'' at the end of subparagraph (A), by 
        striking the period at the end of subparagraph (B) and 
        inserting ``, or'', and by adding at the end the following:
                  ``(C) was a covered employee of the taxpayer (or any 
                predecessor) for any preceding taxable year beginning 
                after December 31, 2016.
        Such term shall include any employee who would be described in 
        subparagraph (B) if the reporting described in such 
        subparagraph were required as so described.''.
  (d) Special Rule for Remuneration Paid to Beneficiaries, etc.--
Section 162(m)(4), as amended by subsection (a), is amended by adding 
at the end the following new subparagraph:
                  ``(F) Special rule for remuneration paid to 
                beneficiaries, etc.--Remuneration shall not fail to be 
                applicable employee remuneration merely because it is 
                includible in the income of, or paid to, a person other 
                than the covered employee, including after the death of 
                the covered employee.''.
  (e) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 3802. EXCISE TAX ON EXCESS TAX-EXEMPT ORGANIZATION EXECUTIVE 
                    COMPENSATION.

  (a) In General.--Subchapter D of chapter 42 is amended by adding at 
the end the following new section:

``SEC. 4960. TAX ON EXCESS TAX-EXEMPT ORGANIZATION EXECUTIVE 
                    COMPENSATION.

  ``(a) Tax Imposed.--There is hereby imposed a tax equal to 20 percent 
of the sum of--
          ``(1) so much of the remuneration paid (other than any excess 
        parachute payment) by an applicable tax-exempt organization for 
        the taxable year with respect to employment of any covered 
        employee in excess of $1,000,000, plus
          ``(2) any excess parachute payment paid by such an 
        organization to any covered employee.
  ``(b) Liability for Tax.--The employer shall be liable for the tax 
imposed under subsection (a).
  ``(c) Definitions and Special Rules.--For purposes of this section--
          ``(1) Applicable tax-exempt organization.--The term 
        `applicable tax-exempt organization' means any organization 
        that for the taxable year--
                  ``(A) is exempt from taxation under section 501(a),
                  ``(B) is a farmers' cooperative organization 
                described in section 521(b)(1),
                  ``(C) has income excluded from taxation under section 
                115(1), or
                  ``(D) is a political organization described in 
                section 527(e)(1).
          ``(2) Covered employee.--For purposes of this section, the 
        term `covered employee' means any employee (including any 
        former employee) of an applicable tax-exempt organization if 
        the employee--
                  ``(A) is one of the 5 highest compensated employees 
                of the organization for the taxable year, or
                  ``(B) was a covered employee of the organization (or 
                any predecessor) for any preceding taxable year 
                beginning after December 31, 2016.
          ``(3) Remuneration.--For purposes of this section, the term 
        `remuneration' means wages (as defined in section 3401(a)), 
        except that such term shall not include any designated Roth 
        contribution (as defined in section 402A(c)).
          ``(4) Remuneration from related organizations.--
                  ``(A) In general.--Remuneration of a covered employee 
                paid by an applicable tax-exempt organization shall 
                include any remuneration paid with respect to 
                employment of such employee by any related person or 
                governmental entity.
                  ``(B) Related organizations.--A person or 
                governmental entity shall be treated as related to an 
                applicable tax-exempt organization if such person or 
                governmental entity--
                          ``(i) controls, or is controlled by, the 
                        organization,
                          ``(ii) is controlled by one or more persons 
                        that control the organization,
                          ``(iii) is a supported organization (as 
                        defined in section 509(f)(2)) during the 
                        taxable year with respect to the organization,
                          ``(iv) is a supporting organization described 
                        in section 509(a)(3) during the taxable year 
                        with respect to the organization, or
                          ``(v) in the case of an organization that is 
                        a voluntary employees' beneficiary association 
                        described in section 501(a)(9), establishes, 
                        maintains, or makes contributions to such 
                        voluntary employees' beneficiary association.
                  ``(C) Liability for tax.--In any case in which 
                remuneration from more than one employer is taken into 
                account under this paragraph in determining the tax 
                imposed by subsection (a), each such employer shall be 
                liable for such tax in an amount which bears the same 
                ratio to the total tax determined under subsection (a) 
                with respect to such remuneration as--
                          ``(i) the amount of remuneration paid by such 
                        employer with respect to such employee, bears 
                        to
                          ``(ii) the amount of remuneration paid by all 
                        such employers to such employee.
          ``(5) Excess parachute payment.--For purposes determining the 
        tax imposed by subsection (a)(2)--
                  ``(A) In general.--The term `excess parachute 
                payment' means an amount equal to the excess of any 
                parachute payment over the portion of the base amount 
                allocated to such payment.
                  ``(B) Parachute payment.--The term `parachute 
                payment' means any payment in the nature of 
                compensation to (or for the benefit of) a covered 
                employee if--
                          ``(i) such payment is contingent on such 
                        employee's separation from employment with the 
                        employer, and
                          ``(ii) the aggregate present value of the 
                        payments in the nature of compensation to (or 
                        for the benefit of) such individual which are 
                        contingent on such separation equals or exceeds 
                        an amount equal to 3 times the base amount.
                Such term does not include any payment described in 
                section 280G(b)(6) (relating to exemption for payments 
                under qualified plans) or any payment made under or to 
                an annuity contract described in section 403(b) or a 
                plan described in section 457(b).
                  ``(C) Base amount.--Rules similar to the rules of 
                280G(b)(3) shall apply for purposes of determining the 
                base amount.
                  ``(D) Property transfers; present value.--Rules 
                similar to the rules of paragraphs (3) and (4) of 
                section 280G(d) shall apply.
          ``(6) Coordination with deduction limitation.--Remuneration 
        the deduction for which is not allowed by reason of section 
        162(m) shall not be taken into account for purposes of this 
        section.
  ``(d) Regulations.--The Secretary shall prescribe such regulations as 
may be necessary to prevent avoidance of the purposes of this section 
through the performance of services other than as an employee.''.
  (b) Clerical Amendment.--The table of sections for subchapter D of 
chapter 42 is amended by adding at the end the following new item:

``Sec. 4960. Tax on excess exempt organization executive 
compensation.''.

  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 3803. TREATMENT OF QUALIFIED EQUITY GRANTS.

  (a) In General.--
          (1) Election to defer income.--Section 83 is amended by 
        adding at the end the following new subsection:
  ``(i) Qualified Equity Grants.--
          ``(1) In general.--For purposes of this subtitle, if 
        qualified stock is transferred to a qualified employee who 
        makes an election with respect to such stock under this 
        subsection--
                  ``(A) except as provided in subparagraph (B), no 
                amount shall be included in income under subsection (a) 
                for the first taxable year in which the rights of the 
                employee in such stock are transferable or are not 
                subject to a substantial risk of forfeiture, whichever 
                is applicable, and
                  ``(B) an amount equal to the amount which would be 
                included in income of the employee under subsection (a) 
                (determined without regard to this subsection) shall be 
                included in income for the taxable year of the employee 
                which includes the earliest of--
                          ``(i) the first date such qualified stock 
                        becomes transferable (including transferable to 
                        the employer),
                          ``(ii) the date the employee first becomes an 
                        excluded employee,
                          ``(iii) the first date on which any stock of 
                        the corporation which issued the qualified 
                        stock becomes readily tradable on an 
                        established securities market (as determined by 
                        the Secretary, but not including any market 
                        unless such market is recognized as an 
                        established securities market by the Secretary 
                        for purposes of a provision of this title other 
                        than this subsection),
                          ``(iv) the date that is 5 years after the 
                        first date the rights of the employee in such 
                        stock are transferable or are not subject to a 
                        substantial risk of forfeiture, whichever 
                        occurs earlier, or
                          ``(v) the date on which the employee revokes 
                        (at such time and in such manner as the 
                        Secretary may provide) the election under this 
                        subsection with respect to such stock.
          ``(2) Qualified stock.--
                  ``(A) In general.--For purposes of this subsection, 
                the term `qualified stock' means, with respect to any 
                qualified employee, any stock in a corporation which is 
                the employer of such employee, if--
                          ``(i) such stock is received--
                                  ``(I) in connection with the exercise 
                                of an option, or
                                  ``(II) in settlement of a restricted 
                                stock unit, and
                          ``(ii) such option or restricted stock unit 
                        was provided by the corporation--
                                  ``(I) in connection with the 
                                performance of services as an employee, 
                                and
                                  ``(II) during a calendar year in 
                                which such corporation was an eligible 
                                corporation.
                  ``(B) Limitation.--The term `qualified stock' shall 
                not include any stock if the employee may sell such 
                stock to, or otherwise receive cash in lieu of stock 
                from, the corporation at the time that the rights of 
                the employee in such stock first become transferable or 
                not subject to a substantial risk of forfeiture.
                  ``(C) Eligible corporation.--For purposes of 
                subparagraph (A)(ii)(II)--
                          ``(i) In general.--The term `eligible 
                        corporation' means, with respect to any 
                        calendar year, any corporation if--
                                  ``(I) no stock of such corporation 
                                (or any predecessor of such 
                                corporation) is readily tradable on an 
                                established securities market (as 
                                determined under paragraph (1)(B)(iii)) 
                                during any preceding calendar year, and
                                  ``(II) such corporation has a written 
                                plan under which, in such calendar 
                                year, not less than 80 percent of all 
                                employees who provide services to such 
                                corporation in the United States (or 
                                any possession of the United States) 
                                are granted stock options, or 
                                restricted stock units, with the same 
                                rights and privileges to receive 
                                qualified stock.
                          ``(ii) Same rights and privileges.--For 
                        purposes of clause (i)(II)--
                                  ``(I) except as provided in 
                                subclauses (II) and (III), the 
                                determination of rights and privileges 
                                with respect to stock shall be 
                                determined in a similar manner as 
                                provided under section 423(b)(5),
                                  ``(II) employees shall not fail to be 
                                treated as having the same rights and 
                                privileges to receive qualified stock 
                                solely because the number of shares 
                                available to all employees is not equal 
                                in amount, so long as the number of 
                                shares available to each employee is 
                                more than a de minimis amount, and
                                  ``(III) rights and privileges with 
                                respect to the exercise of an option 
                                shall not be treated as the same as 
                                rights and privileges with respect to 
                                the settlement of a restricted stock 
                                unit.
                          ``(iii) Employee.--For purposes of clause 
                        (i)(II), the term `employee' shall not include 
                        any employee described in section 4980E(d)(4) 
                        or any excluded employee.
                          ``(iv) Special rule for calendar years before 
                        2018.--In the case of any calendar year 
                        beginning before January 1, 2018, clause 
                        (i)(II) shall be applied without regard to 
                        whether the rights and privileges with respect 
                        to the qualified stock are the same.
          ``(3) Qualified employee; excluded employee.--For purposes of 
        this subsection--
                  ``(A) In general.--The term `qualified employee' 
                means any individual who--
                          ``(i) is not an excluded employee, and
                          ``(ii) agrees in the election made under this 
                        subsection to meet such requirements as 
                        determined by the Secretary to be necessary to 
                        ensure that the withholding requirements of the 
                        corporation under chapter 24 with respect to 
                        the qualified stock are met.
                  ``(B) Excluded employee.--The term `excluded 
                employee' means, with respect to any corporation, any 
                individual--
                          ``(i) who was a 1-percent owner (within the 
                        meaning of section 416(i)(1)(B)(ii)) at any 
                        time during the 10 preceding calendar years,
                          ``(ii) who is or has been at any prior time--
                                  ``(I) the chief executive officer of 
                                such corporation or an individual 
                                acting in such a capacity, or
                                  ``(II) the chief financial officer of 
                                such corporation or an individual 
                                acting in such a capacity,
                          ``(iii) who bears a relationship described in 
                        section 318(a)(1) to any individual described 
                        in subclause (I) or (II) of clause (ii), or
                          ``(iv) who has been for any of the 10 
                        preceding taxable years one of the 4 highest 
                        compensated officers of such corporation 
                        determined with respect to each such taxable 
                        year on the basis of the shareholder disclosure 
                        rules for compensation under the Securities 
                        Exchange Act of 1934 (as if such rules applied 
                        to such corporation).
          ``(4) Election.--
                  ``(A) Time for making election.--An election with 
                respect to qualified stock shall be made under this 
                subsection no later than 30 days after the first time 
                the rights of the employee in such stock are 
                transferable or are not subject to a substantial risk 
                of forfeiture, whichever occurs earlier, and shall be 
                made in a manner similar to the manner in which an 
                election is made under subsection (b).
                  ``(B) Limitations.--No election may be made under 
                this section with respect to any qualified stock if--
                          ``(i) the qualified employee has made an 
                        election under subsection (b) with respect to 
                        such qualified stock,
                          ``(ii) any stock of the corporation which 
                        issued the qualified stock is readily tradable 
                        on an established securities market (as 
                        determined under paragraph (1)(B)(iii)) at any 
                        time before the election is made, or
                          ``(iii) such corporation purchased any of its 
                        outstanding stock in the calendar year 
                        preceding the calendar year which includes the 
                        first time the rights of the employee in such 
                        stock are transferable or are not subject to a 
                        substantial risk of forfeiture, unless--
                                  ``(I) not less than 25 percent of the 
                                total dollar amount of the stock so 
                                purchased is deferral stock, and
                                  ``(II) the determination of which 
                                individuals from whom deferral stock is 
                                purchased is made on a reasonable 
                                basis.
                  ``(C) Definitions and special rules related to 
                limitation on stock redemptions.--
                          ``(i) Deferral stock.--For purposes of this 
                        paragraph, the term `deferral stock' means 
                        stock with respect to which an election is in 
                        effect under this subsection.
                          ``(ii) Deferral stock with respect to any 
                        individual not taken into account if individual 
                        holds deferral stock with longer deferral 
                        period.--Stock purchased by a corporation from 
                        any individual shall not be treated as deferral 
                        stock for purposes of clause (iii) if such 
                        individual (immediately after such purchase) 
                        holds any deferral stock with respect to which 
                        an election has been in effect under this 
                        subsection for a longer period than the 
                        election with respect to the stock so 
                        purchased.
                          ``(iii) Purchase of all outstanding deferral 
                        stock.--The requirements of subclauses (I) and 
                        (II) of subparagraph (B)(iii) shall be treated 
                        as met if the stock so purchased includes all 
                        of the corporation's outstanding deferral 
                        stock.
                          ``(iv) Reporting.--Any corporation which has 
                        outstanding deferral stock as of the beginning 
                        of any calendar year and which purchases any of 
                        its outstanding stock during such calendar year 
                        shall include on its return of tax for the 
                        taxable year in which, or with which, such 
                        calendar year ends the total dollar amount of 
                        its outstanding stock so purchased during such 
                        calendar year and such other information as the 
                        Secretary may require for purposes of 
                        administering this paragraph.
          ``(5) Controlled groups.--For purposes of this subsection, 
        all corporations which are members of the same controlled group 
        of corporations (as defined in section 1563(a)) shall be 
        treated as one corporation.
          ``(6) Notice requirement.--Any corporation that transfers 
        qualified stock to a qualified employee shall, at the time that 
        (or a reasonable period before) an amount attributable to such 
        stock would (but for this subsection) first be includible in 
        the gross income of such employee--
                  ``(A) certify to such employee that such stock is 
                qualified stock, and
                  ``(B) notify such employee--
                          ``(i) that the employee may elect to defer 
                        income on such stock under this subsection, and
                          ``(ii) that, if the employee makes such an 
                        election--
                                  ``(I) the amount of income recognized 
                                at the end of the deferral period will 
                                be based on the value of the stock at 
                                the time at which the rights of the 
                                employee in such stock first become 
                                transferable or not subject to 
                                substantial risk of forfeiture, 
                                notwithstanding whether the value of 
                                the stock has declined during the 
                                deferral period,
                                  ``(II) the amount of such income 
                                recognized at the end of the deferral 
                                period will be subject to withholding 
                                under section 3401(i) at the rate 
                                determined under section 3402(t), and
                                  ``(III) the responsibilities of the 
                                employee (as determined by the 
                                Secretary under paragraph (3)(A)(ii)) 
                                with respect to such withholding.
          ``(7) Restricted stock units.--This section (other than this 
        subsection), including any election under subsection (b), shall 
        not apply to restricted stock units.''.
          (2) Deduction by employer.--Subsection (h) of section 83 is 
        amended by striking ``or (d)(2)'' and inserting ``(d)(2), or 
        (i)''.
  (b) Withholding.--
          (1) Time of withholding.--Section 3401 is amended by adding 
        at the end the following new subsection:
  ``(i) Qualified Stock for Which an Election Is in Effect Under 
Section 83(i).--For purposes of subsection (a), qualified stock (as 
defined in section 83(i)) with respect to which an election is made 
under section 83(i) shall be treated as wages--
          ``(1) received on the earliest date described in section 
        83(i)(1)(B), and
          ``(2) in an amount equal to the amount included in income 
        under section 83 for the taxable year which includes such 
        date.''.
          (2) Amount of withholding.--Section 3402 is amended by adding 
        at the end the following new subsection:
  ``(t) Rate of Withholding for Certain Stock.--In the case of any 
qualified stock (as defined in section 83(i)) with respect to which an 
election is made under section 83(i)--
          ``(1) the rate of tax under subsection (a) shall not be less 
        than the maximum rate of tax in effect under section 1, and
          ``(2) such stock shall be treated for purposes of section 
        3501(b) in the same manner as a non-cash fringe benefit.''.
  (c) Coordination With Other Deferred Compensation Rules.--
          (1) Election to apply deferral to statutory options.--
                  (A) Incentive stock options.--Section 422(b) is 
                amended by adding at the end the following: ``Such term 
                shall not include any option if an election is made 
                under section 83(i) with respect to the stock received 
                in connection with the exercise of such option.''.
                  (B) Employee stock purchase plans.--Section 423(a) is 
                amended by adding at the end the following flush 
                sentence:
``The preceding sentence shall not apply to any share of stock with 
respect to which an election is made under section 83(i).''.
          (2) Exclusion from definition of nonqualified deferred 
        compensation plan.--Subsection (d) of section 409A is amended 
        by adding at the end the following new paragraph:
          ``(7) Treatment of qualified stock.--An arrangement under 
        which an employee may receive qualified stock (as defined in 
        section 83(i)(2)) shall not be treated as a nonqualified 
        deferred compensation plan solely because of an employee's 
        election, or ability to make an election, to defer recognition 
        of income under section 83(i).''.
  (d) Information Reporting.--Section 6051(a) is amended by striking 
``and'' at the end of paragraph (13), by striking the period at the end 
of paragraph (14) and inserting a comma, and by inserting after 
paragraph (14) the following new paragraphs:
          ``(15) the amount excludable from gross income under 
        subparagraph (A) of section 83(i)(1),
          ``(16) the amount includible in gross income under 
        subparagraph (B) of section 83(i)(1) with respect to an event 
        described in such subparagraph which occurs in such calendar 
        year, and
          ``(17) the aggregate amount of income which is being deferred 
        pursuant to elections under section 83(i), determined as of the 
        close of the calendar year.''.
  (e) Penalty for Failure of Employer To Provide Notice of Tax 
Consequences.--Section 6652 is amended by adding at the end the 
following new subsection:
  ``(o) Failure to Provide Notice Under Section 83(i).--In the case of 
each failure to provide a notice as required by section 83(i)(6), at 
the time prescribed therefor, unless it is shown that such failure is 
due to reasonable cause and not to willful neglect, there shall be 
paid, on notice and demand of the Secretary and in the same manner as 
tax, by the person failing to provide such notice, an amount equal to 
$100 for each such failure, but the total amount imposed on such person 
for all such failures during any calendar year shall not exceed 
$50,000.''.
  (f) Effective Dates.--
          (1) In general.--Except as provided in paragraph (2), the 
        amendments made by this section shall apply to stock 
        attributable to options exercised, or restricted stock units 
        settled, after December 31, 2017.
          (2) Requirement to provide notice.--The amendments made by 
        subsection (e) shall apply to failures after December 31, 2017.
  (g) Transition Rule.--Until such time as the Secretary (or the 
Secretary's delegate) issue regulations or other guidance for purposes 
of implementing the requirements of paragraph (2)(C)(i)(II) of section 
83(i) of the Internal Revenue Code of 1986 (as added by this section), 
or the requirements of paragraph (6) of such section, a corporation 
shall be treated as being in compliance with such requirements 
(respectively) if such corporation complies with a reasonable good 
faith interpretation of such requirements.

        TITLE IV--TAXATION OF FOREIGN INCOME AND FOREIGN PERSONS

    Subtitle A--Establishment of Participation Exemption System for 
                       Taxation of Foreign Income

SEC. 4001. DEDUCTION FOR FOREIGN-SOURCE PORTION OF DIVIDENDS RECEIVED 
                    BY DOMESTIC CORPORATIONS FROM SPECIFIED 10-PERCENT 
                    OWNED FOREIGN CORPORATIONS.

  (a) In General.--Part VIII of subchapter B of chapter 1 is amended by 
inserting after section 245 the following new section:

``SEC. 245A. DEDUCTION FOR FOREIGN-SOURCE PORTION OF DIVIDENDS RECEIVED 
                    BY DOMESTIC CORPORATIONS FROM SPECIFIED 10-PERCENT 
                    OWNED FOREIGN CORPORATIONS.

  ``(a) In General.--In the case of any dividend received from a 
specified 10-percent owned foreign corporation by a domestic 
corporation which is a United States shareholder with respect to such 
foreign corporation, there shall be allowed as a deduction an amount 
equal to the foreign-source portion of such dividend.
  ``(b) Specified 10-percent Owned Foreign Corporation.--For purposes 
of this section, the term `specified 10-percent owned foreign 
corporation' means any foreign corporation with respect to which any 
domestic corporation is a United States shareholder. Such term shall 
not include any passive foreign investment company (within the meaning 
of subpart D of part VI of subchapter P) that is not a controlled 
foreign corporation.
  ``(c) Foreign-source Portion.--For purposes of this section--
          ``(1) In general.--The foreign-source portion of any dividend 
        is an amount which bears the same ratio to such dividend as--
                  ``(A) the post-1986 undistributed foreign earnings of 
                the specified 10-percent owned foreign corporation, 
                bears to
                  ``(B) the total post-1986 undistributed earnings of 
                such foreign corporation.
          ``(2) Post-1986 undistributed earnings.--The term `post-1986 
        undistributed earnings' means the amount of the earnings and 
        profits of the specified 10-percent owned foreign corporation 
        (computed in accordance with sections 964(a) and 986) 
        accumulated in taxable years beginning after December 31, 
        1986--
                  ``(A) as of the close of the taxable year of the 
                specified 10-percent owned foreign corporation in which 
                the dividend is distributed, and
                  ``(B) without diminution by reason of dividends 
                distributed during such taxable year.
          ``(3) Post-1986 undistributed foreign earnings.--The term 
        `post-1986 undistributed foreign earnings' means the portion of 
        the post-1986 undistributed earnings which is attributable to 
        neither--
                  ``(A) income described in subparagraph (A) of section 
                245(a)(5), nor
                  ``(B) dividends described in subparagraph (B) of such 
                section (determined without regard to section 
                245(a)(12)).
          ``(4) Treatment of distributions from earnings before 1987.--
                  ``(A) In general.--In the case of any dividend paid 
                out of earnings and profits of the specified 10-percent 
                owned foreign corporation (computed in accordance with 
                sections 964(a) and 986) accumulated in taxable years 
                beginning before January 1, 1987--
                          ``(i) paragraphs (1), (2), and (3) shall be 
                        applied without regard to the phrase `post-
                        1986' each place it appears, and
                          ``(ii) paragraph (2) shall be applied by 
                        substituting `after the date specified in 
                        section 316(a)(1)' for `in taxable years 
                        beginning after December 31, 1986'.
                  ``(B) Dividends paid first out of post-1986 
                earnings.--Dividends shall be treated as paid out of 
                post-1986 undistributed earnings to the extent thereof.
          ``(5) Treatment of certain dividends in excess of 
        undistributed earnings.--In the case of any dividend from the 
        specified 10-percent owned foreign corporation which is in 
        excess of undistributed earnings (as determined under paragraph 
        (2) after taking into account the modifications described in 
        clauses (i) and (ii) of paragraph (4)(A)), the foreign-source 
        portion of such dividend is an amount which bears the same 
        ratio to such dividend as--
                  ``(A) the portion of the earnings and profits 
                described in subparagraph (B) which is attributable to 
                neither income described in paragraph (3)(A) nor 
                dividends described in paragraph (3)(B), bears to
                  ``(B) the earnings and profits of such corporation 
                for the taxable year in which such distribution is made 
                (computed as of the close of the taxable year without 
                diminution by reason of any distributions made during 
                the taxable year).
  ``(d) Disallowance of Foreign Tax Credit, etc.--
          ``(1) In general.--No credit shall be allowed under section 
        901 for any taxes paid or accrued (or treated as paid or 
        accrued) with respect to any dividend for which a deduction is 
        allowed under this section.
          ``(2) Denial of deduction.--No deduction shall be allowed 
        under this chapter for any tax for which credit is not 
        allowable under section 901 by reason of paragraph (1) 
        (determined by treating the taxpayer as having elected the 
        benefits of subpart A of part III of subchapter N).
  ``(e) Regulations.--The Secretary may prescribe such regulations or 
other guidance as may be necessary or appropriate to carry out the 
provisions of this section.''.
  (b) Application of Holding Period Requirement.--Section 246(c) is 
amended--
          (1) by striking ``or 245'' in paragraph (1) and inserting 
        ``245, or 245A'', and
          (2) by adding at the end the following new paragraph:
          ``(5) Special rules for foreign source portion of dividends 
        received from specified 10-percent owned foreign 
        corporations.--
                  ``(A) 6-month holding period requirement.--For 
                purposes of section 245A--
                          ``(i) paragraph (1)(A) shall be applied--
                                  ``(I) by substituting `180 days' for 
                                `45 days'each place it appears, and
                                  ``(II) by substituting `361-day 
                                period' for `91-day period', and
                          ``(ii) paragraph (2) shall not apply.
                  ``(B) Status must be maintained during holding 
                period.--For purposes of applying paragraph (1) with 
                respect to section 245A, the taxpayer shall be treated 
                as holding the stock referred to in paragraph (1) for 
                any period only if--
                          ``(i) the specified 10-percent owned foreign 
                        corporation referred to in section 245A(a) is a 
                        specified 10-percent owned foreign corporation 
                        for such period, and
                          ``(ii) the taxpayer is a United States 
                        shareholder with respect to such specified 10-
                        percent owned foreign corporation for such 
                        period.''.
  (c) Application of Rules Generally Applicable to Deductions for 
Dividends Received.--
          (1) Treatment of dividends from certain corporations.--
        Section 246(a)(1) is amended by striking ``and 245'' and 
        inserting ``245, and 245A''.
          (2) Coordination with section 1059.--Section 1059(b)(2)(B) is 
        amended by striking ``or 245'' and inserting ``245, or 245A''.
  (d) Coordination With Foreign Tax Credit Limitation.--Section 904(b) 
is amended by adding at the end the following new paragraph:
          ``(5) Treatment of dividends for which deduction is allowed 
        under section 245a.--For purposes of subsection (a), in the 
        case of a United States shareholder with respect to a specified 
        10-percent owned foreign corporation, such shareholder's 
        taxable income from sources without the United States (and 
        entire taxable income) shall be determined without regard to--
                  ``(A) the foreign-source portion of any dividend 
                received from such foreign corporation, and
                  ``(B) any deductions properly allocable or 
                apportioned to--
                          ``(i) income (other than subpart F income (as 
                        defined in section 952) and foreign high return 
                        amounts (as defined in section 951A(b)) with 
                        respect to stock of such specified 10-percent 
                        owned foreign corporation, or
                          ``(ii) such stock (to the extent income with 
                        respect to such stock is other than subpart F 
                        income (as so defined) or foreign high return 
                        amounts (as so defined)).
        Any term which is used in section 245A and in this paragraph 
        shall have the same meaning for purposes of this paragraph as 
        when used in such section.''.
  (e) Conforming Amendments.--
          (1) Section 245(a)(4) is amended by striking ``section 
        902(c)(1)'' and inserting ``section 245A(c)(2) applied by 
        substituting `qualified 10-percent owned foreign corporation' 
        for `specified 10-percent owned foreign corporation' each place 
        it appears''.
          (2) Section 951(b) is amended by striking ``subpart'' and 
        inserting ``title''.
          (3) Section 957(a) is amended by striking ``subpart'' in the 
        matter preceding paragraph (1) and inserting ``title''.
          (4) The table of sections for part VIII of subchapter B of 
        chapter 1 is amended by inserting after section 245 the 
        following new item:

``Sec. 245A. Deduction for foreign-source portion of dividends received 
by domestic corporations from specified 10-percent owned foreign 
corporations.''.

  (f) Effective Date.--The amendments made by this section shall apply 
to distributions made after (and, in the case of the amendments made by 
subsection (d), deductions with respect to taxable years ending after) 
December 31, 2017.

SEC. 4002. APPLICATION OF PARTICIPATION EXEMPTION TO INVESTMENTS IN 
                    UNITED STATES PROPERTY.

  (a) In General.--Section 956(a) is amended in the matter preceding 
paragraph (1) by inserting ``(other than a corporation)'' after 
``United States shareholder''.
  (b) Regulatory Authority to Prevent Abuse.--Section 956(e) is amended 
by striking ``including regulations to prevent'' and inserting 
``including regulations--
          ``(1) to address United States shareholders that are 
        partnerships with corporate partners, and
          ``(2) to prevent''.
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years of foreign corporations beginning after December 31, 
2017.

SEC. 4003. LIMITATION ON LOSSES WITH RESPECT TO SPECIFIED 10-PERCENT 
                    OWNED FOREIGN CORPORATIONS.

  (a) Basis in Specified 10-percent Owned Foreign Corporation Reduced 
by Nontaxed Portion of Dividend for Purposes of Determining Loss.--
          (1) In general.--Section 961 is amended by adding at the end 
        the following new subsection:
  ``(d) Basis in Specified 10-percent Owned Foreign Corporation Reduced 
by Nontaxed Portion of Dividend for Purposes of Determining Loss.--If a 
domestic corporation received a dividend from a specified 10-percent 
owned foreign corporation (as defined in section 245A) in any taxable 
year, solely for purposes of determining loss on any disposition of 
stock of such foreign corporation in such taxable year or any 
subsequent taxable year, the basis of such domestic corporation in such 
stock shall be reduced (but not below zero) by the amount of any 
deduction allowable to such domestic corporation under section 245A 
with respect to such stock except to the extent such basis was reduced 
under section 1059 by reason of a dividend for which such a deduction 
was allowable.''.
          (2) Effective date.--The amendments made by this subsection 
        shall apply to distributions made after December 31, 2017.
  (b) Treatment of Foreign Branch Losses Transferred to Specified 10-
percent Owned Foreign Corporations.--
          (1) In general.--Part II of subchapter B of chapter 1 is 
        amended by adding at the end the following new section:

``SEC. 91. CERTAIN FOREIGN BRANCH LOSSES TRANSFERRED TO SPECIFIED 10-
                    PERCENT OWNED FOREIGN CORPORATIONS.

  ``(a) In General.--If a domestic corporation transfers substantially 
all of the assets of a foreign branch (within the meaning of section 
367(a)(3)(C)) to a specified 10-percent owned foreign corporation (as 
defined in section 245A) with respect to which it is a United States 
shareholder after such transfer, such domestic corporation shall 
include in gross income for the taxable year which includes such 
transfer an amount equal to the transferred loss amount with respect to 
such transfer.
  ``(b) Transferred Loss Amount.--For purposes of this section, the 
term `transferred loss amount' means, with respect to any transfer of 
substantially all of the assets of a foreign branch, the excess (if 
any) of--
          ``(1) the sum of losses--
                  ``(A) which were incurred by the foreign branch after 
                December 31, 2017, and before the transfer, and
                  ``(B) with respect to which a deduction was allowed 
                to the taxpayer, over
          ``(2) the sum of--
                  ``(A) any taxable income of such branch for a taxable 
                year after the taxable year in which the loss was 
                incurred and through the close of the taxable year of 
                the transfer, and
                  ``(B) any amount which is recognized under section 
                904(f)(3) on account of the transfer.
  ``(c) Reduction for Recognized Gains.--
          ``(1) In general.--In the case of a transfer not described in 
        section 367(a)(3)(C), the transferred loss amount shall be 
        reduced (but not below zero) by the amount of gain recognized 
        by the taxpayer on account of the transfer (other than amounts 
        taken into account under subsection (c)(2)(B)).
          ``(2) Coordination with recognition under section 367.--In 
        the case of a transfer described in section 367(a)(3)(C), the 
        transferred loss amount shall not exceed the excess (if any) 
        of--
                  ``(A) the excess of the amount described in section 
                367(a)(3)(C)(i) over the amount described in section 
                367(a)(3)(C)(ii) with respect to such transfer, over
                  ``(B) the amount of gain recognized under section 
                367(a)(3)(C) with respect to such transfer.
  ``(d) Source of Income.--Amounts included in gross income under this 
section shall be treated as derived from sources within the United 
States.
  ``(e) Basis Adjustments.--Consistent with such regulations or other 
guidance as the Secretary may prescribe, proper adjustments shall be 
made in the adjusted basis of the taxpayer's stock in the specified 10-
percent owned foreign corporation to which the transfer is made, and in 
the transferee's adjusted basis in the property transferred, to reflect 
amounts included in gross income under this section.''.
          (2) Amounts recognized under section 367 on transfer of 
        foreign branch with previously deducted losses treated as 
        united states source.--Section 367(a)(3)(C) is amended by 
        striking ``outside'' in the last sentence and inserting 
        ``within''.
          (3) Clerical amendment.--The table of sections for part II of 
        subchapter B of chapter 1 is amended by adding at the end the 
        following new item:

``Sec. 91. Certain foreign branch losses transferred to specified 10-
percent owned foreign corporations.''.

          (4) Effective date.--The amendments made by this subsection 
        shall apply to transfers after December 31, 2017.

SEC. 4004. TREATMENT OF DEFERRED FOREIGN INCOME UPON TRANSITION TO 
                    PARTICIPATION EXEMPTION SYSTEM OF TAXATION.

  (a) In General.--Section 965 is amended to read as follows:

``SEC. 965. TREATMENT OF DEFERRED FOREIGN INCOME UPON TRANSITION TO 
                    PARTICIPATION EXEMPTION SYSTEM OF TAXATION.

  ``(a) Treatment of Deferred Foreign Income as Subpart F Income.--In 
the case of the last taxable year of a deferred foreign income 
corporation which begins before January 1, 2018, the subpart F income 
of such foreign corporation (as otherwise determined for such taxable 
year under section 952) shall be increased by the greater of--
          ``(1) the accumulated post-1986 deferred foreign income of 
        such corporation determined as of November 2, 2017, or
          ``(2) the accumulated post-1986 deferred foreign income of 
        such corporation determined as of December 31, 2017.
  ``(b) Reduction in Amounts Included in Gross Income of United States 
Shareholders of Specified Foreign Corporations With Deficits in 
Earnings and Profits.--
          ``(1) In general.--In the case of a taxpayer which is a 
        United States shareholder with respect to at least one deferred 
        foreign income corporation and at least one E&P deficit foreign 
        corporation, the amount which would (but for this subsection) 
        be taken into account under section 951(a)(1) by reason of 
        subsection (a) as such United States shareholder's pro rata 
        share of the subpart F income of each deferred foreign income 
        corporation shall be reduced (but not below zero) by the amount 
        of such United States shareholder's aggregate foreign E&P 
        deficit which is allocated under paragraph (2) to such deferred 
        foreign income corporation.
          ``(2) Allocation of aggregate foreign e&p deficit.--The 
        aggregate foreign E&P deficit of any United States shareholder 
        shall be allocated among the deferred foreign income 
        corporations of such United States shareholder in an amount 
        which bears the same proportion to such aggregate as--
                  ``(A) such United States shareholder's pro rata share 
                of the accumulated post-1986 deferred foreign income of 
                each such deferred foreign income corporation, bears to
                  ``(B) the aggregate of such United States 
                shareholder's pro rata share of the accumulated post-
                1986 deferred foreign income of all deferred foreign 
                income corporations of such United States shareholder.
          ``(3) Definitions related to e&p deficits.--For purposes of 
        this subsection--
                  ``(A) Aggregate foreign e&p deficit.--The term 
                `aggregate foreign E&P deficit' means, with respect to 
                any United States shareholder, the aggregate of such 
                shareholder's pro rata shares of the specified E&P 
                deficits of the E&P deficit foreign corporations of 
                such shareholder.
                  ``(B) E&P deficit foreign corporation.--The term `E&P 
                deficit foreign corporation' means, with respect to any 
                taxpayer, any specified foreign corporation with 
                respect to which such taxpayer is a United States 
                shareholder, if--
                          ``(i) such specified foreign corporation has 
                        a deficit in post-1986 earnings and profits, 
                        and
                          ``(ii) as of November 2, 2017--
                                  ``(I) such corporation was a 
                                specified foreign corporation, and
                                  ``(II) such taxpayer was a United 
                                States shareholder of such corporation.
                  ``(C) Specified e&p deficit.--The term `specified E&P 
                deficit' means, with respect to any E&P deficit foreign 
                corporation, the amount of the deficit referred to in 
                subparagraph (B).
          ``(4) Netting among united states shareholders in same 
        affiliated group.--
                  ``(A) In general.--In the case of any affiliated 
                group which includes at least one E&P net surplus 
                shareholder and one E&P net deficit shareholder, the 
                amount which would (but for this paragraph) be taken 
                into account under section 951(a)(1) by reason of 
                subsection (a) by each such E&P net surplus shareholder 
                shall be reduced (but not below zero) by such 
                shareholder's applicable share of the affiliated 
                group's aggregate unused E&P deficit.
                  ``(B) E&P net surplus shareholder.--For purposes of 
                this paragraph, the term `E&P net surplus shareholder' 
                means any United States shareholder which would 
                (determined without regard to this paragraph) take into 
                account an amount greater than zero under section 
                951(a)(1) by reason of subsection (a).
                  ``(C) E&P net deficit shareholder.--For purposes of 
                this paragraph, the term `E&P net deficit shareholder' 
                means any United States shareholder if--
                          ``(i) the aggregate foreign E&P deficit with 
                        respect to such shareholder (as defined in 
                        paragraph (3)(A)), exceeds
                          ``(ii) the amount which would (but for this 
                        subsection) be taken into account by such 
                        shareholder under section 951(a)(1) by reason 
                        of subsection (a).
                  ``(D) Aggregate unused e&p deficit.--For purposes of 
                this paragraph--
                          ``(i) In general.--The term `aggregate unused 
                        E&P deficit' means, with respect to any 
                        affiliated group, the lesser of--
                                  ``(I) the sum of the excesses 
                                described in subparagraph (C), 
                                determined with respect to each E&P net 
                                deficit shareholder in such group, or
                                  ``(II) the amount determined under 
                                subparagraph (E)(ii).
                          ``(ii) Reduction with respect to e&p net 
                        deficit shareholders which are not wholly owned 
                        by the affiliated group.--If the group 
                        ownership percentage of any E&P net deficit 
                        shareholder is less than 100 percent, the 
                        amount of the excess described in subparagraph 
                        (C) which is taken into account under clause 
                        (i)(I) with respect to such E&P net deficit 
                        shareholder shall be such group ownership 
                        percentage of such amount.
                  ``(E) Applicable share.--For purposes of this 
                paragraph, the term `applicable share' means, with 
                respect to any E&P net surplus shareholder in any 
                affiliated group, the amount which bears the same 
                proportion to such group's aggregate unused E&P deficit 
                as--
                          ``(i) the product of--
                                  ``(I) such shareholder's group 
                                ownership percentage, multiplied by
                                  ``(II) the amount which would (but 
                                for this paragraph) be taken into 
                                account under section 951(a)(1) by 
                                reason of subsection (a) by such 
                                shareholder, bears to
                          ``(ii) the aggregate amount determined under 
                        clause (i) with respect to all E&P net surplus 
                        shareholders in such group.
                  ``(F) Group ownership percentage.--For purposes of 
                this paragraph, the term `group ownership percentage' 
                means, with respect to any United States shareholder in 
                any affiliated group, the percentage of the value of 
                the stock of such United States shareholder which is 
                held by other includible corporations in such 
                affiliated group. Notwithstanding the preceding 
                sentence, the group ownership percentage of the common 
                parent of the affiliated group is 100 percent. Any term 
                used in this subparagraph which is also used in section 
                1504 shall have the same meaning as when used in such 
                section.
  ``(c) Application of Participation Exemption to Included Income.--
          ``(1) In general.--In the case of a United States shareholder 
        of a deferred foreign income corporation, there shall be 
        allowed as a deduction for the taxable year in which an amount 
        is included in the gross income of such United States 
        shareholder under section 951(a)(1) by reason of this section 
        an amount equal to the sum of--
                  ``(A) the United States shareholder's 7 percent rate 
                equivalent percentage of the excess (if any) of--
                          ``(i) the amount so included as gross income, 
                        over
                          ``(ii) the amount of such United States 
                        shareholder's aggregate foreign cash position, 
                        plus
                  ``(B) the United States shareholder's 14 percent rate 
                equivalent percentage of so much of the amount 
                described in subparagraph (A)(ii) as does not exceed 
                the amount described in subparagraph (A)(i).
          ``(2) 7 and 14 percent rate equivalent percentages.--For 
        purposes of this subsection--
                  ``(A) 7 percent rate equivalent percentage.--The term 
                `7 percent rate equivalent percentage' means, with 
                respect to any United States shareholder for any 
                taxable year, the percentage which would result in the 
                amount to which such percentage applies being subject 
                to a 7 percent rate of tax determined by only taking 
                into account a deduction equal to such percentage of 
                such amount and the highest rate of tax specified in 
                section 11 for such taxable year. In the case of any 
                taxable year of a United States shareholder to which 
                section 15 applies, the highest rate of tax under 
                section 11 before the effective date of the change in 
                rates and the highest rate of tax under section 11 
                after the effective date of such change shall each be 
                taken into account under the preceding sentence in the 
                same proportions as the portion of such taxable year 
                which is before and after such effective date, 
                respectively.
                  ``(B) 14 percent rate equivalent percentage.--The 
                term `14 percent rate equivalent percentage' means, 
                with respect to any United States shareholder for any 
                taxable year, the percentage determined under 
                subparagraph (A) applied by substituting `14 percent 
                rate of tax' for `7 percent rate of tax'.
          ``(3) Aggregate foreign cash position.--For purposes of this 
        subsection--
                  ``(A) In general.--The term `aggregate foreign cash 
                position' means, with respect to any United States 
                shareholder, one-third of the sum of--
                          ``(i) the aggregate of such United States 
                        shareholder's pro rata share of the cash 
                        position of each specified foreign corporation 
                        of such United States shareholder determined as 
                        of November 2, 2017,
                          ``(ii) the aggregate described in clause (i) 
                        determined as of the close of the last taxable 
                        year of each such specified foreign corporation 
                        which ends before November 2, 2017, and
                          ``(iii) the aggregate described in clause (i) 
                        determined as of the close of the taxable year 
                        of each such specified foreign corporation 
                        which precedes the taxable year referred to in 
                        clause (ii).
                In the case of any foreign corporation which did not 
                exist as of the determination date described in clause 
                (ii) or (iii), this subparagraph shall be applied 
                separately to such foreign corporation by not taking 
                into account such clause and by substituting `one-half 
                (100 percent in the case that both clauses (ii) and 
                (iii) are disregarded)' for `one-third'.
                  ``(B) Cash position.--For purposes of this paragraph, 
                the cash position of any specified foreign corporation 
                is the sum of--
                          ``(i) cash held by such foreign corporation,
                          ``(ii) the net accounts receivable of such 
                        foreign corporation, plus
                          ``(iii) the fair market value of the 
                        following assets held by such corporation:
                                  ``(I) Actively traded personal 
                                property for which there is an 
                                established financial market.
                                  ``(II) Commercial paper, certificates 
                                of deposit, the securities of the 
                                Federal government and of any State or 
                                foreign government.
                                  ``(III) Any foreign currency.
                                  ``(IV) Any obligation with a term of 
                                less than one year.
                                  ``(V) Any asset which the Secretary 
                                identifies as being economically 
                                equivalent to any asset described in 
                                this subparagraph.
                  ``(C) Net accounts receivable.--For purposes of this 
                paragraph, the term `net accounts receivable' means, 
                with respect to any specified foreign corporation, the 
                excess (if any) of--
                          ``(i) such corporation's accounts receivable, 
                        over
                          ``(ii) such corporation's accounts payable 
                        (determined consistent with the rules of 
                        section 461).
                  ``(D) Prevention of double counting.--
                          ``(i) In general.--The applicable percentage 
                        of each specified cash position of a specified 
                        foreign corporation shall not be taken into 
                        account by--
                                  ``(I) the United States shareholder 
                                referred to in clause (ii) with respect 
                                to such position, or
                                  ``(II) any United States shareholder 
                                which is an includible corporation in 
                                the same affiliated group as such 
                                United States shareholder referred to 
                                in clause (ii).
                          ``(ii) Specified cash position.--For purposes 
                        of this subparagraph, the term `specified cash 
                        position' means--
                                  ``(I) amounts described in 
                                subparagraph (B)(ii) to the extent such 
                                amounts are receivable from another 
                                specified foreign corporation with 
                                respect to any United States 
                                shareholder,
                                  ``(II) amounts described in 
                                subparagraph (B)(iii)(I) to the extent 
                                such amounts consist of an equity 
                                interest in another specified foreign 
                                corporation with respect to any United 
                                States shareholder, and
                                  ``(III) amounts described in 
                                subparagraph (B)(iii)(IV) to the extent 
                                that another specified foreign 
                                corporation with respect to any United 
                                States shareholder is obligated to 
                                repay such amount.
                          ``(iii) Applicable percentage.--For purposes 
                        of this subparagraph, the term `applicable 
                        percentage' means--
                                  ``(I) with respect to each specified 
                                cash position described in subclause 
                                (I) or (III) of clause (ii), the pro 
                                rata share of the United States 
                                shareholder referred to in clause (ii) 
                                with respect to the specified foreign 
                                corporation referred to in such clause, 
                                and
                                  ``(II) with respect to each specified 
                                cash position described in clause 
                                (ii)(II), the ratio (expressed as a 
                                percentage and not in excess of 100 
                                percent) of the United States 
                                shareholder's pro rata share of the 
                                cash position of the specified foreign 
                                corporation referred to in such clause 
                                divided by the amount of such specified 
                                cash position.
                         For purposes of this subparagraph, a separate 
                        applicable percentage shall be determined under 
                        each of subclauses (I) and (II) with respect to 
                        each specified foreign corporation referred to 
                        in clause (ii) with respect to which a 
                        specified cash position is determined for the 
                        specified foreign corporation referred to in 
                        clause (i).
                          ``(iv) Reduction with respect to affiliated 
                        group members not wholly owned by the 
                        affiliated group.--For purposes of clause 
                        (i)(II), in the case of an includible 
                        corporation the group ownership percentage of 
                        which is less than 100 percent (as determined 
                        under subsection (b)(4)(F)), the amount not 
                        take into account by reason of such clause 
                        shall be the group ownership percentage of such 
                        amount (determined without regard to this 
                        clause).
                  ``(E) Certain blocked assets not taken into 
                account.--A cash position of a specified foreign 
                corporation shall not be taken into account under 
                subparagraph (A) if such position could not (as of the 
                date that it would otherwise have been taken into 
                account under clause (i), (ii), or (iii) of 
                subparagraph (A)) have been distributed by such 
                specified foreign corporation to United States 
                shareholders of such specified foreign corporation 
                because of currency or other restrictions or 
                limitations imposed under the laws of any foreign 
                country (within the meaning of section 964(b)).
                  ``(F) Cash positions of certain non-corporate 
                entities taken into account.--An entity (other than a 
                domestic corporation) shall be treated as a specified 
                foreign corporation of a United States shareholder for 
                purposes of determining such United States 
                shareholder's aggregate foreign cash position if any 
                interest in such entity is held by a specified foreign 
                corporation of such United States shareholder 
                (determined after application of this subparagraph) and 
                such entity would be a specified foreign corporation of 
                such United States shareholder if such entity were a 
                foreign corporation.
                  ``(G) Time of certain determinations.--For purposes 
                of this paragraph, the determination of whether a 
                person is a United States shareholder, whether a person 
                is a specified foreign corporation, and the pro rata 
                share of a United States shareholder with respect to a 
                specified foreign corporation, shall be determined as 
                of the end of the taxable year described in subsection 
                (a).
                  ``(H) Anti-abuse.--If the Secretary determines that 
                the principal purpose of any transaction was to reduce 
                the aggregate foreign cash position taken into account 
                under this subsection, such transaction shall be 
                disregarded for purposes of this subsection.
  ``(d) Deferred Foreign Income Corporation; Accumulated Post-1986 
Deferred Foreign Income.--For purposes of this section--
          ``(1) Deferred foreign income corporation.--The term 
        `deferred foreign income corporation' means, with respect to 
        any United States shareholder, any specified foreign 
        corporation of such United States shareholder which has 
        accumulated post-1986 deferred foreign income (as of the date 
        referred to in paragraph (1) or (2) of subsection (a), 
        whichever is applicable with respect to such foreign 
        corporation) greater than zero.
          ``(2) Accumulated post-1986 deferred foreign income.--The 
        term `accumulated post-1986 deferred foreign income' means the 
        post-1986 earnings and profits except to the extent such 
        earnings--
                  ``(A) are attributable to income of the specified 
                foreign corporation which is effectively connected with 
                the conduct of a trade or business within the United 
                States and subject to tax under this chapter, or
                  ``(B) if distributed, would be excluded from the 
                gross income of a United States shareholder under 
                section 959.
        To the extent provided in regulations or other guidance 
        prescribed by the Secretary, in the case of any controlled 
        foreign corporation which has shareholders which are not United 
        States shareholders, accumulated post-1986 deferred foreign 
        income shall be appropriately reduced by amounts which would be 
        described in subparagraph (B) if such shareholders were United 
        States shareholders.
          ``(3) Post-1986 earnings and profits.--The term `post-1986 
        earnings and profits' means the earnings and profits of the 
        foreign corporation (computed in accordance with sections 
        964(a) and 986) accumulated in taxable years beginning after 
        December 31, 1986, and determined--
                  ``(A) as of the date referred to in paragraph (1) or 
                (2) of subsection (a), whichever is applicable with 
                respect to such foreign corporation,
                  ``(B) without diminution by reason of dividends 
                distributed during the taxable year ending with or 
                including such date, and
                  ``(C) increased by the amount of any qualified 
                deficit (within the meaning of section 
                952(c)(1)(B)(ii)) arising before January 1, 2018, which 
                is treated as a qualified deficit (within the meaning 
                of such section as amended by the Tax Cuts and Jobs 
                Act) for purposes of such foreign corporation's first 
                taxable year beginning after December 31, 2017.
  ``(e) Specified Foreign Corporation.--
          ``(1) In general.--For purposes of this section, the term 
        `specified foreign corporation' means--
                  ``(A) any controlled foreign corporation, and
                  ``(B) any foreign corporation with respect to which 
                one or more domestic corporations is a United States 
                shareholder (determined without regard to section 
                958(b)(4)).
          ``(2) Application to certain foreign corporations.--For 
        purposes of sections 951 and 961, a foreign corporation 
        described in paragraph (1)(B) shall be treated as a controlled 
        foreign corporation solely for purposes of taking into account 
        the subpart F income of such corporation under subsection (a) 
        (and for purposes of applying subsection (f)).
          ``(3) Exception for passive foreign investment companies.--
        The term `specified foreign corporation' shall not include any 
        passive foreign investment company (within the meaning of 
        subpart D of part VI of subchapter P) that is not a controlled 
        foreign corporation.
  ``(f) Determinations of Pro Rata Share.--For purposes of this 
section, the determination of any United States shareholder's pro rata 
share of any amount with respect to any specified foreign corporation 
shall be determined under rules similar to the rules of section 
951(a)(2) by treating such amount in the same manner as subpart F 
income (and by treating such specified foreign corporation as a 
controlled foreign corporation).
  ``(g) Disallowance of Foreign Tax Credit, etc.--
          ``(1) In general.--No credit shall be allowed under section 
        901 for the applicable percentage of any taxes paid or accrued 
        (or treated as paid or accrued) with respect to any amount for 
        which a deduction is allowed under this section.
          ``(2) Applicable percentage.--For purposes of this 
        subsection, the term `applicable percentage' means the amount 
        (expressed as a percentage) equal to the sum of--
                  ``(A) 80 percent of the ratio of--
                          ``(i) the excess to which subsection 
                        (c)(1)(A) applies, divided by
                          ``(ii) the sum of such excess plus the amount 
                        to which subsection (c)(1)(B) applies, plus
                  ``(B) 60 percent of the ratio of--
                          ``(i) the amount to which subsection 
                        (c)(1)(B) applies, divided by
                          ``(ii) the sum described in subparagraph 
                        (A)(ii).
          ``(3) Denial of deduction.--No deduction shall be allowed 
        under this chapter for any tax for which credit is not 
        allowable under section 901 by reason of paragraph (1) 
        (determined by treating the taxpayer as having elected the 
        benefits of subpart A of part III of subchapter N).
          ``(4) Coordination with section 78.--With respect to the 
        taxes treated as paid or accrued by a domestic corporation with 
        respect to amounts which are includible in gross income of such 
        domestic corporation by reason of this section, section 78 
        shall apply only to so much of such taxes as bears the same 
        proportion to the amount of such taxes as--
                  ``(A) the excess of--
                          ``(i) the amounts which are includible in 
                        gross income of such domestic corporation by 
                        reason of this section, over
                          ``(ii) the deduction allowable under 
                        subsection (c) with respect to such amounts, 
                        bears to
                  ``(B) such amounts.
          ``(5) Extension of foreign tax credit carryover period.--With 
        respect to any taxes paid or accrued (or treated as paid or 
        accrued) with respect to any amount for which a deduction is 
        allowed under this section, section 904(c) shall be applied by 
        substituting `first 20 succeeding taxable years' for `first 10 
        succeeding taxable years'.
  ``(h) Election to Pay Liability in Installments.--
          ``(1) In general.--In the case of a United States shareholder 
        of a deferred foreign income corporation, such United States 
        shareholder may elect to pay the net tax liability under this 
        section in 8 equal installments.
          ``(2) Date for payment of installments.--If an election is 
        made under paragraph (1), the first installment shall be paid 
        on the due date (determined without regard to any extension of 
        time for filing the return) for the return of tax for the 
        taxable year described in subsection (a) and each succeeding 
        installment shall be paid on the due date (as so determined) 
        for the return of tax for the taxable year following the 
        taxable year with respect to which the preceding installment 
        was made.
          ``(3) Acceleration of payment.--If there is an addition to 
        tax for failure to timely pay any installment required under 
        this subsection, a liquidation or sale of substantially all the 
        assets of the taxpayer (including in a title 11 or similar 
        case), a cessation of business by the taxpayer, or any similar 
        circumstance, then the unpaid portion of all remaining 
        installments shall be due on the date of such event (or in the 
        case of a title 11 or similar case, the day before the petition 
        is filed). The preceding sentence shall not apply to the sale 
        of substantially all the assets of a taxpayer to a buyer if 
        such buyer enters into an agreement with the Secretary under 
        which such buyer is liable for the remaining installments due 
        under this subsection in the same manner as if such buyer were 
        the taxpayer.
          ``(4) Proration of deficiency to installments.--If an 
        election is made under paragraph (1) to pay the net tax 
        liability under this section in installments and a deficiency 
        has been assessed with respect to such net tax liability, the 
        deficiency shall be prorated to the installments payable under 
        paragraph (1). The part of the deficiency so prorated to any 
        installment the date for payment of which has not arrived shall 
        be collected at the same time as, and as a part of, such 
        installment. The part of the deficiency so prorated to any 
        installment the date for payment of which has arrived shall be 
        paid upon notice and demand from the Secretary. This subsection 
        shall not apply if the deficiency is due to negligence, to 
        intentional disregard of rules and regulations, or to fraud 
        with intent to evade tax.
          ``(5) Election.--Any election under paragraph (1) shall be 
        made not later than the due date for the return of tax for the 
        taxable year described in subsection (a) and shall be made in 
        such manner as the Secretary may provide.
          ``(6) Net tax liability under this section.--For purposes of 
        this subsection--
                  ``(A) In general.--The net tax liability under this 
                section with respect to any United States shareholder 
                is the excess (if any) of--
                          ``(i) such taxpayer's net income tax for the 
                        taxable year in which an amount is included in 
                        the gross income of such United States 
                        shareholder under section 951(a)(1) by reason 
                        of this section, over
                          ``(ii) such taxpayer's net income tax for 
                        such taxable year determined--
                                  ``(I) without regard to this section, 
                                and
                                  ``(II) without regard to any income, 
                                deduction, or credit, properly 
                                attributable to a dividend received by 
                                such United States shareholder from any 
                                deferred foreign income corporation.
                  ``(B) Net income tax.--The term `net income tax' 
                means the regular tax liability reduced by the credits 
                allowed under subparts A, B, and D of part IV of 
                subchapter A.
  ``(i) Special Rules for S Corporation Shareholders.--
          ``(1) In general.--In the case of any S corporation which is 
        a United States shareholder of a deferred foreign income 
        corporation, each shareholder of such S corporation may elect 
        to defer payment of such shareholder's net tax liability under 
        this section with respect to such S corporation until the 
        shareholder's taxable year which includes the triggering event 
        with respect to such liability. Any net tax liability payment 
        of which is deferred under the preceding sentence shall be 
        assessed on the return as an addition to tax in the 
        shareholder's taxable year which includes such triggering 
        event.
          ``(2) Triggering event.--
                  ``(A) In general.--In the case of any shareholder's 
                net tax liability under this section with respect to 
                any S corporation, the triggering event with respect to 
                such liability is whichever of the following occurs 
                first:
                          ``(i) Such corporation ceases to be an S 
                        corporation (determined as of the first day of 
                        the first taxable year that such corporation is 
                        not an S corporation).
                          ``(ii) A liquidation or sale of substantially 
                        all the assets of such S corporation (including 
                        in a title 11 or similar case), a cessation of 
                        business by such S corporation, such S 
                        corporation ceases to exist, or any similar 
                        circumstance.
                          ``(iii) A transfer of any share of stock in 
                        such S corporation by the taxpayer (including 
                        by reason of death, or otherwise).
                  ``(B) Partial transfers of stock.--In the case of a 
                transfer of less than all of the taxpayer's shares of 
                stock in the S corporation, such transfer shall only be 
                a triggering event with respect to so much of the 
                taxpayer's net tax liability under this section with 
                respect to such S corporation as is properly allocable 
                to such stock.
                  ``(C) Transfer of liability.--A transfer described in 
                clause (iii) shall not be treated as a triggering event 
                if the transferee enters into an agreement with the 
                Secretary under which such transferee is liable for net 
                tax liability with respect to such stock in the same 
                manner as if such transferee were the taxpayer.
          ``(3) Net tax liability.--A shareholder's net tax liability 
        under this section with respect to any S corporation is the net 
        tax liability under this section which would be determined 
        under subsection (h)(6) if the only subpart F income taken into 
        account by such shareholder by reason of this section were 
        allocations from such S corporation.
          ``(4) Election to pay deferred liability in installments.--In 
        the case of a taxpayer which elects to defer payment under 
        paragraph (1)--
                  ``(A) subsection (h) shall be applied separately with 
                respect to the liability to which such election 
                applies,
                  ``(B) an election under subsection (h) with respect 
                to such liability shall be treated as timely made if 
                made not later than the due date for the return of tax 
                for the taxable year in which the triggering event with 
                respect to such liability occurs,
                  ``(C) the first installment under subsection (h) with 
                respect to such liability shall be paid not later than 
                such due date (but determined without regard to any 
                extension of time for filing the return), and
                  ``(D) if the triggering event with respect to any net 
                tax liability is described in paragraph (2)(A)(ii), an 
                election under subsection (h) with respect to such 
                liability may be made only with the consent of the 
                Secretary.
          ``(5) Joint and several liability of s corporation.--If any 
        shareholder of an S corporation elects to defer payment under 
        paragraph (1), such S corporation shall be jointly and 
        severally liable for such payment and any penalty, addition to 
        tax, or additional amount attributable thereto.
          ``(6) Extension of limitation on collection.--Notwithstanding 
        any other provision of law, any limitation on the time period 
        for the collection of a liability deferred under this 
        subsection shall not be treated as beginning before the date of 
        the triggering event with respect to such liability.
          ``(7) Annual reporting of net tax liability.--
                  ``(A) In general.--Any shareholder of an S 
                corporation which makes an election under paragraph (1) 
                shall report the amount of such shareholder's deferred 
                net tax liability on such shareholder's return of tax 
                for the taxable year for which such election is made 
                and on the return of tax for each taxable year 
                thereafter until such amount has been fully assessed on 
                such returns.
                  ``(B) Deferred net tax liability.--For purposes of 
                this paragraph, the term `deferred net tax liability' 
                means, with respect to any taxable year, the amount of 
                net tax liability payment of which has been deferred 
                under paragraph (1) and which has not been assessed on 
                a return of tax for any prior taxable year.
                  ``(C) Failure to report.--In the case of any failure 
                to report any amount required to be reported under 
                subparagraph (A) with respect to any taxable year 
                before the due date for the return of tax for such 
                taxable year, there shall be assessed on such return as 
                an addition to tax 5 percent of such amount.
          ``(8) Election.--Any election under paragraph (1)--
                  ``(A) shall be made by the shareholder of the S 
                corporation not later than the due date for such 
                shareholder's return of tax for the taxable year which 
                includes the close of the taxable year of such S 
                corporation in which the amount described in subsection 
                (a) is taken into account, and
                  ``(B) shall be made in such manner as the Secretary 
                may provide.
  ``(j) Reporting by S Corporation.--Each S corporation which is a 
United States shareholder of a deferred foreign income corporation 
shall report in its return of tax under section 6037(a) the amount 
includible in its gross income for such taxable year by reason of this 
section and the amount of the deduction allowable by subsection (c). 
Any copy provided to a shareholder under section 6037(b) shall include 
a statement of such shareholder's pro rata share of such amounts.
  ``(k) Inclusion of Deferred Foreign Income Under This Section Not to 
Trigger Recapture of Overall Foreign Loss, etc.--For purposes of 
sections 904(f)(1) and 907(c)(4), in the case of a United States 
shareholder of a deferred foreign income corporation, such United 
States shareholder's taxable income from sources without the United 
States and combined foreign oil and gas income shall be determined 
without regard to this section.
  ``(l) Regulations.--The Secretary may prescribe such regulations or 
other guidance as may be necessary or appropriate to carry out the 
provisions of this section.''.
  (b) Clerical Amendment.--The table of sections for subpart F of part 
III of subchapter N of chapter 1 is amended by striking the item 
relating to section 965 and inserting the following:

``Sec. 965. Treatment of deferred foreign income upon transition to 
participation exemption system of taxation.''.

     Subtitle B--Modifications Related to Foreign Tax Credit System

SEC. 4101. REPEAL OF SECTION 902 INDIRECT FOREIGN TAX CREDITS; 
                    DETERMINATION OF SECTION 960 CREDIT ON CURRENT YEAR 
                    BASIS.

  (a) Repeal of Section 902 Indirect Foreign Tax Credits.--Subpart A of 
part III of subchapter N of chapter 1 is amended by striking section 
902.
  (b) Determination of Section 960 Credit on Current Year Basis.--
Section 960 is amended--
          (1) by striking subsection (c), by redesignating subsection 
        (b) as subsection (c), by striking all that precedes subsection 
        (c) (as so redesignated) and inserting the following:

``SEC. 960. DEEMED PAID CREDIT FOR SUBPART F INCLUSIONS.

  ``(a) In General.--For purposes of this subpart, if there is included 
in the gross income of a domestic corporation any item of income under 
section 951(a)(1) with respect to any controlled foreign corporation 
with respect to which such domestic corporation is a United States 
shareholder, such domestic corporation shall be deemed to have paid so 
much of such foreign corporation's foreign income taxes as are properly 
attributable to such item of income.
  ``(b) Special Rules for Distributions From Previously Taxed Earnings 
and Profits.--For purposes of this subpart--
          ``(1) In general.--If any portion of a distribution from a 
        controlled foreign corporation to a domestic corporation which 
        is a United States shareholder with respect to such controlled 
        foreign corporation is excluded from gross income under section 
        959(a), such domestic corporation shall be deemed to have paid 
        so much of such foreign corporation's foreign income taxes as--
                  ``(A) are properly attributable to such portion, and
                  ``(B) have not been deemed to have to been paid by 
                such domestic corporation under this section for the 
                taxable year or any prior taxable year.
          ``(2) Tiered controlled foreign corporations.--If section 
        959(b) applies to any portion of a distribution from a 
        controlled foreign corporation to another controlled foreign 
        corporation, such controlled foreign corporation shall be 
        deemed to have paid so much of such other controlled foreign 
        corporation's foreign income taxes as--
                  ``(A) are properly attributable to such portion, and
                  ``(B) have not been deemed to have been paid by a 
                domestic corporation under this section for the taxable 
                year or any prior taxable year.'',
          (2) and by adding after subsection (c) (as so redesignated) 
        the following new subsections:
  ``(d) Foreign Income Taxes.--The term `foreign income taxes' means 
any income, war profits, or excess profits taxes paid or accrued to any 
foreign country or possession of the United States.
  ``(e) Regulations.--The Secretary may prescribe such regulations or 
other guidance as may be necessary or appropriate to carry out the 
provisions of this section.''.
  (c) Conforming Amendments.--
          (1) Section 78 is amended to read as follows:

``SEC. 78. GROSS UP FOR DEEMED PAID FOREIGN TAX CREDIT.

  ``If a domestic corporation chooses to have the benefits of subpart A 
of part III of subchapter N (relating to foreign tax credit) for any 
taxable year, an amount equal to the taxes deemed to be paid by such 
corporation under subsections (a) and (b) of section 960 for such 
taxable year shall be treated for purposes of this title (other than 
sections 959, 960, and 961) as an item of income required to be 
included in the gross income of such domestic corporation under section 
951(a) for such taxable year.''.
          (2) Section 245(a)(10)(C) is amended by striking ``sections 
        902, 907, and 960'' and inserting ``sections 907 and 960''.
          (3) Sections 535(b)(1) and 545(b)(1) are each amended by 
        striking ``section 902(a) or 960(a)(1)'' and inserting 
        ``section 960''.
          (4) Section 814(f)(1) is amended--
                  (A) by striking subparagraph (B), and
                  (B) by striking all that precedes ``No income'' and 
                inserting the following:
          ``(1) Treatment of foreign taxes.--''.
          (5) Section 865(h)(1)(B) is amended by striking ``sections 
        902, 907, and 960'' and inserting ``sections 907 and 960''.
          (6) Section 901(a) is amended by striking ``sections 902 and 
        960'' and inserting ``section 960''.
          (7) Section 901(e)(2) is amended by striking ``but is not 
        limited to--'' and all that follows through ``that portion'' 
        and inserting ``but is not limited to, that portion''.
          (8) Section 901(f) is amended by striking ``sections 902 and 
        960'' and inserting ``section 960''.
          (9) Section 901(j)(1)(A) is amended by striking ``902 or''.
          (10) Section 901(j)(1)(B) is amended by striking ``sections 
        902 and 960'' and inserting ``section 960''.
          (11) Section 901(k)(2) is amended by striking ``section 853, 
        902, or 960'' and inserting ``section 853 or 960''.
          (12) Section 901(k)(6) is amended by striking ``902 or''.
          (13) Section 901(m)(1) is amended by striking ``relevant 
        foreign assets--'' and all that follows and inserting 
        ``relevant foreign assets shall not be taken into account in 
        determining the credit allowed under subsection (a).''.
          (14) Section 904(d)(1) is amended by striking ``sections 902, 
        907, and 960'' and inserting ``sections 907 and 960''.
          (15) Section 904(d)(6)(A) is amended by striking ``sections 
        902, 907, and 960'' and inserting ``sections 907 and 960''.
          (16) Section 904(h)(10)(A) is amended by striking ``sections 
        902, 907, and 960'' and inserting ``sections 907 and 960''.
          (17) Section 904 is amended by striking subsection (k).
          (18) Section 905(c)(1) is amended by striking the last 
        sentence.
          (19) Section 905(c)(2)(B)(i) is amended to read as follows:
                          ``(i) shall be taken into account for the 
                        taxable year to which such taxes relate, and''.
          (20) Section 906(a) is amended by striking ``(or deemed, 
        under section 902, paid or accrued during the taxable year)''.
          (21) Section 906(b) is amended by striking paragraphs (4) and 
        (5).
          (22) Section 907(b)(2)(B) is amended by striking ``902 or''.
          (23) Section 907(c)(3) is amended--
                  (A) by striking subparagraph (A) and redesignating 
                subparagraphs (B) and (C) as subparagraphs (A) and (B), 
                respectively, and
                  (B) by striking ``section 960(a)'' in subparagraph 
                (A) (as so redesignated) and inserting ``section 960''.
          (24) Section 907(c)(5) is amended by striking ``902 or''.
          (25) Section 907(f)(2)(B)(i) is amended by striking ``902 
        or''.
          (26) Section 908(a) is amended by striking ``902 or''.
          (27) Section 909(b) is amended--
                  (A) by striking ``section 902 corporation'' in the 
                matter preceding paragraph (1) and inserting ``10/50 
                corporation'',
                  (B) by striking ``902 or'' in paragraph (1),
                  (C) by striking ``by such section 902 corporation'' 
                and all that follows in the matter following paragraph 
                (2) and inserting ``by such 10/50 corporation or a 
                domestic corporation which is a United States 
                shareholder with respect to such 10/50 corporation.'', 
                and
                  (D) by striking ``Section 902 Corporations'' in the 
                heading thereof and inserting ``10/50 Corporations''.
          (28) Section 909(d)(5) is amended to read as follows:
          ``(5) 10/50 corporation.--The term `10/50 corporation' means 
        any foreign corporation with respect to which one or more 
        domestic corporations is a United States shareholder.''.
          (29) Section 958(a)(1) is amended by striking ``960(a)(1)'' 
        and inserting ``960''.
          (30) Section 959(d) is amended by striking ``Except as 
        provided in section 960(a)(3), any'' and inserting ``Any''.
          (31) Section 959(e) is amended by striking ``section 960(b)'' 
        and inserting ``section 960(c)''.
          (32) Section 1291(g)(2)(A) is amended by striking ``any 
        distribution--'' and all that follows through ``but only if'' 
        and inserting ``any distribution, any withholding tax imposed 
        with respect to such distribution, but only if''.
          (33) Section 6038(c)(1)(B) is amended by striking ``sections 
        902 (relating to foreign tax credit for corporate stockholder 
        in foreign corporation) and 960 (relating to special rules for 
        foreign tax credit)'' and inserting ``section 960''.
          (34) Section 6038(c)(4) is amended by striking subparagraph 
        (C).
          (35) The table of sections for subpart A of part III of 
        subchapter N of chapter 1 is amended by striking the item 
        relating to section 902.
          (36) The table of sections for subpart F of part III of 
        subchapter N of chapter 1 is amended by striking the item 
        relating to section 960 and inserting the following:

``Sec. 960. Deemed paid credit for subpart F inclusions.''.

  (d) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 4102. SOURCE OF INCOME FROM SALES OF INVENTORY DETERMINED SOLELY 
                    ON BASIS OF PRODUCTION ACTIVITIES.

  (a) In General.--Section 863(b) is amended by adding at the end the 
following: ``Gains, profits, and income from the sale or exchange of 
inventory property described in paragraph (2) shall be allocated and 
apportioned between sources within and without the United States solely 
on the basis of the production activities with respect to the 
property.''.
  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2017.

            Subtitle C--Modification of Subpart F Provisions

SEC. 4201. REPEAL OF INCLUSION BASED ON WITHDRAWAL OF PREVIOUSLY 
                    EXCLUDED SUBPART F INCOME FROM QUALIFIED 
                    INVESTMENT.

  (a) In General.--Subpart F of part III of subchapter N of chapter 1 
is amended by striking section 955.
  (b) Conforming Amendments.--
          (1)(A) Section 951(a)(1)(A) is amended to read as follows:
                  ``(A) his pro rata share (determined under paragraph 
                (2)) of the corporation's subpart F income for such 
                year, and''.
          (B) Section 851(b)(3) is amended by striking ``section 
        951(a)(1)(A)(i)'' in the flush language at the end and 
        inserting ``section 951(a)(1)(A)''.
          (C) Section 952(c)(1)(B)(i) is amended by striking ``section 
        951(a)(1)(A)(i)'' and inserting ``section 951(a)(1)(A)''.
          (D) Section 953(c)(1)(C) is amended by striking ``section 
        951(a)(1)(A)(i)'' and inserting ``section 951(a)(1)(A)''.
          (2) Section 951(a) is amended by striking paragraph (3).
          (3) Section 953(d)(4)(B)(iv)(II) is amended by striking ``or 
        amounts referred to in clause (ii) or (iii) of section 
        951(a)(1)(A)''.
          (4) Section 964(b) is amended by striking ``, 955,''.
          (5) Section 970 is amended by striking subsection (b).
          (6) The table of sections for subpart F of part III of 
        subchapter N of chapter 1 is amended by striking the item 
        relating to section 955.
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years of foreign corporations beginning after December 31, 
2017, and to taxable years of United States shareholders in which or 
with which such taxable years of foreign corporations end.

SEC. 4202. REPEAL OF TREATMENT OF FOREIGN BASE COMPANY OIL RELATED 
                    INCOME AS SUBPART F INCOME.

  (a) In General.--Section 954(a) is amended by striking paragraph (5), 
by striking the comma at the end of paragraph (3) and inserting a 
period, and by inserting ``and'' at the end of paragraph (2).
  (b) Conforming Amendments.--
          (1) Section 952(c)(1)(B)(iii) is amended by striking 
        subclause (I) and by redesignating subclauses (II) through (V) 
        as subclauses (I) through (IV), respectively.
          (2) Section 954(b)(4) is amended by striking the last 
        sentence.
          (3) Section 954(b)(5) is amended by striking ``the foreign 
        base company services income, and the foreign base company oil 
        related income'' and inserting ``and the foreign base company 
        services income''.
          (4) Section 954(b) is amended by striking paragraph (6).
          (5) Section 954 is amended by striking subsection (g).
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years of foreign corporations beginning after December 31, 
2017, and to taxable years of United States shareholders in which or 
with which such taxable years of foreign corporations end.

SEC. 4203. INFLATION ADJUSTMENT OF DE MINIMIS EXCEPTION FOR FOREIGN 
                    BASE COMPANY INCOME.

  (a) In General.--Section 954(b)(3) is amended by adding at the end 
the following new subparagraph:
                  ``(D) Inflation adjustment.--In the case of any 
                taxable year beginning after 2017, the dollar amount in 
                subparagraph (A)(ii) shall be increased by an amount 
                equal to--
                          ``(i) such dollar amount, multiplied by
                          ``(ii) the cost-of-living adjustment 
                        determined under section 1(c)(2)(A) for the 
                        calendar year in which the taxable year begins.
                Any increase determined under the preceding sentence 
                shall be rounded to the nearest multiple of $50,000.''.
  (b) Effective Date.--The amendments made by this section shall apply 
to taxable years of foreign corporations beginning after December 31, 
2017, and to taxable years of United States shareholders in which or 
with which such taxable years of foreign corporations end.

SEC. 4204. LOOK-THRU RULE FOR RELATED CONTROLLED FOREIGN CORPORATIONS 
                    MADE PERMANENT.

  (a) In General.--Paragraph (6) of section 954(c) is amended by 
striking subparagraph (C).
  (b) Effective Date.--The amendments made by this section shall apply 
to taxable years of foreign corporations beginning after December 31, 
2019, and to taxable years of United States shareholders in which or 
with which such taxable years of foreign corporations end.

SEC. 4205. MODIFICATION OF STOCK ATTRIBUTION RULES FOR DETERMINING 
                    STATUS AS A CONTROLLED FOREIGN CORPORATION.

  (a) In General.--Section 958(b) is amended--
          (1) by striking paragraph (4), and
          (2) by striking ``Paragraphs (1) and (4)'' in the last 
        sentence and inserting ``Paragraph (1)''.
  (b) Application of Certain Reporting Requirements.--Section 
6038(e)(2) is amended by striking ``except that--'' and all that 
follows through ``in applying subparagraph (C)'' and inserting ``except 
that in applying subparagraph (C)''.
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years of foreign corporations beginning after December 31, 
2017, and to taxable years of United States shareholders in which or 
with which such taxable years of foreign corporations end.

SEC. 4206. ELIMINATION OF REQUIREMENT THAT CORPORATION MUST BE 
                    CONTROLLED FOR 30 DAYS BEFORE SUBPART F INCLUSIONS 
                    APPLY.

  (a) In General.--Section 951(a)(1) is amended by striking ``for an 
uninterrupted period of 30 days or more'' and inserting ``at any 
time''.
  (b) Effective Date.--The amendment made by this section shall apply 
to taxable years of foreign corporations beginning after December 31, 
2017, and to taxable years of United States shareholders with or within 
which such taxable years of foreign corporations end.

                 Subtitle D--Prevention of Base Erosion

SEC. 4301. CURRENT YEAR INCLUSION BY UNITED STATES SHAREHOLDERS WITH 
                    FOREIGN HIGH RETURNS.

  (a) In General.--Subpart F of part III of subchapter N of chapter 1 
is amended by inserting after section 951 the following new section:

``SEC. 951A. FOREIGN HIGH RETURN AMOUNT INCLUDED IN GROSS INCOME OF 
                    UNITED STATES SHAREHOLDERS.

  ``(a) In General.--Each person who is a United States shareholder of 
any controlled foreign corporation for any taxable year of such United 
States shareholder shall include in gross income for such taxable year 
50 percent of such shareholder's foreign high return amount for such 
taxable year.
  ``(b) Foreign High Return Amount.--For purposes of this section--
          ``(1) In general.--The term `foreign high return amount' 
        means, with respect to any United States shareholder for any 
        taxable year of such United States shareholder, the excess (if 
        any) of--
                  ``(A) such shareholder's net CFC tested income for 
                such taxable year, over
                  ``(B) the excess (if any) of--
                          ``(i) the applicable percentage of the 
                        aggregate of such shareholder's pro rata share 
                        of the qualified business asset investment of 
                        each controlled foreign corporation with 
                        respect to which such shareholder is a United 
                        States shareholder for such taxable year 
                        (determined for each taxable year of each such 
                        controlled foreign corporation which ends in or 
                        with such taxable year of such United States 
                        shareholder), over
                          ``(ii) the amount of interest expense taken 
                        into account under subsection (c)(2)(A)(ii) in 
                        determining the shareholder's net CFC tested 
                        income for the taxable year.
          ``(2) Applicable percentage.--The term `applicable 
        percentage' means, with respect to any taxable year, the 
        Federal short-term rate (determined under section 1274(d) for 
        the month in which or with which such taxable year ends) plus 7 
        percentage points.
  ``(c) Net CFC Tested Income.--For purposes of this section--
          ``(1) In general.--The term `net CFC tested income' means, 
        with respect to any United States shareholder for any taxable 
        year of such United States shareholder, the excess (if any) 
        of--
                  ``(A) the aggregate of such shareholder's pro rata 
                share of the tested income of each controlled foreign 
                corporation with respect to which such shareholder is a 
                United States shareholder for such taxable year of such 
                United States shareholder (determined for each taxable 
                year of such controlled foreign corporation which ends 
                in or with such taxable year of such United States 
                shareholder), over
                  ``(B) the aggregate of such shareholder's pro rata 
                share of the tested loss of each controlled foreign 
                corporation with respect to which such shareholder is a 
                United States shareholder for such taxable year of such 
                United States shareholder (determined for each taxable 
                year of such controlled foreign corporation which ends 
                in or with such taxable year of such United States 
                shareholder).
          ``(2) Tested income; tested loss.--For purposes of this 
        section--
                  ``(A) Tested income.--The term `tested income' means, 
                with respect to any controlled foreign corporation for 
                any taxable year of such controlled foreign 
                corporation, the excess (if any) of--
                          ``(i) the gross income of such corporation 
                        determined without regard to--
                                  ``(I) any item of income which is 
                                effectively connected with the conduct 
                                by such corporation of a trade or 
                                business within the United States if 
                                subject to tax under this chapter,
                                  ``(II) any gross income taken into 
                                account in determining the subpart F 
                                income of such corporation,
                                  ``(III) except as otherwise provided 
                                by the Secretary, any amount excluded 
                                from the foreign personal holding 
                                company income (as defined in section 
                                954) of such corporation by reason of 
                                section 954(c)(6) but only to the 
                                extent that any deduction allowable for 
                                the payment or accrual of such amount 
                                does not result in a reduction in the 
                                foreign high return amount of any 
                                United States shareholder (determined 
                                without regard to this subclause),
                                  ``(IV) any gross income excluded from 
                                the foreign personal holding company 
                                income (as defined in section 954) of 
                                such corporation by reason of 
                                subsection (c)(2)(C), (h), or (i) of 
                                section 954,
                                  ``(V) any gross income excluded from 
                                the insurance income (as defined in 
                                section 953) of such corporation by 
                                reason of section 953(a)(2),
                                  ``(VI) any gross income excluded from 
                                foreign base company income (as defined 
                                in section 954) or insurance income (as 
                                defined in section 953) of such 
                                corporation by reason of section 
                                954(b)(4),
                                  ``(VII) any dividend received from a 
                                related person (as defined in section 
                                954(d)(3)), and
                                  ``(VIII) any commodities gross income 
                                of such corporation, over
                          ``(ii) the deductions (including taxes) 
                        properly allocable to such gross income under 
                        rules similar to the rules of section 954(b)(5) 
                        (or which would be so properly allocable if 
                        such corporation had such gross income).
                  ``(B) Tested loss.--The term `tested loss' means, 
                with respect to any controlled foreign corporation for 
                any taxable year of such controlled foreign 
                corporation, the excess (if any) of the amount 
                described in subparagraph (A)(ii) over the amount 
                described in subparagraph (A)(i).
  ``(d) Qualified Business Asset Investment.--For purposes of this 
section--
          ``(1) In general.--The term `qualified business asset 
        investment' means, with respect to any controlled foreign 
        corporation for any taxable year of such controlled foreign 
        corporation, the aggregate of the corporation's adjusted bases 
        (determined as of the close of such taxable year and after any 
        adjustments with respect to such taxable year) in specified 
        tangible property--
                  ``(A) used in a trade or business of the corporation, 
                and
                  ``(B) of a type with respect to which a deduction is 
                allowable under section 168.
          ``(2) Specified tangible property.--The term `specified 
        tangible property' means any tangible property to the extent 
        such property is used in the production of tested income or 
        tested loss.
          ``(3) Partnership property.--For purposes of this subsection, 
        if a controlled foreign corporation holds an interest in a 
        partnership at the close of such taxable year of the controlled 
        foreign corporation, such controlled foreign corporation shall 
        take into account under paragraph (1) the controlled foreign 
        corporation's distributive share of the aggregate of the 
        partnership's adjusted bases (determined as of such date in the 
        hands of the partnership) in tangible property held by such 
        partnership to the extent such property--
                  ``(A) is used in the trade or business of the 
                partnership,
                  ``(B) is of a type with respect to which a deduction 
                is allowable under section 168, and
                  ``(C) is used in the production of tested income or 
                tested loss (determined with respect to such controlled 
                foreign corporation's distributive share of income or 
                loss with respect to such property).
        For purposes of this paragraph, the controlled foreign 
        corporation's distributive share of the adjusted basis of any 
        property shall be the controlled foreign corporation's 
        distributive share of income and loss with respect to such 
        property.
          ``(4) Determination of adjusted basis.--For purposes of this 
        subsection, the adjusted basis in any property shall be 
        determined without regard to any provision of this title (or 
        any other provision of law) which is enacted after the date of 
        the enactment of this section.
          ``(5) Regulations.--The Secretary shall issue such 
        regulations or other guidance as the Secretary determines 
        appropriate to prevent the avoidance of the purposes of this 
        subsection, including regulations or other guidance which 
        provide for the treatment of property if--
                  ``(A) such property is transferred, or held, 
                temporarily, or
                  ``(B) the avoidance of the purposes of this paragraph 
                is a factor in the transfer or holding of such 
                property.
  ``(e) Commodities Gross Income.--For purposes of this section--
          ``(1) Commodities gross income.--The term `commodities gross 
        income' means, with respect to any corporation--
                  ``(A) gross income of such corporation from the 
                disposition of commodities which are produced or 
                extracted by such corporation (or a partnership in 
                which such corporation is a partner), and
                  ``(B) gross income of such corporation from the 
                disposition of property which gives rise to income 
                described in subparagraph (A).
          ``(2) Commodity.--The term `commodity' means any commodity 
        described in section 475(e)(2)(A) or section 475(e)(2)(D) 
        (determined without regard to clause (i) thereof and by 
        substituting `a commodity described in subparagraph (A)' for 
        `such a commodity' in clause (ii) thereof).
  ``(f) Taxable Years for Which Persons Are Treated as United States 
Shareholders of Controlled Foreign Corporations.--For purposes of this 
section--
          ``(1) In general.--A United States shareholder of a 
        controlled foreign corporation shall be treated as a United 
        States shareholder of such controlled foreign corporation for 
        any taxable year of such United States shareholder if--
                  ``(A) a taxable year of such controlled foreign 
                corporation ends in or with such taxable year of such 
                person, and
                  ``(B) such person owns (within the meaning of section 
                958(a)) stock in such controlled foreign corporation on 
                the last day, in such taxable year of such foreign 
                corporation, on which the foreign corporation is a 
                controlled foreign corporation.
          ``(2) Treatment as a controlled foreign corporation.--Except 
        for purposes of paragraph (1)(B) and the application of section 
        951(a)(2) to this section pursuant to subsection (g), a foreign 
        corporation shall be treated as a controlled foreign 
        corporation for any taxable year of such foreign corporation if 
        such foreign corporation is a controlled foreign corporation at 
        any time during such taxable year.
  ``(g) Determination of Pro Rata Share.--For purposes of this section, 
pro rata shares shall be determined under the rules of section 
951(a)(2) in the same manner as such section applies to subpart F 
income.
  ``(h) Coordination With Subpart F.--
          ``(1) Treatment as subpart f income for certain purposes.--
        Except as otherwise provided by the Secretary any foreign high 
        return amount included in gross income under subsection (a) 
        shall be treated in the same manner as an amount included under 
        section 951(a)(1)(A) for purposes of applying sections 
        168(h)(2)(B), 535(b)(10), 851(b), 904(h)(1), 959, 961, 962, 
        993(a)(1)(E), 996(f)(1), 1248(b)(1), 1248(d)(1), 6501(e)(1)(C), 
        6654(d)(2)(D), and 6655(e)(4).
          ``(2) Entire foreign high return amount taken into account 
        for purposes of certain sections.--For purposes of applying 
        paragraph (1) with respect to sections 168(h)(2)(B), 851(b), 
        959, 961, 962, 1248(b)(1), and 1248(d)(1), the foreign high 
        return amount included in gross income under subsection (a) 
        shall be determined by substituting `100 percent' for `50 
        percent' in such subsection.
          ``(3) Allocation of foreign high return amount to controlled 
        foreign corporations.--For purposes of the sections referred to 
        in paragraph (1), with respect to any controlled foreign 
        corporation any pro rata amount from which is taken into 
        account in determining the foreign high return amount included 
        in gross income of a United States shareholder under subsection 
        (a), the portion of such foreign high return amount which is 
        treated as being with respect to such controlled foreign 
        corporation is--
                  ``(A) in the case of a controlled foreign corporation 
                with tested loss, zero, and
                  ``(B) in the case of a controlled foreign corporation 
                with tested income, the portion of such foreign high 
                return amount which bears the same ratio to such 
                foreign high return amount as--
                          ``(i) such United States shareholder's pro 
                        rata amount of the tested income of such 
                        controlled foreign corporation, bears to
                          ``(ii) the aggregate amount determined under 
                        subsection (c)(1)(A) with respect to such 
                        United States shareholder.
          ``(4) Coordination with subpart f to deny double benefit of 
        losses.--In the case of any United States shareholder of any 
        controlled foreign corporation, the amount included in gross 
        income under section 951(a)(1)(A) shall be determined by 
        increasing the earnings and profits of such controlled foreign 
        corporation (solely for purposes of determining such amount) by 
        an amount that bears the same ratio (not greater than 1) to 
        such shareholder's pro rata share of the tested loss of such 
        controlled foreign corporation as--
                  ``(A) the aggregate amount determined under 
                subsection (c)(1)(A) with respect to such shareholder, 
                bears to
                  ``(B) the aggregate amount determined under 
                subsection (c)(1)(B) with respect to such 
                shareholder.''.
  (b) Foreign Tax Credit.--
          (1) Application of deemed paid foreign tax credit.--Section 
        960, as amended by the preceding provisions of this Act, is 
        amended by redesignating subsections (d) and (e) as subsections 
        (e) and (f), respectively, and by inserting after subsection 
        (c) the following new subsection:
  ``(d) Deemed Paid Credit for Taxes Properly Attributable to Tested 
Income.--
          ``(1) In general.--For purposes of this subpart, if any 
        amount is includible in the gross income of a domestic 
        corporation under section 951A, such domestic corporation shall 
        be deemed to have paid foreign income taxes equal to 80 percent 
        of--
                  ``(A) such domestic corporation's foreign high return 
                percentage, multiplied by
                  ``(B) the aggregate tested foreign income taxes paid 
                or accrued by controlled foreign corporations with 
                respect to which such domestic corporation is a United 
                States shareholder.
          ``(2) Foreign high return percentage.--For purposes of 
        paragraph (1), the term `foreign high return percentage' means, 
        with respect to any domestic corporation, the ratio (expressed 
        as a percentage) of--
                  ``(A) such corporation's foreign high return amount 
                (as defined in section 951A(b)), divided by
                  ``(B) the aggregate amount determined under section 
                951A(c)(1)(A) with respect to such corporation.
          ``(3) Tested foreign income taxes.--For purposes of paragraph 
        (1), the term `tested foreign income taxes' means, with respect 
        to any domestic corporation which is a United States 
        shareholder of a controlled foreign corporation, the foreign 
        income taxes paid or accrued by such foreign corporation which 
        are properly attributable to gross income described in section 
        951A(c)(2)(A)(i).''.
          (2) Application of foreign tax credit limitation.--
                  (A) Separate basket for foreign high return amount.--
                Section 904(d)(1) is amended by redesignating 
                subparagraphs (A) and (B) as subparagraphs (B) and (C), 
                respectively, and by inserting before subparagraph (B) 
                (as so redesignated) the following new subparagraph:
                  ``(A) any amount includible in gross income under 
                section 951A,''.
                  (B) No carryover of excess taxes.--Section 904(c) is 
                amended by adding at the end the following: ``This 
                subsection shall not apply to taxes paid or accrued 
                with respect to amounts described in subsection 
                (d)(1)(A).''
          (3) Gross up for deemed paid foreign tax credit.--Section 78, 
        as amended by the preceding provisions of this Act, is 
        amended--
                  (A) by striking ``any taxable year, an amount'' and 
                inserting ``any taxable year--
          ``(1) an amount'', and
                  (B) by striking the period at the end and inserting 
                ``, and
          ``(2) an amount equal to the taxes deemed to be paid by such 
        corporation under section 960(d) for such taxable year 
        (determined by substituting `100 percent' for `80 percent' in 
        such section) shall be treated for purposes of this title 
        (other than sections 959, 960, and 961) as an increase in the 
        foreign high return amount of such domestic corporation under 
        section 951A for such taxable year.''.
  (c) Conforming Amendments.--
          (1) Section 170(b)(2)(D) is amended by striking ``computed 
        without regard to'' and all that follows and inserting 
        ``computed--
                          ``(i) without regard to--
                                  ``(I) this section,
                                  ``(II) part VIII (except section 
                                248),
                                  ``(III) any net operating loss 
                                carryback to the taxable year under 
                                section 172,
                                  ``(IV) any capital loss carryback to 
                                the taxable year under section 
                                1212(a)(1), and
                          ``(ii) by substituting `100 percent' for `50 
                        percent' in section 951A(a).''.
          (2) Section 246(b)(1) is amended by--
                  (A) striking ``and without regard to'' and inserting 
                ``without regard to'', and
                  (B) by striking the period at the end and inserting 
                ``, and by substituting `100 percent' for `50 percent' 
                in section 951A(a).''.
          (3) Section 469(i)(3)(F) is amended by striking ``determined 
        without regard to'' and all that follows and inserting 
        ``determined--
                          ``(i) without regard to--
                                  ``(I) any amount includible in gross 
                                income under section 86,
                                  ``(II) the amounts allowable as a 
                                deduction under section 219, and
                                  ``(III) any passive activity loss or 
                                any loss allowable by reason of 
                                subsection (c)(7), and
                          ``(ii) by substituting `100 percent' for `50 
                        percent' in section 951A(a).''.
          (4) Section 856(c)(2) is amended by striking ``and'' at the 
        end of subparagraph (H), by adding ``and'' at the end of 
        subparagraph (I), and by inserting after subparagraph (I) the 
        following new subparagraph:
                  ``(J) amounts includible in gross income under 
                section 951A(a);''.
          (5) Section 856(c)(3)(D) is amended by striking ``dividends 
        or other distributions on, and gain'' and inserting 
        ``dividends, other distributions on, amounts includible in 
        gross income under section 951A(a) with respect to, and gain''.
          (6) The table of sections for subpart F of part III of 
        subchapter N of chapter 1 is amended by inserting after the 
        item relating to section 951 the following new item:

``Sec. 951A. Foreign high return amount included in gross income of 
United States shareholders.''.

  (d) Effective Date.--The amendments made by this section shall apply 
to taxable years of foreign corporations beginning after December 31, 
2017, and to taxable years of United States shareholders in which or 
with which such taxable years of foreign corporations end.

SEC. 4302. LIMITATION ON DEDUCTION OF INTEREST BY DOMESTIC CORPORATIONS 
                    WHICH ARE MEMBERS OF AN INTERNATIONAL FINANCIAL 
                    REPORTING GROUP.

  (a) In General.--Section 163 is amended by redesignating subsection 
(n) as subsection (p) and by inserting after subsection (m) the 
following new subsection:
  ``(n) Limitation on Deduction of Interest by Domestic Corporations in 
International Financial Reporting Groups.--
          ``(1) In general.--In the case of any domestic corporation 
        which is a member of any international financial reporting 
        group, the deduction under this chapter for interest paid or 
        accrued during the taxable year shall not exceed the sum of--
                  ``(A) the allowable percentage of 110 percent of the 
                excess (if any) of --
                          ``(i) the amount of such interest so paid or 
                        accrued, over
                          ``(ii) the amount described in subparagraph 
                        (B), plus
                  ``(B) the amount of interest includible in gross 
                income of such corporation for such taxable year.
          ``(2) International financial reporting group.--
                  ``(A) For purposes of this subsection, the term 
                `international financial reporting group' means, with 
                respect to any reporting year, any group of entities 
                which--
                          ``(i) includes--
                                  ``(I) at least one foreign 
                                corporation engaged in a trade or 
                                business within the United States, or
                                  ``(II) at least one domestic 
                                corporation and one foreign 
                                corporation,
                          ``(ii) prepares consolidated financial 
                        statements with respect to such year, and
                          ``(iii) reports in such statements average 
                        annual gross receipts (determined in the 
                        aggregate with respect to all entities which 
                        are part of such group) for the 3-reporting-
                        year period ending with such reporting year in 
                        excess of $100,000,000.
                  ``(B) Rules relating to determination of average 
                gross receipts.--For purposes of subparagraph (A)(iii), 
                rules similar to the rules of section 448(c)(3) shall 
                apply.
          ``(3) Allowable percentage.--For purposes of this 
        subsection--
                  ``(A) In general.--The term `allowable percentage' 
                means, with respect to any domestic corporation for any 
                taxable year, the ratio (expressed as a percentage and 
                not greater than 100 percent) of--
                          ``(i) such corporation's allocable share of 
                        the international financial reporting group's 
                        reported net interest expense for the reporting 
                        year of such group which ends in or with such 
                        taxable year of such corporation, over
                          ``(ii) such corporation's reported net 
                        interest expense for such reporting year of 
                        such group.
                  ``(B) Reported net interest expense.--The term 
                `reported net interest expense' means--
                          ``(i) with respect to any international 
                        financial reporting group for any reporting 
                        year, the excess of--
                                  ``(I) the aggregate amount of 
                                interest expense reported in such 
                                group's consolidated financial 
                                statements for such taxable year, over
                                  ``(II) the aggregate amount of 
                                interest income reported in such 
                                group's consolidated financial 
                                statements for such taxable year, and
                          ``(ii) with respect to any domestic 
                        corporation for any reporting year, the excess 
                        of--
                                  ``(I) the amount of interest expense 
                                of such corporation reported in the 
                                books and records of the international 
                                financial reporting group which are 
                                used in preparing such group's 
                                consolidated financial statements for 
                                such taxable year, over
                                  ``(II) the amount of interest income 
                                of such corporation reported in such 
                                books and records.
                  ``(C) Allocable share of reported net interest 
                expense.--With respect to any domestic corporation 
                which is a member of any international financial 
                reporting group, such corporation's allocable share of 
                such group's reported net interest expense for any 
                reporting year is the portion of such expense which 
                bears the same ratio to such expense as--
                          ``(i) the EBITDA of such corporation for such 
                        reporting year, bears to
                          ``(ii) the EBITDA of such group for such 
                        reporting year.
                  ``(D) EBITDA.--
                          ``(i) In general.--The term `EBITDA' means, 
                        with respect to any reporting year, earnings 
                        before interest, taxes, depreciation, and 
                        amortization--
                                  ``(I) as determined in the 
                                international financial reporting 
                                group's consolidated financial 
                                statements for such year, or
                                  ``(II) for purposes of subparagraph 
                                (A)(i), as determined in the books and 
                                records of the international financial 
                                reporting group which are used in 
                                preparing such statements if not 
                                determined in such statements.
                          ``(ii) Treatment of disregarded entities.--
                        The EBITDA of any domestic corporation shall 
                        not fail to include the EBITDA of any entity 
                        which is disregarded for purposes of this 
                        chapter.
                          ``(iii) Treatment of intra-group 
                        distributions.--The EBITDA of any domestic 
                        corporation shall be determined without regard 
                        to any distribution received by such 
                        corporation from any other member of the 
                        international financial reporting group.
                  ``(E) Special rules for non-positive ebitda.--
                          ``(i) Non-positive group ebitda.--In the case 
                        of any international financial reporting group 
                        the EBITDA of which is zero or less, paragraph 
                        (1) shall not apply to any member of such group 
                        the EBITDA of which is above zero.
                          ``(ii) Non-positive entity ebitda.--In the 
                        case of any group member the EBITDA of which is 
                        zero or less, paragraph (1) shall be applied 
                        without regard to subparagraph (A) thereof.
          ``(4) Consolidated financial statement.--For purposes of this 
        subsection, the term `consolidated financial statement' means 
        any consolidated financial statement described in paragraph 
        (2)(A)(ii) if such statement is--
                  ``(A) a financial statement which is certified as 
                being prepared in accordance with generally accepted 
                accounting principles, international financial 
                reporting standards, or any other comparable method of 
                accounting identified by the Secretary, and which is--
                          ``(i) a 10-K (or successor form), or annual 
                        statement to shareholders, required to be filed 
                        with the United States Securities and Exchange 
                        Commission,
                          ``(ii) an audited financial statement which 
                        is used for--
                                  ``(I) credit purposes,
                                  ``(II) reporting to shareholders, 
                                partners, or other proprietors, or to 
                                beneficiaries, or
                                  ``(III) any other substantial nontax 
                                purpose,
                        but only if there is no statement described in 
                        clause (i), or
                          ``(iii) filed with any other Federal or State 
                        agency for nontax purposes, but only if there 
                        is no statement described in clause (i) or 
                        (ii), or
                  ``(B) a financial statement which--
                          ``(i) is used for a purpose described in 
                        subclause (I), (II), or (III) of subparagraph 
                        (A)(ii), or
                          ``(ii) filed with any regulatory or 
                        governmental body (whether domestic or foreign) 
                        specified by the Secretary,
                but only if there is no statement described in 
                subparagraph (A).
          ``(5) Reporting year.--For purposes of this subsection, the 
        term `reporting year' means, with respect to any international 
        financial reporting group, the year with respect to which the 
        consolidated financial statements are prepared.
          ``(6) Application to certain entities.--
                  ``(A) Partnerships.--Except as otherwise provided by 
                the Secretary in paragraph (7), this subsection shall 
                apply to any partnership which is a member of any 
                international financial reporting group under rules 
                similar to the rules of section 163(j)(3).
                  ``(B) Foreign corporations engaged in trade or 
                business within the united states.--Except as otherwise 
                provided by the Secretary in paragraph (8), any 
                deduction for interest paid or accrued by a foreign 
                corporation engaged in a trade or business within the 
                United States shall be limited in a manner consistent 
                with the principles of this subsection.
                  ``(C) Consolidated groups.--For purposes of this 
                subsection, the members of any group that file (or are 
                required to file) a consolidated return with respect to 
                the tax imposed by chapter 1 for a taxable year shall 
                be treated as a single corporation.
          ``(7) Regulations.--The Secretary may issue such regulations 
        or other guidance as are necessary or appropriate to carry out 
        the purposes of this subsection.''.
  (b) Carryforward of Disallowed Interest.--
          (1) In general.--Section 163(o) is amended to read as 
        follows:
  ``(o) Carryforward of Certain Disallowed Interest.--The amount of any 
interest not allowed as a deduction for any taxable year by reason of 
subsection (j)(1) or (n)(1) (whichever imposes the lower limitation 
with respect to such taxable year) shall be treated as interest (and as 
business interest for purposes of subsection (j)(1)) paid or accrued in 
the succeeding taxable year. Interest paid or accrued in any taxable 
year (determined without regard to the preceding sentence) shall not be 
carried past the 5th taxable year following such taxable year, 
determined by treating interest as allowed as a deduction on a first-
in, first-out basis.''.
          (2) Treatment of carryforward of disallowed interest in 
        certain corporate acquisitions.--For rules related to the 
        carryforward of disallowed interest in certain corporate 
        acquisitions, see the amendments made by section 3301(c).
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 4303. EXCISE TAX ON CERTAIN PAYMENTS FROM DOMESTIC CORPORATIONS TO 
                    RELATED FOREIGN CORPORATIONS; ELECTION TO TREAT 
                    SUCH PAYMENTS AS EFFECTIVELY CONNECTED INCOME.

  (a) Excise Tax on Certain Amounts From Domestic Corporations to 
Foreign Affiliates.--
          (1) In general.--Chapter 36 is amended by adding at the end 
        the following new subchapter:

      ``Subchapter E--Tax on Certain Amounts to Foreign Affiliates

``Sec. 4491. Imposition of tax on certain amounts from domestic 
corporations to foreign affiliates.

``SEC. 4491. IMPOSITION OF TAX ON CERTAIN AMOUNTS FROM DOMESTIC 
                    CORPORATIONS TO FOREIGN AFFILIATES.

  ``(a) In General.--There is hereby imposed on each specified amount 
paid or incurred by a domestic corporation to a foreign corporation 
which is a member of the same international financial reporting group 
as such domestic corporation a tax equal to the highest rate of tax in 
effect under section 11 multiplied by such amount.
  ``(b) By Whom Paid.--The tax imposed by subsection (a) shall be paid 
by the domestic corporation described in such subsection.
  ``(c) Exception for Effectively Connected Income.--Subsection (a) 
shall not apply to so much of any specified amount as is effectively 
connected with the conduct of a trade or business within the United 
States if such amount is subject to tax under chapter 1. In the case of 
any amount which is treated as effectively connected with the conduct 
of a trade or business within the United States by reason of section 
882(g), the preceding sentence shall apply to such amount only if the 
domestic corporation provides to the Secretary (at such time and in 
such form and manner as the Secretary may provide) a copy of the 
election made under section 882(g) by the foreign corporation referred 
to in subsection (a).
  ``(d) Definitions and Special Rules.--Terms used in this section that 
are also used in section 882(g) shall have the same meaning as when 
used in such section and rules similar to the rules of paragraphs (5) 
and (6) of such section shall apply for purposes of this section.''.
          (2) Denial of deduction for tax imposed.--Section 275(a) is 
        amended by inserting after paragraph (6) the following new 
        paragraph:
          ``(7) Taxes imposed by section 4491.''.
          (3) Clerical amendment.--The table of subchapters for chapter 
        36 is amended by adding at the end the following new item:

    ``subchapter e. tax on certain amounts to foreign affiliates.''.

  (b) Election to Treat Certain Payments From Domestic Corporations to 
Related Foreign Corporations as Effectively Connected Income.--Section 
882 is amended by adding at the end the following new subsection:
  ``(g) Election to Treat Certain Payments From Domestic Corporations 
to Related Foreign Corporations as Effectively Connected Income.--
          ``(1) In general.--In the case of any specified amount paid 
        or incurred by a domestic corporation to a foreign corporation 
        which is a member of the same international financial reporting 
        group as such domestic corporation and which has elected to be 
        subject to the provisions of this subsection--
                  ``(A) such amount shall be taken into account (other 
                than for purposes of sections 245, 245A, and 881) in 
                the taxable year of such foreign corporation during 
                which such amount is paid or incurred as if--
                          ``(i) such foreign corporation were engaged 
                        in a trade or business within the United 
                        States,
                          ``(ii) such foreign corporation had a 
                        permanent establishment in the United States 
                        during the taxable year, and
                          ``(iii) such payment were effectively 
                        connected with the conduct of a trade or 
                        business within the United States and were 
                        attributable to such permanent establishment,
                  ``(B) for purposes of subsection (c)(1)(A), no 
                deduction shall be allowed with respect to such amount 
                and such subsection shall be applied without regard to 
                such amount, and
                  ``(C) the foreign corporation shall be allowed a 
                deduction (for the taxable year referred to in 
                subparagraph (A)) equal to the deemed expenses with 
                respect to such amount.
          ``(2) Specified amount.--For purposes of this subsection--
                  ``(A) In general.--The term `specified amount' means 
                any amount which is, with respect to the payor, 
                allowable as a deduction or includible in costs of 
                goods sold, inventory, or the basis of a depreciable or 
                amortizable asset.
                  ``(B) Exceptions.--The term `specified amount' shall 
                not include--
                          ``(i) interest,
                          ``(ii) any amount paid or incurred for the 
                        acquisition of any security described in 
                        section 475(c)(2) (determined without regard to 
                        the last sentence thereof) or any commodity 
                        described in section 475(e)(2),
                          ``(iii) except as provided in subparagraph 
                        (C), any amount with respect to which tax is 
                        imposed under section 881(a), and
                          ``(iv) in the case of a payor which has 
                        elected to use a services cost method for 
                        purposes of section 482, any amount paid or 
                        incurred for services if such amount is the 
                        total services cost with no markup.
                  ``(C) Amounts not treated as effectively connected to 
                extent of gross-basis tax.--Subparagraph (B)(iii) shall 
                only apply to so much of any specified amount as bears 
                the proportion to such amount as--
                          ``(i) the rate of tax imposed under section 
                        881(a) with respect to such amount, bears to
                          ``(ii) 30 percent.
          ``(3) Deemed expenses.--
                  ``(A) In general.--The deemed expenses with respect 
                to any specified amount received by a foreign 
                corporation during any reporting year is the amount of 
                expenses such that the net income ratio of such foreign 
                corporation with respect to such amount (taking into 
                account only such specified amount and such deemed 
                expenses) is equal to the net income ratio of the 
                international financial reporting group determined for 
                such reporting year with respect to the product line to 
                which the specified amount relates.
                  ``(B) Net income ratio.--For purposes of this 
                paragraph, the term `net income ratio' means the ratio 
                of--
                          ``(i) net income determined without regard to 
                        interest income, interest expense, and income 
                        taxes, divided by
                          ``(ii) revenues.
                  ``(C) Method of determination.--Amounts described in 
                subparagraph (B) shall be determined with respect to 
                the international financial reporting group on the 
                basis of the consolidated financial statements referred 
                to in paragraph (4)(A)(i) and the books and records of 
                the members of the international financial reporting 
                group which are used in preparing such statements, 
                taking into account only revenues and expenses of the 
                members of such group (other than the members of such 
                group which are (or are treated as) a domestic 
                corporation for purposes of this subsection) derived 
                from, or incurred with respect to--
                          ``(i) persons who are not members of such 
                        group, and
                          ``(ii) members of such group which are (or 
                        are treated as) a domestic corporation for 
                        purposes of this subsection.
          ``(4) International financial reporting group.--For purposes 
        of this subsection--
                  ``(A) In general.--The term `international financial 
                reporting group' means any group of entities, with 
                respect to any specified amount, if such amount is paid 
                or incurred during a reporting year of such group with 
                respect to which--
                          ``(i) such group prepares consolidated 
                        financial statements (within the meaning of 
                        section 163(n)(4)) with respect to such year, 
                        and
                          ``(ii) the average annual aggregate payment 
                        amount of such group for the 3-reporting-year 
                        period ending with such reporting year exceeds 
                        $100,000,000.
                  ``(B) Annual aggregate payment amount.--The term 
                `annual aggregate payment amount' means, with respect 
                to any reporting year of the group referred to in 
                subparagraph (A)(i), the aggregate specified amounts to 
                which paragraph (1) applies (or would apply if such 
                group were an international financial reporting group).
                  ``(C) Application of certain rules.--Rules similar to 
                the rules of subparagraphs (A), (B), and (D) of section 
                448(c)(3) shall apply for purposes of this paragraph.
          ``(5) Treatment of partnerships.--Any specified amount paid, 
        incurred, or received by a partnership which is a member of any 
        international financial reporting group (and any amount treated 
        as paid, incurred, or received by a partnership under this 
        paragraph) shall be treated for purposes of this subsection as 
        amounts paid, incurred, or received, respectively, by each 
        partner of such partnership in an amount equal to such 
        partner's distributive share of the items of income, gain, 
        deduction, or loss to which such amounts relate.
          ``(6) Treatment of amounts in connection with united states 
        trade or business.--Any specified amount paid, incurred, or 
        received by a foreign corporation in connection with the 
        conduct of a trade or business within the United States (other 
        than a trade or business it is deemed to conduct pursuant to 
        this subsection) shall be treated for purposes of this 
        subsection as an amount paid, incurred, or received, 
        respectively, by a domestic corporation. For purposes of the 
        preceding sentence, a foreign corporation shall be deemed to 
        pay, incur, and receive amounts with respect to a trade or 
        business it conducts within the United States (other than a 
        trade or business it is deemed to conduct pursuant to this 
        subsection) to the extent such foreign corporation would be 
        treated as paying, incurring, or receiving such amounts from 
        such trade or business if such trade or business were a 
        domestic corporation.
          ``(7) Joint and several liability of members of internal 
        financial reporting group.--In the case of any underpayment 
        with respect to any taxable year of a foreign corporation which 
        is a member of an international financial accounting group, 
        each domestic corporation which is a member of such group at 
        any time during such taxable year shall be jointly and 
        severally liable for--
                  ``(A) so much of such underpayment as does not exceed 
                the excess (if any) of such underpayment over the 
                amount of such underpayment determined without regard 
                to this subsection, and
                  ``(B) any penalty, addition to tax, or additional 
                amount attributable to the amount described in 
                subparagraph (A).
          ``(8) Foreign tax credit allowed.--The credit allowed under 
        section 906(a) with respect to amounts taken into account in 
        income under paragraph (1)(A) shall be limited to 80 percent of 
        the amount of taxes paid or accrued and determined without 
        regard to section 906(b)(1).
          ``(9) Election.--Any election under paragraph (1)--
                  ``(A) shall be made at such time and in such form and 
                manner as the Secretary may provide, and
                  ``(B) shall apply for the taxable year for which made 
                and all subsequent taxable years unless revoked with 
                the consent of the Secretary.
          ``(10) Regulations.--The Secretary may issue such regulations 
        or other guidance as are necessary or appropriate to carry out 
        the purposes of this subsection, including regulations or other 
        guidance--
                  ``(A) to provide for the proper determination of 
                product lines, and
                  ``(B) to prevent the avoidance of the purposes of 
                this subsection through the use of conduit transactions 
                or by other means.''.
  (c) Reporting Requirements.--
          (1) Reporting by foreign corporation.--Section 6038C(b) is 
        amended to read as follows:
  ``(b) Required Information.--
          ``(1) In general.--The information described in this 
        subsection is--
                  ``(A) the information described in section 6038A(b), 
                and
                  ``(B) such other information as the Secretary may 
                prescribe by regulations relating to any item not 
                directly connected with a transaction for which 
                information is required under subparagraph (A).
          ``(2) Certain payments from related domestic corporations.--
                  ``(A) In general.--In the case of any reporting 
                corporation that receives during the taxable year any 
                amount to which section 882(g)(1) applies, the 
                information described in this subsection shall include, 
                with respect to each member of the international 
                financial reporting group from which any such amount is 
                received--
                          ``(i) the name and taxpayer identification 
                        number of such member,
                          ``(ii) the aggregate amounts received from 
                        such member,
                          ``(iii) the product lines to which such 
                        amounts relate, the aggregate amounts relating 
                        to each such product line, and the net income 
                        ratio for each such product line (determined 
                        under section 882(g)(3)(B) with respect to the 
                        international financial reporting group), and
                          ``(iv) a summary of any changes in financial 
                        accounting methods that affect the computation 
                        of any net income ratio described in clause 
                        (iii).
                  ``(B) Definitions and special rules.--Terms used in 
                this paragraph that are also used in section 882(g) 
                shall have the same meaning as when used in such 
                section and rules similar to the rules of paragraphs 
                (5) and (6) of such section shall apply for purposes of 
                this paragraph.''.
          (2) Reporting by domestic group members.--
                  (A) In general .--Subpart A of part III of subchapter 
                A of chapter 61 is amended by inserting after section 
                6038D the following new section:

``SEC. 6038E. INFORMATION WITH RESPECT TO CERTAIN PAYMENTS FROM 
                    DOMESTIC CORPORATIONS TO RELATED FOREIGN 
                    CORPORATIONS.

  ``(a) In General.--In the case of any domestic corporation which pays 
or incurs any amount to which section 882(g)(1) applies, such person 
shall--
          ``(1) make a return according to the forms and regulations 
        prescribed the Secretary, setting forth the information 
        described in subsection (b), and
          ``(2) maintain (at the location, in the manner, and to the 
        extent prescribed in regulations) such records as may be 
        appropriate to determine liability for tax pursuant to 
        paragraphs (1) and (7) of section 882(g).
  ``(b) Required Information.--The information described in this 
subsection is--
          ``(1) the name and taxpayer identification number of the 
        common parent of the international financial reporting group in 
        which such domestic corporation is a member, and
          ``(2) with respect to any person who receives an amount 
        described in subsection (a) from such domestic corporation--
                  ``(A) the name and taxpayer identification number of 
                such person,
                  ``(B) the aggregate amounts received by such person,
                  ``(C) the product lines to which such amounts relate, 
                the aggregate amounts relating to each such product 
                line, and the net income ratio for each such product 
                line (determined under section 882(g)(3)(B) with 
                respect to the international financial reporting 
                group), and
                  ``(D) a summary of any changes in financial 
                accounting methods that affect the computation of any 
                net income ratios described in subparagraph (C).
  ``(c) Definitions and Special Rules.--Terms used in this paragraph 
that are also used in section 882(g) shall have the same meaning as 
when used in such section and rules similar to the rules of paragraphs 
(5) and (6) of such section shall apply for purposes of this 
paragraph.''.
                  (B) Clerical amendment.--The table of sections for 
                subpart A of part III of subchapter A of chapter 61 is 
                amended by inserting after the item relating to section 
                6038D the following new item:

``Sec. 6038E. Information with respect to certain payments from 
domestic corporations to related foreign corporations.''.

  (d) Effective Date.--The amendments made by this section shall apply 
to amounts paid or incurred after December 31, 2018.

   Subtitle E--Provisions Related to Possessions of the United States

SEC. 4401. EXTENSION OF DEDUCTION ALLOWABLE WITH RESPECT TO INCOME 
                    ATTRIBUTABLE TO DOMESTIC PRODUCTION ACTIVITIES IN 
                    PUERTO RICO.

  (a) In General.--Section 199(d)(8)(C), prior to its repeal by this 
Act, is amended--
          (1) by striking ``first 11 taxable years'' and inserting 
        ``first 12 taxable years'', and
          (2) by striking ``January 1, 2017'' and inserting ``January 
        1, 2018''.
  (b) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2016.

SEC. 4402. EXTENSION OF TEMPORARY INCREASE IN LIMIT ON COVER OVER OF 
                    RUM EXCISE TAXES TO PUERTO RICO AND THE VIRGIN 
                    ISLANDS.

  (a) In General.--Section 7652(f)(1) is amended by striking ``January 
1, 2017'' and inserting ``January 1, 2023''.
  (b) Effective Date.--The amendment made by this section shall apply 
to distilled spirits brought into the United States after December 31, 
2016.

SEC. 4403. EXTENSION OF AMERICAN SAMOA ECONOMIC DEVELOPMENT CREDIT.

  (a) In General.--Section 119(d) of division A of the Tax Relief and 
Health Care Act of 2006 is amended--
          (1) by striking ``January 1, 2017'' each place it appears and 
        inserting ``January 1, 2023'',
          (2) by striking ``first 11 taxable years'' in paragraph (1) 
        and inserting ``first 17 taxable years'', and
          (3) by striking ``first 5 taxable years'' in paragraph (2) 
        and inserting ``first 11 taxable years''.
  (b) Treatment of Certain References.--Section 119(e) of division A of 
the Tax Relief and Health Care Act of 2006 is amended by adding at the 
end the following: ``References in this subsection to section 199 of 
the Internal Revenue Code of 1986 shall be treated as references to 
such section as in effect before its repeal by the Tax Cuts and Jobs 
Act.''.
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2016.

                Subtitle F--Other International Reforms

SEC. 4501. RESTRICTION ON INSURANCE BUSINESS EXCEPTION TO PASSIVE 
                    FOREIGN INVESTMENT COMPANY RULES.

  (a) In General.--Section 1297(b)(2)(B) is amended to read as follows:
                  ``(B) derived in the active conduct of an insurance 
                business by a qualifying insurance corporation (as 
                defined in subsection (f)),''.
  (b) Qualifying Insurance Corporation Defined.--Section 1297 is 
amended by adding at the end the following new subsection:
  ``(f) Qualifying Insurance Corporation.--For purposes of subsection 
(b)(2)(B)--
          ``(1) In general.--The term `qualifying insurance 
        corporation' means, with respect to any taxable year, a foreign 
        corporation--
                  ``(A) which would be subject to tax under subchapter 
                L if such corporation were a domestic corporation, and
                  ``(B) the applicable insurance liabilities of which 
                constitute more than 25 percent of its total assets, 
                determined on the basis of such liabilities and assets 
                as reported on the corporation's applicable financial 
                statement for the last year ending with or within the 
                taxable year.
          ``(2) Alternative facts and circumstances test for certain 
        corporations.--If a corporation fails to qualify as a qualified 
        insurance corporation under paragraph (1) solely because the 
        percentage determined under paragraph (1)(B) is 25 percent or 
        less, a United States person that owns stock in such 
        corporation may elect to treat such stock as stock of a 
        qualifying insurance corporation if--
                  ``(A) the percentage so determined for the 
                corporation is at least 10 percent, and
                  ``(B) under regulations provided by the Secretary, 
                based on the applicable facts and circumstances--
                          ``(i) the corporation is predominantly 
                        engaged in an insurance business, and
                          ``(ii) such failure is due solely to runoff-
                        related or rating-related circumstances 
                        involving such insurance business.
          ``(3) Applicable insurance liabilities.--For purposes of this 
        subsection--
                  ``(A) In general.--The term `applicable insurance 
                liabilities' means, with respect to any life or 
                property and casualty insurance business--
                          ``(i) loss and loss adjustment expenses, and
                          ``(ii) reserves (other than deficiency, 
                        contingency, or unearned premium reserves) for 
                        life and health insurance risks and life and 
                        health insurance claims with respect to 
                        contracts providing coverage for mortality or 
                        morbidity risks.
                  ``(B) Limitations on amount of liabilities.--Any 
                amount determined under clause (i) or (ii) of 
                subparagraph (A) shall not exceed the lesser of such 
                amount--
                          ``(i) as reported to the applicable insurance 
                        regulatory body in the applicable financial 
                        statement described in paragraph (4)(A) (or, if 
                        less, the amount required by applicable law or 
                        regulation), or
                          ``(ii) as determined under regulations 
                        prescribed by the Secretary.
          ``(4) Other definitions and rules.--For purposes of this 
        subsection--
                  ``(A) Applicable financial statement.--The term 
                `applicable financial statement' means a statement for 
                financial reporting purposes which--
                          ``(i) is made on the basis of generally 
                        accepted accounting principles,
                          ``(ii) is made on the basis of international 
                        financial reporting standards, but only if 
                        there is no statement that meets the 
                        requirement of clause (i), or
                          ``(iii) except as otherwise provided by the 
                        Secretary in regulations, is the annual 
                        statement which is required to be filed with 
                        the applicable insurance regulatory body, but 
                        only if there is no statement which meets the 
                        requirements of clause (i) or (ii).
                  ``(B) Applicable insurance regulatory body.--The term 
                `applicable insurance regulatory body' means, with 
                respect to any insurance business, the entity 
                established by law to license, authorize, or regulate 
                such business and to which the statement described in 
                subparagraph (A) is provided.''.
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

                     TITLE V--EXEMPT ORGANIZATIONS

               Subtitle A--Unrelated Business Income Tax

SEC. 5001. CLARIFICATION OF UNRELATED BUSINESS INCOME TAX TREATMENT OF 
                    ENTITIES TREATED AS EXEMPT FROM TAXATION UNDER 
                    SECTION 501(A).

  (a) In General.--Section 511 is amended by adding at the end the 
following new subsection:
  ``(d) Organizations and Trusts Exempt From Taxation Not Solely by 
Reason of Section 501(a).--For purposes of subsections (a)(2) and 
(b)(2), an organization or trust shall not fail to be treated as exempt 
from taxation under this subtitle by reason of section 501(a) solely 
because such organization is also so exempt, or excludes amounts from 
gross income, by reason of any other provision of this title.''.
  (b) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 5002. EXCLUSION OF RESEARCH INCOME LIMITED TO PUBLICLY AVAILABLE 
                    RESEARCH.

  (a) In General.--Section 512(b)(9) is amended by striking ``from 
research'' and inserting ``from such research''.
  (b) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

                        Subtitle B--Excise Taxes

SEC. 5101. SIMPLIFICATION OF EXCISE TAX ON PRIVATE FOUNDATION 
                    INVESTMENT INCOME.

  (a) Rate Reduction.--Section 4940(a) is amended by striking ``2 
percent'' and inserting ``1.4 percent''.
  (b) Repeal of Special Rules for Certain Private Foundations.--Section 
4940 is amended by striking subsection (e).
  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 5102. PRIVATE OPERATING FOUNDATION REQUIREMENTS RELATING TO 
                    OPERATION OF ART MUSEUM.

  (a) In General.--Section 4942(j) is amended by adding at the end the 
following new paragraph:
          ``(6) Organization operating art museum.--For purposes of 
        this section, the term `operating foundation' shall not include 
        an organization which operates an art museum as a substantial 
        activity unless such museum is open during normal business 
        hours to the public for at least 1,000 hours during the taxable 
        year.''.
  (b) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 5103. EXCISE TAX BASED ON INVESTMENT INCOME OF PRIVATE COLLEGES 
                    AND UNIVERSITIES.

  (a) In General.--Chapter 42 is amended by adding at the end the 
following new subchapter:

   ``Subchapter H--Excise Tax Based on Investment Income of Private 
                       Colleges and Universities

``Sec. 4969. Excise tax based on investment income of private colleges 
and universities.

``SEC. 4969. EXCISE TAX BASED ON INVESTMENT INCOME OF PRIVATE COLLEGES 
                    AND UNIVERSITIES.

  ``(a) Tax Imposed.--There is hereby imposed on each applicable 
educational institution for the taxable year a tax equal to 1.4 percent 
of the net investment income of such institution for the taxable year.
  ``(b) Applicable Educational Institution.--For purposes of this 
subchapter--
          ``(1) In general.--The term `applicable educational 
        institution' means an eligible educational institution (as 
        defined in section 25A(e)(3))--
                  ``(A) which has at least 500 students during the 
                preceding taxable year,
                  ``(B) which is not described in the first sentence of 
                section 511(a)(2)(B), and
                  ``(C) the aggregate fair market value of the assets 
                of which at the end of the preceding taxable year 
                (other than those assets which are used directly in 
                carrying out the institution's exempt purpose) is at 
                least $250,000 per student of the institution.
          ``(2) Students.--For purposes of paragraph (1), the number of 
        students of an institution shall be based on the daily average 
        number of full-time students attending such institution (with 
        part-time students taken into account on a full-time student 
        equivalent basis).
  ``(c) Net Investment Income.--For purposes of this section, net 
investment income shall be determined under rules similar to the rules 
of section 4940(c).
  ``(d) Assets and Net Investment Income of Related Organizations.--
          ``(1) In general.--For purposes of subsections (b)(1)(C) and 
        (c), the assets and net investment income of any related 
        organization shall be treated as the assets and net investment 
        income of the eligible educational institution.
          ``(2) Related organization.--For purposes of this subsection, 
        the term `related organization' means, with respect to an 
        eligible educational institution, any organization which--
                  ``(A) controls, or is controlled by, such 
                institution,
                  ``(B) is controlled by one or more persons that 
                control such institution, or
                  ``(C) is a supported organization (as defined in 
                section 509(f)(3)), or an organization described in 
                section 509(a)(3), during the taxable year with respect 
                to such institution.''.
  (b) Clerical Amendment.--The table of subchapters for chapter 42 is 
amended by adding at the end the following new item:

   ``subchapter h--excise tax based on investment income of private 
                      colleges and universities''.

  (c) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

SEC. 5104. EXCEPTION FROM PRIVATE FOUNDATION EXCESS BUSINESS HOLDING 
                    TAX FOR INDEPENDENTLY-OPERATED PHILANTHROPIC 
                    BUSINESS HOLDINGS.

  (a) In General.--Section 4943 is amended by adding at the end the 
following new subsection:
  ``(g) Exception for Certain Holdings Limited to Independently-
operated Philanthropic Business.--
          ``(1) In general.--Subsection (a) shall not apply with 
        respect to the holdings of a private foundation in any business 
        enterprise which for the taxable year meets--
                  ``(A) the ownership requirements of paragraph (2),
                  ``(B) the all profits to charity distribution 
                requirement of paragraph (3), and
                  ``(C) the independent operation requirements of 
                paragraph (4).
          ``(2) Ownership.--The ownership requirements of this 
        paragraph are met if--
                  ``(A) 100 percent of the voting stock in the business 
                enterprise is held by the private foundation at all 
                times during the taxable year, and
                  ``(B) all the private foundation's ownership 
                interests in the business enterprise were acquired not 
                by purchase.
          ``(3) All profits to charity.--
                  ``(A) In general.--The all profits to charity 
                distribution requirement of this paragraph is met if 
                the business enterprise, not later than 120 days after 
                the close of the taxable year, distributes an amount 
                equal to its net operating income for such taxable year 
                to the private foundation.
                  ``(B) Net operating income.--For purposes of this 
                paragraph, the net operating income of any business 
                enterprise for any taxable year is an amount equal to 
                the gross income of the business enterprise for the 
                taxable year, reduced by the sum of--
                          ``(i) the deductions allowed by chapter 1 for 
                        the taxable year which are directly connected 
                        with the production of such income,
                          ``(ii) the tax imposed by chapter 1 on the 
                        business enterprise for the taxable year, and
                          ``(iii) an amount for a reasonable reserve 
                        for working capital and other business needs of 
                        the business enterprise.
          ``(4) Independent operation.--The independent operation 
        requirements of this paragraph are met if, at all times during 
        the taxable year--
                  ``(A) no substantial contributor (as defined in 
                section 4958(c)(3)(C)) to the private foundation, or 
                family member of such a contributor (determined under 
                section 4958(f)(4)) is a director, officer, trustee, 
                manager, employee, or contractor of the business 
                enterprise (or an individual having powers or 
                responsibilities similar to any of the foregoing),
                  ``(B) at least a majority of the board of directors 
                of the private foundation are not--
                          ``(i) also directors or officers of the 
                        business enterprise, or
                          ``(ii) members of the family (determined 
                        under section 4958(f)(4)) of a substantial 
                        contributor (as defined in section 
                        4958(c)(3)(C)) to the private foundation, and
                  ``(C) there is no loan outstanding from the business 
                enterprise to a substantial contributor (as so defined) 
                to the private foundation or a family member of such 
                contributor (as so determined).
          ``(5) Certain deemed private foundations excluded.--This 
        subsection shall not apply to--
                  ``(A) any fund or organization treated as a private 
                foundation for purposes of this section by reason of 
                subsection (e) or (f),
                  ``(B) any trust described in section 4947(a)(1) 
                (relating to charitable trusts), and
                  ``(C) any trust described in section 4947(a)(2) 
                (relating to split-interest trusts).''.
  (b) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2017.

       Subtitle C--Requirements for Organizations Exempt From Tax

SEC. 5201. 501(C)(3) ORGANIZATIONS PERMITTED TO MAKE STATEMENTS 
                    RELATING TO POLITICAL CAMPAIGN IN ORDINARY COURSE 
                    OF ACTIVITIES.

  (a) In General.--Section 501 is amended by adding at the end the 
following new subsection:
  ``(s) Special Rule Relating to Political Campaign Statements of 
Organizations Described in Subsection (c)(3).--
          ``(1) In general.--For purposes of subsection (c)(3) and 
        sections 170(c)(2), 2055, 2106, 2522, and 4955, an organization 
        shall not fail to be treated as organized and operated 
        exclusively for a purpose described in subsection (c)(3), nor 
        shall it be deemed to have participated in, or intervened in 
        any political campaign on behalf of (or in opposition to) any 
        candidate for public office, solely because of the content of 
        any statement which--
                  ``(A) is made in the ordinary course of the 
                organization's regular and customary activities in 
                carrying out its exempt purpose, and
                  ``(B) results in the organization incurring not more 
                than de minimis incremental expenses.
          ``(2) Termination.--Paragraph (1) shall not apply to taxable 
        years beginning after December 31, 2023.''.
  (b) Effective Date.--The amendments made by this section shall apply 
to taxable years beginning after December 31, 2018.

SEC. 5202. ADDITIONAL REPORTING REQUIREMENTS FOR DONOR ADVISED FUND 
                    SPONSORING ORGANIZATIONS.

  (a) In General.--Section 6033(k) is amended by striking ``and'' at 
the end of paragraph (2), by striking the period at the end of 
paragraph (3), and by adding at the end the following new paragraphs:
          ``(4) indicate the average amount of grants made from such 
        funds during such taxable year (expressed as a percentage of 
        the value of assets held in such funds at the beginning of such 
        taxable year), and
          ``(5) indicate whether the organization has a policy with 
        respect to donor advised funds (as so defined) for frequency 
        and minimum level of distributions.
Such organization shall include with such return a copy of any policy 
described in paragraph (5).''.
  (b) Effective Date.--The amendment made by this section shall apply 
for returns filed for taxable years beginning after December 31, 2017.

    Amend the title so as to read:
    A bill to provide for reconciliation pursuant to titles II 
and V of the concurrent resolution on the budget for fiscal 
year 2018.

                       I. SUMMARY AND BACKGROUND

                         A. Purpose and Summary

    H.R. 1, as reported by the Committee on Ways and Means, 
makes comprehensive reforms to the Internal Revenue Code of 
1986 to provide tax relief and simplification to American 
families and individuals so that they can keep more of what 
they earn and devote less time and resources to filing their 
tax returns; to provide tax relief to businesses of all sizes 
so that they can create jobs, increase paychecks, and invest in 
the American economy; and to modernize the U.S. international 
tax system to unleash the global competitiveness of America and 
American businesses. H.R. 1 fulfills the reconciliation 
instructions included in Titles II and V of the Concurrent 
Resolution on the Budget for Fiscal Year 2018.

                 B. Background and Need for Legislation

    H.R. 1 reflects the Committee's long-standing focus on 
achieving comprehensive tax reform in order to promote economic 
growth and job creation, to support global competiveness, and 
to reduce tax burdens on families and individuals. Lowering tax 
burdens on the middle class and creating a healthier economy 
will help American families, as will reforms that make the 
system simpler and fairer for taxpayers. Lowering the tax 
burden on businesses small and large and modernizing the U.S. 
international tax rules will promote investment and job 
creation and put America back in the lead pack. The Committee 
believes that H.R. 1 delivers a 21st century tax code that is 
built for growth.

                         C. Legislative History

Budget resolution

    On October 26, 2017, the House of Representatives approved 
H. Con. Res. 71, the budget resolution for fiscal year 2018. 
Pursuant to section 5113(b) of H. Con. Res. 71, the Committee 
on Ways and Means was directed to submit to the Committee on 
the Budget recommendations for changes in law within the 
jurisdiction of the Committee on Ways and Means that increase 
the deficit by not more than $1,500,000,000,000 for the period 
of fiscal years 2018 through 2027.

Committee action

    Beginning November 6, 2017, the Committee on Ways and Means 
marked up H.R. 1, a bill to provide for reconciliation pursuant 
to the concurrent resolution on the budget for fiscal year 
2018, and ordered the bill, as amended, favorably reported 
(with a quorum being present) on November 9, 2017.

Committee hearings

    The Ways and Means Committee has held extensive hearings 
over many years focused on tax reform overall and on particular 
aspects of tax reform.
    During the 115th Congress, the Committee held the following 
hearings that addressed aspects of tax reform:
           How Tax Reform Will Grow our Economy and 
        Create Jobs (May 18, 2017)
           Increasing U.S. Competitiveness and 
        Preventing American Jobs from Moving Overseas (May 23, 
        2017)
           The President's Fiscal Year 2018 Budget 
        Proposals (May 24, 2017).
    Also during the 115th Congress, the Subcommittee on Tax 
Policy held hearings on the following tax reform topics:
           How Tax Reform Will Help America's Small 
        Businesses Grow and Create New Jobs (July 13, 2017)
           How Tax Reform Will Simplify Our Broken Tax 
        Code and Help Individuals and Families (July 19, 2017).
    In addition, the Committee and its Subcommittees held many 
hearings over the past several years on a wide variety of 
subjects relevant to comprehensive tax reform, including the 
following hearings:
            Committee on Ways and Means
           The Global Tax Environment in 2016 and 
        Implications for International Tax Reform (February 24, 
        2016)
           Reaching America's Potential: Delivering 
        Growth and Opportunity for All Americans (February 2, 
        2016)
           Benefits of Permanent Tax Policy for 
        America's Job Creators (April 8, 2014).
           Tax Reform: Tax Havens, Base Erosion, and 
        Profit-Shifting (June 13, 2013)
           Tax Reform and Residential Real Estate 
        (April 25, 2013)
           Tax Reform and Tax Provisions Affecting 
        State and Local Governments (March 19, 2013)
           Tax Reform and Charitable Contributions 
        (February 14, 2013)
           Tax Reform and the Tax Treatment of Capital 
        Gains (September 20, 2012)
           Tax Reform and the U.S. Manufacturing Sector 
        (July 19, 2012)
           Tax Reform and Tax-Favored Retirement 
        Accounts (April 17, 2012)
           Treatment of Closely-Held Businesses in the 
        Context of Tax Reform (March 7, 2012)
           Interaction of Tax and Financial Accounting 
        on Tax Reform (February 8, 2012)
           Economic Models Available to the Joint 
        Committee on Taxation for Analyzing Tax Reform 
        Proposals (September 21, 2011)
           Tax Reform and Consumption-Based Tax Systems 
        (July 26, 2011)
           Tax Reform and the Tax Treatment of Debt and 
        Equity (July 13, 2011)
           How Business Tax Reform Can Encourage Job 
        Creation (June 2, 2011)
           How Other Countries Have Used Tax Reform to 
        Help Their Companies Compete in the Global Market and 
        Create Jobs (May 24, 2011)
           The Need for Comprehensive Tax Reform to 
        Help American Companies Compete in the Global Market 
        and Create Jobs for American Workers (May 12, 2011)
           How the Tax Code's Burdens on Individuals 
        and Families Demonstrate the Need for Comprehensive Tax 
        Reform (April 13, 2011)
           Fundamental Tax Reform (January 20, 2011)
            Subcommittee on Tax Policy (formerly Subcommittee on Select 
                    Revenue Measures)
           Perspectives on Need for Tax Reform (May 25, 
        2016)
           Member Proposals for Improvements to the 
        U.S. Tax System (May 12, 2016)
           Fundamental Tax Reform Proposals, Part II 
        (April 13, 2016)
           Fundamental Tax Reform Proposals, Part I 
        (March 22, 2016)
           OECD Base Erosion and Profit Shifting (BEPS) 
        Project (December 1, 2015)
           Burden of the Estate Tax on Family 
        Businesses and Farms (March 18, 2015)
           Dynamic Analysis of the Tax Reform Act of 
        2014 (July 30, 2014)
           Small Business Pass-Through Entity Tax 
        Reform Discussion Draft (May 15, 2013)
           Financial Products Tax Reform Discussion 
        Draft (March 20, 2013)
           How Welfare and Tax Benefits Can Discourage 
        Work (June 27, 2012)
           Framework for Evaluating Certain Expiring 
        Tax Provisions (June 8, 2012)
           Certain Expiring Tax Provisions (April 26, 
        2012)
           International Tax Reform Discussion Draft 
        (November 17, 2011)
           Energy Tax Policy and Tax Reform (September 
        22, 2011)
           Tax Reform and Foreign Investment in the 
        United States (June 23, 2011)
           Small Business and Tax Reform (March 3, 
        2011)
            Subcommittee on Oversight
           Back to School: A Review of Tax-Exempt 
        College and University Endowments (September 13, 2016)
           Tax-Exempt Colleges and Universities: 
        Encouraging the Free Exchange of Ideas (March 2, 2016)
           The Rising Costs of Higher Education and Tax 
        Policy (October 7, 2015)
           The Department of Labor's Proposed Fiduciary 
        Rule (September 30, 2015)
           Protecting Small Businesses from IRS Abuse 
        (February 11, 2015)
           Internal Revenue Service's Colleges and 
        Universities Compliance Project (May 8, 2013)
           Public Charity Organizational Issues, 
        Unrelated Business Income Tax, and the Revised Form 990 
        (July 25, 2012)
           Tax Exempt Organizations (May 16, 2012)

                      II. EXPLANATION OF THE BILL

                  TITLE I--TAX REFORM FOR INDIVIDUALS

    A. Simplification and Reform of Rates, Standard Deductions, and 
                               Exemptions

 1. Reduction and simplification of individual income tax rates (secs. 
           1001 and 1005 of the bill and sec. 1 of the Code)

                              PRESENT LAW

In general

    To determine regular tax liability, an individual taxpayer 
generally must apply the tax rate schedules (or the tax tables) 
to his or her regular taxable income. The rate schedules are 
broken into several ranges of income, known as income brackets, 
and the marginal tax rate increases as a taxpayer's income 
increases.

Tax rate schedules

    Separate rate schedules apply based on an individual's 
filing status. For 2017, the regular individual income tax rate 
schedules are as follows:

        TABLE 1.--FEDERAL INDIVIDUAL INCOME TAX RATES FOR 2017\1\
------------------------------------------------------------------------
         If taxable income is:               Then income tax equals:
------------------------------------------------------------------------
                           Single Individuals
------------------------------------------------------------------------
Not over $9,325........................  10% of the taxable income.
Over $9,325 but not over $37,950.......  $932.50 plus 15% of the excess
                                          over $9,325.
Over $37,950 but not over $91,900......  $5,226.25 plus 25% of the
                                          excess over $37,950.
Over $91,900 but not over $191,650.....  $18,713.75 plus 28% of the
                                          excess over $91,900.
Over $191,650 but not over $416,700....  $46,643.75 plus 33% of the
                                          excess over $191,650.
Over $416,700 but not over $418,400....  $120,910.25 plus 35% of the
                                          excess over $416,700.
Over $418,400..........................  $121,505.25 plus 39.6% of the
                                          excess over $418,400.
------------------------------------------------------------------------
                           Heads of Households
------------------------------------------------------------------------
Not over $13,350.......................  10% of the taxable income.
Over $13,350 but not over $50,800......  $1,335 plus 15% of the excess
                                          over $13,350.
Over $50,800 but not over $131,200.....  $6,952.50 plus 25% of the
                                          excess over $50,800.
Over $131,200 but not over $212,500....  $27,052.50 plus 28% of the
                                          excess over $131,200.
Over $212,500 but not over $416,700....  $49,816.50 plus 33% of the
                                          excess over $212,500.
Over $416,700 but not over $444,550....  $117,202.50 plus 35% of the
                                          excess over $416,700.
Over $444,550..........................  $126,950 plus 39.6% of the
                                          excess over $444,550.
------------------------------------------------------------------------
     Married Individuals Filing Joint Returns and Surviving Spouses
------------------------------------------------------------------------
Not over $18,650.......................  10% of the taxable income.
Over $18,650 but not over $75,900......  $1,865 plus 15% of the excess
                                          over $18,650.
Over $75,900 but not over $153,100.....  $10,452.50 plus 25% of the
                                          excess over $75,900.
Over $153,100 but not over $233,350....  $29,752.50 plus 28% of the
                                          excess over $153,100.
Over $233,350 but not over $416,700....  $52,222.50 plus 33% of the
                                          excess over $233,350.
Over $416,700 but not over $470,700....  $112,728 plus 35% of the excess
                                          over $416,700.
Over $470,700..........................  $131,628 plus 39.6% of the
                                          excess over $470,700.
------------------------------------------------------------------------
               Married Individuals Filing Separate Returns
------------------------------------------------------------------------
Not over $9,325........................  10% of the taxable income.
Over $9,325 but not over $37,950.......  $932.50 plus 15% of the excess
                                          over $9,325.
Over $37,950 but not over $76,550......  $5,226.25 plus 25% of the
                                          excess over $37,950.
Over $76,550 but not over $116,675.....  $14,876.25 plus 28% of the
                                          excess over $76,550.
Over $116,675 but not over $208,350....  $26,111.25 plus 33% of the
                                          excess over $116,675.
Over $208,350 but not over $235,350....  $56,364 plus 35% of the excess
                                          over $208,350.
Over $235,350..........................  $65,814 plus 39.6% of the
                                          excess over $235,350.
------------------------------------------------------------------------
                           Estates and Trusts
------------------------------------------------------------------------
Not over $2,550........................  15% of the taxable income.
Over $2,550 but not over $6,000........  $382.50 plus 25% of the excess
                                          over $2,550.
Over $6,000 but not over $9,150........  $1,245 plus 28% of the excess
                                          over $6,000.
Over $9,150 but not over $12,500.......  $2,127 plus 33% of the excess
                                          over $9,150.
Over $12,500...........................  $3,232.50 plus 39.6% of the
                                          excess over $12,500.
------------------------------------------------------------------------
\1\Rev. Proc. 2016-55, 2016-45 I.R.B. 707, sec. 3.01.

Unearned income of children

    Special rules (generally referred to as the ``kiddie tax'') 
apply to the net unearned income of certain children.\1\ 
Generally, the kiddie tax applies to a child if: (1) the child 
has not reached the age of 19 by the close of the taxable year, 
or the child is a full-time student under the age of 24, and 
either of the child's parents is alive at such time; (2) the 
child's unearned income exceeds $2,100 (for 2017); and (3) the 
child does not file a joint return.\2\ The kiddie tax applies 
regardless of whether the child may be claimed as a dependent 
by either or both parents. For children above age 17, the 
kiddie tax applies only to children whose earned income does 
not exceed one-half of the amount of their support.
---------------------------------------------------------------------------
    \1\Sec. 1(g). Unless otherwise stated, all section references are 
to the Internal Revenue Code of 1986, as amended (the ``Code'').
    \2\Sec. 1(g)(2).
---------------------------------------------------------------------------
    Under these rules, the net unearned income of a child (for 
2017, unearned income over $2,100) is taxed at the parents' tax 
rates if the parents' tax rates are higher than the tax rates 
of the child.\3\ The remainder of a child's taxable income 
(i.e., earned income, plus unearned income up to $2,100 (for 
2017), less the child's standard deduction) is taxed at the 
child's rates, regardless of whether the kiddie tax applies to 
the child. For these purposes, unearned income is income other 
than wages, salaries, professional fees, other amounts received 
as compensation for personal services actually rendered, and 
distributions from qualified disability trusts.\4\ In general, 
a child is eligible to use the preferential tax rates for 
qualified dividends and capital gains.\5\
---------------------------------------------------------------------------
    \3\Special rules apply for determining which parent's rate applies 
where a joint return is not filed.
    \4\Sec. 1(g)(4) and sec. 911(d)(2).
    \5\Sec. 1(h).
---------------------------------------------------------------------------
    The kiddie tax is calculated by computing the ``allocable 
parental tax.'' This involves adding the net unearned income of 
the child to the parent's income and then applying the parent's 
tax rate. A child's ``net unearned income'' is the child's 
unearned income less the sum of (1) the minimum standard 
deduction allowed to dependents ($1,050 for 2017\6\), and (2) 
the greater of (a) such minimum standard deduction amount or 
(b) the amount of allowable itemized deductions that are 
directly connected with the production of the unearned 
income.\7\
---------------------------------------------------------------------------
    \6\Sec. 3.02 of Rev. Proc. 2016-55, supra.
    \7\Sec. 1(g)(4).
---------------------------------------------------------------------------
    The allocable parental tax equals the hypothetical increase 
in tax to the parent that results from adding the child's net 
unearned income to the parent's taxable income.\8\ If the child 
has net capital gains or qualified dividends, these items are 
allocated to the parent's hypothetical taxable income according 
to the ratio of net unearned income to the child's total 
unearned income. If a parent has more than one child subject to 
the kiddie tax, the net unearned income of all children is 
combined, and a single kiddie tax is calculated. Each child is 
then allocated a proportionate share of the hypothetical 
increase, based upon the child's net unearned income relative 
to the aggregate net unearned income of all of the parent's 
children subject to the tax.
---------------------------------------------------------------------------
    \8\Sec. 1(g)(3).
---------------------------------------------------------------------------
    Generally, a child must file a separate return to report 
his or her income.\9\ In such case, items on the parents' 
return are not affected by the child's income, and the total 
tax due from the child is the greater of:
---------------------------------------------------------------------------
    \9\Sec. 1(g)(6). See Form 8615, Tax for Certain Children Who Have 
Unearned Income.
---------------------------------------------------------------------------
          1. The sum of (a) the tax payable by the child on the 
        child's earned income and unearned income up to $2,100 
        (for 2017), plus (b) the allocable parental tax on the 
        child's unearned income, or
          2. The tax on the child's income without regard to 
        the kiddie tax provisions.\10\
---------------------------------------------------------------------------
    \10\Sec. 1(g)(1).
---------------------------------------------------------------------------
    Under certain circumstances, a parent may elect to report a 
child's unearned income on the parent's return.\11\
---------------------------------------------------------------------------
    \11\Sec. 1(g)(7).
---------------------------------------------------------------------------

Indexing tax provisions for inflation

    Under present law, many parameters of the tax system are 
adjusted for inflation to protect taxpayers from the effects of 
rising prices. Most of the adjustments are based on annual 
changes in the level of the Consumer Price Index for all Urban 
Consumers (``CPI-U'').\12\ The CPI-U is an index that measures 
prices paid by typical urban consumers on a broad range of 
products, and is developed and published by the Department of 
Labor.
---------------------------------------------------------------------------
    \12\Sec. 1(f)(5).
---------------------------------------------------------------------------
    Among the inflation-indexed tax parameters are the 
following individual income tax amounts: (1) the regular income 
tax brackets; (2) the basic standard deduction; (3) the 
additional standard deduction for aged and blind; (4) the 
personal exemption amount; (5) the thresholds for the overall 
limitation on itemized deductions and the personal exemption 
phase-out; (6) the phase-in and phase-out thresholds of the 
earned income credit; (7) IRA contribution limits and 
deductible amounts; and (8) the saver's credit.

Capital gains rates

            In general
    In the case of an individual, estate, or trust, any 
adjusted net capital gain which otherwise would be taxed at the 
10- or 15-percent rate is not taxed. Any adjusted net capital 
gain which otherwise would be taxed at rates over 15-percent 
and below 39.6 percent is taxed at a 15-percent rate. Any 
adjusted net capital gain which otherwise would be taxed at a 
39.6-percent rate is taxed at a 20-percent rate.
    The unrecaptured section 1250 gain is taxed at a maximum 
rate of 25 percent, and 28-percent rate gain is taxed at a 
maximum rate of 28 percent. Any amount of unrecaptured section 
1250 gain or 28-percent rate gain otherwise taxed at a 10- or 
15-percent rate is taxed at the otherwise applicable rate.
    In addition, a tax is imposed on net investment income in 
the case of an individual, estate, or trust. In the case of an 
individual, the tax is 3.8 percent of the lesser of net 
investment income, which includes gains and dividends, or the 
excess of modified adjusted gross income over the threshold 
amount. The threshold amount is $250,000 in the case of a joint 
return or surviving spouse, $125,000 in the case of a married 
individual filing a separate return, and $200,000 in the case 
of any other individual.
            Definitions
              Net capital gain
    In general, gain or loss reflected in the value of an asset 
is not recognized for income tax purposes until a taxpayer 
disposes of the asset. On the sale or exchange of a capital 
asset, any gain generally is included in income. Net capital 
gain is the excess of the net long-term capital gain for the 
taxable year over the net short-term capital loss for the year. 
Gain or loss is treated as long-term if the asset is held for 
more than one year.
    A capital asset generally means any property except (1) 
inventory, stock in trade, or property held primarily for sale 
to customers in the ordinary course of the taxpayer's trade or 
business, (2) depreciable or real property used in the 
taxpayer's trade or business, (3) specified literary or 
artistic property, (4) business accounts or notes receivable, 
(5) certain U.S. publications, (6) certain commodity derivative 
financial instruments, (7) hedging transactions, and (8) 
business supplies. In addition, the net gain from the 
disposition of certain property used in the taxpayer's trade or 
business is treated as long-term capital gain. Gain from the 
disposition of depreciable personal property is not treated as 
capital gain to the extent of all previous depreciation 
allowances. Gain from the disposition of depreciable real 
property is generally not treated as capital gain to the extent 
of the depreciation allowances in excess of the allowances 
available under the straight-line method of depreciation.
              Adjusted net capital gain
    The ``adjusted net capital gain'' of an individual is the 
net capital gain reduced (but not below zero) by the sum of the 
28-percent rate gain and the unrecaptured section 1250 gain. 
The net capital gain is reduced by the amount of gain that the 
individual treats as investment income for purposes of 
determining the investment interest limitation under section 
163(d).
              Qualified dividend income
    Adjusted net capital gain is increased by the amount of 
qualified dividend income.
    A dividend is the distribution of property made by a 
corporation to its shareholders out of its after-tax earnings 
and profits. Qualified dividends generally includes dividends 
received from domestic corporations and qualified foreign 
corporations. The term ``qualified foreign corporation'' 
includes a foreign corporation that is eligible for the 
benefits of a comprehensive income tax treaty with the United 
States which the Treasury Department determines to be 
satisfactory and which includes an exchange of information 
program. In addition, a foreign corporation is treated as a 
qualified foreign corporation for any dividend paid by the 
corporation with respect to stock that is readily tradable on 
an established securities market in the United States.
    If a shareholder does not hold a share of stock for more 
than 60 days during the 121-day period beginning 60 days before 
the ex-dividend date (as measured under section 246(c)), 
dividends received on the stock are not eligible for the 
reduced rates. Also, the reduced rates are not available for 
dividends to the extent that the taxpayer is obligated to make 
related payments with respect to positions in substantially 
similar or related property.
    Dividends received from a corporation that is a passive 
foreign investment company (as defined in section 1297) in 
either the taxable year of the distribution, or the preceding 
taxable year, are not qualified dividends.
    A dividend is treated as investment income for purposes of 
determining the amount of deductible investment interest only 
if the taxpayer elects to treat the dividend as not eligible 
for the reduced rates.
    The amount of dividends qualifying for reduced rates that 
may be paid by a regulated investment company (``RIC'') for any 
taxable year in which the qualified dividend income received by 
the RIC is less than 95 percent of its gross income (as 
specially computed) may not exceed the sum of (1) the qualified 
dividend income of the RIC for the taxable year and (2) the 
amount of earnings and profits accumulated in a non-RIC taxable 
year that were distributed by the RIC during the taxable year.
    The amount of qualified dividend income that may be paid by 
a real estate investment trust (``REIT'') for any taxable year 
may not exceed the sum of (1) the qualified dividend income of 
the REIT for the taxable year, (2) an amount equal to the 
excess of the income subject to the taxes imposed by section 
857(b)(1) and the regulations prescribed under section 337(d) 
for the preceding taxable year over the amount of these taxes 
for the preceding taxable year, and (3) the amount of earnings 
and profits accumulated in a non-REIT taxable year that were 
distributed by the REIT during the taxable year.
    Dividends received from an organization that was exempt 
from tax under section 501 or was a tax-exempt farmers' 
cooperative in either the taxable year of the distribution or 
the preceding taxable year; dividends received from a mutual 
savings bank that received a deduction under section 591; or 
deductible dividends paid on employer securities are not 
qualified dividend income.
            28-percent rate gain
    The term ``28-percent rate gain'' means the excess of the 
sum of the amount of net gain attributable to long-term capital 
gains and losses from the sale or exchange of collectibles (as 
defined in section 408(m) without regard to paragraph (3) 
thereof) and the amount of gain equal to the additional amount 
of gain that would be excluded from gross income under section 
1202 (relating to certain small business stock) if the 
percentage limitations of section 1202(a) did not apply, over 
the sum of the net short-term capital loss for the taxable year 
and any long-term capital loss carryover to the taxable year.
            Unrecaptured section 1250 gain
    ``Unrecaptured section 1250 gain'' means any long-term 
capital gain from the sale or exchange of section 1250 property 
(i.e., depreciable real estate) held more than one year to the 
extent of the gain that would have been treated as ordinary 
income if section 1250 applied to all depreciation, reduced by 
the net loss (if any) attributable to the items taken into 
account in computing 28-percent rate gain. The amount of 
unrecaptured section 1250 gain (before the reduction for the 
net loss) attributable to the disposition of property to which 
section 1231 (relating to certain property used in a trade or 
business) applies may not exceed the net section 1231 gain for 
the year.

                           REASONS FOR CHANGE

    The Committee believes that changing the individual rate 
structure by reducing the total number of rate brackets and the 
size of some rate brackets creates a simpler and fairer Federal 
income tax. The committee further believes that a tax system 
with lower rates will allow taxpayers to keep more of their 
earnings to spend on family needs and will contribute to 
economic growth.
    Under present law, the tax on the unearned income of 
children depends on the income of the child, parents, and when 
applicable, siblings. The Committee intends to simplify the 
taxation of unearned income of children, while continuing to 
minimize the benefit of tax-motivated income shifting, by 
subjecting this unearned income to the rates applicable to 
trusts.
    The Committee believes that the cost-of-living adjustments 
provided throughout the code can be improved by indexing with 
the chained Consumer Price Index (``C-CPI-U''), which is 
designed by the Bureau of Labor Statistics to be a closer 
approximation of a cost-of-living index than other CPI 
measures.

                        EXPLANATION OF PROVISION

Modification of rates

    The provision replaces the individual income tax rate 
structure with a new rate structure.

     TABLE 2.--FEDERAL INDIVIDUAL INCOME TAX RATES FOR 2018 UNDER THE
                                PROVISION
------------------------------------------------------------------------
         If taxable income is:               Then income tax equals:
------------------------------------------------------------------------
                           Single Individuals
------------------------------------------------------------------------
Not over $45,000.......................  12% of the taxable income.
Over $45,000 but not over $200,000.....  $5,400 plus 25% of the excess
                                          over $45,000.
Over $200,000 but not over $500,000....  $44,150 plus 35% of the excess
                                          over $200,000.
Over $500,000..........................  $149,150 plus 39.6% of the
                                          excess over $500,000.
------------------------------------------------------------------------
                           Heads of Households
------------------------------------------------------------------------
Not over $67,500.......................  12% of the taxable income.
Over $67,500 but not over $200,000.....  $8,100 plus 25% of the excess
                                          over $67,500.
Over $200,000 but not over $500,000....  $41,225 plus 35% of the excess
                                          over $200,000.
Over $500,000..........................  $146,225 plus 39.6% of the
                                          excess over $500,000.
------------------------------------------------------------------------
     Married Individuals Filing Joint Returns and Surviving Spouses
------------------------------------------------------------------------
Not over $90,000.......................  12% of the taxable income.
Over $90,000 but not over $260,000.....  $10,800 plus 25% of the excess
                                          over $90,000.
Over $260,000 but not over $1,000,000..  $53,300 plus 35% of the excess
                                          over $260,000.
Over $1,000,000........................  $312,300 plus 39.6% of the
                                          excess over $1,000,000.
------------------------------------------------------------------------
               Married Individuals Filing Separate Returns
------------------------------------------------------------------------
Not over $45,000.......................  12% of the taxable income.
Over $45,000 but not over $130,000.....  $5,400 plus 25% of the excess
                                          over $45,000.
Over $130,000 but not over $500,000....  $26,650 plus 35% of the excess
                                          over $130,000.
Over $500,000..........................  $156,150 plus 39.6% of the
                                          excess over $500,000.
------------------------------------------------------------------------
                           Estates and Trusts
------------------------------------------------------------------------
Not over $2,550........................  12% of the taxable income.
Over $2,550 but not over $9,150........  $306 plus 25% of the excess
                                          over $2,550.
Over $9,150 but not over $12,500.......  $1,956 plus 35% of the excess
                                          over $9,150.
Over $12,500...........................  $3,128.50 plus 39.6% of the
                                          excess over $12,500.
------------------------------------------------------------------------

    The bracket thresholds are all adjusted for inflation and 
then rounded to the next lowest multiple of $100 in future 
years. Unlike present law (which uses a measure of the consumer 
price index for all-urban consumers), the new inflation 
adjustment uses the chained consumer price index for all-urban 
consumers.

Phaseout of benefit of the 12-percent bracket

    For taxpayers with adjusted gross income in excess of 
$1,000,000 ($1,200,000 in the case of married taxpayers filing 
jointly), the benefit of the 12-percent bracket, as measured 
against the 39.6-percent bracket, is phased out at a rate of 6-
percent for taxpayers whose AGI is in excess of these amounts. 
Thus, in the case of a married taxpayer filing a joint return, 
if AGI is in excess of $1,200,000, the benefit of $24,840 
(27.6-percent of $90,000) phases out over an income range of 
$414,000. The phaseout thresholds are indexed for inflation.

Simplification of tax on unearned income of children

    The provision simplifies the ``kiddie tax'' by effectively 
applying the rates applicable to trusts, without the 12-percent 
rate applicable to estates and trusts, to the net unearned 
income of a child to whom the provision applies. Specifically, 
the amount of taxable income taxed at a 12 percent rate may not 
exceed the amount of taxable income in excess of the net 
unearned income of the child. The amount of taxable income 
taxed at rates below 35 percent may not exceed sum of (1) the 
taxable income in excess of the net unearned income of the 
child plus (2) the amount of taxable income not in excess of 
the 35-percent bracket threshold applicable to a trust. The 
amount of taxable income taxed at rates below 39.6 percent may 
not exceed sum of (1) the taxable income in excess of the net 
unearned income of the child plus (2) the amount of taxable 
income not in excess of the 39.6-percent bracket threshold 
applicable to a trust.
    The following examples illustrate the application of the 
provision:
    Example 1.--Assume a child to whom the ``kiddie tax'' 
applies has $60,000 taxable income of which $50,000 is net 
unearned income, which would otherwise be treated as ordinary 
income, such as interest. Assume the 25-percent bracket 
threshold amount for the taxable year is $45,000 for an 
unmarried taxpayer, and the 35-percent and 39.6-percent bracket 
thresholds for a trust are $9,150 and $12,500 respectively.
    The child's 25-percent bracket threshold is $10,000 
($60,000 less $50,000), 35-percent bracket threshold is $19,150 
($10,000 plus $9,150), and 39.6-percent bracket threshold is 
$22,500 ($10,000 plus $12,500). Thus, $10,000 is taxed at a 12-
percent rate, $9,150 at a 25 percent rate, $3,350 at a 35-
percent rate, and $37,500 at a 39.6-percent rate.
    Example 2.--Assume the same facts as Example 1 except that 
the amount of the child's net unearned income is $20,000 
(rather than $50,000).
    The child's 25-percent bracket threshold is $40,000 
($60,000 less $50,000), 35-percent bracket threshold is $49,150 
($40,000 plus $9,150), and the 39.6-percent bracket threshold 
is $52,500 ($40,000 plus $12,500). Thus, $40,000 is taxed at a 
10-percent rate, $9,150 at a 25-percent rate, $3,350 at a 35-
percent rate, and $7,500 at a 39.6-percent rate.

Replacing CPI-U with chained CPI-U

    The provision requires the use of the chained CPI-U (``C-
CPI-U'') to index tax parameters currently indexed by the CPI-
U. The C-CPI-U, like the CPI-U, is a measure of the average 
change over time in prices paid by urban consumers. It is 
developed and published by the Department of Labor, but differs 
from the CPI-U in accounting for the ability of individuals to 
alter their consumption patterns in response to relative price 
changes. The C-CPI-U accomplishes this by allowing for consumer 
substitution between item categories in the market basket of 
consumer goods and services that make up the index, while the 
CPI-U only allows for modest substitution within item 
categories. Values that are reset for 2018, such as the bracket 
thresholds and standard deduction, are indexed by the C-CPI-U 
in taxable years beginning after December 31, 2018. Other 
indexed values in the code switch from CPI indexing to C-CPI-U 
indexing going forward in taxable years beginning after 
December 31, 2017.

Maximum rates on capital gains and qualified dividends

    The provision generally retains the present-law maximum 
rates on net capital gain and qualified dividends. The 
breakpoints between the zero-and 15-percent rates (``15-percent 
breakpoint'') and the 15-and 20-percent rates (``20-percent 
breakpoint'') are the same amounts as the breakpoints under 
present law, except the breakpoints are indexed using the C-
CPI-U in taxable years beginning after 2017. Thus, for 2018, 
the 15-percent breakpoint is $77,200 for joint returns and 
surviving spouses (one-half of this amount for married 
taxpayers filing separately), $51,700 for heads of household, 
$2,600 for estates and trusts, and $38,600 for other unmarried 
individuals. The 20-percent breakpoint is $479,000 for joint 
returns and surviving spouses (one-half of this amount for 
married taxpayers filing separately), $452,400 for heads of 
household, $12,700 for estates and trusts, and $425,800 for 
other unmarried individuals.
    Therefore, in the case of an individual (including an 
estate or trust) with adjusted net capital gain, to the extent 
the gain would not result in taxable income exceeding the 15-
percent breakpoint is not taxed. Any adjusted net capital gain 
which would result in taxable income exceeding the 15-percent 
breakpoint but not exceeding the 20-percent breakpoint is taxed 
at 15 percent. The remaining adjusted net capital gain is taxed 
at 20 percent.
    As under present law, unrecaptured section 1250 gain 
generally is taxed at a maximum rate of 25 percent, and 28-
percent rate gain is taxed at a maximum rate of 28 percent.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2017.

2. Enhancement of standard deduction (sec. 1002 of the bill and sec. 63 
                              of the Code)

                              PRESENT LAW

    Under present law, an individual who does not elect to 
itemize deductions may reduce his adjusted gross income 
(``AGI'') by the amount of the applicable standard deduction in 
arriving at his taxable income. The standard deduction is the 
sum of the basic standard deduction and, if applicable, the 
additional standard deduction. The basic standard deduction 
varies depending upon a taxpayer's filing status. For 2017, the 
amount of the basic standard deduction is $6,350 for single 
individuals and married individuals filing separate returns, 
$9,350 for heads of households, and $12,700 for married 
individuals filing a joint return and surviving spouses. An 
additional standard deduction is allowed with respect to any 
individual who is elderly or blind.\13\ The amount of the 
standard deduction is indexed annually for inflation.
---------------------------------------------------------------------------
    \13\For 2017, the additional amount is $1,250 for married taxpayers 
(for each spouse meeting the applicable criterion) and surviving 
spouses. The additional amount for single individuals and heads of 
households is $1,550. An individual who qualifies as both blind and 
elderly is entitled to two additional standard educations, for a total 
additional amount (for 2017) of $2,500 or $3,100, as applicable.
---------------------------------------------------------------------------
    In the case of a dependent for whom a deduction for a 
personal exemption is allowed to another taxpayer, the standard 
deduction may not exceed the greater of (i) $1,050 (in 2017) or 
(ii) the sum of $350 (in 2017) plus the individual's earned 
income.

                           REASONS FOR CHANGE

    The Committee believes that consolidating the basic 
standard deduction, additional standard deduction, personal 
exemption, and other tax benefits for taxpayer and spouse into 
a larger standard deduction simplifies the tax code while 
allowing a minimum level of income to be exempt from Federal 
income taxation.

                        EXPLANATION OF PROVISION

    The provision increases the standard deduction for 
individuals across all filing statuses. Under the provision, 
the amount of the standard deduction is $24,400 for married 
individuals filing a joint return, $18,300 for head-of-
household filers, and $12,200 for all other taxpayers. The 
amount of the standard deduction is indexed for inflation using 
the chained consumer price index for all-urban consumers for 
taxable years beginning after December 31, 2019.\14\
---------------------------------------------------------------------------
    \14\Thus, the standard deduction is the same for 2018 and 2019.
---------------------------------------------------------------------------
    The provision eliminates the additional standard deduction 
for the aged and the blind.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2017.

 3. Repeal of deduction for personal exemptions (sec. 1003 of the bill 
                     and secs. 151-153 of the Code)

                              PRESENT LAW

    Under present law, in determining taxable income, an 
individual reduces AGI by any personal exemption deductions and 
either the applicable standard deduction or his or her itemized 
deductions. Personal exemptions generally are allowed for the 
taxpayer, his or her spouse, and any dependents. For 2017, the 
amount deductible for each personal exemption is $4,050. This 
amount is indexed annually for inflation. The personal 
exemption amount is phased out in the case of an individual 
with AGI in excess of $313,800 for taxpayers filing jointly, 
$287,650 for heads of household and $261,500 for all other 
filers. In addition, no personal exemption is allowed in the 
case of a dependent if a deduction is allowed to another 
taxpayer.
            Withholding rules
    Under present law, the amount of tax required to be 
withheld by employers from a taxpayer's wages is based in part 
on the number of withholding exemptions a taxpayer claims on 
his Form W-4. An employee is entitled to the following 
exemptions: (1) an exemption for himself, unless he allowed to 
be claimed as a dependent of another person; (2) an exemption 
to which the employee's spouse would be entitled, if that 
spouse does not file a Form W-4 for that taxable year claiming 
an exemption described in (1); (3) an exemption for each 
individual who is a dependent (but only if the employee's 
spouse has not also claimed such a withholding exemption on a 
Form W-4); (4) additional withholding allowances (taking into 
account estimated itemized deductions, estimated tax credits, 
and additional deductions as provided by the Secretary of the 
Treasury); and (5) a standard deduction allowance.
            Filing requirements
    Under present law, an unmarried individual is required to 
file a tax return for the taxable year if in that year the 
individual had income which equals or exceeds the exemption 
amount plus the standard deduction applicable to such 
individual (i.e., single, head of household, or surviving 
spouse). An individual entitled to file a joint return is 
required to do so unless that individual's gross income, when 
combined with the individual's spouse's gross income for the 
taxable year, is less than the sum of twice the exemption 
amount plus the basic standard deduction applicable to a joint 
return, provided that such individual and his spouse, at the 
close of the taxable year, had the same household as their 
home.

                           TRUSTS AND ESTATES

    In lieu of the deduction for personal exemptions, an estate 
is allowed a deduction of $600. A trust is allowed a deduction 
of $100; $300 if required to distribute all its income 
currently; and an amount equal to the personal exemption of an 
individual in the case of a qualified disability trust.

                           REASONS FOR CHANGE

    The Committee believes that consolidating the basic 
standard deduction, additional standard deduction, personal 
exemption, and other tax benefits for taxpayer and spouse into 
a larger standard deduction simplifies the tax code while 
allowing a minimum level of income to be exempt from Federal 
income taxation.

                        EXPLANATION OF PROVISION

    The provision repeals the deduction for personal 
exemptions.
    The provision modifies the requirements for those who are 
required to file a tax return. In the case of an individual who 
is not married, such individual is required to file a tax 
return if the taxpayer's gross income for the taxable year 
exceeds the applicable standard deduction. Married individuals 
are required to file a return if that individual's gross 
income, when combined with the individual's spouse's gross 
income, for the taxable year is more than the standard 
deduction applicable to a joint return, provided that: (i) such 
individual and his spouse, at the close of the taxable year, 
had the same household as their home; (ii) the individual's 
spouse does not make a separate return; and (iii) neither the 
individual nor his spouse is a dependent of another taxpayer 
who has income (other than earned income) in excess of $500 
(indexed for inflation).
    The provision repeals the enhanced deduction for qualified 
disability trusts.
    Under the provision, the Secretary of the Treasury is to 
develop rules to determine the amount of tax required to be 
withheld by employers from a taxpayer's wages.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2017.

  4. Maximum rate on business income of individuals (sec. 1004 of the 
                    bill and new sec. 4 of the Code)

                              PRESENT LAW

Individual income tax rates

    To determine regular tax liability, an individual taxpayer 
generally must apply the tax rate schedules (or the tax tables) 
to his or her regular taxable income. The rate schedules are 
broken into several ranges of income, known as income brackets, 
and the marginal tax rate increases as a taxpayer's income 
increases. Separate rate schedules apply based on an 
individual's filing status (i.e, single, head of household, 
married filing jointly, or married filing separately). For 
2017, the regular individual income tax rate schedule provides 
rates of 10, 15, 25, 28, 33, 35, and 39.6 percent.
    Under present law, no separate or different tax rate 
schedule applies to business income of individuals from 
partnerships, S corporations, or sole proprietorships.

Partnerships

            In general
    Partnerships generally are treated for Federal income tax 
purposes as pass-through entities not subject to tax at the 
entity level.\15\ Items of income (including tax-exempt 
income), gain, loss, deduction, and credit of the partnership 
are taken into account by the partners in computing their 
income tax liability (based on the partnership's method of 
accounting and regardless of whether the income is distributed 
to the partners).\16\ A partner's deduction for partnership 
losses is limited to the partner's adjusted basis in its 
partnership interest.\17\ Losses not allowed as a result of 
that limitation generally are carried forward to the next year. 
A partner's adjusted basis in the partnership interest 
generally equals the sum of (1) the partner's capital 
contributions to the partnership, (2) the partner's 
distributive share of partnership income, and (3) the partner's 
share of partnership liabilities, less (1) the partner's 
distributive share of losses allowed as a deduction and certain 
nondeductible expenditures, and (2) any partnership 
distributions to the partner.\18\ Partners generally may 
receive distributions of partnership property without 
recognition of gain or loss, subject to some exceptions.\19\
---------------------------------------------------------------------------
    \15\Sec. 701.
    \16\Sec. 702(a).
    \17\Sec. 704(d). In addition, passive loss and at-risk limitations 
limit the extent to which certain types of income can be offset by 
partnership deductions (sections 469 and 465). These limitations do not 
apply to corporate partners (except certain closely-held corporations) 
and may not be important to individual partners who have partner-level 
passive income from other investments.
    \18\Sec. 705.
    \19\Sec. 731. Gain or loss may nevertheless be recognized, for 
example, on the distribution of money or marketable securities, 
distributions with respect to contributed property, or in the case of 
disproportionate distributions (which can result in ordinary income).
---------------------------------------------------------------------------
    Partnerships may allocate items of income, gain, loss, 
deduction, and credit among the partners, provided the 
allocations have substantial economic effect.\20\ In general, 
an allocation has substantial economic effect to the extent the 
partner to which the allocation is made receives the economic 
benefit or bears the economic burden of such allocation and the 
allocation substantially affects the dollar amounts to be 
received by the partners from the partnership independent of 
tax consequences.\21\
---------------------------------------------------------------------------
    \20\Sec. 704(b)(2).
    \21\Treas. Reg. sec. 1.704-1(b)(2).
---------------------------------------------------------------------------
            Limited liability companies
    State laws of every State provide for limited liability 
companies\22\ (``LLCs''), which are neither partnerships nor 
corporations under applicable State law, but which are 
generally treated as partnerships for Federal tax purposes.\23\
---------------------------------------------------------------------------
    \22\The first LLC statute was enacted in Wyoming in 1977. All 
States (and the District of Columbia) now have an LLC statute, though 
the tax treatment of LLCs for State tax purposes may differ.
    \23\Under Treasury regulations promulgated in 1996, any domestic 
nonpublicly traded unincorporated entity with two or more members 
generally is treated as a partnership for federal income tax purposes, 
while any single-member domestic unincorporated entity generally is 
treated as disregarded for Federal income tax purposes (i.e., treated 
as not separate from its owner). Instead of the applicable default 
treatment, however, an LLC may elect to betreate as a corporation for 
Federal income tax purposes. Treas. Reg. sec. 301.7701-3. These are 
known as the ``check-the-box'' regulations.
---------------------------------------------------------------------------
            Publicly traded partnerships
    Under present law, a publicly traded partnership generally 
is treated as a corporation for Federal tax purposes.\24\ For 
this purpose, a publicly traded partnership means any 
partnership if interests in the partnership are traded on an 
established securities market or interests in the partnership 
are readily tradable on a secondary market (or the substantial 
equivalent thereof).\25\
---------------------------------------------------------------------------
    \24\Sec. 7704(a). The reasons for change stated by the Ways and 
Means Committee when the provision was enacted provide in part: ``[t]he 
recent proliferation of publicly traded partnerships has come to the 
committee's attention. The growth in such partnerships has caused 
concern about long-term erosion of the corporate tax base.'' H.R. Rep. 
100-391, Omnibus Reconciliation Act of 1987, October 26, 1987, p. 1065.
    \25\Sec. 7704(b).
---------------------------------------------------------------------------
    An exception from corporate treatment is provided for 
certain publicly traded partnerships, 90 percent or more of 
whose gross income is qualifying income.\26\
---------------------------------------------------------------------------
    \26\Sec. 7704(c)(2). Qualifying income is defined to include 
interest, dividends, and gains from the disposition of a capital asset 
(or of property described in section 1231(b)) that is held for the 
production of income that is qualifying income. Sec. 7704(d). 
Qualifying income also includes rents from real property, gains from 
the sale or other disposition of real property, and income and gains 
from the exploration, development, mining or production, processing, 
refining, transportation (including pipelines transporting gas, oil, or 
products thereof), or the marketing of any mineral or natural resource 
(including fertilizer, geothermal energy, and timber), industrial 
source carbon dioxide, or the transportation or storage of certain fuel 
mixtures, alternative fuel, alcohol fuel, or biodiesel fuel. It also 
includes income and gains from commodities (not described in section 
1221(a)(1)) or futures, options, or forward contracts with respect to 
such commodities (including foreign currency transactions of a 
commodity pool) where a principal activity of the partnership is the 
buying and selling of such commodities, futures, options, or forward 
contracts. However, the exception for partnerships with qualifying 
income does not apply to any partnership resembling a mutual fund 
(i.e., that would be described in section 851(a) if it were a domestic 
corporation), which includes a corporation registered under the 
Investment Company Act of 1940 (Pub. L. No. 76-768 (1940)) as a 
management company or unit investment trust (sec. 7704(c)(3)).
---------------------------------------------------------------------------

S corporations

            Generally
    For Federal income tax purposes, an S corporation\27\ 
generally is not subject to tax at the corporate level.\28\ 
Items of income (including tax-exempt income), gain, loss, 
deduction, and credit of the S corporation are taken into 
account by the S corporation shareholders in computing their 
income tax liabilities (based on the S corporation's method of 
accounting and regardless of whether the income is distributed 
to the shareholders). A shareholder's deduction for corporate 
losses is limited to the sum of the shareholder's adjusted 
basis in its S corporation stock and the indebtedness of the S 
corporation to such shareholder. Losses not allowed as a result 
of that limitation generally are carried forward to the next 
year. A shareholder's adjusted basis in the S corporation stock 
generally equals the sum of (1) the shareholder's capital 
contributions to the S corporation and (2) the shareholder's 
pro rata share of S corporation income, less (1) the 
shareholder's pro rata share of losses allowed as a deduction 
and certain nondeductible expenditures, and (2) any S 
corporation distributions to the shareholder.\29\
---------------------------------------------------------------------------
    \27\An S corporation is so named because its Federal tax treatment 
is governed by subchapter S of the Code.
    \28\Secs. 1363 and 1366.
    \29\Sec. 1367. If any amount that would reduce the adjusted basis 
of a shareholder's S corporation stock exceeds the amount that would 
reduce that basis to zero, the excess is applied to reduce (but not 
below zero) the shareholder's basis in any indebtedness of the S 
corporation to the shareholder. If, after a reduction in the basis of 
such indebtedness, there is an event that would increase the adjusted 
basis of the shareholder's S corporation stock, such increase is 
instead first applied to restore the reduction in the basis of the 
shareholder's indebtedness. Sec. 1367(b)(2).
---------------------------------------------------------------------------
    To be eligible to elect S corporation status, a corporation 
may not have more than 100 shareholders and may not have more 
than one class of stock.\30\ Only individuals (other than 
nonresident aliens), certain tax-exempt organizations, and 
certain trusts and estates are permitted shareholders of an S 
corporation. A corporation may elect S corporation status only 
with the consent of all of its shareholders, and may terminate 
its election with the consent of shareholders holding more than 
50 percent of the stock.\31\ Although there are limitations on 
the types of shareholders and stock structure an S corporation 
may have, businesses organized as S corporations may be as 
large as those organized as C corporations or partnerships. 
Certain corporations may not elect S corporation status, 
including financial institutions using the reserve method of 
accounting for bad debts and insurance companies subject to tax 
under subchapter L.\32\
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    \30\Sec. 1361. For this purpose, a husband and wife and all members 
of a family are treated as one shareholder. Sec. 1361(c)(1).
    \31\Sec. 1362.
    \32\Sec. 1361(b)(2).
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    In general, an S corporation shareholder is not subject to 
tax on corporate distributions unless the distributions exceed 
the shareholder's basis in the stock of the corporation.
            S corporations that were previously C corporations
    There are two principal exceptions to the general pass-
through treatment of S corporations. Both are applicable only 
if the S corporation was previously a C corporation. The first 
applies when the C corporation had appreciated assets,\33\ and 
the second applies when the C corporation had accumulated 
earnings and profits.\34\
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    \33\Sec. 1374. The period was seven years for taxable years 
beginning in 2009 and 2010, and five years for taxable years beginning 
in 2011, 2012, 2013, and 2014. If a C corporation elects to be an S 
corporation (or transfers assets to an S corporation in a carryover 
basis transaction), certain net built-in gains that are attributable to 
the period in which it was a C corporation, and that are recognized 
during the first five years in which the former C corporation is an S 
corporation, are subject to corporate-level tax.
    \34\Sec. 1375. An S corporation with accumulated earnings and 
profits is subject to corporate tax on excess net passive investment 
income (but not in excess of its taxable income, subject to certain 
adjustments), if more than 25 percent of its gross receipts for the 
year are passive investment income. Subchapter C earnings and profits 
generally refers to the earnings of the corporation prior to its 
subchapter S election which would have been taxable as dividends if 
distributed to shareholders by the corporation prior to its subchapter 
S election. If the S corporation continues to have C corporation 
earnings and profits and has gross receipts more than 25 percent of 
which are passive investment income in each year for three consecutive 
years, the S corporation election is automatically terminated. Sec. 
1362(d)(3). Further, while an S corporation shareholder generally is 
not subject to tax on corporate distributions unless the distributions 
exceed the shareholder's basis in the stock of the corporation, 
distributions from an S corporation that was formerly a C corporation 
generally are taxed to shareholders as dividends to the extent of the S 
corporation's accumulated earnings and profits. Sec. 1368.
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Sole proprietorships

    Unlike a C corporation, partnership, or S corporation, a 
business conducted as a sole proprietorship is not treated as 
an entity distinct from its owner for Federal income tax 
purposes.\35\ Rather, the business owner is taxed directly on 
business income, and files Schedule C (sole proprietorships 
generally), Schedule E (rental real estate and royalties), or 
Schedule F (farms) with his or her individual tax return. 
Furthermore, transfer of a sole proprietorship is treated as a 
transfer of each individual asset of the business. Nonetheless, 
a sole proprietorship is treated as an entity separate from its 
owner for employment tax purposes,\36\ for certain excise 
taxes,\37\ and certain information reporting requirements.\38\
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    \35\A single-member unincorporated entity is disregarded for 
Federal income tax purposes, unless its owner elects to be treated as a 
C corporation. Treas. Reg. sec. 301.7701-3(b)(1)(ii). Sole 
proprietorships often are conducted through legal entities for nontax 
reasons. While sole proprietorships generally may have no more than one 
owner, a married couple that files a joint return and jointly owns and 
operates a business may elect to have that business treated as a sole 
proprietorship under section 761(f).
    \36\Treas. Reg. sec. 301.7701-2(c)(2)(iv).
    \37\Treas. Reg. sec. 301.7701-2(c)(2)(v).
    \38\Treas. Reg. sec. 301.7701-2(c)(2)(vi).
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                           REASONS FOR CHANGE

    The Committee believes that a reduction in the corporate 
income tax rate to 20 percent provided by the bill does not 
completely address the income tax rate on business income. Many 
businesses are conducted in the form of passthrough entities, 
namely partnerships and S corporations. Further, businesses are 
frequently conducted as sole proprietorships, rather than 
through a legal entity that is treated for tax purposes as 
separate from the individual who owns the business. The income 
of businesses conducted in passthrough form or in sole 
proprietorship form is subject to tax in the hands of their 
individual owners at the income tax rates of individuals. To 
treat corporate and noncorporate business income more similarly 
under the income tax, the bill provides a maximum rate of 25 
percent on qualified business income of individuals.

                        EXPLANATION OF PROVISION

    Qualified business income of an individual from a 
partnership, S corporation, or sole proprietorship is subject 
to Federal income tax at a rate no higher than 25 percent. 
Qualified business income means, generally, all net business 
income from a passive business activity plus the capital 
percentage of net business income from an active business 
activity, reduced by carryover business losses and by certain 
net business losses from the current year, as determined under 
the provision.

Determination of rate

            25-percent rate
    The provision provides that an individual's tax is reduced 
to reflect a maximum rate of 25 percent on qualified business 
income. Qualified business income includes the capital 
percentage, generally 30 percent, of net business income. The 
percentage differs in the case of specified service activities 
or in the case of a taxpayer election to prove out a different 
percentage.
    Taxable income (reduced by net capital gain) that exceeds 
the maximum dollar amount for the 25-percent rate bracket 
applicable to the taxpayer, and that exceeds qualified business 
income, is subject to tax in the next higher brackets.
    The provision provides that a 25-percent tax rate applies 
generally to dividends received from a real estate investment 
trust (other than any portion that is a capital gain dividend 
or a qualified dividend), and applies generally to dividends 
that are includable in gross income from certain cooperatives.
            Nine-percent rate
    A special rule provides a reduced tax rate of 11, 10, or 
nine percent in the case of an individual's qualified active 
business income below an indexed threshold of $75,000 (in the 
case of a joint return or a surviving spouse) (the ``nine-
percent bracket threshold amount''). The indexed $75,000 
threshold is three quarters of that amount for individuals 
filing as head of household and half that amount for other 
individuals. The reduced rate is not available to estates and 
trusts.
    The reduced rate is phased in. The reduced rate is 11 
percent (that is, one percentage point below the 12 percent 
rate) for taxable years beginning in 2018 and 2019, and is 10 
percent (that is, two percentage points below the 12 percent 
rate) for taxable years beginning in 2020 and 2021. For taxable 
years beginning in 2022 and thereafter the reduced rate is nine 
percent (that is, three percentage points below the 12 percent 
rate).
    The reduced tax rate applies to the least of three amounts, 
the taxpayer's: (1) qualified active business income, (2) 
taxable income reduced by net capital gain, or (3) nine-percent 
bracket threshold amount (described above). Qualified active 
business income for a taxable year means the excess of the 
taxpayer's net business income from any active business 
activity over his or her net business loss from any active 
business activity. An active business activity is an activity 
that involves the conduct of any trade or business and that is 
not a passive activity for purposes of the passive loss rules 
of section 469 determined without regard to paragraphs (2) and 
(6)(B) of section 469(c) (that is, generally, the taxpayer 
materially participates in the trade or business activity). 
Qualified active business income includes income from any trade 
or business activity, including service businesses. No capital 
percentage limitation applies in determining qualified active 
business income.
    A phaseout applies to the amount subject to the 11-, 10-, 
or nine-percent rate. The amount taxed at one of these rates is 
reduced by the excess of taxable income over an indexed 
applicable threshold amount, $150,000 in the case of married 
individuals filing jointly. The applicable threshold amount is 
three quarters of that amount for individuals filing as head of 
household and half that amount for other individuals.
    For example, assume that in 2022, an individual (married 
filing jointly) has $70,000 of qualified active business income 
and $40,000 of other income, resulting in taxable income of 
$110,000. The $70,000 of qualified active business income is 
subject to tax at nine percent. Alternatively, assume that in 
2022, another individual has $160,000 of qualified active 
business income and $10,000 of other income resulting in 
taxable income of $170,000. The excess of the taxpayer's 
$170,000 taxable income over the $150,000 applicable threshold 
amount is $20,000. Taking into account the phaseout, this 
$20,000 amount reduces the $75,000 amount that, absent the 
phaseout, would be subject to the nine-percent rate, reversing 
the benefit of the nine-percent rate for $20,000 of the 
taxpayer's qualified active business income. The effect is that 
$55,000 is subject to the nine percent rate.

Qualified business income

    Qualified business income is defined as the sum of 100 
percent of any net business income derived from any passive 
business activity plus the capital percentage of net business 
income derived from any active business activity, reduced by 
the sum of 100 percent of any net business loss derived from 
any passive business activity, 30 percent (except as otherwise 
provided under rules for determining the capital percentage, 
below) of any net business loss derived from any active 
business activity, and any carryover business loss determined 
for the preceding taxable year. Qualified business income does 
not include income from a business activity that exceeds these 
percentages.
            Net business income or loss
    To determine qualified business income requires a 
calculation of net business income or loss from each of an 
individual's passive business activities and active business 
activities. Net business income or loss is determined at the 
activity level, that is, separately for each business activity.
    Net business income is determined by appropriately netting 
items of income, gain, deduction and loss with respect to the 
business activity. The determination takes into account these 
amounts only to the extent the amount affects the determination 
of taxable income for the year. For example, if in a taxable 
year, a business activity has 100 of ordinary income from 
inventory sales, and makes an expenditure of 25 that is 
required to be capitalized and amortized over 5 years under 
applicable tax rules, the net business income is 100 minus 5 
(current-year ordinary amortization deduction), or 95. The net 
business income is not reduced by the entire amount of the 
capital expenditure, only by the amount deductible in 
determining taxable income for the year.
    Net business income or loss includes the amounts received 
by the individual taxpayer as wages, director's fees, 
guaranteed payments and amounts received from a partnership 
other than in the individual's capacity as a partner, that are 
properly attributable to a business activity. These amounts are 
taken into account as an item of income with respect to the 
business activity. For example, if an individual shareholder of 
an S corporation engaged in a business activity is paid wages 
or director's fees by the S corporation, the amount of wages or 
director's fees is added in determining net business or loss 
with respect to the business activity. This rule is intended to 
ensure that the amount eligible for the 25-percent tax rate is 
not erroneously reduced because of compensation for services or 
other specified amounts that are paid separately (or treated as 
separate) from the individual's distributive share of 
passthrough income.
    Net business income or loss does not include specified 
investment-related income, deductions, or loss. Specifically, 
net business income does not include (1) any item taken into 
account in determining net long-term capital gain or net long-
term capital loss, (2) dividends, income equivalent to a 
dividend, or payments in lieu of dividends, (3) interest income 
and income equivalent to interest, other than that which is 
properly allocable to a trade or business, (4) the excess of 
gain over loss from commodities transactions, other than those 
entered into in the normal course of the trade or business or 
with respect to stock in trade or property held primarily for 
sale to customers in the ordinary course of the trade or 
business, property used in the trade or business, or supplies 
regularly used or consumed in the trade or business, (5) the 
excess of foreign currency gains over foreign currency losses 
from section 988 transactions, other than transactions directly 
related to the business needs of the business activity, (6) net 
income from notional principal contracts, other than clearly 
identified hedging transactions that are treated as ordinary 
(i.e., not treated as capital assets), and (7) any amount 
received from an annuity that is not used in the trade or 
business of the business activity. Net business income does not 
include any item of deduction or loss properly allocable to 
such income.
            Carryover business loss
    The carryover business loss from the preceding taxable year 
reduces qualified business income in the taxable year. The 
carryover business loss is the excess of (1) the sum of 100 
percent of any net business loss derived from any passive 
business activity, 30 percent (except as otherwise provided 
under rules for determining the capital percentage, below) of 
any net business loss derived from any active business 
activity, and any carryover business loss determined for the 
preceding taxable year, over (2) the sum of 100 percent of any 
net business income derived from any passive business activity 
plus the capital percentage of net business income derived from 
any active business activity. There is no time limit on 
carryover business losses. For example, an individual has two 
business activities that give rise to a net business loss of 3 
and 4, respectively, in year one, giving rise to a carryover 
business loss of 7 in year two. If in year two the two business 
activities each give rise to net business income of 2, a 
carryover business loss of 3 is carried to year three (that is, 
 - (2 + 2) = ).
            Passive business activity and active business activity
    A business activity means an activity that involves the 
conduct of any trade or business. A taxpayer's activities 
include those conducted through partnerships, S corporations, 
and sole proprietorships. An activity has the same meaning as 
under the present-law passive loss rules (section 469). As 
provided in regulations under those rules, a taxpayer may use 
any reasonable method of applying the relevant facts and 
circumstances in grouping activities together or as separate 
activities (through rental activities generally may not be 
grouped with other activities unless together they constitute 
an appropriate economic unit, and grouping real property 
rentals with personal property rentals is not permitted). It is 
intended that the activity grouping the taxpayer has selected 
under the passive loss rules is required to be used for 
purposes of the passthrough rate rules. For example, an 
individual taxpayer has an interest in a bakery and a movie 
theater in Baltimore, and a bakery and a movie theatre in 
Philadelphia. For purposes of the passive loss rules, the 
taxpayer has grouped them as two activities, a bakery activity 
and a movie theatre activity. The taxpayer must group them the 
same way, that is as two activities, a bakery activity and a 
movie theatre activity, for purposes of rules of this 
provision.
    Regulatory authority is provided to require or permit 
grouping as one or as multiple activities in particular 
circumstances, in the case of specified services activities 
that would be treated as a single employer under broad related 
party rules of present law.
    A passive business activity generally has the same meaning 
as a passive activity under the present-law passive loss rules. 
However, for this purpose, a passive business activity is not 
defined to exclude a working interest in any oil or gas 
property that the taxpayer holds directly or through an entity 
that does not limit the taxpayer's liability. Rather, whether 
the taxpayer materially participates in the activity is 
relevant. Further, for this purpose, a passive business 
activity does not include an activity in connection with a 
trade or business or in connection with the production of 
income.
    An active business activity is an activity that involves 
the conduct of any trade or business and that is not a passive 
activity. For example, if an individual has a partnership 
interest in a manufacturing business and materially 
participates in the manufacturing business, it is considered an 
active business activity of the individual.
            Capital percentage
    The capital percentage is the percentage of net business 
income from an active business activity that is included in 
qualified business income subject to Federal income tax at a 
rate no higher than 25 percent.
    In general, the capital percentage is 30 percent, except as 
provided in the case of application of an increased percentage 
for capital-intensive business activities, in the case of 
specified service activities, and in the case of application of 
the rule for capital-intensive specified service activities.
    The capital percentage is reduced if the portion of net 
business income represented by the sum of wages, director's 
fees, guaranteed payments and amounts received from a 
partnership other than in the individual's capacity as a 
partner, that are properly attributable to a business activity 
exceeds the difference between 100 percent and the capital 
percentage. For example, if net business income from an 
individual's active business activity conducted through an S 
corporation is 100, including 75 of wages that the S 
corporation pays the individual, the otherwise applicable 
capital percentage is reduced from 30 percent to 25 percent.
    Increased percentage for capital-intensive business 
activities.--A taxpayer may elect the application of an 
increased percentage with respect to any active business 
activity other than a specified service activity (described 
below). The election applies for the taxable year it is made 
and each of the next four taxable years. The election is to be 
made no later than the due date (including extensions) of the 
return for the taxable year made, and is irrevocable. The 
percentage under the election is the applicable percentage 
(described below) for the five taxable years of the election.
    Specified service activities.--In the case of an active 
business activity that is a specified service activity, 
generally the capital percentage is 0 and the percentage of any 
net business loss from the specified service activity that is 
taken into account as qualified business income is 0 percent.
    A specified service activity means any trade or business 
activity involving the performance of services in the fields of 
health, law, engineering, architecture, accounting, actuarial 
science, performing arts, consulting, athletics, financial 
services, brokerage services, any trade or business where the 
principal asset of such trade or business is the reputation or 
skill of one or more of its employees, or investing, trading, 
or dealing in securities, partnership interests, or 
commodities. For this purpose a security and a commodity have 
the meanings provided in the rules for the mark-to-market 
accounting method for dealers in securities (sections 475(c)(2) 
and 475(e)(2), respectively).
    Capital-intensive specified service activities.--A taxpayer 
may elect the application of an exception with respect to any 
active business activity that is specified service activity, 
provided the applicable percentage (described below) for the 
taxable year is at least 10 percent. If the election is validly 
made, the capital percentage and the percentage of net business 
loss with respect to the activity are not 0 percent, but 
rather, the applicable percentage for the taxable year.
    Calculation of applicable percentage.--The applicable 
percentage is the percentage applied in lieu of the capital 
percentage in the case of either of the foregoing elections. 
The applicable percentage (not the capital percentage) then 
determines the portion of the net business income or loss from 
the activity for the taxable year that is taken into account in 
determining qualified business income subject to Federal income 
tax at a rate no higher than 25 percent.
    The applicable percentage is determined by dividing (1) the 
specified return on capital for the activity for the taxable 
year, by (2) the taxpayer's net business income derived from 
that activity for that taxable year. The specified return on 
capital for any active business activity is determined by 
multiplying a deemed rate of return, the short-term AFR plus 7 
percentage points, times the asset balance for the activity for 
the taxable year, and reducing the product by interest expense 
deducted with respect to the activity for the taxable year. The 
asset balance for this purpose is the adjusted basis of 
property used in connection with the activity as of the end of 
the taxable year, but without taking account of basis 
adjustments for bonus depreciation under section 168(k) or 
expensing under section 179. In the case of an active business 
activity conducted through a partnership or S corporation, the 
taxpayer takes into account his distributive share of the asset 
balance of the partnership's or S corporation's property used 
in connection with the activity. Regulatory authority is 
provided to ensure that in determining asset balance, no amount 
is taken into account for more than one activity.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2017. A transition rule provides that for 
fiscal year taxpayers whose taxable year includes December 31, 
2017, a proportional benefit of the reduced rate under the 
provision is allowed for the period beginning January 1, 2018, 
and ending on the day before the beginning of the taxable year 
beginning after December 31, 2017.

   B. Simplification and Reform of Family and Individual Tax Credits

1. Enhancement of child tax credit and new family tax credit (sec. 1101 
                  of the bill and sec. 24 of the Code)

                              PRESENT LAW

    An individual may claim a tax credit for each qualifying 
child under the age of 17. The amount of the credit per child 
is $1,000. A child who is not a citizen, national, or resident 
of the United States cannot be a qualifying child.
    The aggregate amount of child credits that may be claimed 
is phased out for individuals with income over certain 
threshold amounts. Specifically, the otherwise allowable child 
tax credit is reduced by $50 for each $1,000 (or fraction 
thereof) of modified adjusted gross income (``AGI'') over 
$75,000 for single individuals or heads of households, $110,000 
for married individuals filing joint returns, and $55,000 for 
married individuals filing separate returns. For purposes of 
this limitation, modified AGI includes certain otherwise 
excludable income earned by U.S. citizens or residents living 
abroad or in certain U.S. territories.
    The credit is allowable against both the regular tax and 
the alternative minimum tax (``AMT''). To the extent the child 
credit exceeds the taxpayer's tax liability, the taxpayer is 
eligible for a refundable credit\39\ (the ``additional child 
tax credit'') equal to 15 percent of earned income in excess of 
$3,000 (the ``earned income'' formula).
---------------------------------------------------------------------------
    \39\The refundable credit may not exceed the maximum credit per 
child of $1,000.
---------------------------------------------------------------------------
    Families with three or more children may determine the 
additional child tax credit using the ``alternative formula,'' 
if this results in a larger credit than determined under the 
earned income formula. Under the alternative formula, the 
additional child tax credit equals the amount by which the 
taxpayer's Social Security taxes exceed the taxpayer's earned 
income credit (``EIC'').
    Earned income is defined as the sum of wages, salaries, 
tips, and other taxable employee compensation plus net self-
employment earnings. At the taxpayer's election, combat pay may 
be treated as earned income for these purposes. Unlike the EIC, 
which also includes the preceding items in its definition of 
earned income, the additional child tax credit is based only on 
earned income to the extent it is included in computing taxable 
income. For example, some ministers' parsonage allowances are 
considered self-employment income, and thus are considered 
earned income for purposes of computing the EIC, but the 
allowances are excluded from gross income for individual income 
tax purposes, and thus are not considered earned income for 
purposes of the additional child tax credit since the income is 
not included in taxable income.
    Any credit or refund allowed or made to an individual under 
this provision (including to any resident of a U.S. possession) 
is not taken into account as income and is not be taken into 
account as resources for the month of receipt and the following 
two months for purposes of determining eligibility of such 
individual or any other individual for benefits or assistance, 
or the amount or extent of benefits or assistance, under any 
Federal program or under any State or local program financed in 
whole or in part with Federal funds.

                           REASONS FOR CHANGE

    The Committee believes that it is important to provide an 
increased tax benefit for families raising children, as well as 
to ensure that all members of a household are accounted for in 
determining families' ability to pay income tax. The Committee 
believes that an expanded child tax credit and a new family tax 
credit are an equitable means of achieving this goal.

                        EXPLANATION OF PROVISION

    The provision expands the child tax credit into a new 
family tax credit. The family credit consists of a $1,600 
credit per qualifying child under the age of 17, and a $300 
credit for each of the taxpayer (both spouses in the case of 
married taxpayers filing a joint return) and each dependent of 
the taxpayer who is not a qualifying child under age 17.
    The provision generally retains the present-law definition 
of dependent. However, under the provision, a qualifying child 
is eligible for the $1,600 credit only if such child is a 
citizen or national of the United States.
    The family credit phases out at AGI of $230,000 for married 
taxpayers filing joint returns and $115,000 for other 
individuals. The credit is refundable under rules similar to 
the present law additional child tax credit. That is, to the 
extent the credit exceeds the taxpayer's tax liability, the 
taxpayer is eligible for a refundable credit equal to 15 
percent of earned income in excess of $3,000.\40\ The 
refundable credit is limited to $1,000 times the number of 
qualifying children under the age of 17 claimed on the return. 
This $1,000 per child dollar limitation is indexed for 
inflation, with a base year of 2017, rounding up to the nearest 
$100. Accordingly, in 2018 the limitation will be $1,100.
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    \40\The alternate formula described in the present law section 
applies to the refundable portion of the family credit as well.
---------------------------------------------------------------------------
    The provision requires that the taxpayer include the name 
and taxpayer identification number of each qualifying child and 
dependent on the tax return for each taxable year.
    The $300 credit for the taxpayer, spouse, and non-child 
dependents of the taxpayer expires for taxable years beginning 
after December 31, 2022.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2017.

  2. Repeal of credit for the elderly and permanently disabled (sec. 
              1102(a) of the bill and sec. 22 of the Code)

                              PRESENT LAW

    Certain taxpayers who are over the age of 65 or retired on 
account of permanent and total disability may claim a 
nonrefundable credit. The maximum credit is 15 percent of 
$5,000 for a return where one individual qualifies and $7,500 
on a joint return where both spouses qualify.\41\ Thus, the 
maximum credit amounts are $750 and $1,125, respectively.
---------------------------------------------------------------------------
    \41\Sec. 22(a).
---------------------------------------------------------------------------
    The credit base is reduced by one half of the amount by 
which the taxpayer's adjusted gross income exceeds $7,500 if 
the taxpayer is unmarried, $10,000 if the taxpayer is married 
and files a joint return, or $5,000 if the taxpayer is married 
and files a separate return.\42\ Thus, the credit base is 
phased down to zero when adjusted gross income exceeds $17,500 
for an unmarried person, $20,000 for a married couple filing a 
joint return where only one spouse qualifies for the credit, 
$25,000 for a joint return where both spouses qualify, and 
$12,500 for a married person filing a separate return.
---------------------------------------------------------------------------
    \42\Sec. 22(d).
---------------------------------------------------------------------------
    Additionally, the credit base is reduced by certain items 
of income otherwise exempt from tax: (1) benefits under Title 
II of the Social Security Act; (2) retirement benefits under 
the Railroad Retirement Act of 1974; (3) disability benefits 
paid by the Veterans Administration, except for benefits 
payable on account of personal injuries or sickness resulting 
from active service in the Armed Forces; and (4) pensions, 
annuities, and disability benefits exempted from tax by any 
provision not in the Code.\43\
---------------------------------------------------------------------------
    \43\Sec. 22(c)(3).
---------------------------------------------------------------------------
    To qualify for the credit, a taxpayer must, at the end of 
the taxable year, be at least 65 years old or retired on 
account of permanent and total disability.\44\ Permanent and 
total disability exists if, at the time of retirement, the 
taxpayer was ``unable to engage in any substantial gainful 
activity by reason of any medically determinable physical or 
mental impairment which can be expected to result in death or 
which has lasted or can be expected to last for a continuous 
period of not less than 12 months.\45\
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    \44\Sec. 22(b).
    \45\Sec. 22(e)(3).
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                           REASONS FOR CHANGE

    The Committee recognizes that, because the parameters of 
the credit for the elderly and permanently disabled are not 
indexed for inflation, under present law virtually no taxpayers 
benefit from the credit. Accordingly, repealing the credit 
makes the system simpler by reducing outdated and unnecessary 
provisions in the Code and in IRS forms and publications.

                        EXPLANATION OF PROVISION

    The provision repeals the credit for the elderly and 
permanently disabled.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2017.

 3. Termination of credit for interest on certain home mortgages (sec. 
              1102(b) of the bill and sec. 25 of the Code)

                              PRESENT LAW

    Qualified governmental units can elect to exchange all or a 
portion of their qualified mortgage bond authority for 
authority to issue mortgage credit certificates (``MCCs'').\46\ 
MCCs entitle homebuyers to a nonrefundable income tax credit 
for a specified percentage of interest paid on mortgage loans 
on their principal residences. The tax credit provided by the 
MCC may be carried forward three years. Once issued, an MCC 
generally remains in effect as long as the residence being 
financed is the certificate-recipient's principal residence. 
MCCs generally are subject to the same eligibility and targeted 
area requirements as qualified mortgage bonds.\47\
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    \46\Sec. 25.
    \47\Sec. 143.
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                           REASONS FOR CHANGE

    As the bill repeals the authority to issue qualified 
private activity bonds,\48\ including qualified mortgage bonds, 
the Committee believes it is an appropriate conforming change 
to also terminate the related mortgage credit certificate 
program.
---------------------------------------------------------------------------
    \48\Sec. 3601 of the bill, infra.
---------------------------------------------------------------------------

                        EXPLANATION OF PROVISION

    No credit is allowed with respect to any MCC issued after 
December 31, 2017.

                             EFFECTIVE DATE

    The provision applies to taxable years ending after 
December 31, 2017. Credits continue for interest paid on 
mortgage loans on principal residences for which MCCs have been 
issued on or before December 31, 2017.

  4. Repeal of credit for plug-in electric drive motor vehicles (sec. 
             1102(c) of the bill and sec. 30d of the Code)

                              PRESENT LAW

    A credit is available for new four-wheeled vehicles 
(excluding low speed vehicles and vehicles weighing 14,000 
pounds or more) propelled by a battery with at least 4 
kilowatt-hours of electricity that can be charged from an 
external source.\49\ The base credit is $2,500 plus $417 for 
each kilowatt-hour of additional battery capacity in excess of 
4 kilowatt-hours (for a maximum credit of $7,500). Qualified 
vehicles are subject to a 200,000 vehicle-permanufacturer 
limitation. Once the limitation has been reached the credit is 
phased down over four calendar quarters.
---------------------------------------------------------------------------
    \49\Sec. 30D.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the repeal of many existing tax 
incentives, including the credit for plug-in electric drive 
motor vehicles, makes the system simpler and fairer for all 
families and individuals, and allows for lower tax rates. The 
Committee further believes that repeal of this provision is 
consistent with streamlining the tax code, broadening the tax 
base, lowering rates, and growing the economy.

                        EXPLANATION OF PROVISION

    The provision repeals the credit for plug-in electric drive 
motor vehicles.

                             EFFECTIVE DATE

    The provision is effective for vehicles placed in service 
in taxable years beginning after December 31, 2017.

5. Modification of taxpayer identification number requirements for the 
child tax credit, earned income credit, and american opportunity credit 
      (sec. 1103 of the bill and secs. 24, 25A and 32 of the Code)

                              PRESENT LAW

Earned income credit

    Low and moderate-income taxpayers may be eligible for the 
refundable earned income credit (``EIC''). Eligibility for the 
EIC is based on the taxpayer's earned income, adjusted gross 
income, investment income, filing status, and work status in 
the United States. The amount of the EIC is based on the 
presence and number of qualifying children in the worker's 
family, as well as on adjusted gross income and earned income.
    The earned income credit generally equals a specified 
percentage of earned income\50\ up to a maximum dollar amount. 
The maximum amount applies over a certain income range and then 
diminishes to zero over a specified phase-out range. For 
taxpayers with earned income (or adjusted gross income 
(``AGI''), if greater) in excess of the beginning of the phase-
out range, the maximum EIC amount is reduced by the phase-out 
rate multiplied by the amount of earned income (or AGI, if 
greater) in excess of the beginning of the phase-out range. For 
taxpayers with earned income (or AGI, if greater) in excess of 
the end of the phase-out range, no credit is allowed.
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    \50\Earned income is defined as (1) wages, salaries, tips, and 
other employee compensation, but only if such amounts are includible in 
gross income, plus (2) the amount of the individual's net self-
employment earnings.
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    An individual is not eligible for the EIC if the aggregate 
amount of disqualified income of the taxpayer for the taxable 
year exceeds $3,450 (for 2017). This threshold is indexed for 
inflation. Disqualified income is the sum of: (1) interest 
(taxable and tax-exempt); (2) dividends; (3) net rent and 
royalty income (if greater than zero); (4) capital gains net 
income; and (5) net passive income (if greater than zero) that 
is not self-employment income.
    The EIC is a refundable credit, meaning that if the amount 
of the credit exceeds the taxpayer's Federal income tax 
liability, the excess is payable to the taxpayer as a direct 
transfer payment.

Child tax credit\51\
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    \51\See description of sec. 1101 of the bill for the provision's 
modifications to the child tax 
credit.
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    An individual may claim a tax credit of $1,000 for each 
qualifying child under the age of 17. A child who is not a 
citizen, national, or resident of the United States cannot be a 
qualifying child.
    The aggregate amount of allowable child credits is phased 
out for individuals with income over certain threshold amounts. 
Specifically, the otherwise allowable aggregate child tax 
credit (``CTC'') amount is reduced by $50 for each $1,000 (or 
fraction thereof) of modified adjusted gross income (``modified 
AGI'') over $75,000 for single individuals or heads of 
households, $110,000 for married individuals filing joint 
returns, and $55,000 for married individuals filing separate 
returns. For purposes of this limitation, modified AGI includes 
certain otherwise excludable income\52\ earned by U.S. citizens 
or residents living abroad or in certain U.S. territories.
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    \52\Sec. 911.
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    The child tax credit is allowable against both the regular 
tax and the alternative minimum tax (``AMT''). To the extent 
the credit exceeds the taxpayer's tax liability, the taxpayer 
is eligible for a refundable credit (the ``additional child tax 
credit'') equal to 15 percent of earned income in excess of a 
threshold dollar amount of $3,000 (the ``earned income'' 
formula).
    Families with three or more qualifying children may 
determine the additional child tax credit using the 
``alternative formula'' if this results in a larger credit than 
determined under the earned income formula. Under the 
alternative formula, the additional child tax credit equals the 
amount by which the taxpayer's Social Security taxes exceed the 
taxpayer's EIC.
    As with the EIC, earned income is defined as the sum of 
wages, salaries, tips, and other taxable employee compensation 
plus net self-employment earnings. Unlike the EIC, the 
additional child tax credit is based on earned income only to 
the extent it is included in computing taxable income. For 
example, some ministers' parsonage allowances are considered 
self-employment income and thus are considered earned income 
for purposes of computing the EIC, but the allowances are 
excluded from gross income for individual income tax purposes 
and thus are not considered earned income for purposes of the 
additional child tax credit.

American Opportunity credit\53\
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    \53\See description of sec. 1201 of the bill for the provision's 
modifications to the American Opportunity credit.
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    The American Opportunity credit provides individuals with a 
tax credit of up to $2,500 per eligible student per year for 
qualified tuition and related expenses (including course 
materials) paid for each of the first four years of the 
student's post-secondary education in a degree or certificate 
program. The credit rate is 100 percent on the first $2,000 of 
qualified tuition and related expenses, and 25 percent on the 
next $2,000 of qualified tuition and related expenses.
    The American Opportunity credit is phased out ratably for 
taxpayers with modified AGI between $80,000 and $90,000 
($160,000 and $180,000 for married taxpayers filing a joint 
return). The credit may be claimed against a taxpayer's AMT 
liability.
    Forty percent of a taxpayer's otherwise allowable modified 
credit is refundable. A refundable credit is a credit which, if 
the amount of the credit exceeds the taxpayer's Federal income 
tax liability, the excess is payable to the taxpayer as a 
direct transfer payment.
    No credit is allowed to a taxpayer who fails to include the 
taxpayer identification number of the student to whom the 
qualified tuition and related expenses relate.

Taxpayer identification number requirements

    Any individual filing a U.S. tax return is required to 
state his or her taxpayer identification number on such return. 
Generally, a taxpayer identification number is the individual's 
Social Security number (``SSN'').\54\ However, in the case of 
an individual who is not eligible to be issued an SSN, but who 
has a tax filing obligation, the Internal Revenue Service 
(``IRS'') issues an individual taxpayer identification number 
(``ITIN'') for use in connection with the individual's tax 
filing requirements.\55\ An individual who is eligible to 
receive an SSN may not obtain an ITIN for purposes of his or 
her tax filing obligations.\56\ An ITIN does not provide 
eligibility to work in the United States or claim Social 
Security benefits.
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    \54\Sec. 6109(a).
    \55\Treas. Reg. Sec. 301.6109-1(d)(3)(i).
    \56\Treas. Reg. Sec. 301.6109-1(d)(3)(ii).
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    Examples of individuals who are not eligible for SSNs, but 
potentially need ITINs in order to file U.S. returns include a 
nonresident alien filing a claim for a reduced withholding rate 
under a U.S. income tax treaty, a nonresident alien required to 
file a U.S. tax return,\57\ an individual who is a U.S. 
resident alien under the substantial presence test and who 
therefore must file a U.S. tax return,\58\ a dependent or 
spouse of the prior two categories of individuals, or a 
dependent or spouse of a nonresident alien visa holder.
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    \57\For instance, in the case of an individual that has income 
which is effectively connected with a United States trade or business, 
such as the performance of personal services in the United States.
    \58\Such an individual would have a filing requirement without 
regard to whether the individual is lawfully present or has work 
authorization.
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    An individual is ineligible for the EIC (but not the child 
tax credit) if he or she does not include a valid SSN and the 
qualifying child's valid SSN (and, if married, the spouse's 
SSN) on his or her tax return. For these purposes, the Code 
defines an SSN as a Social Security number issued to an 
individual, other than an SSN issued to an individual solely 
for the purpose of applying for or receiving federally funded 
benefits.\59\ If an individual fails to provide a correct 
taxpayer identification number, such omission will be treated 
as a mathematical or clerical error by the IRS.
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    \59\Sec. 205(c)(2)(B)(i)(II) (and that portion of sec. 
205(c)(2)(B)(i)(III) relating to it) of the Social Security Act.
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    A taxpayer who resides with a qualifying child may not 
claim the EIC with respect to the qualifying child if such 
child does not have a valid SSN. The taxpayer also is 
ineligible for the EIC for workers without children because he 
or she resides with a qualifying child. However, if a taxpayer 
has two or more qualifying children, some of whom do not have a 
valid SSN, the taxpayer may claim the EIC based on the number 
of qualifying children for whom there are valid SSNs.

                           REASONS FOR CHANGE

    The Committee believes that it is important to ensure that 
refundable and other credits are not being claimed 
fraudulently. The Committee believes that requiring Social 
Security numbers as the identifying number for taxpayers and 
children will substantially lower the overpayment rate on these 
credits.

                        EXPLANATION OF PROVISION

    Under the provision, any qualifying child claimed by the 
taxpayer on the tax return must use, as that child's 
identifying number, a Social Security number that is valid for 
employment in the United States in order to be eligible for the 
CTC. Under the provision, if a child's identifying number was 
other than a Social Security number (such as an ITIN), the 
taxpayer would be eligible to receive the $300 credit for 
dependents other than qualifying children, assuming such child 
otherwise qualified as a dependent of the taxpayer.\60\
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    \60\See description of sec. 1101 of the bill.
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    Additionally, under the provision, taxpayers who use as 
their taxpayer identification number a Social Security number 
issued for non-work reasons, such as for purposes of receiving 
Federal benefits or for any other reason, are not eligible for 
the EIC.
    Lastly, under the provision, in order to claim the American 
Opportunity credit, the identification number provided with 
respect to the student to whom the tuition and related expenses 
relate must be a Social Security number.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2017.

 6. Procedures to reduce improper claims of earned income credit (sec. 
  1104 of the bill and new secs. 32(c)(2)(B)(vii) and 6011(i) of the 
                                 Code)

                              PRESENT LAW

            Earned income credit
    Low-and moderate-income workers may be eligible for the 
refundable earned income credit (``EIC''). Eligibility for the 
EIC is based on earned income, adjusted gross income (``AGI''), 
investment income, filing status, number of children, and 
immigration and work status in the United States. The maximum 
amount of the EIC applies over a certain income range and then 
diminishes to zero over a specified phaseout range. The EIC is 
a refundable credit, meaning that if the amount of the credit 
exceeds the taxpayer's Federal income tax liability, the excess 
is payable to the taxpayer as a direct transfer payment.
    The EIC generally equals a specified percentage of earned 
income up to a maximum dollar amount. Earned income is the sum 
of employee compensation includible in gross income (generally 
the amount reported in Box 1 of Form W-2, Wage and Tax 
Statement, discussed below) plus net earnings from self-
employment determined with regard to the deduction for one-half 
of self-employment taxes.\61\ Special rules apply in computing 
earned income for purposes of the EIC.\62\ Net earnings from 
self-employment generally includes the gross income derived by 
an individual from any trade or business carried on by the 
individual, less the deductions attributable to the trade or 
business that are allowed under the self-employment tax rules, 
plus the individual's distributive share of income or loss from 
any trade or business of a partnership in which the individual 
is a partner.\63\
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    \61\Sec. 32(c)(2)(A).
    \62\Sec. 32(c)(2)(B).
    \63\Sec. 1402(a); Chief Counsel Advice 200022051.
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            Employment taxes and quarterly reporting by employers
    Employment taxes include employer and employee taxes on 
employee wages under the Federal Insurance Contributions Act 
(``FICA'') and income taxes required to be withheld by 
employers from employee wages (``income tax withholding'').\64\ 
Income tax withholding rates vary depending on the amount of 
wages paid, the length of the payroll period, and the number of 
withholding allowances claimed by the employee. Employers are 
required also to withhold the employee share of FICA tax from 
employee wages. For these purposes, wages is defined broadly to 
include all remuneration, subject to exceptions specifically 
provided in the relevant statutory provisions.
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    \64\Secs. 3101-3128 (FICA) and 3401-3404 (income tax withholding). 
Employment taxes also include taxes under the Railroad Retirement Act 
(``RRTA''), sections 3201-3241, and tax under the Federal Unemployment 
Taxes Act (``FUTA''), sections 3301-3311. Sections 3501-3510 provide 
additional employment tax rules.
---------------------------------------------------------------------------
    Employers generally submit quarterly reports to IRS on Form 
941, Employer's Quarterly Federal Tax Return, showing the 
number of employees to whom wages were paid during the quarter, 
the total wages paid to employees, total FICA taxes (employer 
and employee) on the wages, and total income tax withheld from 
the wages.\65\ In addition, by January 31 after the end of a 
calendar year, an employer must provide each employee with Form 
W-2, Wage and Tax Statement, showing the total wages paid to 
the employee during the calendar year and certain other 
information.\66\ The information contained on each employee's 
W-2 is also provided to the IRS, accompanied by Form W-3, 
Transmittal of Wage and Tax Statements, showing the total 
number of Forms W-2 and aggregate information for all 
employees, such as aggregate wages reported on Forms W-2. IRS 
then compares the W-3 wage totals to the Form 941 (or Form 944) 
wage totals.
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    \65\Treas. Secs. 31.6011(a)-1(a)(1), 31.6011(a)-4(a)(1), 
31.6011(a)-1(a)(5). If the total amount of FICA taxes and withheld 
income tax for a year is $1,000 or less, instead of filing Form 941 for 
each quarter, the employer is permitted file annually on Form 944, 
Employer's Annual Federal Tax Return. Separate forms and filing 
requirement apply with respect to RRTA and FUTA taxes.
    \66\Sec. 6051(a). Employees are required to include a copy of Form 
W-2 when filing their income tax returns.
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                           REASONS FOR CHANGE

    The Committee recognizes that overclaims and overpayments 
are prevalent in the EIC program. The Committee further 
recognizes that the overwhelming majority of individuals making 
overclaims were not eligible for the credit. The Committee 
believes that these overclaims and overpayments can be 
significantly reduced by making it clear that taxpayers are 
required to claim all allowable deductions in determining 
earned income and by providing the IRS additional quarterly 
wage information on every taxpayer-employee such that the IRS 
will be able to verify reported income before any refundable 
EIC payment is made.

                        EXPLANATION OF PROVISION

            Modification of the definition of ``earned income''
    The provision clarifies that a taxpayer is required to 
claim all allowable deductions in computing net earnings from 
self-employment for EIC purposes.
            Quarterly reporting of wages by employers
    The provision modifies employer reporting requirements 
associated with the deduction and withholding of certain 
employment taxes on wages. Under the provision, employers must 
report, along with the aggregate wages paid and employment 
taxes collected on Form 941 or Form 944, the name and address 
of each employee and the amount of reportable wages received by 
each of those employees.

                             EFFECTIVE DATE

            Modification of the definition of ``earned income''
    The provision applies to taxable years ending after the 
date of enactment.
            Quarterly reporting of wages by employers
    The provision applies to taxable years ending after the 
date of enactment, subject to the authority of the Secretary to 
delay for such period as the Secretary determines to be 
reasonable to allow adequate time to modify systems to permit 
compliance with the additional reporting requirements.

  7. Certain income disallowed for purposes of the earned income tax 
 credit (sec. 1105 of the bill, new secs. 32(n) and 32(c)(2)(C) of the 
     Code, and secs. 6051, 6052, 6041(a), and 6050(w) of the Code)

                              PRESENT LAW

            Earned income credit
    Low-and moderate-income workers may be eligible for the 
refundable earned income credit (``EIC''). Eligibility for the 
EIC is based on earned income, adjusted gross income (``AGI''), 
investment income, filing status, number of children, and 
immigration and work status in the United States. The maximum 
amount of the EIC applies over a certain income range and then 
diminishes to zero over a specified phaseout range. The EIC is 
a refundable credit, meaning that if the amount of the credit 
exceeds the taxpayer's Federal income tax liability, the excess 
is payable to the taxpayer as a direct transfer payment.
    The EIC generally equals a specified percentage of earned 
income up to a maximum dollar amount. Earned income is the sum 
of employee compensation includible in gross income plus net 
earnings from self-employment determined with regard to the 
deduction for one-half of self-employment taxes.\67\ Special 
rules apply in computing earned income for purposes of the 
EIC.\68\
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    \67\Sec. 32(c)(2)(A).
    \68\Sec. 32(c)(2)(B).
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            Information reporting
    Present law imposes a variety of information reporting 
requirements on participants in certain transactions.\69\ These 
requirements are intended to assist taxpayers in preparing 
their income tax returns and to help the Internal Revenue 
Service (``IRS'') determine whether such returns are correct 
and complete.
---------------------------------------------------------------------------
    \69\Sec. 6031 through 6060.
---------------------------------------------------------------------------
    The primary provision governing information reporting by 
payors requires an information return by every person engaged 
in a trade or business who makes payments aggregating $600 or 
more in any taxable year to a single payee in the course of the 
payor's trade or business.\70\ Payments to corporations 
generally are excepted from this requirement. Payments subject 
to reporting include fixed or determinable income or 
compensation, but do not include payments for goods or certain 
enumerated types of payments that are subject to other specific 
reporting requirements.\71\ Detailed rules are provided for the 
reporting of various types of investment income, including 
interest, dividends, and gross proceeds from brokered 
transactions (such as a sale of stock) paid to U.S. 
persons.\72\
---------------------------------------------------------------------------
    \70\The information return generally is submitted electronically as 
a Form-1099 or Form-1096, although certain payments to beneficiaries or 
employees may require use of Forms W-3 or W-2, respectively. Treas. 
Reg. sec. 1.6041-1(a)(2).
    \71\Sec. 6041(a) requires reporting as to fixed or determinable 
gains, profits, and income (other than payments to which section 
6042(a)(1), 6044(a)(1), 6047(c), 6049(a), or 6050N(a) applies and other 
than payments with respect to which a statement is required under 
authority of section 6042(a), 6044(a)(2) or 6045). These payments 
excepted from section 6041(a) include most interest, royalties, and 
dividends.
    \72\Secs. 6042 (dividends), 6045 (broker reporting) and 6049 
(interest) and the Treasury regulations thereunder.
---------------------------------------------------------------------------
    Special information reporting requirements exist for 
employers required to deduct and withhold tax from employees' 
income.\73\ In addition, any service recipient engaged in a 
trade or business and paying for services is required to make a 
return according to regulations when the aggregate of payments 
is $600 or more.\74\
---------------------------------------------------------------------------
    \73\Sec. 6051(a).
    \74\Sec. 6041A.
---------------------------------------------------------------------------
    There are also information reporting requirements for 
merchant acquiring entities and third party settlement 
organizations with respect to payments made in settlement of 
payment card transactions and third party payment network 
transactions occurring in that calendar year.\75\
---------------------------------------------------------------------------
    \75\Sec. 6050W.
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    The payor of amounts described above is required to provide 
the recipient of the payment with an annual statement showing 
the aggregate payments made and contact information for the 
payor.\76\ The statement must be supplied to taxpayers by the 
payors by January 31 of the following calendar year.\7\ Payors 
generally must file the information return with the IRS on or 
before January 31 of the year following the calendar year to 
which such returns relate.\77\
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    \76\Sec. 6041(d).
    \77\Sec. 6071(d).
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    Failure to comply with the information reporting 
requirements results in penalties, which may include a penalty 
for failure to file the information return,\78\ to furnish 
payee statements,\79\ or to comply with other various reporting 
requirements.\80\ No penalty is imposed if the failure is due 
to reasonable cause.\81\ Any person who is required to file an 
information return, but who fails to do so on or before the 
prescribed filing date is subject to a penalty that varies 
based on when, if at all, the correct information return is 
filed and the correct payee statement is furnished.
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    \78\Sec. 6721.
    \79\Sec. 6722.
    \80\Sec. 6723.
    \81\Sec. 6724.
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            Books or records
    Every person liable for any tax imposed by the Code, or for 
the collection thereof, must keep such records, render such 
statements, make such returns, and comply with such rules and 
regulations as the Secretary may from time to time 
prescribe.\82\ Whenever necessary, the Secretary may require 
any person, by notice served upon that person or by 
regulations, to make such returns, render such statements, or 
keep such records, as the Secretary deems sufficient to show 
whether or not that person is liable for tax. Persons subject 
to income tax are required to keep books or records sufficient 
to establish the amount of gross income, deductions, credits, 
or other matters required to be shown by that person in any 
return of such tax or information.\83\ The books or records are 
required to be kept available at all times for inspection by 
the IRS, and must be retained so long as the contents thereof 
may become material in the administration of any internal 
revenue law.\84\
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    \82\Sec. 6001.
    \83\Treas. sec. 1.6001-1(a).
    \84\Treas. sec. 1.6001-1(e).
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                           REASONS FOR CHANGE

    The Committee recognizes that overclaims and overpayments 
are prevalent in the EIC program. The Committee further 
recognizes that the overwhelming majority of individuals making 
overclaims were not eligible for the credit. The Committee 
believes that these overclaims and overpayments can be 
significantly reduced by limiting earned income for purposes of 
the EIC to amounts that can be verified by third party 
reporting or the taxpayer.

                        EXPLANATION OF PROVISION

    The provision limits earned income for purposes of the 
earned income credit to amounts substantiated by the taxpayer 
on statements furnished or returns filed under third party 
information reporting requirements, or amounts substantiated by 
the taxpayer's books and records. The authority of the IRS to 
make returns, render statements, or keep records and, pursuant 
to the Code, to make corresponding adjustments to income to 
reflect substantiated amounts for purposes other than the EIC 
remains unaffected by this provision.

                             EFFECTIVE DATE

    The provision is effective for taxable years ending after 
the date of enactment.

          C. Simplification and Reform of Education Incentives

  1. Reform of American Opportunity tax credit and repeal of Lifetime 
    Learning credit (sec. 1201 of the bill and sec. 25A of the Code)

                              PRESENT LAW

American Opportunity credit

    The American Opportunity credit provides individuals with a 
tax credit of up to $2,500 per eligible student per year for 
qualified tuition and related expenses (including course 
materials) paid for each of the first four years of the 
student's post-secondary education in a degree or certificate 
program. The credit rate is 100 percent on the first $2,000 of 
qualified tuition and related expenses, and 25 percent on the 
next $2,000 of qualified tuition and related expenses. The 
credit may not be claimed for more than four taxable years with 
respect to any student.
    The American Opportunity credit is phased out ratably for 
taxpayers with modified AGI between $80,000 and $90,000 
($160,000 and $180,000 for married taxpayers filing a joint 
return). The credit may be claimed against a taxpayer's AMT 
liability.
    Forty percent of a taxpayer's otherwise allowable modified 
credit is refundable. A refundable credit is a credit which, if 
the amount of the credit exceeds the taxpayer's Federal income 
tax liability, the excess is payable to the taxpayer as a 
direct transfer payment.
    A taxpayer may not claim the American Opportunity credit if 
the qualified tuition and related expenses for the enrollment 
or attendance of a student, if such student has been convicted 
of a Federal or State felony offense consisting of the 
possession or distribution of a controlled substance before the 
end of the taxable year.\85\
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    \85\Sec. 25A(b)(2)(D).
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Lifetime learning credit

    Individual taxpayers may be eligible to claim a 
nonrefundable credit, the Lifetime Learning credit, against 
Federal income taxes equal to 20 percent of qualified tuition 
and related expenses incurred during the taxable year on behalf 
of the taxpayer, the taxpayer's spouse, or any dependents. Up 
to $10,000 of qualified tuition and related expenses per 
taxpayer return are eligible for the Lifetime Learning credit 
(i.e., the maximum credit per taxpayer return is $2,000).
    In contrast to the American Opportunity credit, a taxpayer 
may claim the Lifetime Learning credit for an unlimited number 
of taxable years.\86\ Also in contrast to the American 
Opportunity credit, the maximum amount of the Lifetime Learning 
credit that may be claimed on a taxpayer's return does not vary 
based on the number of students in the taxpayer's family--that 
is, the American Opportunity credit is computed on a per-
student basis while the Lifetime Learning credit is computed on 
a family-wide basis. The Lifetime Learning credit amount that a 
taxpayer may otherwise claim is phased out ratably for 
taxpayers with modified AGI between $56,000 and $66,000 
($112,000 and $132,000 for married taxpayers filing a joint 
return) in 2017.
---------------------------------------------------------------------------
    \86\Sec. 25A(a)(2).
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                           REASONS FOR CHANGE

    The Committee believes that it is important to provide 
access to affordable, high-quality higher education. Combining 
the American Opportunity credit with elements of the Lifetime 
Learning Credit will continue to serve to make college more 
affordable, while also streamlining these tax provisions so 
that they are easier for families to apply--an important step 
towards consolidating duplicative Code provisions and 
simplifying the Code. The Committee believes that these changes 
will make the system simpler and fairer for all families and 
individuals.

                        EXPLANATION OF PROVISION

    The provision modifies the American Opportunity credit\87\ 
by providing that a credit may be claimed with respect to a 
student for five taxable years (rather than four taxable years 
under present law). For a credit claimed with respect to the 
student's fifth taxable year, the credit is half the value of 
the American Opportunity credit that is applicable to the first 
four taxable years (the refundable portion of the credit is 40-
percent of the half-value credit). Additionally, the provision 
allows a student to claim the American Opportunity credit for 
any of the first five years of postsecondary education.
---------------------------------------------------------------------------
    \87\The provision also repeals the Hope credit, a precursor to the 
American Opportunity credit which since 2009 has been largely 
superseded in the Code by the American Opportunity credit.
---------------------------------------------------------------------------
    The operation of this provision is as follows. Assume that 
a student enters college in the Fall of 2018, attending for 
eight consecutive semesters, such that the student graduates in 
the Spring of 2022. Assume that qualifying tuition and fees for 
each semester is in excess of $5,000. For each of taxable years 
2018, 2019, 2020 and 2021, an individual claiming the credit on 
behalf of the student would be eligible for the maximum credit 
of $2,500 (of which $1,000 is refundable). For taxable year 
2022, a taxpayer claiming the credit on behalf of the student 
may be eligible for a $1,250 credit (of which $500 is 
refundable). Alternatively, if no credit were claimed with 
respect to the student in 2022, and the student were to decide 
to attend graduate school in the Fall of 2024, the student may 
claim the half-value fifth year credit ($1,250 ($500 
refundable)) for the 2024 taxable year.
    The provision repeals the lifetime learning credit.

                             EFFECTIVE DATE

    The proposal applies to taxable years beginning after 
December 31, 2017.

2. Consolidation and modification of education savings rules (sec. 1202 
             of the bill and secs. 529 and 530 of the Code)

                              PRESENT LAW

Coverdell education savings accounts

    A Coverdell education savings account is a trust or 
custodial account created exclusively for the purpose of paying 
qualified education expenses of a named beneficiary.\88\ Annual 
contributions to Coverdell education savings accounts may not 
exceed $2,000 per designated beneficiary and may not be made 
after the designated beneficiary reaches age 18 (except in the 
case of a special needs beneficiary). The contribution limit is 
phased out for taxpayers with modified AGI between $95,000 and 
$110,000 ($190,000 and $220,000 for married taxpayers filing a 
joint return); the AGI of the contributor, and not that of the 
beneficiary, controls whether a contribution is permitted by 
the taxpayer.
---------------------------------------------------------------------------
    \88\Sec. 530.
---------------------------------------------------------------------------
    Earnings on contributions to a Coverdell education savings 
account generally are subject to tax when withdrawn.\89\ 
However, distributions from a Coverdell education savings 
account are excludable from the gross income of the distributee 
(i.e., the student) to the extent that the distribution does 
not exceed the qualified education expenses incurred by the 
beneficiary during the year the distribution is made. The 
earnings portion of a Coverdell education savings account 
distribution not used to pay qualified education expenses is 
includible in the gross income of the distributee and generally 
is subject to an additional 10-percent tax.\90\
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    \89\In addition, Coverdell education savings accounts are subject 
to the unrelated business income tax imposed by section 511.
    \90\This 10-percent additional tax does not apply if a distribution 
from an education savings account is made on account of the death or 
disability of the designated beneficiary, or if made on account of a 
scholarship received by the designated beneficiary.
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    Tax-free (and free of additional 10-percent tax) transfers 
or rollovers of account balances from one Coverdell education 
savings account benefiting one beneficiary to another Coverdell 
education savings account benefiting another beneficiary (as 
well as redesignations of the named beneficiary) are permitted, 
provided that the new beneficiary is a member of the family of 
the prior beneficiary and is under age 30 (except in the case 
of a special needs beneficiary). In general, any balance 
remaining in a Coverdell education savings account is deemed to 
be distributed within 30 days after the date that the 
beneficiary reaches age 30 (or, if the beneficiary dies before 
attaining age 30, within 30 days of the date that the 
beneficiary dies).
    Qualified education expenses include qualified elementary 
and secondary expenses and qualified higher education expenses. 
Such qualified education expenses generally include only out-
of-pocket expenses. They do not include expenses covered by 
employer-provided educational assistance or scholarships for 
the benefit of the beneficiary that are excludable from gross 
income.
    The term qualified elementary and secondary school 
expenses, means expenses for: (1) tuition, fees, academic 
tutoring, special needs services, books, supplies, and other 
equipment incurred in connection with the enrollment or 
attendance of the beneficiary at a public, private, or 
religious school providing elementary or secondary education 
(kindergarten through grade 12) as determined under State law; 
(2) room and board, uniforms, transportation, and supplementary 
items or services (including extended day programs) required or 
provided by such a school in connection with such enrollment or 
attendance of the beneficiary; and (3) the purchase of any 
computer technology or equipment (as defined in section 
170(e)(6)(F)(i)) or internet access and related services, if 
such technology, equipment, or services are to be used by the 
beneficiary and the beneficiary's family during any of the 
years the beneficiary is in elementary or secondary school. 
Computer software primarily involving sports, games, or hobbies 
is not considered a qualified elementary and secondary school 
expense unless the software is predominantly educational in 
nature.
    The term qualified higher education expenses includes 
tuition, fees, books, supplies, and equipment required for the 
enrollment or attendance of the designated beneficiary at an 
eligible education institution, regardless of whether the 
beneficiary is enrolled at an eligible educational institution 
on a full-time, half-time, or less than half-time basis.\91\ 
Moreover, qualified higher education expenses include certain 
room and board expenses for any period during which the 
beneficiary is at least a half-time student. Qualified higher 
education expenses include expenses with respect to 
undergraduate or graduate-level courses. In addition, qualified 
higher education expenses include amounts paid or incurred to 
purchase tuition credits (or to make contributions to an 
account) under a qualified tuition program for the benefit of 
the beneficiary of the Coverdell education savings account.\92\
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    \91\Qualified higher education expenses are defined in the same 
manner as for qualified tuition programs.
    \92\Sec. 530(b)(2)(B).
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Section 529 qualified tuition programs

            In general
    A qualified tuition program is a program established and 
maintained by a State or agency or instrumentality thereof, or 
by one or more eligible educational institutions, which 
satisfies certain requirements and under which a person may 
purchase tuition credits or certificates on behalf of a 
designated beneficiary that entitle the beneficiary to the 
waiver or payment of qualified higher education expenses of the 
beneficiary (a ``prepaid tuition program''). Section 529 
provides specified income tax and transfer tax rules for the 
treatment of accounts and contracts established under qualified 
tuition programs.\93\ In the case of a program established and 
maintained by a State or agency or instrumentality thereof, a 
qualified tuition program also includes a program under which a 
person may make contributions to an account that is established 
for the purpose of satisfying the qualified higher education 
expenses of the designated beneficiary of the account, provided 
it satisfies certain specified requirements (a ``savings 
account program''). Under both types of qualified tuition 
programs, a contributor establishes an account for the benefit 
of a particular designated beneficiary to provide for that 
beneficiary's higher education expenses.
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    \93\For purposes of this description, the term ``account'' is used 
interchangeably to refer to a prepaid tuition benefit contract or a 
tuition savings account established pursuant to a qualified tuition 
program.
---------------------------------------------------------------------------
    In general, prepaid tuition contracts and tuition savings 
accounts established under a qualified tuition program involve 
prepayments or contributions made by one or more individuals 
for the benefit of a designated beneficiary. Decisions with 
respect to the contract or account are typically made by an 
individual who is not the designated beneficiary. Qualified 
tuition accounts or contracts generally require the designation 
of a person (generally referred to as an ``account owner'')\94\ 
whom the program administrator (oftentimes a third party 
administrator retained by the State or by the educational 
institution that established the program) may look to for 
decisions, recordkeeping, and reporting with respect to the 
account established for a designated beneficiary. The person or 
persons who make the contributions to the account need not be 
the same person who is regarded as the account owner for 
purposes of administering the account. Under many qualified 
tuition programs, the account owner generally has control over 
the account or contract, including the ability to change 
designated beneficiaries and to withdraw funds at any time and 
for any purpose. Thus, in practice, qualified tuition accounts 
or contracts generally involve a contributor, a designated 
beneficiary, an account owner (who oftentimes is not the 
contributor or the designated beneficiary), and an 
administrator of the account or contract.
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    \94\Section 529 refers to contributors and designated 
beneficiaries, but does not define or otherwise refer to the term 
``account owner,'' which is a commonly used term among qualified 
tuition programs.
---------------------------------------------------------------------------
            Qualified higher education expenses
    For purposes of receiving a distribution from a qualified 
tuition program that qualifies for favorable tax treatment 
under the Code, qualified higher education expenses means 
tuition, fees, books, supplies, and equipment required for the 
enrollment or attendance of a designated beneficiary at an 
eligible educational institution, and expenses for special 
needs services in the case of a special needs beneficiary that 
are incurred in connection with such enrollment or attendance. 
Qualified higher education expenses generally also include room 
and board for students who are enrolled at least half-time. 
Qualified higher education expenses include the purchase of any 
computer technology or equipment, or Internet access or related 
services, if such technology or services were to be used 
primarily by the beneficiary during any of the years a 
beneficiary is enrolled at an eligible institution.
            Contributions to qualified tuition programs
    Contributions to a qualified tuition program must be made 
in cash. Section 529 does not impose a specific dollar limit on 
the amount of contributions, account balances, or prepaid 
tuition benefits relating to a qualified tuition account; 
however, the program is required to have adequate safeguards to 
prevent contributions in excess of amounts necessary to provide 
for the beneficiary's qualified higher education expenses. 
Contributions generally are treated as a completed gift 
eligible for the gift tax annual exclusion. Contributions are 
not tax deductible for Federal income tax purposes, although 
they may be deductible for State income tax purposes. Amounts 
in the account accumulate on a tax-free basis (i.e., income on 
accounts in the plan is not subject to current income tax).
    A qualified tuition program may not permit any contributor 
to, or designated beneficiary under, the program to direct 
(directly or indirectly) the investment of any contributions 
(or earnings thereon) more than two times in any calendar year, 
and must provide separate accounting for each designated 
beneficiary. A qualified tuition program may not allow any 
interest in an account or contract (or any portion thereof) to 
be used as security for a loan.

                           REASONS FOR CHANGE

    The Committee believes that expanding and strengthening the 
529 program will help families have the ability to save for 
future college expenses. Additionally, the Committee believes 
that replacing Coverdell savings accounts with an expanded 529 
program that allows individuals to save for primary and 
secondary school tuition is an important step towards 
consolidating duplicative Code provisions and simplifying the 
Code.

                        EXPLANATION OF PROVISION

    Under the provision, no new contributions are permitted 
into Coverdell savings accounts after December 31, 2017. 
However, rollovers of account balances from one Coverdell 
education savings account to another pre-existing Coverdell 
education savings account benefiting another beneficiary remain 
permitted after this date. Additionally, the provision allows 
section 529 plans to receive rollover contributions from 
Coverdell education savings accounts.
    The provision modifies section 529 plans to allow such 
plans to distribute not more than $10,000 in expenses for 
tuition incurred during the taxable year in connection with the 
enrollment or attendance of the designated beneficiary at a 
public, private or religious elementary or secondary school. 
This limitation applies on a per-student basis, rather than a 
per-account basis. Thus, under the provision, although an 
individual may be the designated beneficiary of multiple 
accounts, that individual may receive a maximum of $10,000 in 
distributions free of tax, regardless of whether the funds are 
distributed from multiple accounts. Any excess distributions 
received by the individual would be treated as a distribution 
subject to tax under the general rules of section 529.
    The provision also modifies section 529 plans to allow such 
plan distributions to be used for certain expenses, including 
books, supplies, and equipment, required for attendance in a 
registered apprenticeship program. Registered apprenticeship 
programs are apprenticeship programs registered and certified 
with the Secretary of Labor.
    Finally, the provision specifies that nothing in this 
section shall prevent an unborn child from qualifying as a 
designated beneficiary. For these purposes, an unborn child 
means a child in utero, and the term child in utero means a 
member of the species homo sapiens, at any stage of 
development, who is carried in the womb.

                             EFFECTIVE DATE

    The provision applies to contributions and distributions 
made after December 31, 2017.

3. Reforms to discharge of certain student loan indebtedness (sec. 1203 
                of the bill and sec. 108(f) of the Code)

                              PRESENT LAW

    Gross income generally includes the discharge of 
indebtedness of the taxpayer. Under an exception to this 
general rule, gross income does not include any amount from the 
forgiveness (in whole or in part) of certain student loans, 
provided that the forgiveness is contingent on the student's 
working for a certain period of time in certain professions for 
any of a broad class of employers.\95\
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    \95\Sec. 108(f).
---------------------------------------------------------------------------
    Student loans eligible for this special rule must be made 
to an individual to assist the individual in attending an 
educational institution that normally maintains a regular 
faculty and curriculum and normally has a regularly enrolled 
body of students in attendance at the place where its education 
activities are regularly carried on. Loan proceeds may be used 
not only for tuition and required fees, but also to cover room 
and board expenses. The loan must be made by (1) the United 
States (or an instrumentality or agency thereof), (2) a State 
(or any political subdivision thereof), (3) certain tax-exempt 
public benefit corporations that control a State, county, or 
municipal hospital and whose employees have been deemed to be 
public employees under State law, or (4) an educational 
organization that originally received the funds from which the 
loan was made from the United States, a State, or a tax-exempt 
public benefit corporation.
    In addition, an individual's gross income does not include 
amounts from the forgiveness of loans made by educational 
organizations (and certain tax-exempt organizations in the case 
of refinancing loans) out of private, nongovernmental funds if 
the proceeds of such loans are used to pay costs of attendance 
at an educational institution or to refinance any outstanding 
student loans (not just loans made by educational 
organizations) and the student is not employed by the lender 
organization. In the case of such loans made or refinanced by 
educational organizations (or refinancing loans made by certain 
tax-exempt organizations), cancellation of the student loan 
must be contingent on the student working in an occupation or 
area with unmet needs and such work must be performed for, or 
under the direction of, a tax-exempt charitable organization or 
a governmental entity.
    Finally, an individual's gross income does not include any 
loan repayment amount received under the National Health 
Service Corps loan repayment program, certain State loan 
repayment programs, or any amount received by an individual 
under any State loan repayment or loan forgiveness program that 
is intended to provide for the increased availability of health 
care services in underserved or health professional shortage 
areas (as determined by the State).

                           REASONS FOR CHANGE

    The Committee believes that the discharge of a student loan 
in the case of an individual whose loan was discharged on 
account of death or disability of the student borrower should 
not be a taxable event.

                        EXPLANATION OF PROVISION

    The provision modifies the exclusion of student loan 
discharges from gross income, by including within the exclusion 
certain discharges on account of death or disability. Loans 
eligible for the exclusion under the provision are loans made 
by (1) the United States (or an instrumentality or agency 
thereof), (2) a State (or any political subdivision thereof), 
(3) certain tax-exempt public benefit corporations that control 
a State, county, or municipal hospital and whose employees have 
been deemed to be public employees under State law, (4) an 
educational organization that originally received the funds 
from which the loan was made from the United States, a State, 
or a tax-exempt public benefit corporation, or (5) private 
education loans (for this purpose, private education loan is 
defined in section 140(7) of the Consumer Protection Act).\96\
---------------------------------------------------------------------------
    \96\15 U.S.C. 1650(7).
---------------------------------------------------------------------------
    Under the provision, the discharge of a loan as described 
above is excluded from gross income if the discharge was 
pursuant to the death or total and permanent disability of the 
student.\97\
---------------------------------------------------------------------------
    \97\Although the provision makes specific reference to those 
provisions of the Higher Education Act of 1965 that discharge William 
D. Ford Federal Direct Loan Program loans, Federal Family Education 
Loan Program loans, and Federal Perkins Loan Program loans in the case 
of death and total and permanent disability, the provision also 
contains a catch-all exclusion in the case of a student loan discharged 
on account of the death or total and permanent disability of the 
student, in addition to those specific statutory references.
---------------------------------------------------------------------------
    Additionally, the provision modifies the gross income 
exclusion for amounts received under the National Health 
Service Corps loan repayment program or certain State loan 
repayment programs to include any amount received by an 
individual under the Indian Health Service loan repayment 
program.\98\
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    \98\Section 108 of the Indian Health Care Improvement Act 
established the Indian Health Service loan repayment program to assure 
a sufficient supply of trained health professionals needed to provide 
health care services to Indians. Pub. L. No. 94-437, as amended by Pub. 
L. No. 100-713, sec. 108, and Pub. L. No. 102-573, sec. 106, and as 
amended, and permanently reauthorized by Pub. L. No. 111-148, sec. 
10221.
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                             EFFECTIVE DATE

    The provision applies to discharges of loans after, and 
amounts received after, December 31, 2017.

4. Repeal of deduction for student loan interest (sec. 1204 of the bill 
                       and sec. 221 of the Code)

                              PRESENT LAW

    Certain individuals who have paid interest on qualified 
education loans may claim an above-the-line deduction for such 
interest expenses, subject to a maximum annual deduction 
limit.\99\ Required payments of interest generally do not 
include voluntary payments, such as interest payments made 
during a period of loan forbearance. No deduction is allowed to 
an individual if that individual is claimed as a dependent on 
another taxpayer's return for the taxable year.\100\
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    \99\Sec. 221.
    \100\Sec. 221(c).
---------------------------------------------------------------------------
    A qualified education loan generally is defined as any 
indebtedness incurred solely to pay for the costs of attendance 
(including room and board) of the taxpayer, the taxpayer's 
spouse, or any dependent of the taxpayer as of the time the 
indebtedness was incurred in attending on at least a half-time 
basis (1) eligible educational institutions, or (2) 
institutions conducting internship or residency programs 
leading to a degree or certificate from an institution of 
higher education, a hospital, or a health care facility 
conducting postgraduate training. The cost of attendance is 
reduced by any amount excluded from gross income under the 
exclusions for qualified scholarships and tuition reductions, 
employer-provided educational assistance, interest earned on 
education savings bonds, qualified tuition programs, and 
Coverdell education savings accounts, as well as the amount of 
certain other scholarships and similar payments.
    The maximum allowable deduction per year is $2,500.\101\ 
For 2017, the deduction is phased out ratably for taxpayers 
with AGI between $65,000 and $80,000 ($135,000 and $165,000 for 
married taxpayers filing a joint return). The income phase-out 
ranges are indexed for inflation and rounded to the next lowest 
multiple of $5,000.
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    \101\Sec. 221(b)(1).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the repeal of many existing tax 
incentives, including the deduction for student loan interest, 
makes the system simpler and fairer for all families and 
individuals, and allows for lower tax rates. The Committee 
further believes that repeal of this provision is consistent 
with streamlining the tax code, broadening the tax base, 
lowering rates, and growing the economy.

                        EXPLANATION OF PROVISION

    The provision repeals the deduction for student loan 
interest.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2017.

5. Repeal of deduction for qualified tuition and related expenses (sec. 
               1204 of the bill and sec. 222 of the Code)

                              PRESENT LAW

    For taxable years beginning before January 1, 2017, an 
individual is allowed an above-the-line deduction for qualified 
tuition and related expenses for higher education paid by the 
individual during the taxable year.\102\ Qualified tuition 
includes tuition and fees required for the enrollment or 
attendance by the taxpayer, the taxpayer's spouse, or any 
dependent of the taxpayer with respect to whom the taxpayer may 
claim a personal exemption, at an eligible institution of 
higher education for courses of instruction of such individual 
at such institution. The expenses must be in connection with 
enrollment at an institution of higher education during the 
taxable year, or with an academic term beginning during the 
taxable year or during the first three months of the next 
taxable year. The deduction is not available for tuition and 
related expenses paid for elementary or secondary education.
---------------------------------------------------------------------------
    \102\Sec. 222(a).
---------------------------------------------------------------------------
    The maximum deduction is $4,000 for an individual whose AGI 
for the taxable year does not exceed $65,000 ($130,000 in the 
case of a joint return), or $2,000 for other individuals whose 
AGI does not exceed $80,000 ($160,000 in the case of a joint 
return).\103\ No deduction is allowed for an individual whose 
AGI exceeds the relevant AGI limitations, for a married 
individual who does not file a joint return, or for an 
individual with respect to whom a personal exemption deduction 
may be claimed by another taxpayer for the taxable year. The 
deduction is not available for taxable years beginning after 
December 31, 2016.
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    \103\Sec. 222(b)(2)(B).
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                           REASONS FOR CHANGE

    The Committee believes that the repeal of many existing tax 
incentives, including the deduction for tuition, makes the 
system simpler and fairer for all families and individuals, and 
allows for lower tax rates. The Committee further believes that 
repeal of this provision is consistent with streamlining the 
tax code, broadening the tax base, lowering rates, and growing 
the economy.

                        EXPLANATION OF PROVISION

    The provision repeals the deduction for qualified tuition 
and related expenses.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2017.

 6. Repeal of exclusion for educational assistance programs (sec. 1204 
                 of the bill and sec. 127 of the Code)

                              PRESENT LAW

    Up to $5,250 annually of educational assistance provided by 
an employer to an employee is excludible from the employee's 
gross income, provided that certain requirements are 
satisfied.\104\ Nondiscrimination rules\105\ apply and the 
educational assistance must be provided pursuant to a separate 
written plan of the employer. The exclusion applies to both 
graduate and undergraduate courses, and applies only with 
respect to education provided to the employee (i.e., it does 
not apply to education provided to the spouse or a child of the 
employee). Amounts that are excludible from gross income for 
income tax purposes are also excluded from wages for employment 
tax purposes.
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    \104\Sec. 127(a).
    \105\The employer's educational assistance program must not 
discriminate in favor of highly compensated employees, within the 
meaning of Sec. 414(q). In addition, no more than five percent of the 
amounts paid or incurred by the employer during the year for 
educational assistance under a qualified educational assistance program 
can be provided for the class of individuals consisting of more-than-
five-percent owners of the employer and the spouses or dependents of 
such more-than-five-percent owners.
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    For purposes of the exclusion, educational assistance means 
the payment by an employer of expenses incurred by or on behalf 
of the employee for education of the employee including, but 
not limited to, tuition, fees and similar payments, books, 
supplies, and equipment. Educational assistance also includes 
the provision by the employer of courses of instruction for the 
employee (including books, supplies, and equipment). 
Educational assistance does not include (1) tools or supplies 
that may be retained by the employee after completion of a 
course, (2) meals, lodging, or transportation, and (3) any 
education involving sports, games, or hobbies.

                           REASONS FOR CHANGE

    The Committee believes that the repeal of many existing tax 
incentives, including the exclusion for educational assistance 
programs, makes the system simpler and fairer for all families 
and individuals, and allows for lower tax rates. The Committee 
further believes that repeal of this provision is consistent 
with streamlining the tax code, broadening the tax base, 
lowering rates, and growing the economy.

                        EXPLANATION OF PROVISION

    The provision repeals the exclusions from gross income and 
wages for educational assistance programs.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2017.

7. Repeal of exclusion for interest on United States savings bonds used 
 for higher education expenses (sec. 1204 of the bill and sec. 135 of 
                               the Code)

                              PRESENT LAW

    Interest earned on a qualified United States Series EE 
savings bond issued after 1989 is excludable from gross income 
if the proceeds of the bond upon redemption do not exceed 
qualified higher education expenses paid by the taxpayer during 
the taxable year.\106\ Qualified higher education expenses 
include tuition and fees (but not room and board expenses) 
required for the enrollment or attendance of the taxpayer, the 
taxpayer's spouse, or a dependent of the taxpayer at certain 
eligible higher educational institutions. The amount of 
qualified higher education expenses taken into account for 
purposes of the exclusion is reduced by the amount of such 
expenses taken into account in determining the Hope, American 
Opportunity, or Lifetime Learning credits claimed by any 
taxpayer, or taken into account in determining an exclusion 
from gross income for a distribution from a qualified tuition 
program or a Coverdell education savings account, with respect 
to a particular student for the taxable year.
---------------------------------------------------------------------------
    \106\Sec. 135.
---------------------------------------------------------------------------
    The exclusion is phased out for certain higher-income 
taxpayers, determined by the taxpayer's modified AGI during the 
year the bond is redeemed. For 2017, the exclusion is phased 
out for taxpayers with modified AGI between $78,150 and $93,150 
($117,250 and $147,250 for married taxpayers filing a joint 
return). To prevent taxpayers from effectively avoiding the 
income phaseout limitation through the purchase of bonds 
directly in the child's name, the interest exclusion is 
available only with respect to U.S. Series EE savings bonds 
issued to taxpayers who are at least 24 years old.

                           REASONS FOR CHANGE

    The Committee believes that the repeal of many existing tax 
incentives, including the exclusion for interest on United 
States savings bonds used for higher education expenses, makes 
the system simpler and fairer for all families and individuals, 
and allows for lower tax rates. The Committee further believes 
that repeal of this provision is consistent with streamlining 
the tax code, broadening the tax base, lowering rates, and 
growing the economy.

                        EXPLANATION OF PROVISION

    The provision repeals exclusion for interest on Series EE 
savings bonds used for qualified higher education expenses.

                             EFFECTIVE DATE

    The provision generally applies to taxable years beginning 
after December 31, 2017.

 8. Repeal of exclusion for qualified tuition reductions (sec. 1204 of 
                 the bill and sec. 117(d) of the Code)

                              PRESENT LAW

    Qualified tuition reductions for certain education provided 
to employees (and their spouses and dependents\107\) of certain 
educational organizations are excludible from gross 
income.\108\ The tuition reduction is subject to 
nondiscrimination rules.\109\ The exclusion generally applies 
below the graduate level, and to teaching and research 
assistants who are students at the graduate level, but does not 
apply to any amount received by a student that represents 
payment for teaching, research or other services by the student 
required as a condition for receiving the tuition reduction. 
Amounts that are excludible from gross income for income tax 
purposes are also excluded from wages for employment tax 
purposes.
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    \107\Individuals described under the rules of Sec. 132(h).
    \108\Educational organization described in section 
170(b)(1)(A)(ii). Sec. 117(d)(2).
    \109\The exclusion applies with respect to highly compensated 
employees, within the meaning of Sec. 414(q), only if such tuition 
reductions are available on substantially the same terms to each member 
of a group of employees which is defined under a reasonable 
classification established by the employer, such that the benefit does 
not discriminate in favor of highly compensated employees.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the repeal of many existing tax 
incentives, including the exclusion for qualified tuition 
reductions, makes the system simpler and fairer for all 
families and individuals, and allows for lower tax rates. The 
Committee further believes that repeal of this provision is 
consistent with streamlining the tax code, broadening the tax 
base, lowering rates, and growing the economy.

                        EXPLANATION OF PROVISION

    The provision repeals the exclusions from gross income and 
wages for qualified tuition reductions.

                             EFFECTIVE DATE

    The provision applies to amounts paid or incurred after 
December 31, 2017.

  9. Rollovers between qualified tuition programs and qualified ABLE 
  programs (sec. 1205 of the bill and secs. 529 and 529A of the Code)

                            PRESENT LAW\110\
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    \110\For a description of qualified tuition programs (also known as 
529 plans), see the description of sec. 1203 of the bill.
---------------------------------------------------------------------------

Qualified ABLE programs

    The Code provides for a tax-favored savings program 
intended to benefit disabled individuals, known as qualified 
ABLE programs.\111\ A qualified ABLE program is a program 
established and maintained by a State or agency or 
instrumentality thereof. A qualified ABLE program must meet the 
following conditions: (1) under the provisions of the program, 
contributions may be made to an account (an ``ABLE account''), 
established for the purpose of meeting the qualified disability 
expenses of the designated beneficiary of the account; (2) the 
program must limit a designated beneficiary to one ABLE 
account; and (3) the program must meet certain other 
requirements discussed below. A qualified ABLE program is 
generally exempt from income tax, but is otherwise subject to 
the taxes imposed on the unrelated business income of tax-
exempt organizations.
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    \111\Sec. 529A.
---------------------------------------------------------------------------
    A designated beneficiary of an ABLE account is the owner of 
the ABLE account. A designated beneficiary must be an eligible 
individual (defined below) who established the ABLE account and 
who is designated at the commencement of participation in the 
qualified ABLE program as the beneficiary of amounts paid (or 
to be paid) into and from the program.
    Contributions to an ABLE account must be made in cash and 
are not deductible for Federal income tax purposes. Except in 
the case of a rollover contribution from another ABLE account, 
an ABLE account must provide that it may not receive aggregate 
contributions during a taxable year in excess of the amount 
under section 2503(b) of the Code (the annual gift tax 
exemption). For 2017, this is $14,000.\112\ Additionally, a 
qualified ABLE program must provide adequate safeguards to 
ensure that ABLE account contributions do not exceed the limit 
imposed on accounts under the qualified tuition program of the 
State maintaining the qualified ABLE program. Amounts in the 
account accumulate on a tax-deferred basis (i.e., income on 
accounts under the program is not subject to current income 
tax).
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    \112\This amount is indexed for inflation. In the case that 
contributions to an ABLE account exceed the annual limit, an excise tax 
in the amount of six percent of the excess contribution to such account 
is imposed on the designated beneficiary. Such tax does not apply in 
the event that the trustee of such account makes a corrective 
distribution of such excess amounts by the due date (including 
extensions) of the individual's tax return for the year within the 
taxable year.
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    A qualified ABLE program may permit a designated 
beneficiary to direct (directly or indirectly) the investment 
of any contributions (or earnings thereon) no more than two 
times in any calendar year and must provide separate accounting 
for each designated beneficiary. A qualified ABLE program may 
not allow any interest in the program (or any portion thereof) 
to be used as security for a loan.
    Distributions from an ABLE account are generally includible 
in the distributee's income to the extent consisting of 
earnings on the account.\113\ Distributions from an ABLE 
account are excludable from income to the extent that the total 
distribution does not exceed the qualified disability expenses 
of the designated beneficiary during the taxable year. If a 
distribution from an ABLE account exceeds the qualified 
disability expenses of the designated beneficiary, a pro rata 
portion of the distribution is excludable from income. The 
portion of any distribution that is includible in income is 
subject to an additional 10-percent tax unless the distribution 
is made after the death of the beneficiary. Amounts in an ABLE 
account may be rolled over without income tax liability to 
another ABLE account for the same beneficiary\114\ or another 
ABLE account for the designated beneficiary's brother, sister, 
stepbrother or stepsister who is also an eligible individual.
---------------------------------------------------------------------------
    \113\The rules of section 72 apply in determining the portion of a 
distribution that consists of earnings.
    \114\For instance, if a designated beneficiary were to relocate to 
a different State.
---------------------------------------------------------------------------
    Except in the case of an ABLE account established in a 
different ABLE program for purposes of transferring ABLE 
accounts,\115\ no more than one ABLE account may be established 
by a designated beneficiary. Thus, once an ABLE account has 
been established by a designated beneficiary, no account 
subsequently established by such beneficiary shall be treated 
as an ABLE account.
---------------------------------------------------------------------------
    \115\In which case the contributor ABLE account must be closed 60 
days after the transfer to the new ABLE account is made.
---------------------------------------------------------------------------
    A contribution to an ABLE account is treated as a completed 
gift of a present interest to the designated beneficiary of the 
account. Such contributions qualify for the per-donee annual 
gift tax exclusion ($14,000 for 2017) and, to the extent of 
such exclusion, are exempt from the generation skipping 
transfer (``GST'') tax. A distribution from an ABLE account 
generally is not subject to gift tax or GST tax.
            Eligible individuals
    As described above, a qualified ABLE program may provide 
for the establishment of ABLE accounts only if those accounts 
are established and owned by an eligible individual, such owner 
referred to as a designated beneficiary. For these purposes, an 
eligible individual is an individual either (1) for whom a 
disability certification has been filed with the Secretary for 
the taxable year, or (2) who is entitled to Social Security 
Disability Insurance benefits or SSI benefits\116\ based on 
blindness or disability, and such blindness or disability 
occurred before the individual attained age 26.
---------------------------------------------------------------------------
    \116\These are benefits, respectively, under Title II or Title XVI 
of the Social Security Act.
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    A disability certification means a certification to the 
satisfaction of the Secretary, made by the eligible individual 
or the parent or guardian of the eligible individual, that the 
individual has a medically determinable physical or mental 
impairment, which results in marked and severe functional 
limitations, and which can be expected to result in death or 
which has lasted or can be expected to last for a continuous 
period of not less than 12 months, or is blind (within the 
meaning of section 1614(a)(2) of the Social Security Act). Such 
blindness or disability must have occurred before the date the 
individual attained age 26. Such certification must include a 
copy of the diagnosis of the individual's impairment and be 
signed by a licensed physician.\117\
---------------------------------------------------------------------------
    \117\No inference may be drawn from a disability certification for 
purposes of eligibility for Social Security, SSI or Medicaid benefits.
---------------------------------------------------------------------------
            Qualified disability expenses
    As described above, the earnings on distributions from an 
ABLE account are excluded from income only to the extent total 
distributions do not exceed the qualified disability expenses 
of the designated beneficiary. For this purpose, qualified 
disability expenses are any expenses related to the eligible 
individual's blindness or disability which are made for the 
benefit of the designated beneficiary. Such expenses include 
the following expenses: education, housing, transportation, 
employment training and support, assistive technology and 
personal support services, health, prevention and wellness, 
financial management and administrative services, legal fees, 
expenses for oversight and monitoring, funeral and burial 
expenses, and other expenses, which are approved by the 
Secretary under regulations and consistent with the purposes of 
section 529A.
            Transfer to State
    In the event that the designated beneficiary dies, subject 
to any outstanding payments due for qualified disability 
expenses incurred by the designated beneficiary, all amounts 
remaining in the deceased designated beneficiary's ABLE account 
not in excess of the amount equal to the total medical 
assistance paid such individual under any State Medicaid plan 
established under title XIX of the Social Security Act shall be 
distributed to such State upon filing of a claim for payment by 
such State. Such repaid amounts shall be net of any premiums 
paid from the account or by or on behalf of the beneficiary to 
the State's Medicaid Buy-In program.
            Treatment of ABLE accounts under Federal programs
    Any amounts in an ABLE account, and any distribution for 
qualified disability expenses, shall be disregarded for 
purposes of determining eligibility to receive, or the amount 
of, any assistance or benefit authorized by any Federal means-
tested program. However, in the case of the SSI program, a 
distribution for housing expenses is not disregarded, nor are 
amounts in an ABLE account in excess of $100,000. In the case 
that an individual's ABLE account balance exceeds $100,000, 
such individual's SSI benefits shall not be terminated, but 
instead shall be suspended until such time as the individual's 
resources fall below $100,000. However, such suspension shall 
not apply for purposes of Medicaid eligibility.

                           REASONS FOR CHANGE

    ABLE programs can be viewed as an alternative to college 
savings, allowing a parent to save for a child with a 
disability in the same way a parent might save for a child to 
go to college. The Committee believes that families should have 
the flexibility to transition between these savings vehicles by 
allowing amounts saved in a section 529 account to be 
transferred to an ABLE account tax-free.''

                        EXPLANATION OF PROVISION

    The provision allows for amounts from qualified tuition 
programs (also known as 529 accounts) to be rolled over to an 
ABLE account without penalty, provided that the ABLE account is 
owned by the designated beneficiary of that 529 account, or a 
member of such designated beneficiary's family.\118\ Such 
rolled-over amounts count towards the overall limitation on 
amounts that can be contributed to an ABLE account within a 
taxable year.\119\ Any amount rolled over that is in excess of 
this limitation shall be includible in the gross income of the 
distributee in a manner provided by section 72.\120\
---------------------------------------------------------------------------
    \118\For these purposes, a member of the family means, with respect 
to any designated beneficiary, the taxpayer's: (1) spouse; (2) child or 
descendant of a child; (3) brother, sister, stepbrother or stepsister; 
(4) father, mother or ancestor of either; (5) stepfather or stepmother; 
(6) niece or nephew; (7) aunt or uncle; (8) in-law; (9) the spouse of 
any individual described in (2)-(8); and (10) any first cousin of the 
designated beneficiary.
    \119\529A(b)(2)(B).
    \120\529(c)(3)(A).
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                             EFFECTIVE DATE

    The provision applies to distributions after December 31, 
2017.

               D. Simplification and Reform of Deductions

 1. Repeal of overall limitation on itemized deductions (sec. 1301 of 
                   the bill and sec. 68 of the Code)

                              PRESENT LAW

    The total amount of most otherwise allowable itemized 
deductions (other than the deductions for medical expenses, 
investment interest and casualty, theft or gambling losses) is 
limited for certain upper-income taxpayers.\121\ All other 
limitations applicable to such deductions (such as the separate 
floors) are first applied and, then, the otherwise allowable 
total amount of itemized deductions is reduced by three percent 
of the amount by which the taxpayer's adjusted gross income 
exceeds a threshold amount.
---------------------------------------------------------------------------
    \121\Sec. 68.
---------------------------------------------------------------------------
    For 2017, the threshold amounts are $261,500 for single 
taxpayers, $287,650 for heads of household, $313,800 for 
married couples filing jointly, and $156,900 for married 
taxpayers filing separately. These threshold amounts are 
indexed for inflation. The otherwise allowable itemized 
deductions may not be reduced by more than 80 percent by reason 
of the overall limit on itemized deductions.

                           REASONS FOR CHANGE

    The Committee believes that the overall limitation on 
itemized deductions has functioned as a hidden marginal tax 
rate. In its mission to make the Code simpler, fairer, and more 
transparent, the Committee believes that the provision should 
be repealed.

                        EXPLANATION OF PROVISION

    The provision repeals the overall limitation on itemized 
deductions.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2017.

 2. Modification of deduction for home mortgage interest (sec. 1302 of 
                 the bill and sec. 163(h) of the Code)

                              PRESENT LAW

    As a general matter, personal interest is not 
deductible.\122\ Qualified residence interest is not treated as 
personal interest and is allowed as an itemized deduction, 
subject to limitations.\123\ Qualified residence interest means 
interest paid or accrued during the taxable year on either 
acquisition indebtedness or home equity indebtedness. A 
qualified residence means the taxpayer's principal residence 
and one other residence of the taxpayer selected to be a 
qualified residence. A qualified residence can be a house, 
condominium, cooperative, mobile home, house trailer, or boat.
---------------------------------------------------------------------------
    \122\Sec. 163(h)(1).
    \123\Sec. 163(h)(2)(D) and (h)(3).
---------------------------------------------------------------------------

Acquisition indebtedness

    Acquisition indebtedness is indebtedness that is incurred 
in acquiring, constructing, or substantially improving a 
qualified residence of the taxpayer and which secures the 
residence. The maximum amount treated as acquisition 
indebtedness is $1 million ($500,000 in the case of a married 
person filing a separate return).
    Acquisition indebtedness also includes indebtedness from 
the refinancing of other acquisition indebtedness but only to 
the extent of the amount (and term) of the refinanced 
indebtedness. Thus, for example, if the taxpayer incurs 
$200,000 of acquisition indebtedness to acquire a principal 
residence and pays down the debt to $150,000, the taxpayer's 
acquisition indebtedness with respect to the residence cannot 
thereafter be increased above $150,000 (except by indebtedness 
incurred to substantially improve the residence).
    Interest on acquisition indebtedness is allowable in 
computing alternative minimum taxable income. However, in the 
case of a second residence, the acquisition indebtedness may 
only be incurred with respect to a house, apartment, 
condominium, or a mobile home that is not used on a transient 
basis.

Home equity indebtedness

    Home equity indebtedness is indebtedness (other than 
acquisition indebtedness) secured by a qualified residence.
    The amount of home equity indebtedness may not exceed 
$100,000 ($50,000 in the case of a married individual filing a 
separate return) and may not exceed the fair market value of 
the residence reduced by the acquisition indebtedness.
    Interest on home equity indebtedness is not deductible in 
computing alternative minimum taxable income.
    Interest on qualifying home equity indebtedness is 
deductible, regardless of how the proceeds of the indebtedness 
are used. For example, personal expenditures may include health 
costs and education expenses for the taxpayer's family members 
or any other personal expenses such as vacations, furniture, or 
automobiles. A taxpayer and a mortgage company can contract for 
the home equity indebtedness loan proceeds to be transferred to 
the taxpayer in a lump sum payment (e.g., a traditional 
mortgage), a series of payments (e.g., a reverse mortgage), or 
the lender may extend the borrower a line of credit up to a 
fixed limit over the term of the loan (e.g., a home equity line 
of credit).
    Thus, the aggregate limitation on the total amount of a 
taxpayer's acquisition indebtedness and home equity 
indebtedness with respect to a taxpayer's principal residence 
and a second residence that may give rise to deductible 
interest is $1,100,000 ($550,000, for married persons filing a 
separate return).

                           REASONS FOR CHANGE

    The Committee believes that scaling back existing tax 
incentives, including the home mortgage interest deduction, 
makes the system simpler and fairer for all families and 
individuals, and allows for lower tax rates. The Committee 
further believes that modification of this provision is 
consistent with streamlining the tax code, broadening the tax 
base, lowering rates, and growing the economy.

                        EXPLANATION OF PROVISION

    The provision modifies the home mortgage interest deduction 
in the following ways.
    First, under the provision, only interest paid on 
indebtedness used to acquire, construct or substantially 
improve the taxpayer's principal residence may be included in 
the calculation of the deduction. Thus, under the provision, a 
taxpayer receives no deduction for interest paid on 
indebtedness used to acquire a second home.
    Second, under the provision, a taxpayer may treat no more 
than $500,000 as principal residence acquisition indebtedness 
($250,000 in the case of married taxpayers filing separately). 
In the case of principal residence acquisition indebtedness 
incurred before the date of introduction (November 2, 2017), 
this limitation is $1,000,000 ($500,000 in the case of married 
taxpayers filing separately).\124\ Although the term principal 
residence acquisition indebtedness is not defined in the 
statute, it is intended that this ``grandfathering'' provision 
apply only with respect to indebtedness incurred with respect 
to a taxpayer's principal residence.
---------------------------------------------------------------------------
    \124\Special rules apply in the case of indebtedness from 
refinancing existing principal residence acquisition indebtedness. 
Specifically, the $1,000,000 ($500,000 in the case of married taxpayers 
filing separately) limitation continues to apply to any indebtedness 
incurred on or after November 2, 2017, to refinance qualified residence 
indebtedness incurred before that date to the extent the amount of the 
indebtedness resulting from the refinancing does not exceed the amount 
of the refinanced indebtedness. Thus, the maximum dollar amount that 
may be treated as principal residence acquisition indebtedness will not 
decrease by reason of a refinancing.
---------------------------------------------------------------------------
    Last, under the provision, interest paid on home equity 
indebtedness is not treated as qualified residence interest, 
and thus is not deductible. This is the case regardless of when 
the home equity indebtedness was incurred.

                             EFFECTIVE DATE

    The provision is effective for interest paid or accrued in 
taxable years beginning after December 31, 2017.

 3. Modification of deduction for taxes not paid or accrued in a trade 
    or business (sec. 1303 of the bill and sec. 164(b) of the Code)

                              PRESENT LAW

    Individuals are permitted a deduction for certain taxes 
paid or accrued, whether or not incurred in a taxpayer's trade 
or business. These taxes are: (i) State and local real and 
foreign property taxes;\125\ (ii) State and local personal 
property taxes;\126\ (iii) State, local, and foreign income, 
war profits, and excess profits taxes.\127\ At the election of 
the taxpayer, an itemized deduction may be taken for State and 
local general sales taxes in lieu of the itemized deduction for 
State and local income taxes.\128\
---------------------------------------------------------------------------
    \125\Sec. 164(a)(1).
    \126\Sec. 164(a)(2).
    \127\Sec. 164(a)(3). A foreign tax credit, in lieu of a deduction, 
is allowable for foreign taxes if the taxpayer so elects.
    \128\Sec. 164(b)(5).
---------------------------------------------------------------------------
    Property taxes may be allowed as a deduction in computing 
adjusted gross income if incurred in connection with property 
used in a trade or business; otherwise they are an itemized 
deduction. In the case of State and local income taxes, the 
deduction is an itemized deduction notwithstanding that the tax 
may be imposed on profits from a trade or business.\129\
---------------------------------------------------------------------------
    \129\See H. Rep. No. 1365 to accompany Individual Income Tax Bill 
of 1944 (78th Cong., 2d. Sess.), reprinted at 19 C.B. 839 (1944).
---------------------------------------------------------------------------
    Individuals also are permitted a deduction for Federal and 
State generation skipping transfer tax (``GST tax'') imposed on 
certain income distributions that are included in the gross 
income of the distributee.\130\
---------------------------------------------------------------------------
    \130\Sec. 164(a)(4).
---------------------------------------------------------------------------
    In determining a taxpayer's alternative minimum taxable 
income, no itemized deduction for property, income, or sales 
tax is allowed.

                           REASONS FOR CHANGE

    The Committee believe that scaling back existing tax 
incentives, including the deduction for State and local taxes, 
makes the system simpler and fairer for all families and 
individuals, and allows for lower tax rates. The Committee 
further believes that modification of this provision to apply 
only to real property taxes is consistent with streamlining the 
tax code, broadening the tax base, lowering rates, and growing 
the economy.

                        EXPLANATION OF PROVISION

    Under the provision, in the case of an individual, as a 
general matter, State, local, and foreign property taxes and 
State and local sales taxes are allowed as a deduction only 
when paid or accrued in carrying on a trade or business, or an 
activity described in section 212 (relating to expenses for the 
production of income).\131\ Thus, the provision allows only 
those deductions for State, local, and foreign property taxes, 
and sales taxes, that are presently deductible in computing 
income on an individual's Schedule C, Schedule E, or Schedule F 
on such individual's tax return. Thus, for instance, in the 
case of property taxes, an individual may deduct such items 
only if these taxes were imposed on business assets (such as 
residential rental property).
---------------------------------------------------------------------------
    \131\The proposal does not modify the deductibility of GST tax 
imposed on certain income distributions.
---------------------------------------------------------------------------
    The provision contains an exception to the above-stated 
rule in the case of real property taxes. Under this exception, 
an individual may claim an itemized deduction of up to $10,000 
($5,000 for married taxpayer filing a separate return) for 
property taxes paid or accrued in the taxable year, in addition 
to any property taxes deducted in carrying on a trade or 
business or an activity described in section 212. Foreign real 
property taxes may not be deducted under this exception.
    Under the provision, in the case of an individual, State 
and local income, war profits, and excess profits taxes are not 
allowable as a deduction.
    It is intended that persons required to report refunds of 
State and local income taxes under section 6050E should no 
longer be required to report such refunds of tax relating to 
taxable years beginning after December 31, 2017. A technical 
amendment may be needed to reflect this intent.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2017.

  4. Repeal of deduction for personal casualty and theft losses (sec. 
               1304 of the bill and sec. 165 of the Code)

                              PRESENT LAW

    A taxpayer may generally claim a deduction for any loss 
sustained during the taxable year, not compensated by insurance 
or otherwise. For individual taxpayers, deductible losses must 
be incurred in a trade or business or other profit-seeking 
activity or consist of property losses arising from fire, 
storm, shipwreck, or other casualty, or from theft.\132\ 
Personal casualty or theft losses are deductible only if they 
exceed $100 per casualty or theft. In addition, aggregate net 
casualty and theft losses are deductible only to the extent 
they exceed 10 percent of an individual taxpayer's adjusted 
gross income.
---------------------------------------------------------------------------
    \132\Sec. 165(c).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the repeal of many existing tax 
incentives, including the deduction for personal casualty and 
theft losses, makes the system simpler and fairer for all 
families and individuals, and allows for lower tax rates. The 
Committee further believes that repeal of this provision is 
consistent with streamlining the tax code, broadening the tax 
base, lowering rates, and growing the economy.

                        EXPLANATION OF PROVISION

    The provision repeals the deduction for personal casualty 
and theft losses. However, notwithstanding the repeal of the 
deduction, the provision retains the benefit of the deduction, 
as modified by the Disaster Tax Relief and Airport and Airway 
Extension Act of 2017,\133\ for those individuals who sustained 
a personal casualty loss arising from hurricanes Harvey, Irma, 
or Maria.
---------------------------------------------------------------------------
    \133\Pub. L. No. 115-63.
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2017.

5. Limitation on wagering losses (sec. 1305 of the bill and sec. 165 of 
                               the Code)

                              PRESENT LAW

    Losses sustained during the taxable year on wagering 
transactions are allowed as a deduction only to the extent of 
the gains during the taxable year from such transactions.\134\
---------------------------------------------------------------------------
    \134\Sec. 165(d).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the scope of the limitation on 
wagering losses should be broadened to cover expenses incurred 
in the conduct of the individual's gambling activity.

                        EXPLANATION OF PROVISION

    The provision clarifies the scope of ``losses from wagering 
transactions'' as that term is used in section 165(d). Under 
the provision, this term includes any deduction otherwise 
allowable under chapter 1 of the Code incurred in carrying on 
any wagering transaction.
    The provision is intended to clarify that the limitation on 
losses from wagering transactions applies not only to the 
actual costs of wagers incurred by an individual, but to other 
expenses incurred by the individual in connection with the 
conduct of that individual's gambling activity.\135\ The 
provision clarifies, for instance, an individual's otherwise 
deductible expenses in traveling to or from a casino are 
subject to the limitation under section 165(d).
---------------------------------------------------------------------------
    \135\The provision thus reverses the result reached by the Tax 
Court in Ronald A. Mayo v. Commissioner, 136 T.C. 81 (2011). In that 
case, the Court held that a taxpayer's expenses incurred in the conduct 
of the trade or business of gambling, other than the cost of wagers, 
were not limited by sec. 165(d), and were thus deductible under sec. 
162(a).
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2017.

 6. Modifications to the deduction for charitable contributions (sec. 
               1306 of the bill and sec. 170 of the Code)

                              PRESENT LAW

In general

    The Internal Revenue Code allows taxpayers to reduce their 
income tax liability by taking deductions for contributions to 
certain organizations, including charities, Federal, State, 
local, and Indian tribal governments, and certain other 
organizations.
    To be deductible, a charitable contribution generally must 
meet several threshold requirements. First, the recipient of 
the transfer must be eligible to receive charitable 
contributions (i.e., an organization or entity described in 
section 170(c)). Second, the transfer must be made with 
gratuitous intent and without the expectation of a benefit of 
substantial economic value in return. Third, the transfer must 
be complete and generally must be a transfer of a donor's 
entire interest in the contributed property (i.e., not a 
contingent or partial interest contribution). To qualify for a 
current year charitable deduction, payment of the contribution 
must be made within the taxable year.\136\ Fourth, the transfer 
must be of money or property--contributions of services are not 
deductible.\137\ Finally, the transfer must be substantiated 
and in the proper form.
---------------------------------------------------------------------------
    \136\Sec. 170(a)(1).
    \137\For example, as discussed in greater detail below, the value 
of time spent volunteering for a charitable organization is not 
deductible. Incidental expenses such as mileage, supplies, or other 
expenses incurred while volunteering for a charitable organization, 
however, may be deductible.
---------------------------------------------------------------------------
    As discussed below, special rules limit the deductibility 
of a taxpayer's charitable contributions in a given year to a 
percentage of income, and those rules, in part, turn on whether 
the organization receiving the contributions is a public 
charity or a private foundation. Other special rules determine 
the deductible value of contributed property for each type of 
property.

Contributions of partial interests in property

            In general
    In general, a charitable deduction is not allowed for 
income, estate, or gift tax purposes if the donor transfers an 
interest in property to a charity while retaining an interest 
in that property or transferring an interest in that property 
to a noncharity for less than full and adequate 
consideration.\138\ This rule of nondeductibility, often 
referred to as the partial interest rule, generally prohibits a 
charitable deduction for contributions of income interests, 
remainder interests, or rights to use property.
---------------------------------------------------------------------------
    \138\Secs. 170(f)(3)(A) (income tax), 2055(e)(2) (estate tax), and 
2522(c)(2) (gift tax).
---------------------------------------------------------------------------
    A charitable contribution deduction generally is not 
allowable for a contribution of a future interest in tangible 
personal property.\139\ For this purpose, a future interest is 
one ``in which a donor purports to give tangible personal 
property to a charitable organization, but has an 
understanding, arrangement, agreement, etc., whether written or 
oral, with the charitable organization that has the effect of 
reserving to, or retaining in, such donor a right to the use, 
possession, or enjoyment of the property.''\140\
---------------------------------------------------------------------------
    \139\Sec. 170(a)(3).
    \140\Treas. Reg. sec. 1.170A-5(a)(4). Treasury regulations provide 
that section 170(a)(3), which generally denies a deduction for a 
contribution of a future interest in tangible personal property, has 
``no application in respect of a transfer of an undivided present 
interest in property. For example, a contribution of an undivided one-
quarter interest in a painting with respect to which the donee is 
entitled to possession during three months of each year shall be 
treated as made upon the receipt by the donee of a formally executed 
and acknowledged deed of gift. However, the period of initial 
possession by the donee may not be deferred in time for more than one 
year.'' Treas. Reg. sec. 1.170A-5(a)(2).
---------------------------------------------------------------------------
    A gift of an undivided portion of a donor's entire interest 
in property generally is not treated as a nondeductible gift of 
a partial interest in property.\141\ For this purpose, an 
undivided portion of a donor's entire interest in property must 
consist of a fraction or percentage of each and every 
substantial interest or right owned by the donor in such 
property and must extend over the entire term of the donor's 
interest in such property.\142\ A gift generally is treated as 
a gift of an undivided portion of a donor's entire interest in 
property if the donee is given the right, as a tenant in common 
with the donor, to possession, dominion, and control of the 
property for a portion of each year appropriate to its interest 
in such property.\143\
---------------------------------------------------------------------------
    \141\Sec. 170(f)(3)(B)(ii).
    \142\Treas. Reg. sec. 1.170A-7(b)(1).
    \143\Treas. Reg. sec. 1.170A-7(b)(1).
---------------------------------------------------------------------------
    Other exceptions to the partial interest rule are provided 
for, among other interests: (1) remainder interests in 
charitable remainder annuity trusts, charitable remainder 
unitrusts, and pooled income funds; (2) present interests in 
the form of a guaranteed annuity or a fixed percentage of the 
annual value of the property; (3) a remainder interest in a 
personal residence or farm; and (4) qualified conservation 
contributions.
            Qualified conservation contributions
    Qualified conservation contributions are not subject to the 
partial interest rule, which generally bars deductions for 
charitable contributions of partial interests in property.\144\ 
A qualified conservation contribution is a contribution of a 
qualified real property interest to a qualified organization 
exclusively for conservation purposes. A qualified real 
property interest is defined as: (1) the entire interest of the 
donor other than a qualified mineral interest; (2) a remainder 
interest; or (3) a restriction (granted in perpetuity) on the 
use that may be made of the real property (generally, a 
conservation easement). Qualified organizations include certain 
governmental units, public charities that meet certain public 
support tests, and certain supporting organizations. 
Conservation purposes include: (1) the preservation of land 
areas for outdoor recreation by, or for the education of, the 
general public; (2) the protection of a relatively natural 
habitat of fish, wildlife, or plants, or similar ecosystem; (3) 
the preservation of open space (including farmland and forest 
land) where such preservation will yield a significant public 
benefit and is either for the scenic enjoyment of the general 
public or pursuant to a clearly delineated Federal, State, or 
local governmental conservation policy; and (4) the 
preservation of an historically important land area or a 
certified historic structure.
---------------------------------------------------------------------------
    \144\Secs. 170(f)(3)(B)(iii) and 170(h).
---------------------------------------------------------------------------

Percentage limits on charitable contributions

            Individual taxpayers
    Charitable contributions by individual taxpayers are 
limited to a specified percentage of the individual's 
contribution base. The contribution base is the taxpayer's 
adjusted gross income (``AGI'') for a taxable year, 
disregarding any net operating loss carryback to the year under 
section 172.\145\ In general, more favorable (higher) 
percentage limits apply to contributions of cash and ordinary 
income property than to contributions of capital gain property. 
More favorable limits also generally apply to contributions to 
public charities (and certain operating foundations) than to 
contributions to nonoperating private foundations.
---------------------------------------------------------------------------
    \145\Sec. 170(b)(1)(G).
---------------------------------------------------------------------------
    More specifically, the deduction for charitable 
contributions by an individual taxpayer of cash and property 
that is not appreciated to a charitable organization described 
in section 170(b)(1)(A) (public charities, private foundations 
other than nonoperating private foundations, and certain 
governmental units) may not exceed 50 percent of the taxpayer's 
contribution base. Contributions of this type of property to 
nonoperating private foundations generally may be deducted up 
to the lesser of 30 percent of the taxpayer's contribution base 
or the excess of (i) 50 percent of the contribution base over 
(ii) the amount of contributions subject to the 50 percent 
limitation.
    Contributions of appreciated capital gain property to 
public charities and other organizations described in section 
170(b)(1)(A) generally are deductible up to 30 percent of the 
taxpayer's contribution base (after taking into account 
contributions other than contributions of capital gain 
property). An individual may elect, however, to bring all these 
contributions of appreciated capital gain property for a 
taxable year within the 50-percent limitation category by 
reducing the amount of the contribution deduction by the amount 
of the appreciation in the capital gain property. Contributions 
of appreciated capital gain property to nonoperating private 
foundations are deductible up to the lesser of 20 percent of 
the taxpayer's contribution base or the excess of (i) 30 
percent of the contribution base over (ii) the amount of 
contributions subject to the 30 percent limitation.
    Finally, contributions that are for the use of (not to) the 
donee charity get less favorable percentage limits. 
Contributions of capital gain property for the use of public 
charities and other organizations described in section 
170(b)(1)(A) also are limited to 20 percent of the taxpayer's 
contribution base. Property contributed for the use of an 
organization generally has been interpreted to mean property 
contributed in trust for the organization.\146\ Charitable 
contributions of income interests (where deductible) also 
generally are treated as contributions for the use of the donee 
organization.
---------------------------------------------------------------------------
    \146\Rockefeller v. Commissioner, 676 F.2d 35, 39 (2d Cir. 1982).

                Table 3--CHARITABLE CONTRIBUTION PERCENTAGE LIMITS FOR INDIVIDUAL TAXPAYERS\147\
----------------------------------------------------------------------------------------------------------------
                                                                    Ordinary                       Capital Gain
                                                                     Income        Capital Gain    Property for
                                                                  Property and   Property to the  the use of the
                                                                      Cash        Recipient\148\     Recipient
----------------------------------------------------------------------------------------------------------------
Public Charities, Private Operating Foundations, and Private                50%         30%\149\             20%
 Distributing Foundations......................................
Nonoperating Private Foundations...............................             30%              20%             20%
----------------------------------------------------------------------------------------------------------------
\147\Percentages shown are the percentage of an individual's contribution base.
\148\Capital gain property contributed to public charities, private operating foundations, or private
  distributing foundations will be subject to the 50-percent limitation if the donor elects to reduce the fair
  market value of the property by the amount that would have been long-term capital gain if the property had
  been sold.
\149\Certain qualified conservation contributions to public charities (generally, conservation easements),
  qualify for more generous contribution limits. In general, the 30-percent limit applicable to contributions of
  capital gain property is increased to 100 percent if the individual making the qualified conservation
  contribution is a qualified farmer or rancher or to 50 percent if the individual is not a qualified farmer or
  rancher.

            Corporate taxpayers
    A corporation generally may deduct charitable contributions 
up to 10 percent of the corporation's taxable income for the 
year.\150\ For this purpose, taxable income is determined 
without regard to: (1) the charitable contributions deduction; 
(2) any net operating loss carryback to the taxable year; (3) 
deductions for dividends received; (4) deductions for dividends 
paid on certain preferred stock of public utilities; and (5) 
any capital loss carryback to the taxable year.\151\
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    \150\Sec. 170(b)(2)(A).
    \151\Sec. 170(b)(2)(C).
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            Carryforwards of excess contributions
    Charitable contributions that exceed the applicable 
percentage limit generally may be carried forward for up to 
five years.\152\ In general, contributions carried over from a 
prior year are taken into account after contributions for the 
current year that are subject to the same percentage limit. 
Excess contributions made for the use of (rather than to) an 
organization generally may not be carried forward.
---------------------------------------------------------------------------
    \152\Sec. 170(d).
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            Qualified conservation contributions
    Preferential percentage limits and carryforward rules apply 
for qualified conservation contributions.\153\ In general, the 
30-percent contribution base limitation on contributions of 
capital gain property by individuals does not apply to 
qualified conservation contributions. Instead, individuals may 
deduct the fair market value of any qualified conservation 
contribution to an organization described in section 
170(b)(1)(A) (generally, public charities) to the extent of the 
excess of 50 percent of the contribution base over the amount 
of all other allowable charitable contributions. These 
contributions are not taken into account in determining the 
amount of other allowable charitable contributions. Individuals 
are allowed to carry forward any qualified conservation 
contributions that exceed the 50-percent limitation for up to 
15 years. In the case of an individual who is a qualified 
farmer or rancher for the taxable year in which the 
contribution is made, a qualified conservation contribution is 
allowable up to 100 percent of the excess of the taxpayer's 
contribution base over the amount of all other allowable 
charitable contributions.
---------------------------------------------------------------------------
    \153\Sec. 170(b)(1)(E).
---------------------------------------------------------------------------
    In the case of a corporation (other than a publicly traded 
corporation) that is a qualified farmer or rancher for the 
taxable year in which the contribution is made, any qualified 
conservation contribution is allowable up to 100 percent of the 
excess of the corporation's taxable income (as computed under 
section 170(b)(2)) over the amount of all other allowable 
charitable contributions. Any excess may be carried forward for 
up to 15 years as a contribution subject to the 100-percent 
limitation.\154\
---------------------------------------------------------------------------
    \154\Sec. 170(b)(2)(B).
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    A qualified farmer or rancher means a taxpayer whose gross 
income from the trade or business of farming (within the 
meaning of section 2032A(e)(5)) is greater than 50 percent of 
the taxpayer's gross income for the taxable year.

Valuation of charitable contributions

            In general
    For purposes of the income tax charitable deduction, the 
value of property contributed to charity may be limited to the 
fair market value of the property, the donor's tax basis in the 
property, or in some cases a different amount.
    Charitable contributions of cash are deductible in the 
amount contributed, subject to the percentage limits discussed 
above. In addition, a taxpayer generally may deduct the full 
fair market value of long-term capital gain property 
contributed to charity.\155\ Contributions of tangible personal 
property also generally are deductible at fair market value if 
the use by the recipient charitable organization is related to 
its tax-exempt purpose.
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    \155\Capital gain property means any capital asset or property used 
in the taxpayer's trade or business, the sale of which at its fair 
market value, at the time of contribution, would have resulted in gain 
that would have been long-term capital gain. Sec. 170(e)(1)(A).
---------------------------------------------------------------------------
    In certain other cases, however, section 170(e) limits the 
deductible value of the contribution of appreciated property to 
the donor's tax basis in the property. This limitation of the 
property's deductible value to basis generally applies, for 
example, for: (1) contributions of inventory or other ordinary 
income or short-term capital gain property;\156\ (2) 
contributions of tangible personal property if the use by the 
recipient charitable organization is unrelated to the 
organization's tax-exempt purpose;\157\ and (3) contributions 
to or for the use of a private foundation (other than certain 
private operating foundations).\158\
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    \156\Sec. 170(e). Special rules, discussed below, apply for certain 
contributions of inventory and other property.
    \157\Sec. 170(e)(1)(B)(i)(I).
    \158\Sec. 170(e)(1)(B)(ii). Certain contributions of patents or 
other intellectual property also generally are limited to the donor's 
basis in the property. Sec. 170(e)(1)(B)(iii). However, a special rule 
permits additional charitable deductions beyond the donor's tax basis 
in certain situations.
---------------------------------------------------------------------------
    For contributions of qualified appreciated stock, the 
above-described rule that limits the value of property 
contributed to or for the use of a private nonoperating 
foundation to the taxpayer's basis in the property does not 
apply; therefore, subject to certain limits, contributions of 
qualified appreciated stock to a nonoperating private 
foundation may be deducted at fair market value.\159\ Qualified 
appreciated stock is stock that is capital gain property and 
for which (as of the date of the contribution) market 
quotations are readily available on an established securities 
market.\160\ A contribution of qualified appreciated stock 
(when increased by the aggregate amount of all prior such 
contributions by the donor of stock in the corporation) 
generally does not include a contribution of stock to the 
extent the amount of the stock contributed exceeds 10 percent 
(in value) of all of the outstanding stock of the 
corporation.\161\
---------------------------------------------------------------------------
    \159\Sec. 170(e)(5).
    \160\Sec. 170(e)(5)(B).
    \161\Sec. 170(e)(5)(C).
---------------------------------------------------------------------------
    Contributions of property with a fair market value that is 
less than the donor's tax basis generally are deductible at the 
fair market value of the property.
            Enhanced deduction rules for certain contributions of 
                    inventory and other property
    Although most charitable contributions of property are 
valued at fair market value or the donor's tax basis in the 
property, certain statutorily described contributions of 
appreciated inventory and other property qualify for an 
enhanced deduction valuation that exceeds the donor's tax basis 
in the property, but which is less than the fair market value 
of the property.
    As discussed above, a taxpayer's deduction for charitable 
contributions of inventory property generally is limited to the 
taxpayer's basis (typically, cost) in the inventory, or if 
less, the fair market value of the property. For certain 
contributions of inventory, however, C corporations (but not 
other taxpayers) may claim an enhanced deduction equal to the 
lesser of (1) basis plus one-half of the item's appreciation 
(i.e., basis plus one-half of fair market value in excess of 
basis) or (2) two times basis.\162\ To be eligible for the 
enhanced deduction value, the contributed property generally 
must be inventory of the taxpayer, contributed to a charitable 
organization described in section 501(c)(3) (except for private 
nonoperating foundations), and the donee must (1) use the 
property consistent with the donee's exempt purpose solely for 
the care of the ill, the needy, or infants, (2) not transfer 
the property in exchange for money, other property, or 
services, and (3) provide the taxpayer a written statement that 
the donee's use of the property will be consistent with such 
requirements.\163\ Contributions to organizations that are not 
described in section 501(c)(3), such as governmental entities, 
do not qualify for this enhanced deduction.
---------------------------------------------------------------------------
    \162\Sec. 170(e)(3).
    \163\Sec. 170(e)(3)(A)(i)-(iii).
---------------------------------------------------------------------------
    To use the enhanced deduction provision, the taxpayer must 
establish that the fair market value of the donated item 
exceeds basis.
    A taxpayer engaged in a trade or business, whether or not a 
C corporation, is eligible to claim the enhanced deduction for 
certain donations of food inventory.\164\
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    \164\Sec. 170(e)(3)(C).
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            Selected statutory rules for specific types of 
                    contributions
    Special statutory rules limit the deductible value (and 
impose enhanced reporting obligations on donors) of charitable 
contributions of certain types of property, including vehicles, 
intellectual property, and clothing and household items. Each 
of these rules was enacted in response to concerns that some 
taxpayers did not accurately report--and in many instances 
overstated--the value of the property for purposes of claiming 
a charitable deduction.
    Vehicle donations.--Under present law, the amount of 
deduction for charitable contributions of vehicles (generally 
including automobiles, boats, and airplanes for which the 
claimed value exceeds $500 and excluding inventory property) 
depends upon the use of the vehicle by the donee organization. 
If the donee organization sells the vehicle without any 
significant intervening use or material improvement of such 
vehicle by the organization, the amount of the deduction may 
not exceed the gross proceeds received from the sale. In other 
situations, a fair market value deduction may be allowed.
    Patents and other intellectual property.--If a taxpayer 
contributes a patent or other intellectual property (other than 
certain copyrights or inventory)\165\ to a charitable 
organization, the taxpayer's initial charitable deduction is 
limited to the lesser of the taxpayer's basis in the 
contributed property or the fair market value of the 
property.\166\ In addition, the taxpayer generally is permitted 
to deduct, as a charitable contribution, certain additional 
amounts in the year of contribution or in subsequent taxable 
years based on a specified percentage of the qualified donee 
income received or accrued by the charitable donee with respect 
to the contributed intellectual property. For this purpose, 
qualified donee income includes net income received or accrued 
by the donee that properly is allocable to the intellectual 
property itself (as opposed to the activity in which the 
intellectual property is used).\167\
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    \165\Under present and prior law, certain copyrights are not 
considered capital assets, such that the charitable deduction for such 
copyrights generally is limited to the taxpayer's basis. See sec. 
1221(a)(3), 1231(b)(1)(C).
    \166\Sec. 170(e)(1)(B)(iii).
    \167\The present-law rules allowing additional charitable 
deductions for qualified donee income were enacted as part of the 
American Jobs Creation Act of 2004, and are effective for contributions 
made after June 3, 2004. For a more detailed description of these 
rules, see Joint Committee on Taxation, General Explanation of Tax 
Legislation Enacted in the 108th Congress (JCS-5-05), May 2005, pp. 
457-461.
---------------------------------------------------------------------------
    Clothing and household items.--Charitable contributions of 
clothing and household items generally are subject to the 
charitable deduction rules applicable to tangible personal 
property. If such contributed property is appreciated property 
in the hands of the taxpayer, and is not used to further the 
donee's exempt purpose, the deduction is limited to basis. In 
most situations, however, clothing and household items have a 
fair market value that is less than the taxpayer's basis in the 
property. Because property with a fair market value less than 
basis generally is deductible at the property's fair market 
value, taxpayers generally may deduct only the fair market 
value of most contributions of clothing or household items, 
regardless of whether the property is used for exempt or 
unrelated purposes by the donee organization. Furthermore, a 
special rule generally provides that no deduction is allowed 
for a charitable contribution of clothing or a household item 
unless the item is in good used or better condition. The 
Secretary is authorized to deny by regulation a deduction for 
any contribution of clothing or a household item that has 
minimal monetary value, such as used socks and used 
undergarments. Notwithstanding the general rule, a charitable 
contribution of clothing or household items not in good used or 
better condition with a claimed value of more than $500 may be 
deducted if the taxpayer includes with the taxpayer's return a 
qualified appraisal with respect to the property.\168\ 
Household items include furniture, furnishings, electronics, 
appliances, linens, and other similar items. Food, paintings, 
antiques, and other objects of art, jewelry and gems, and 
certain collections are excluded from the special rules 
described in the preceding paragraph.\169\
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    \168\As is discussed above, the charitable contribution 
substantiation rules generally require a qualified appraisal where the 
claimed value of a contribution is more than $5,000.
    \169\The special rules concerning the deductibility of clothing and 
household items were enacted as part of the Pension Protection Act of 
2006, P.L. 109-280 (August 17, 2006), and are effective for 
contributions made after August 17, 2006. For a more detailed 
description of these rules, see Joint Committee on Taxation, General 
Explanation of Tax Legislation Enacted in the 109th Congress (JCS-1-
07), January 17, 2007, pp. 597-600.
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    College athletic seating rights.--In general, where a 
taxpayer receives or expects to receive a substantial return 
benefit for a payment to charity, the payment is not deductible 
as a charitable contribution. However, special rules apply to 
certain payments to institutions of higher education in 
exchange for which the payor receives the right to purchase 
tickets or seating at an athletic event. Specifically, the 
payor may treat 80 percent of a payment as a charitable 
contribution where: (1) the amount is paid to or for the 
benefit of an institution of higher education (as defined in 
section 3304(f)) described in section (b)(1)(A)(ii) (generally, 
a school with a regular faculty and curriculum and meeting 
certain other requirements), and (2) such amount would be 
allowable as a charitable deduction but for the fact that the 
taxpayer receives (directly or indirectly) as a result of the 
payment the right to purchase tickets for seating at an 
athletic event in an athletic stadium of such institution.\170\
---------------------------------------------------------------------------
    \170\Sec. 170(l).
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Use of a vehicle when volunteering for a charity

    Unreimbursed out-of-pocket expenditures made incident to 
providing donated services to a qualified charitable 
organization--such as out-of-pocket transportation expenses 
necessarily incurred in performing donated services--may 
qualify as a charitable contribution.\171\ No charitable 
contribution deduction is allowed for traveling expenses 
(including expenses for meals and lodging) while away from 
home, whether paid directly or by reimbursement, unless there 
is no significant element of personal pleasure, recreation, or 
vacation in such travel.\172\
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    \171\Treas. Reg. sec. 1.170A-1(g).
    \172\Sec. 170(j).
---------------------------------------------------------------------------
    In determining the amount treated as a charitable 
contribution where a taxpayer operates a vehicle in providing 
donated services to a charity, the taxpayer either may track 
and deduct actual out-of-pocket expenditures or, in the case of 
a passenger automobile, may use the charitable standard mileage 
rate. The charitable standard mileage rate is set by statute at 
14 cents per mile.\173\ The taxpayer may also deduct (under 
either computation method), any parking fees and tolls incurred 
in rendering the services, but may not deduct any amount 
(regardless of the computation method used) for general repair 
or maintenance expenses, depreciation, insurance, registration 
fees, etc. Regardless of the computation method used, the 
taxpayer must keep reliable written records of expenses 
incurred. For example, where a taxpayer uses the charitable 
standard mileage rate to determine a deduction, the IRS has 
stated that the taxpayer generally must maintain records of 
miles driven, time, place (or use), and purpose of the mileage. 
If the charitable standard mileage rate is not used to 
determine the deduction, the taxpayer generally must maintain 
reliable written records of actual expenses incurred.\174\
---------------------------------------------------------------------------
    \173\Sec. 170(i).
    \174\In lieu of actual operating expenses, an optional standard 
mileage rate may be used in computing deductible transportation 
expenses for medical purposes (section 213) or for work-related moving 
(section 217). The standard mileage rates for medical and moving 
purposes generally cover only out-of-pocket operating expenses 
(including gasoline and oil) directly related to the use of the 
automobile. Such rates do not include costs that are not deductible for 
medical or moving purposes, such as general maintenance expenses, 
depreciation, insurance, and registration fees. The medical and moving 
standard mileage rates are determined by the IRS and updated 
periodically. For expenses paid or incurred on or after January 1, 
2017, the rate for both such purposes is 17 cents per mile. IRS Notice 
2016-79.
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Substantiation and other formal requirements

            In general
    A donor who claims a deduction for a charitable 
contribution must maintain reliable written records regarding 
the contribution, regardless of the value or amount of such 
contribution.\175\ In the case of a charitable contribution of 
money, regardless of the amount, applicable recordkeeping 
requirements are satisfied only if the donor maintains as a 
record of the contribution a bank record or a written 
communication from the donee showing the name of the donee 
organization, the date of the contribution, and the amount of 
the contribution. In such cases, the recordkeeping requirements 
may not be satisfied by maintaining other written records.
---------------------------------------------------------------------------
    \175\Sec. 170(f)(17).
---------------------------------------------------------------------------
    No charitable contribution deduction is allowed for a 
separate contribution of $250 or more unless the donor obtains 
a contemporaneous written acknowledgement of the contribution 
from the charity indicating whether the charity provided any 
good or service (and an estimate of the value of any such good 
or service) to the taxpayer in consideration for the 
contribution.\176\
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    \176\Such acknowledgement must include the amount of cash and a 
description (but not value) of any property other than cash 
contributed, whether the donee provided any goods or services in 
consideration for the contribution, and a good faith estimate of the 
value of any such goods or services. Sec. 170(f)(8).
---------------------------------------------------------------------------
    In addition, any charity receiving a contribution exceeding 
$75 made partly as a gift and partly as consideration for goods 
or services furnished by the charity (a ``quid pro quo'' 
contribution) is required to inform the contributor in writing 
of an estimate of the value of the goods or services furnished 
by the charity and that only the portion exceeding the value of 
the goods or services is deductible as a charitable 
contribution.\177\
---------------------------------------------------------------------------
    \177\Sec. 6115.
---------------------------------------------------------------------------
    If the total charitable deduction claimed for noncash 
property is more than $500, the taxpayer must attach a 
completed Form 8283 (Noncash Charitable Contributions) to the 
taxpayer's return or the deduction is not allowed.\178\ In 
general, taxpayers are required to obtain a qualified appraisal 
for donated property with a value of more than $5,000, and to 
attach an appraisal summary to the tax return.
---------------------------------------------------------------------------
    \178\Sec. 170(f)(11).
---------------------------------------------------------------------------
            Exception for certain contributions reported by the donee 
                    organization
    Subsection 170(f)(8)(D) provides an exception to the 
contemporaneous written acknowledgment requirement described 
above. Under the exception, a contemporaneous written 
acknowledgment is not required if the donee organization files 
a return, on such form and in accordance with such regulations 
as the Secretary may prescribe, that includes the same content. 
``[T]he section 170(f)(8)(D) exception is not available unless 
and until the Treasury Department and the IRS issue final 
regulations prescribing the method by which donee reporting may 
be accomplished.''\179\ No such final regulations have been 
issued.\180\
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    \179\See IRS, Notice of Proposed Rulemaking, Substantiation 
Requirement for Certain Contributions, REG-138344-13 (October 13, 
2015), I.R.B. 2015-41 (preamble).
    \180\In October 2015, the IRS issued proposed regulations that, if 
finalized, would have implemented the section 170(f)(8)(D) exception to 
the contemporaneous written acknowledgment requirement. The proposed 
regulations provided that a return filed by a donee organization under 
section 170(f)(8)(D) must include, in addition to the information 
generally required on a contemporaneous written acknowledgment: (1) the 
name and address of the donee organization; (2) the name and address of 
the donor; and (3) the taxpayer identification number of the donor. In 
addition, the return must be filed with the IRS (with a copy provided 
to the donor) on or before February 28 of the year following the 
calendar year in which the contribution was made. Under the proposed 
regulations, donee reporting would have been optional and would have 
been available solely at the discretion of the donee organization. The 
proposed regulations were withdrawn in January 2016. See Prop. Treas. 
Reg. sec 1.170A-13(f)(18).
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                           REASONS FOR CHANGE

    The Committee believes that a robust charitable sector is 
vital to our economy, and that charitable giving is critical to 
ensuring that the sector thrives. For this reason, the 
Committee believes that it is desirable to provide additional 
incentives for taxpayers to provide monetary and volunteer 
support to charities. Increasing the charitable percentage 
limit for cash contributions to public charities will encourage 
taxpayers to provide essential monetary support to front-line 
charities. Allowing the charitable standard mileage rate to be 
adjusted for inflation will encourage the volunteer support 
that charities need to carry out their missions. At the same 
time, the Committee believes that taxpayers should only be 
permitted a charitable deduction commensurate with the value of 
assets given to charity. For this reason, the provision 
eliminates the special rule under present law that allows 
taxpayers to take a charitable deduction for 80 percent of an 
amount contributed to a college or university in exchange for 
the right to purchase stadium seating and denies a deduction 
for such contribution.

                        EXPLANATION OF PROVISION

    The provision makes the following modifications to the 
present law charitable deduction rules.

Increased percentage limits for contributions of cash to public 
        charities

    The provision increases the income-based percentage limit 
described in section 170(b)(1)(A) for certain charitable 
contributions by an individual taxpayer of cash to public 
charities and certain other organizations from 50 percent to 60 
percent.

Charitable mileage rate adjusted for inflation

    The provision repeals the statutory charitable mileage rate 
and provides instead that the standard mileage rate used for 
determining the charitable contribution deduction shall be a 
rate which takes into account the variable costs of operating 
an automobile. The intent of the provision is to allow the IRS 
to determine, and make periodic adjustments to, the charitable 
standard mileage rate, taking into account the types of costs 
that are deductible under section 170 of the Code when 
operating a vehicle in connection with providing volunteer 
services (i.e., generally, the out-of-pocket operating expenses 
(including gasoline and oil) directly related to the use of the 
automobile for such purposes).

Denial of deduction for college athletic event seating rights

    The provision amends section 170(l) to provide that no 
charitable deduction shall be allowed for any amount described 
in paragraph 170(l)(2), generally, a payment to an institution 
of higher education in exchange for which the payor receives 
the right to purchase tickets or seating at an athletic event, 
as described in greater detail above.

Repeal of substantiation exception for certain contributions reported 
        by the donee organization

    The provision repeals the section 170(f)(8)(D) exception to 
the contemporaneous written acknowledgment requirement.

                             EFFECTIVE DATE

    The provision is effective for contributions made in 
taxable years beginning after December 31, 2017.

 7. Repeal of deduction for tax preparation expenses (sec. 1307 of the 
                     bill and sec. 212 of the Code)

                              PRESENT LAW

    For regular income tax purposes, individuals are allowed an 
itemized deduction for expenses for the production of income. 
These expenses are defined as ordinary and necessary expenses 
paid or incurred in a taxable year: (1) for the production or 
collection of income; (2) for the management, conservation, or 
maintenance of property held for the production of income; or 
(3) in connection with the determination, collection, or refund 
of any tax.\181\
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    \181\Sec. 212.
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                           REASONS FOR CHANGE

    The Committee believes that the repeal of many existing tax 
incentives, including the deduction for tax preparation 
expenses, makes the system simpler and fairer for all families 
and individuals, and allows for lower tax rates. The Committee 
further believes that repeal of this provision is consistent 
with streamlining the tax code, broadening the tax base, 
lowering rates, and growing the economy.

                        EXPLANATION OF PROVISION

    The provision repeals the deduction for expenses in 
connection with the determination, collection, or refund of any 
tax.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2017.

8. Repeal of deduction for medical expenses (sec. 1308 of the bill and 
                         sec. 213 of the Code)

                              PRESENT LAW

    Individuals may claim an itemized deduction for 
unreimbursed medical expenses, but only to the extent that such 
expenses exceed 10 percent of adjusted gross income.\182\ For 
taxable years beginning before January 1, 2017, the 10-percent 
threshold is reduced to 7.5 percent in the case of taxpayers 
who have attained the age of 65 before the close of the taxable 
year. In the case of married taxpayers, the 7.5 percent 
threshold applies if either spouse has obtained the age of 65 
before the close of the taxable year. For these taxpayers, 
during these years, the threshold is 10 percent for AMT 
purposes.
---------------------------------------------------------------------------
    \182\Sec. 213. The threshold was amended by the Patient Protection 
and Affordable Care Act (Pub. L. No. 111-118). For taxable years 
beginning before January 1, 2013, the threshold was 7.5 percent and 10 
percent for alternative minimum tax (``AMT'') purposes.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the repeal of many existing tax 
incentives, including the deduction for unreimbursed medical 
expenses, makes the system simpler and fairer for all families 
and individuals, and allows for lower tax rates. The Committee 
further believes that repeal of this provision is consistent 
with streamlining the tax code, broadening the tax base, 
lowering rates, and growing the economy.

                        EXPLANATION OF PROVISION

    The provision repeals the deduction for unreimbursed 
medical expenses.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2017.

9. Repeal of deduction for alimony payments and corresponding inclusion 
in gross income (sec. 1309 of the bill and secs. 61, 71, and 215 of the 
                                 Code)

                              PRESENT LAW

    Alimony and separate maintenance payments are deductible by 
the payor spouse and includible in income by the recipient 
spouse.\183\ Child support payments are not treated as 
alimony.\184\
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    \183\Secs. 215(a), 61(a)(8) and 71(a).
    \184\Sec. 71(c).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the repeal of the deduction for 
alimony payments from the payor spouse and repeal of the 
corresponding inclusion in gross income by the recipient spouse 
simplifies the tax code and prevents divorced couples from 
reducing income tax through a specific form of payments 
unavailable to married couples.

                        EXPLANATION OF PROVISION

    Under the provision, alimony and separate maintenance 
payments are not deductible by the payor spouse. The provision 
repeals the Code provisions that specify that alimony and 
separate maintenance payments are included in income. Thus, the 
intent of the provision is to follow the rule of the United 
States Supreme Court's holding in Gould v. Gould,\185\ in which 
the Court held that such payments are not income to the 
recipient. Income used for alimony payments is taxed at the 
rates applicable to the payor spouse rather than the recipient 
spouse. The treatment of child support is not changed.
---------------------------------------------------------------------------
    \185\245 U.S. 151 (1917).
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The provision is effective for any divorce or separation 
instrument executed after December 31, 2017, or for any divorce 
or separation instrument executed on or before December 31, 
2017, and modified after that date, if the modification 
expressly provides that the amendments made by this section 
apply to such modification.

10. Repeal of deduction for moving expenses (sec. 1310 of the bill and 
                     secs. 134 and 217 of the Code)

                              PRESENT LAW

    Individuals are permitted an above-the-line deduction for 
moving expenses paid or incurred during the taxable year in 
connection with the commencement of work by the taxpayer as an 
employee or as a self-employed individual at a new principal 
place of work.\186\ Such expenses are deductible only if the 
move meets certain conditions related to distance from the 
taxpayer's previous residence and the taxpayer's status as a 
full-time employee in the new location.
---------------------------------------------------------------------------
    \186\Sec. 217(a).
---------------------------------------------------------------------------
    Special rules apply in the case of a member of the Armed 
Forces of the United States. In the case of any such individual 
who is on active duty, who moves pursuant to a military order 
and incident to a permanent change of station, the limitations 
related to distance from the taxpayer's previous residence and 
status as a full-time employee in the new location do not 
apply.\187\ Additionally, any moving and storage expenses which 
are furnished in kind to such an individual, spouse, or 
dependents, or if such expenses are reimbursed or an allowance 
for such expenses is provided, such amounts are excluded from 
gross income.\188\ Rules also apply to exclude amounts 
furnished to the spouse and dependents of such an individual in 
the event that such individuals move to a location other than 
to where the member of the Armed Forces is moving.
---------------------------------------------------------------------------
    \187\Sec. 217(g).
    \188\Sec. 217(g)(2).
---------------------------------------------------------------------------
    Present law provides income exclusions for various benefits 
provided to members of the Armed Forces.\189\
---------------------------------------------------------------------------
    \189\Sec. 134.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the repeal of many existing tax 
incentives, including the deduction for moving expenses, makes 
the system simpler and fairer for all families and individuals, 
and allows for lower tax rates. The Committee further believes 
that repeal of this provision is consistent with streamlining 
the tax code, broadening the tax base, lowering rates, and 
growing the economy.
    However, the Committee recognizes that special 
circumstances apply to members of the Armed Forces, and thus 
the provision retains the present law benefits relating to the 
moving expenses of these taxpayers.

                        EXPLANATION OF PROVISION

    The provision generally repeals the deduction for moving 
expenses. The provision intends to retain tax benefits for the 
moving expenses of members of the Armed Forces of the United 
States.\190\ Thus, the provision retains the special rules 
under present law that provide a exclusions for amounts 
attributable to in-kind moving and storage expenses (and 
reimbursements or allowances for these expenses) for members of 
the Armed Forces (or their spouse or dependents) on active duty 
that move pursuant to a military order and incident to a 
permanent change of station.\191\
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    \190\A technical amendment may be needed to reflect this intent for 
the deduction for moving expenses for members of the Armed Forces.
    \191\Under the provision, these exclusions are added to section 
134.
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                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2017.

   11. Termination of deduction and exclusions for contributions to 
 medical savings accounts (sec. 1311 of the bill and secs. 106(b) and 
                            220 of the Code)

                              PRESENT LAW

Archer MSAs

    As of 1997, certain individuals are permitted to contribute 
to an Archer MSA, which is a tax-exempt trust or custodial 
account.\192\ Within limits, contributions to an Archer MSA are 
deductible in determining adjusted gross income if made by an 
individual and are excludible from gross income for income tax 
purposes and wages for employment tax\193\ purposes if made by 
the employer of an individual.\194\
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    \192\Archer MSAs were originally called medical savings accounts or 
MSAs.
    \193\The FICA exclusion is provided under IRS Notice 96-53.
    \194\Secs. 106(b) and 220.
---------------------------------------------------------------------------
    An individual is generally eligible for an Archer MSA if 
the individual is covered by a high deductible health plan and 
no other health plan other than a plan that provides certain 
permitted insurance or permitted coverage. In addition, the 
individual either must be an employee of a small employer 
(generally an employer with 50 or fewer employees on average) 
that provides the high deductible health plan or must be self-
employed or the spouse of a self-employed individual and the 
high deductible health plan is not provided by the employer of 
the individual or spouse.
    For 2017, a high deductible health plan for purposes of 
Archer MSA eligibility is a health plan with an annual 
deductible of at least $2,250 and not more than $3,350 in the 
case of self-only coverage and at least $4,500 and not more 
than $6,750 in the case of family coverage. In addition, for 
2017, the maximum out-of-pocket expenses with respect to 
allowed costs must be no more than $4,500 in the case of self-
only coverage and no more than $8,250 in the case of family 
coverage. Out-of-pocket expenses include deductibles, co-
payments, and other amounts (other than premiums) that the 
individual must pay for covered benefits under the plan. A plan 
does not fail to qualify as a high deductible health plan if 
substantially all of the coverage under the plan is certain 
permitted insurance or is coverage (whether provided through 
insurance or otherwise) for accidents, disability, dental care, 
vision care, or long-term care.
    The maximum annual contribution that can be made to an 
Archer MSA for a year is 65 percent of the annual deductible 
under the individual's high deductible health plan in the case 
of self-only coverage (65 percent of $3,350 for 2017) and 75 
percent of the annual deductible in the case of family coverage 
(75 percent of $6,750 for 2017), but in no case more than the 
individual's compensation income. In addition, the maximum 
contribution can be made only if the individual is covered by 
the high deductible health plan for the full year.
    Distributions from an Archer MSA for qualified medical 
expenses are not includible in gross income. Distributions not 
used for qualified medical expenses are includible in gross 
income and subject to an additional 20-percent tax unless an 
exception applies. A distribution from an Archer MSA may be 
rolled over on a nontaxable basis to another Archer MSA or to a 
health savings account and does not count against the 
contribution limits.
    After 2007, no new contributions can be made to Archer MSAs 
except by or on behalf of individuals who previously had made 
Archer MSA contributions and employees of small employers that 
previously contributed to Archer MSAs (or at least 20 percent 
of whose employees who were previously eligible to contribute 
to Archer MSAs did so).

Health savings accounts

    As of 2004, an individual with a high deductible health 
plan (and no other health plan other than a plan that provides 
certain permitted insurance or permitted coverage) generally 
may contribute to a health savings account (``HSA''), which is 
a tax-exempt trust or custodial account. HSAs provide similar 
tax-favored savings treatment as Archer MSAs. That is, within 
limits, contributions to an HSA are deductible in determining 
adjusted gross income if made by an individual and are 
excludable from gross income for income tax purposes and wages 
for employment tax\195\ purposes if made by the employer of an 
individual, and distributions for qualified medical expenses 
are not includible in gross income.\196\ However, the rules for 
HSAs are in various aspects more favorable than the rules for 
Archer MSAs.\197\ For example, the availability of HSAs is not 
limited to employees of small employers or self-employed 
individuals and their spouses.
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    \195\The FICA exclusion is provided under IRS Notice 2004-2.
    \196\Secs. 106(d) and 223.
    \197\Sections 4980E and 4980G respectively require an employer 
making MSA or HSA contributions to make comparable contributions for 
comparable participating employees. However, under section 4980G(d), an 
employer may make larger HSA contributions for nonhighly compensated 
employees.
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    For 2017, a high deductible health plan for purposes of HSA 
eligibility is a health plan with an annual deductible of at 
least $1,300 in the case of self-only coverage and at least 
$2,600 in the case of family coverage. In addition, for 2017, 
the sum of the deductible and the maximum out-of-pocket 
expenses with respect to allowed costs must be no more than 
$6,550 in the case of self-only coverage and no more than 
$13,100 in the case of family coverage. A plan does not fail to 
qualify as a high deductible health plan for HSA purposes 
merely because it does not have a deductible for preventive 
care.
    For 2017, the maximum aggregate annual contribution that 
can be made to an HSA is $3,400 in the case of self-only 
coverage and $6,750 in the case of family coverage. The annual 
contribution limits are increased by $1,000 for individuals who 
have attained age 55 by the end of the taxable year (referred 
to as ``catch-up contributions''). The maximum amount that an 
individual make contribute is reduced by the amount of any 
contributions to the individual's Archer MSA and any excludable 
HSA contributions made by the individual's employer. In some 
cases, an individual may make the maximum HSA contribution, 
even if the individual is covered by the high deductible health 
plan for only part of the year. A distribution from an HSA may 
be rolled over on a nontaxable basis to another HSA and does 
not count against the contribution limits.

                           REASONS FOR CHANGE

    The Committee recognizes that Archer MSAs provide fewer 
benefits than HSAs. The termination of the deduction and 
exclusions for contributions to Archer MSAs therefore 
simplifies the Code by consolidating two similar tax-favored 
accounts into a single account with more favorable benefits for 
the taxpayer (i.e., HSAs).

                        EXPLANATION OF PROVISION

    Under the provision, contributions to Archer MSAs for 
taxable years beginning after December 31, 2017, are not 
deductible or excludible from gross income and wages.\198\
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    \198\The provision retains the requirement that an employer making 
HSA contributions must make comparable contributions for comparable 
participating employees, including the rule under which an employer may 
make larger HSA contributions for nonhighly compensated employees. As 
under present law, with respect to highly compensated employees, both 
highly compensated employees and nonhighly compensated employees are to 
be treated as comparable participating employees. (A technical 
amendment is needed to the reference within new section 4980G(d)(3)(B) 
to subparagraph (B), which should be a reference to subparagraph 
(A)(ii).)
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                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2017.

   12. Denial of deduction for expenses attributable to the trade or 
business of being an employee, expenses of teachers, performing artists 
and certain officials (sec. 1312 of the bill and secs. 62, 67, and new 
                         sec. 262A of the Code)

                              PRESENT LAW

    In general, business expenses incurred by an employee are 
deductible, but only as an itemized deduction and only to the 
extent the expenses exceed two percent of adjusted gross 
income.\199\ However, in the case of certain employees and 
certain expenses, a deduction may be taken in determining 
adjusted gross income (referred to as an ``above-the-line'' 
deduction), including expenses of qualified performing artists, 
expenses of State or local government officials performing 
services on a fee basis, and expenses of eligible 
educators.\200\
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    \199\Secs. 62(a)(1) and 67.
    \200\Sec. 62(a)(2)(B), (C), and (D). Under section 62(a)(2)(A) and 
(c), certain reimbursements of employee business expenses are excluded 
from income. Under section 62(a)(2)(E), an above-the-line deduction 
applies to expenses of members of a reserve component of the Armed 
Forces.
---------------------------------------------------------------------------
    Present law and IRS guidance provide for numerous items 
that may be deducted under this provision (subject to the two-
percent adjusted gross income floor). This non-exhaustive list 
includes):\201\
---------------------------------------------------------------------------
    \201\See IRS Publication 529, ``Miscellaneous Deductions'' (2016), 
p. 3.
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           Business bad debt of an employee;
           Business liability insurance premiums;
            Damages paid to a former employer for 
        breach of an employment contract;
           Depreciation on a computer a taxpayer's 
        employer requires him to use in his work;
            Dues to a chamber of commerce if membership 
        helps the taxpayer do his job;
            Dues to professional societies;
            Educator expenses;\202\
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    \202\Under a special provision, these expenses are deductible 
``above the line'' up to $250.
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            Home office or part of a taxpayer's home 
        used regularly and exclusively in the taxpayer's work;
            Job search expenses in the taxpayer's 
        present occupation;
            Laboratory breakage fees;
           Legal fees related to the taxpayer's job;
            Licenses and regulatory fees;
            Malpractice insurance premiums;
           Medical examinations required by an 
        employer;
           Occupational taxes;
            Passport for a business trip;
            Repayment of an income aid payment received 
        under an employer's plan;
            Research expenses of a college professor;
            Rural mail carriers' vehicle expenses;
            Subscriptions to professional journals and 
        trade magazines related to the taxpayer's work;
           Tools and supplies used in the taxpayer's 
        work;
           Travel, transportation, meals, 
        entertainment, gifts, and local lodging related to the 
        taxpayer's work;
           Union dues and expenses;
           Work clothes and uniforms if required and 
        not suitable for everyday use; and
           Work-related education.
    A working condition fringe provided to an employee is 
excluded from the employee's income and wages.\203\ For this 
purpose, a working condition fringe means property or services 
provided to an employee to the extent that, if the employee 
paid for the property or service, the payment would be 
deductible as a business expense or depreciation.
---------------------------------------------------------------------------
    \203\Sec. 132(a)(3) and (d).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the repeal of many existing tax 
incentives, including the deduction for expenses attributable 
to the trade or business of being an employee, and expenses of 
teachers, performing artists, and certain officials, makes the 
system simpler and fairer for all families and individuals, and 
allows for lower tax rates. The Committee further believes that 
repeal of this provision is consistent with streamlining the 
tax code, broadening the tax base, lowering rates, and growing 
the economy.

                        EXPLANATION OF PROVISION

    Under the provision, business expenses incurred by an 
employee are not deductible, other than expenses that are 
deductible in determining adjusted gross income (that is, 
above-the-line deductions).
    In addition, the present-law provisions allowing above-the-
line deductions for expenses of qualified performing artists 
and expenses of State or local government officials performing 
services on a fee basis are repealed. The present-law provision 
allowing an above-the-line deduction for expenses of eligible 
educators is also repealed.\204\
---------------------------------------------------------------------------
    \204\The provision retains the present-law provisions under which 
certain reimbursements of employee business expenses are excluded from 
income and under which an above-the-line deduction applies to expenses 
of members of a reserve component of the Armed Forces.
---------------------------------------------------------------------------
    In addition, whether property or services provided by an 
employer are excluded as a working condition fringe is 
determined without regard to the provision. That is, the same 
standard as under present law applies for this purpose.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2017.

  E. Simplification and Reform of Exclusions and Taxable Compensation

1. Limitation on exclusion for employer-provided housing (sec. 1401 of 
                   the bill and sec. 119 of the Code)

                              PRESENT LAW

    The value of lodging furnished to an employee, spouse, or 
dependents by or on behalf of an employer for the convenience 
of the employer (referred to as ``employer-provided lodging'') 
is excludible from the employee's gross income, but only if the 
employee is required to accept the lodging on the business 
premises of the employer as a condition of employment.\205\ 
Special rules apply with respect to employees living in foreign 
camps\206\ and lodging furnished by certain educational 
institutions to employees.\207\ Amounts attributable to 
employer-provided lodging that are excludible from gross income 
for income tax purposes are also excluded from wages for 
employment tax purposes.
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    \205\Sec. 119(a).
    \206\Sec. 119(c).
    \207\Sec. 119(d).
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                           REASONS FOR CHANGE

    The Committee believes that limiting the exclusion for 
employer-provided housing broadens the tax base, closes 
loopholes, and allows for lower tax rates. The Committee 
further believes that limiting the exclusion accomplishes these 
goals without placing undue burden on lower income taxpayers, 
achieving simplicity and fairness for all individuals and 
families.

                        EXPLANATION OF PROVISION

    The provision limits the amount that may be excluded from 
gross income for employer-provided lodging to $50,000 ($25,000 
in the case of a married individual filing a separate return), 
subject to a phase-out based on the employee's level of 
compensation. The exclusion is phased out by $1 for every $2 
earned above the indexed compensation threshold. For 2017, this 
compensation threshold is $120,000.\208\ The provision also 
denies any exclusion for employer-provided housing provided to 
5% owners,\209\ regardless of their compensation level.
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    \208\The compensation threshold is that amount in effect under 
section 414(q)(1)(B)(i).
    \209\As defined in section 416(i)(1)(B)(i).
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    In addition, the exclusion does not apply to more than one 
residence at any given time. In the case of spouses filing a 
joint return, the one residence limit may be applied separately 
to each spouse for a period during which the spouses reside in 
separate residences provided in connection with their 
respective employments.
    Those amounts that are not excludible from gross income for 
income tax purposes will also not be excluded from wages for 
employment tax purposes.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2017.

 2. Modification of exclusion of gain on sale of a principal residence 
            (sec. 1402 of the bill and sec. 121 of the Code)

                              PRESENT LAW

    A taxpayer who is an individual may exclude up to $250,000 
($500,000 if married filing a joint return) of gain realized on 
the sale or exchange of a principal residence. To be eligible 
for the exclusion, the taxpayer must have owned and used the 
residence as a principal residence for at least two of the five 
years ending on the date of the sale or exchange. A taxpayer 
who fails to meet these requirements by reason of a change of 
place of employment, health, or, to the extent provided under 
regulations, unforeseen circumstances, is able to exclude an 
amount equal to the fraction of the $250,000 ($500,000 if 
married filing a joint return) that is equal to the fraction of 
the two years that the ownership and use requirements are met.
    The exclusion under this provision may not be claimed for 
more than one sale or exchange during any two-year period.

                           REASONS FOR CHANGE

    The Committee believes that the exclusion on proceeds from 
the sale of a principal residence is intended to prevent 
longtime homeowners from recognizing a gain upon an infrequent 
and important transaction, and to allow those individuals to 
use the full proceeds of the home sale to purchase another 
home. The Committee believes that present-law the rule allowing 
individuals to live in their home for only two out of the prior 
five years to qualify for the exclusion has allowed individuals 
to cycle between building homes and living in those homes while 
they build the next, selling the lived-in home and qualifying 
for the exclusion on the proceeds. Such use takes advantage of 
the exclusion in a manner that was not intended.
    The Committee further believes that high income taxpayers 
should not be eligible for the exclusion.

                        EXPLANATION OF PROVISION

    The provision extends the length of time a taxpayer must 
own and use a residence to qualify for this exclusion. 
Specifically, the exclusion is available only if the taxpayer 
has owned and used the residence as a principal residence for 
at least five of the eight years ending on the date of the sale 
or exchange. A taxpayer who fails to meet these requirements by 
reason of a change of place of employment, health, or, to the 
extent provided under regulations, unforeseen circumstances is 
able to exclude an amount equal to the fraction of the $250,000 
($500,000 if married filing a joint return) that is equal to 
the fraction of the five years that the ownership and use 
requirements are met.
    The provision limits the exclusion so that the exclusion 
may not apply to more than one sale or exchange during any 
five-year period.
    The provision phases-out the exclusion by one dollar for 
every dollar a taxpayer's AGI exceeds $250,000 ($500,000 if 
married filing a joint return). For purposes of this provision, 
AGI is measured using the average of the taxpayer's AGI in the 
year of sale (excluding any income from the sale of the home) 
and the prior two taxable years before the sale.

                             EFFECTIVE DATE

    The provision is effective for sales and exchanges after 
December 31, 2017.

  3. Repeal of exclusion, etc., for employee achievement awards (sec. 
        1403 of the bill and secs. 74(c) and 274(j) of the Code)

                              PRESENT LAW

    An employer's deduction for the cost of an employee 
achievement award is limited to a certain amount.\210\ Employee 
achievement awards that are deductible by an employer (or would 
be deductible but for the fact that the employer is a tax-
exempt organization) are excludible from an employee's gross 
income.\211\ Amounts that are excludible from gross income 
under section 74(c) for income tax purposes are also excluded 
from wages for employment tax purposes.
---------------------------------------------------------------------------
    \210\Sec. 274(j).
    \211\Sec. 74(c).
---------------------------------------------------------------------------
    An employee achievement award is an item of tangible 
personal property given to an employee in recognition of either 
length of service or safety achievement and presented as part 
of a meaningful presentation.

                           REASONS FOR CHANGE

    The Committee believes that the repeal of the deduction 
limitation and exclusions for employee achievement awards makes 
the system simpler and fairer for all families and individuals, 
and allows for lower tax rates. The Committee further believes 
that the repeal of this provision is part of its larger effort 
toward tax reform which broadens the tax base, closes 
loopholes, and grows the economy.

                        EXPLANATION OF PROVISION

    The provision repeals the deduction limitation for employee 
achievement awards. It also repeals the exclusions from gross 
income and wages.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2017.

  4. Sunset of exclusion for dependent care assistance programs (sec. 
               1404 of the bill and sec. 129 of the Code)

                              PRESENT LAW

    An exclusion from the gross income of an employee of up to 
$5,000 annually for employer-provided dependent care 
assistance\212\ is allowed if the assistance is provided 
pursuant to a separate written plan of an employer that does 
not discriminate in favor of highly compensated employees\213\ 
and meets certain other requirements. The amount excludible 
cannot exceed the earned income of the employee or, if the 
employee is married, the lesser of the earned income of the 
employee or the earned income of the employee's spouse. Amounts 
attributable to dependent care assistance that are excludible 
from gross income for income tax purposes are also excludible 
from wages for employment tax purposes.
---------------------------------------------------------------------------
    \212\Sec. 129(a).
    \213\Section 129(d). The exclusion applies if the contributions or 
benefits under the program do not discriminate in favor of highly 
compensated employees, within the meaning of Sec. 414(q), or their 
dependents, and the program benefits employees under a classification 
established by the employer found not to be discriminatory in favor or 
such highly compensated employees or their dependents.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the sunset of the exclusion for 
dependent care assistance programs makes the system simpler and 
fairer for all families and individuals, and allows for lower 
tax rates. The Committee further believes that repeal of this 
provision is consistent with streamlining the tax code, 
broadening the tax base, lowering rates, and growing the 
economy.

                        EXPLANATION OF PROVISION

    The provision terminates the exclusions from gross income 
and wages for dependent care assistance programs for taxable 
years beginning after December 31, 2022.

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

5. Repeal of exclusion for qualified moving expense reimbursement (sec. 
             1405 of the bill and sec. 132(g) of the Code)

                              PRESENT LAW

    Qualified moving expense reimbursements are excludible from 
an employee's gross income\214\, and are defined as any amount 
received (directly or indirectly) from an employer as payment 
for (or reimbursement of) expenses which would be deductible as 
moving expenses under section 217\215\ if directly paid or 
incurred by the employee. However, any such amount actually 
deducted by the individual is not eligible for this exclusion. 
Amounts excludible from gross income for income tax purposes as 
qualified moving expense reimbursements are also excluded from 
wages for employment tax purposes.
---------------------------------------------------------------------------
    \214\Section 132(a)(6) and 132(g).
    \215\Individuals are allowed an itemized deduction for moving 
expenses paid or incurred during the taxable year in connection with 
the commencement of work by the taxpayer as an employee or as a self-
employed individual at a new principal place of work. Such expenses are 
deductible only if the move meets certain conditions related to 
distance from the taxpayer's previous residence and the taxpayer's 
status as a full-time employee in the new location.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the repeal of the exclusion for 
qualified moving expense reimbursement makes the system simpler 
and fairer for all families and individuals, and allows for 
lower tax rates. The Committee further believes that the repeal 
of this provision is part of its larger effort toward tax 
reform which broadens the tax base, closes loopholes and grows 
the economy.

                        EXPLANATION OF PROVISION

    The provision repeals the exclusion from gross income and 
wages for qualified moving expense reimbursements.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2017.

 6. Repeal of exclusion for adoption assistance programs (sec. 1406 of 
                   the bill and sec. 137 of the Code)

                              PRESENT LAW

    An exclusion from an employee's gross income is allowed for 
qualified adoption expenses paid or reimbursed by an employer, 
if such amounts are furnished pursuant to an adoption 
assistance program.\216\ For 2017, the maximum exclusion amount 
is $13,570, and is phased out ratably for taxpayers with 
modified adjusted gross income (``AGI'') above a certain 
amount. In 2017, the phase out range begins at modified AGI of 
$203,540, with no exclusion when modified AGI equals or exceeds 
$243,540. Modified AGI is the sum of the taxpayer's AGI plus 
amounts excluded from income under sections 911, 931, and 933 
(relating to the exclusion of income of U.S. citizens or 
residents living abroad; residents of Guam, American Samoa, and 
the Northern Mariana Islands and residents of Puerto Rico, 
respectively).
---------------------------------------------------------------------------
    \216\Section 137(a).
---------------------------------------------------------------------------
    In the case of adoption of a child with special needs that 
is finalized during a taxable year, the taxpayer may claim as 
an exclusion the amount of the maximum exclusion minus the 
aggregate qualified adoption expenses with respect to that 
adoption for all prior taxable years.
    Qualified adoption expenses are reasonable and necessary 
adoption fees, court costs, attorney fees, and other expenses 
that are: (1) directly related to, and the principal purpose of 
which is for, the legal adoption of an eligible child by the 
taxpayer; (2) not incurred in violation of State or Federal 
law, or in carrying out any surrogate parenting arrangement; 
(3) not for the adoption of the child of the taxpayer's spouse; 
and (4) not reimbursed (e.g., by an employer).\217\
---------------------------------------------------------------------------
    \217\Section 23(d)(1).
---------------------------------------------------------------------------
    For the exclusion to apply, certain requirements must be 
satisfied, including satisfaction of nondiscrimination rules 
and providing employees with reasonable notification of the 
availability and terms of the program.\218\
---------------------------------------------------------------------------
    \218\The employer's adoption assistance program must not 
discriminate in favor of highly compensated employees, within the 
meaning of Sec. 414(q). In addition, no more than five percent of the 
amounts paid or incurred by the employer during the year for qualified 
adoption expenses under an adoption assistance program can be provided 
for the class of individuals consisting of more-than-five-percent 
owners of the employer and the spouses or dependents of such more-than-
five-percent owners.
---------------------------------------------------------------------------
    Adoption expenses paid or reimbursed by the employer under 
an adoption assistance program are not eligible for the 
adoption credit under section 23. A taxpayer may be eligible 
for the adoption credit (with respect to qualified adoption 
expenses he or she incurs) and also for the exclusion (with 
respect to different qualified adoption expenses paid or 
reimbursed by his or her employer).

                           REASONS FOR CHANGE

    The Committee believes that the repeal of the exclusion for 
adoption assistance programs makes the system simpler and 
fairer for all families and individuals, and allows for lower 
tax rates. The Committee further believes that the repeal of 
this provision is part of its larger effort toward tax reform 
which broadens the tax base, closes loopholes and grows the 
economy.

                        EXPLANATION OF PROVISION

    The provision repeals the exclusion from gross income for 
adoption assistance programs.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2017.

     F. Simplification and Reform of Savings, Pensions, Retirement

    1. Repeal of special rule permitting recharacterization of IRA 
    contributions (sec. 1501 of the bill and sec. 408A of the Code)

                              PRESENT LAW

Individual retirement arrangements

    There are two basic types of individual retirement 
arrangements (``IRAs'') under present law: traditional 
IRAs,\219\ to which both deductible and nondeductible 
contributions may be made,\220\ and Roth IRAs, to which only 
nondeductible contributions may be made.\221\ The principal 
difference between these two types of IRAs is the timing of 
income tax inclusion.
---------------------------------------------------------------------------
    \219\Sec. 408.
    \220\Secs. 219(a) and 408(o).
    \221\Sec. 408A.
---------------------------------------------------------------------------
    An annual limit applies to contributions to IRAs. The 
contribution limit is coordinated so that the aggregate maximum 
amount that can be contributed to all of an individual's IRAs 
(both traditional and Roth) for a taxable year is the lesser of 
a certain dollar amount ($5,500 for 2017) or the individual's 
compensation. In the case of a married couple, contributions 
can be made up to the dollar limit for each spouse if the 
combined compensation of the spouses is at least equal to the 
contributed amount. The dollar limit is increased annually 
(``indexed'') as needed to reflect increases in the cost-of 
living. An individual who has attained age 50 before the end of 
the taxable year may also make catch-up contributions up to 
$1,000 to an IRA. The IRA catch-up contribution limit is not 
indexed.

Traditional IRAs

    An individual may make deductible contributions to a 
traditional IRA up to the IRA contribution limit (reduced by 
any contributions to Roth IRAs) if neither the individual nor 
the individual's spouse is an active participant in an 
employer-sponsored retirement plan. If an individual (or the 
individual's spouse) is an active participant in an employer-
sponsored retirement plan, the deduction is phased out for 
taxpayers with adjusted gross income (``AGI'') for the taxable 
year over certain indexed levels.\222\ To the extent an 
individual cannot or does not make deductible contributions to 
a traditional IRA or contributions to a Roth IRA for the 
taxable year, the individual may make nondeductible after-tax 
contributions to a traditional IRA (that is, no AGI limits 
apply), subject to the same contribution limits as the limits 
on deductible contributions, including catch-up contributions. 
An individual who has attained age 70\1/2\ before to the close 
of a year is not permitted to make contributions to a 
traditional IRA for that year.
---------------------------------------------------------------------------
    \222\Sec. 219(g).
---------------------------------------------------------------------------
    Amounts held in a traditional IRA are includible in income 
when withdrawn, except to the extent the withdrawal is a return 
of the individual's basis.\223\ All traditional IRAs of an 
individual are treated as a single contract for purposes of 
recovering basis in the IRAs.
---------------------------------------------------------------------------
    \223\Basis results from after-tax contributions to traditional IRAs 
or a rollovers to traditional IRAs of after-tax amounts from another 
eligible retirement plan.
---------------------------------------------------------------------------

Roth IRAs

    Individuals with AGI below certain levels may make 
nondeductible contributions to a Roth IRA. The maximum annual 
contribution that can be made to a Roth IRA is phased out for 
taxpayers with AGI for the taxable year over certain indexed 
levels.\224\
---------------------------------------------------------------------------
    \224\Although an individual with AGI exceeding certain limits is 
not permitted to make a contribution directly to a Roth IRA, the 
individual can make a contribution to a traditional IRA and convert the 
traditional IRA to a Roth IRA, as discussed below.
---------------------------------------------------------------------------
    Amounts held in a Roth IRA that are withdrawn as a 
qualified distribution are not includible in income. A 
qualified distribution is a distribution that (1) is made after 
the five-taxable-year period beginning with the first taxable 
year for which the individual first made a contribution to a 
Roth IRA, and (2) is made after attainment of age 59\1/2\, on 
account of death or disability, or is made for first-time 
homebuyer expenses of up to $10,000.
    Distributions from a Roth IRA that are not qualified 
distributions are includible in income to the extent 
attributable to earnings; amounts that are attributable to a 
return of contributions to the Roth IRA are not includible in 
income. All Roth IRAs are treated as a single contract for 
purposes of determining the amount that is a return of 
contributions.

Separation of traditional and Roth IRA accounts

    Contributions to traditional IRAs and to Roth IRAs must be 
segregated into separate IRAs, meaning arrangements with 
separate trusts, accounts, or contracts, and separate IRA 
documents. Except in the case of a conversion or 
recharacterization, amounts cannot be transferred or rolled 
over between the two types of IRAs.
    Taxpayers generally may convert an amount in a traditional 
IRA to a Roth IRA.\225\ The amount converted is includible in 
the taxpayer's income as if a withdrawal had been made.\226\ 
The conversion is accomplished by a trustee-to-trustee transfer 
of the amount from the traditional IRA to the Roth IRA, or by a 
distribution from the traditional IRA and contribution to the 
Roth IRA within 60 days.
---------------------------------------------------------------------------
    \225\Although an individual with AGI exceeding certain limits is 
not permitted to make a contribution directly to a Roth IRA, the 
individual can make a contribution to a traditional IRA and convert the 
traditional IRA to a Roth IRA.
    \226\Subject to various exceptions, distributions from an IRA 
before age 59\1/2\ that are includible in income are subject to a 10-
percent early distribution tax under section 72(t). An exception 
applies to an amount includible in income as a result of the conversion 
from a traditional IRA into a Roth IRA. However, the early distribution 
tax applies if the taxpayer withdraws the amount within five years of 
the conversion.
---------------------------------------------------------------------------
    Rollovers to IRAs of distributions from tax-favored 
employer-sponsored retirement plans (that is, qualified 
retirement plans, tax-deferred annuity plans, and governmental 
eligible deferred compensation plans\227\) are also permitted. 
For tax-free rollovers, distributions from pretax accounts 
under an employer-sponsored plan generally must are contributed 
to a traditional IRA, and distributions from a designated Roth 
account under an employer-sponsored plan must be contributed 
only to a Roth IRA. However, a distribution from an employer-
sponsored plan that is not from a designated Roth account is 
also permitted to be rolled over into a Roth IRA, subject to 
the rules that apply to conversions from a traditional IRA into 
a Roth IRA. Thus, a rollover from a tax-favored employer-
sponsored plan to a Roth IRA is includible in gross income 
(except to the extent it represents a return of after-tax 
contributions).\228\
---------------------------------------------------------------------------
    \227\Secs. 401(a), 403(a), 403(b) and 457(b).
    \228\As in the case of a conversion of an amount from a traditional 
IRA to a Roth IRA, the special recapture rule relating to the 10-
percent additional tax on early distributions applies for distributions 
made from the Roth IRA within a specified five-year period after the 
rollover.
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Recharacterization of IRA contributions

    If an individual makes a contribution to an IRA 
(traditional or Roth) for a taxable year, the individual is 
permitted to recharacterize the contribution as a contribution 
to the other type of IRA (traditional or Roth) by making a 
trustee-to-trustee transfer to the other type of IRA before the 
due date for the individual's income tax return for that 
year.\229\ In the case of a recharacterization, the 
contribution will be treated as having been made to the 
transferee IRA (and not the original, transferor IRA) as of the 
date of the original contribution. Both regular contributions 
and conversion contributions to a Roth IRA can be 
recharacterized as having been made to a traditional IRA.
---------------------------------------------------------------------------
    \229\Sec. 408A(d)(6).
---------------------------------------------------------------------------
    The amount transferred in a recharacterization must be 
accompanied by any net income allocable to the contribution. In 
general, even if a recharacterization is accomplished by 
transferring a specific asset, net income is calculated as a 
pro rata portion of income on the entire account rather than 
income allocable to the specific asset transferred. However, 
when doing a Roth conversion of an amount for a year, an 
individual may establish multiple Roth IRAs, for example, Roth 
IRAs with different investment strategies, and divide the 
amount being converted among the IRAs. The individual can then 
choose whether to recharacterize any of the Roth IRAs as a 
traditional IRA by transferring the entire amount in the 
particular Roth IRA to a traditional IRA.\230\ For example, if 
the value of the assets in a particular Roth IRA declines after 
the conversion, the conversion can be reversed by 
recharacterizing that IRA as a traditional IRA. The individual 
may then later convert that traditional IRA to a Roth IRA 
(referred to as a reconversion), including only the lower value 
in income. Treasury regulations prevent the reconversion from 
taking place immediately after the recharcterization, by 
requiring a minimum period to elapse before the reconversion. 
Generally the reconversion cannot occur sooner than the later 
of 30 days after the recharacterization or a date during the 
taxable year following the taxable year of the original 
conversion.\231\
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    \230\Treas. Reg. sec. 1.408A-5, Q&A-2(b).
    \231\Treas. Reg. sec. 1.408A-5, Q&A-9.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    Recharacterization of IRA contributions may enable an 
individual to avoid tax by retroactively manipulating the 
amount of income that must be recognized for tax purposes. The 
Committee intends to repeal the recharacterization rule in 
order to prevent such manipulation.

                        EXPLANATION OF PROVISION

    The provision repeals the special rule that allows IRA 
contributions to one type of IRA (either traditional or Roth) 
to be recharacterized as a contribution to the other type of 
IRA. Thus, for example, under the provision, a conversion 
contribution establishing a Roth IRA during a taxable year can 
no longer be recharacterized as a contribution to a traditional 
IRA (thereby unwinding the conversion).\232\
---------------------------------------------------------------------------
    \232\The provision does not preclude an individual from making a 
contribution to a traditional IRA and converting the traditional IRA to 
a Roth IRA. Rather, the provision would preclude the individual from 
later unwinding the conversion through a recharacterization.
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2017.

  2. Reduction in minimum age for allowable in-service distributions 
       (sec. 1502 of the bill and secs. 401 and 457 of the Code)

                              PRESENT LAW

    Tax-favored employer-sponsored retirement plans consist of 
qualified retirement plans, including certain defined 
contribution plans that allow employees to make elective 
deferrals (a ``section 401(k) plan''), tax-deferred annuity 
plans (a ``section 403(b) plan''), which may also allow 
employees to make elective deferrals, and eligible deferred 
compensation plans of State and local government employers (a 
``governmental section 457(b) plan'').\233\ The terms of an 
employer-sponsored retirement plan generally determine when 
distributions are permitted. However, in some cases, 
restrictions may apply to distribution before an employee's 
severance from employment, referred to as ``in-service'' 
distributions.
---------------------------------------------------------------------------
    \233\Secs. 401(a), 401(k), 403(a), 403(b), and 457(b).
---------------------------------------------------------------------------
    In-service distributions of elective deferrals (and related 
earnings) under a section 401(k) plan generally are permitted 
only after attainment of age 59\1/2\ or termination of the 
plan.\234\ In-service distributions of elective deferrals (but 
not related earnings) are also permitted in the case of 
hardship. Elective deferrals under a section 403(b) plan are 
subject to in-service distribution restrictions similar to 
those applicable to elective deferrals under a section 401(k) 
plan, and, in some cases, other contributions to a section 
403(b) plan are subject to similar restrictions.\235\
---------------------------------------------------------------------------
    \234\Sec. 401(k)(2)(B). Similar restrictions apply to certain other 
contributions, such as employer matching or nonelective contributions 
required under the nondiscrimination safe harbors under section 401(k).
    \235\Secs. 403(b)(7)(A)(ii) and 403(b)(11).
---------------------------------------------------------------------------
    Pension plans, that is, qualified defined benefit plans and 
money purchase pension plans, a type of qualified defined 
contribution plan, generally may not permit in-service 
distributions before attainment of age 62 (or attainment of 
normal retirement age under the plan if earlier) or termination 
of the plan.\236\
---------------------------------------------------------------------------
    \236\Sec. 401(a)(36) and Treas. Reg. secs. 1.401-1(b)(1)(i) and 
1.401(a)-1(b).
---------------------------------------------------------------------------
    Deferrals under a governmental section 457(b) plan are 
subject to in-service distribution restrictions similar to 
those applicable to elective deferrals under a section 401(k) 
plan, except that in-service distributions under a governmental 
section 457(b) plan are permitted only after attainment of age 
70\1/2\ (rather than age 59\1/2\).\237\
---------------------------------------------------------------------------
    \237\Sec. 457(d)(1)(A).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    Present law offers various types of tax-favored employer-
sponsored retirement plans that are very similar, but with 
minor variations such as the age at which in-service 
distributions are permitted. These variations create complexity 
for employers and plan administrators and may cause confusion 
for employees. These variations also impose different rules on 
generally similarly situated taxpayers instead of providing the 
same rules for all taxpayers. Providing a uniform age for 
allowable in-service distributions will help simplify the rules 
for various types of plans. In addition, lowering the age to 
59\1/2\ for all plans will remove a tax barrier to phased 
retirement as an alternative to early retirement.

                        EXPLANATION OF PROVISION

    Under the provision, in-service distributions are permitted 
under a pension plan or a governmental section 457(b) plan at 
age 59\1/2\, thus making the rules for those plans consistent 
with the rules for section 401(k) plans and section 403(b) 
plans.

                             EFFECTIVE DATE

    The provision is effective for plan years beginning after 
December 31, 2017.

3. Modification of rules governing hardship distributions (sec. 1503 of 
              the bill and secs. 401 and 403 of the Code)

                              PRESENT LAW

    Elective deferrals under a section 401(k) plan or a section 
403(b) plan may not be distributed before the occurrence of one 
or more specified events, including financial hardship of the 
employee.\238\
---------------------------------------------------------------------------
    \238\Secs. 401(k)(2)(B)(i)(IV) and 403(b)(7)(A)(ii) and (b)(11)(B). 
Other types of contributions may also be subject to this restriction.
---------------------------------------------------------------------------
    Applicable Treasury regulations provide that a distribution 
is made on account of hardship only if the distribution is made 
on account of an immediate and heavy financial need of the 
employee and is necessary to satisfy the heavy need.\239\ The 
Treasury regulations provide a safe harbor under which a 
distribution may be deemed necessary to satisfy an immediate 
and heavy financial need. One requirement of this safe harbor 
is that the employee be prohibited from making elective 
deferrals and employee contributions to the plan and all other 
plans maintained by the employer for at least six months after 
receipt of the hardship distribution.
---------------------------------------------------------------------------
    \239\Treas. Reg. sec. 1.401(k)-1(d)(3).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The rules relating to hardship distributions contain minor 
distinctions that create complexity for employers and plan 
administrators. These distinctions may lead to inadvertent 
errors, correction of which increases plan costs, and may also 
cause confusion for employees. In addition, the rule 
prohibiting employees from making contributions for six months 
after receiving a hardship distribution impedes employees' 
ability to save for retirement. The Committee believes that the 
rules relating to hardship withdrawals should be more 
consistent and should not impede retirement savings.

                        EXPLANATION OF PROVISION

    The Secretary of the Treasury is directed to modify the 
applicable regulations within one year of the date of enactment 
to (1) delete the requirement that an employee be prohibited 
from making elective deferrals and employee contributions for 
six months after the receipt of a hardship distribution in 
order for the distribution to be deemed necessary to satisfy an 
immediate and heavy financial need, and (2) make any other 
modifications necessary to carry out the purposes of the rule 
allowing elective deferrals to be distributed in the case of 
hardship. Thus, under the modified regulations, an employee 
would not be prevented for any period after the receipt of a 
hardship distribution from continuing to make elective 
deferrals and employee contributions.

                             EFFECTIVE DATE

    The regulations as revised by the provision shall apply to 
plan years beginning after December 31, 2017.

4. Modification of rules relating to hardship withdrawals from cash or 
 deferred arrangements (sec. 1504 of the bill and sec. 401 of the Code)

                              PRESENT LAW

    Amounts attributable to elective deferrals (including 
earnings thereon) under a section 401(k) plan generally may not 
be distributed before the earliest of the employee's severance 
from employment, death, disability or attainment of age 59\1/
2\, or termination of the plan, or as a qualified reservist 
distribution.\240\ Elective deferrals, but not associated 
earnings, may be distributed on account of hardship.
---------------------------------------------------------------------------
    \240\Sec. 401(k)(2)(B)(i).
---------------------------------------------------------------------------
    An employer may make nonelective and matching contributions 
for employees under a section 401(k) plan. Elective deferrals, 
and matching contributions and after-tax employee 
contributions, are subject to special tests 
(``nondiscrimination tests'') to prevent discrimination in 
favor of highly compensated employees. Nonelective 
contributions and matching contributions that satisfy certain 
requirements (``qualified nonelective contributions and 
qualified matching contributions'') may be used to enable the 
plan to satisfy these nondiscrimination tests. One of the 
requirements is that these contributions be subject to the same 
distribution restrictions as elective deferrals, except that 
these contributions (and associated earnings) are not permitted 
to be distributed on account of hardship.
    Applicable Treasury regulations provide that a distribution 
is made on account of hardship only if the distribution is made 
on account of an immediate and heavy financial need of the 
employee and is necessary to satisfy the heavy need.\241\ The 
Treasury regulations provide a safe harbor under which a 
distribution may be deemed necessary to satisfy an immediate 
and heavy financial need. One requirement of the safe harbor is 
that the employee represent that the need cannot be satisfied 
through currently available plan loans. This in effect requires 
an employee to take any available plan loan before receiving a 
hardship distribution.
---------------------------------------------------------------------------
    \241\Treas. Reg. sec. 1.401(k)-1(d)(3).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The rules for determining which amounts may be distributed 
as hardship distributions are overly complex. This complexity 
may lead to inadvertent errors, correction of which increases 
plan costs, and may also cause confusion for employees. The 
Committee wishes to provide more consistency in these rules, 
thereby reducing complexity.
    Plan loans serve a valid purpose in providing employees 
with temporary use of retirement funds without depleting 
retirement savings. However, in some cases, a loan may not be 
suitable to cover an employee's financial need. In that case, a 
requirement to document the need for a distribution, rather 
than a loan, creates an unnecessary burden for the employee and 
plan administrator and may cause a delay that aggravates the 
employee's financial hardship. The Committee wishes to reduce 
administrative complexity by removing the requirement to obtain 
a loan before a hardship distribution. In addition the 
Committee believes that hardship distributions should not be 
limited to amounts contributed by the employee.

                        EXPLANATION OF PROVISION

    The provision allows earnings on elective deferrals under a 
section 401(k) plan, as well as qualified nonelective 
contributions and qualified matching contributions (and 
associated earnings), to be distributed on account of hardship. 
Further, a distribution is not treated as failing to be on 
account of hardship solely because the employee does not take 
any available plan loan.

                             EFFECTIVE DATE

    The provision applies to plan years beginning after 
December 31, 2017.

   5. Extended rollover period for the rollover of plan loan offset 
  amounts in certain cases (sec. 1505 of the bill and sec. 402 of the 
                                 Code)

                              PRESENT LAW

Taxation of retirement plan distributions

    A distribution from a tax-favored employer-sponsored 
retirement plan (that is, a qualified retirement plan, section 
403(b) plan, or a governmental section 457(b) plan) is 
generally includible in gross income, except in the case of a 
qualified distribution from a designated Roth account or to the 
extent the distribution is a recovery of basis under the plan 
or the distribution is contributed to another such plan or an 
IRA (referred to as eligible retirement plans) in a tax-free 
rollover.\242\ In the case of a distribution from a retirement 
plan to an employee under age 59\1/2\, the distribution (other 
than a distribution from a governmental section 457(b) plan) is 
also subject to a 10-percent early distribution tax unless an 
exception applies.\243\
---------------------------------------------------------------------------
    \242\Secs. 402(a) and (c), 402A(d), 403(a) and (b), 457(a) and 
(e)(16).
    \243\Sec. 72(t).
---------------------------------------------------------------------------
    A distribution from a tax-favored employer-sponsored 
retirement plan that is an eligible rollover distribution may 
be rolled over to an eligible retirement plan.\244\ The 
rollover generally can be achieved by direct rollover (direct 
payment from the distributing plan to the recipient plan) or by 
contributing the distribution to the eligible retirement plan 
within 60 days of receiving the distribution (``60-day 
rollover'').
---------------------------------------------------------------------------
    \244\Certain distributions are not eligible rollover distributions, 
such as annuity payments, required minimum distributions, hardship 
distributions, and loans that are treated as deemed distributions under 
section 72(p).
---------------------------------------------------------------------------
    Employer-sponsored retirement plans are required to offer 
an employee a direct rollover with respect to any eligible 
rollover distribution before paying the amount to the employee. 
If an eligible rollover distribution is not directly rolled 
over to an eligible retirement plan, the taxable portion of the 
distribution generally is subject to mandatory 20-percent 
income tax withholding.\245\ Employees who do not elect a 
direct rollover but who roll over eligible distributions within 
60 days of receipt also defer tax on the rollover amounts; 
however, the 20 percent withheld will remain taxable unless the 
employee substitutes funds within the 60-day period.
---------------------------------------------------------------------------
    \245\Treas. Reg. sec. 1.402(c)-2, Q&A-1(b)(3).
---------------------------------------------------------------------------

Plan loans

    Employer-sponsored retirement plans may provide loans to 
employees. Unless the loan satisfies certain requirements in 
both form and operation, the amount of a retirement plan loan 
is a deemed distribution from the retirement plan, including 
that the terms of the loan provide for a repayment period of 
not more than five years (except for a loan specifically to 
purchase a home) and for level amortization of loan payments 
with payments not less frequently than quarterly.\246\ Thus, if 
an employee stops making payments on a loan before the loan is 
repaid, a deemed distribution of the outstanding loan balance 
generally occurs. A deemed distribution of an unpaid loan 
balance is generally taxed as though an actual distribution 
occurred, including being subject to a 10-percent early 
distribution tax, if applicable. A deemed distribution is not 
eligible for rollover to another eligible retirement plan.
---------------------------------------------------------------------------
    \246\Sec. 72(p).
---------------------------------------------------------------------------
    A plan may also provide that, in certain circumstances (for 
example, if an employee terminates employment), an employee's 
obligation to repay a loan is accelerated and, if the loan is 
not repaid, the loan is cancelled and the amount in employee's 
account balance is offset by the amount of the unpaid loan 
balance, referred to as a loan offset. A loan offset is treated 
as an actual distribution from the plan equal to the unpaid 
loan balance (rather than a deemed distribution), and (unlike a 
deemed distribution) the amount of the distribution is eligible 
for tax-free rollover to another eligible retirement plan 
within 60 days. However, the plan is not required to offer a 
direct rollover with respect to a plan loan offset amount that 
is an eligible rollover distribution, and the plan loan offset 
amount is generally not subject to 20-percent income tax 
withholding.

                           REASONS FOR CHANGE

    The Committee believes that providing a longer rollover 
period with respect to plan loan offsets may result in more 
rollovers, thus increasing retirement savings.

                        EXPLANATION OF PROVISION

    Under the provision, the period during which a qualified 
plan loan offset amount may be contributed to an eligible 
retirement plan as a rollover contribution is extended from 60 
days after the date of the offset to the due date (including 
extensions) for filing the Federal income tax return for the 
taxable year in which the plan loan offset occurs, that is, the 
taxable year in which the amount is treated as distributed from 
the plan. Under the provision, a qualified plan loan offset 
amount is a plan loan offset amount that is treated as 
distributed from a qualified retirement plan, a section 403(b) 
plan or a governmental section 457(b) plan solely by reason of 
the termination of the plan or the failure to meet the 
repayment terms of the loan because of the employee's 
separation from service, whether due to layoff, cessation of 
business, termination of employment, or otherwise. As under 
present law, a loan offset amount under the provision is the 
amount by which an employee's account balance under the plan is 
reduced to repay a loan from the plan.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2017.

6. Modification of nondiscrimination rules for certain plans providing 
 benefits or contributions to older, longer service participants (sec. 
               1506 of the bill and sec. 401 of the Code)

                              PRESENT LAW

In general

    Qualified retirement plans are subject to nondiscrimination 
requirements, under which the group of employees covered by a 
plan (``plan coverage'') and the contributions or benefits 
provided to employees, including benefits, rights, and features 
under the plan, must not discriminate in favor of highly 
compensated employees.\247\ The timing of plan amendments must 
also not have the effect of discriminating significantly in 
favor of highly compensated employees. In addition, in the case 
of a defined benefit plan, the plan must benefit at least the 
lesser of (1) 50 employees and (2) the greater of 40 percent of 
all employees and two employees (or one employee if the 
employer has only one employee), referred to as the ``minimum 
participation'' requirements.\248\ These nondiscrimination 
requirements are designed to help ensure that qualified 
retirement plans achieve the goal of retirement security for 
both lower and higher paid employees.
---------------------------------------------------------------------------
    \247\Secs. 401(a)(3)-(5) and 410(b). Detailed rules are provided in 
Treas. Reg. secs. 1.401(a)(4)-1 through-13 and secs. 1.410(b)-2 through 
-10. In applying the nondiscrimination requirements, certain employees, 
such as those under age 21 or with less than a year of service, 
generally may be disregarded. In addition, employees of controlled 
groups and affiliated service groups under the aggregation rules of 
section 414(b), (c), (m) and (o) are treated as employed by a single 
employer.
    \248\Sec. 401(a)(26).
---------------------------------------------------------------------------
    For nondiscrimination purposes, an employee generally is 
treated as highly compensated if the employee (1) was a five-
percent owner of the employer at any time during the year or 
the preceding year, or (2) had compensation for the preceding 
year in excess of $120,000 (for 2017).\249\ Employees who are 
not highly compensated are referred to as nonhighly compensated 
employees.
---------------------------------------------------------------------------
    \249\Sec. 414(q). At the election of the employer, employees who 
are highly compensated based on the amount of their compensation may be 
limited to employees who were among the top 20 percent of employees 
based on compensation.
---------------------------------------------------------------------------

Nondiscriminatory plan coverage

    Whether plan coverage of employees is nondiscriminatory is 
determined by calculating a plan's ratio percentage, that is, 
the ratio of the percentage of nonhighly compensated employees 
covered under the plan to the percentage of highly compensated 
employees covered. For this purpose, certain portions of a 
defined contribution plan are treated as separate plans to 
which the plan coverage requirements are applied separately, 
referred to as mandatory disaggregation. Specifically, the 
following, if provided under a plan, are treated as separate 
plans: the portion of a plan consisting of employee elective 
deferrals, the portion consisting of employer matching 
contributions, the portion consisting of employer nonelective 
contributions, and the portion consisting of an employee stock 
ownership plan (``ESOP'').\250\ Subject to mandatory 
disaggregation, different qualified retirement plans may 
otherwise be aggregated and tested together as a single plan, 
provided that they use the same plan year. The plan determined 
under these rules for plan coverage purposes generally is also 
treated as the plan for purposes of applying the other 
nondiscrimination requirements.
---------------------------------------------------------------------------
    \250\Elective deferrals are contributions that an employee elects 
to have made to a defined contribution plan that includes a qualified 
cash or deferred arrangement (referred to as ``section 401(k) plan'') 
rather than receive the same amount as current compensation. Employer 
matching contributions are contributions made by an employer only if an 
employee makes elective deferrals or after-tax employee contributions. 
Employer nonelective contributions are contributions made by an 
employer regardless of whether an employee makes elective deferrals or 
after-tax employee contributions. Under section 4975(e)(7), an ESOP is 
a defined contribution plan, or portion of a defined contribution plan, 
that is designated as an ESOP and is designed to invest primarily in 
employer stock.
---------------------------------------------------------------------------
    A plan's coverage is nondiscriminatory if the ratio 
percentage, as determined above, is 70 percent or greater. If a 
plan's ratio percentage is less than 70 percent, a multi-part 
test applies, referred to as the average benefit test. First, 
the plan must meet a ``nondiscriminatory classification 
requirement,'' that is, it must cover a group of employees that 
is reasonable and established under objective business criteria 
and the plan's ratio percentage must be at or above a level 
specified in the regulations, which varies depending on the 
percentage of nonhighly compensated employees in the employer's 
workforce. In addition, the average benefit percentage test 
must be satisfied.
    Under the average benefit percentage test, in general, the 
average rate of employer-provided contributions or benefit 
accruals for all nonhighly compensated employees under all 
plans of the employer must be at least 70 percent of the 
average contribution or accrual rate of all highly compensated 
employees.\251\ In applying the average benefit percentage 
test, elective deferrals made by employees, as well as employer 
matching and nonelective contributions, are taken into account. 
Generally, all plans maintained by the employer are taken into 
account, including ESOPs, regardless of whether plans use the 
same plan year.
---------------------------------------------------------------------------
    \251\Contribution and benefit rates are generally determined under 
the rules for nondiscriminatory contributions or benefit accruals, 
described below. These rules are generally based on benefit accruals 
under a defined benefit plan, other than accruals attributable to 
after-tax employee contributions, and contributions allocated to 
participants' accounts under a defined contribution plan, other than 
allocations attributable to after-tax employee (Under these rules, 
contributions allocated to a participants accounts are referred to as 
``allocations,'' with the related rates referred to as ``allocation 
rates,'' but ``contribution rates'' is used herein for convenience.) 
However, as discussed below, benefit accruals can be converted to 
actuarially equivalent contributions, and contributions can be 
converted to actuarially equivalent benefit accruals.
---------------------------------------------------------------------------
    Under a transition rule applicable in the case of the 
acquisition or disposition of a business, or portion of a 
business, or a similar transaction, a plan that satisfied the 
plan coverage requirements before the transaction is deemed to 
continue to satisfy them for a period after the transaction, 
provided coverage under the plan is not significantly changed 
during that period.\252\
---------------------------------------------------------------------------
    \252\Sec. 410(b)(6)(C).
---------------------------------------------------------------------------

Nondiscriminatory contributions or benefit accruals

            In general
    There are three general approaches to testing the amount of 
benefits under qualified retirement plans: (1) design-based 
safe harbors under which the plan's contribution or benefit 
accrual formula satisfies certain uniformity standards, (2) a 
general test, described below, and (3) cross-testing of 
equivalent contributions or benefit accruals. Employee elective 
deferrals and employer matching contributions under defined 
contribution plans are subject to special testing rules and 
generally are not permitted to be taken into account in 
determining whether other contributions or benefits are 
nondiscriminatory.\253\
---------------------------------------------------------------------------
    \253\Secs. 401(k) and (m), the latter of which applies also to 
after-tax employee contributions under a defined contribution plan.
---------------------------------------------------------------------------
    The nondiscrimination rules allow contributions and benefit 
accruals to be provided to highly compensated and nonhighly 
compensated employees at the same percentage of 
compensation.\254\ Thus, the various testing approaches 
described below are generally applied to the amount of 
contributions or accruals provided as a percentage of 
compensation, referred to as a contribution rate or accrual 
rate. In addition, under the ``permitted disparity'' rules, in 
calculating an employee's contribution or accrual rate, credit 
may be given for the employer paid portion of Social Security 
taxes or benefits.\255\ The permitted disparity rules do not 
apply in testing whether elective deferrals, matching 
contributions, or ESOP contributions are nondiscriminatory.
---------------------------------------------------------------------------
    \254\For this purpose, under section 401(a)(17), compensation 
generally is limited to $265,000 per year (for 2016).
    \255\See sections 401(a)(5)(C) and (D) and 401(l) and Treas. Reg. 
section 1. 401(a)(4)-7 and 1.401(l)-1 through -6 for rules for 
determining the amount of contributions or benefits that can be 
attributed to the employer-paid portion of Social Security taxes or 
benefits.
---------------------------------------------------------------------------
    The general test is generally satisfied by measuring the 
rate of contribution or benefit accrual for each highly 
compensated employee to determine if the group of employees 
with the same or higher rate (a ``rate'' group) is a 
nondiscriminatory group, using the nondiscriminatory plan 
coverage standards described above. For this purpose, if the 
ratio percentage of a rate group is less than 70 percent, a 
simplified standard applies, which includes disregarding the 
reasonable classification requirement, but requires 
satisfaction of the average benefit percentage test.
            Cross-testing
    Cross-testing involves the conversion of contributions 
under a defined contribution plan or benefit accruals under a 
defined benefit plan to actuarially equivalent accruals or 
contributions, with the resulting equivalencies tested under 
the general test. However, employee elective deferrals and 
employer matching contributions under defined contribution 
plans are not permitted to be taken into account for this 
purpose, and cross-testing of contributions under a defined 
contribution plan, or cross-testing of a defined contribution 
plan aggregated with a defined benefit plan, is permitted only 
if certain threshold requirements are satisfied.
    In order for a defined contribution plan to be tested on an 
equivalent benefit accrual basis, one of the following three 
threshold conditions must be met:
         The plan has broadly available allocation 
        rates, that is, each allocation rate under the plan is 
        available to a nondiscriminatory group of employees 
        (disregarding certain permitted additional 
        contributions provided to employees as a replacement 
        for benefits under a frozen defined benefit plan, as 
        discussed below);
         The plan provides allocations that meet 
        prescribed designs under which allocations gradually 
        increase with age or service or are expected to provide 
        a target level of annuity benefit; or
         The plan satisfies a minimum allocation 
        gateway, under which each nonhighly compensated 
        employee has an allocation rate of (a) at least one-
        third of the highest rate for any highly compensated 
        employee, or (b) if less, at least five percent.
    In order for an aggregated defined contribution and defined 
benefit plan to be tested on an aggregate equivalent benefit 
accrual basis, one of the following three threshold conditions 
must be met:
         The plan must be primarily defined benefit in 
        character, that is, for more than fifty percent of the 
        nonhighly compensated employees under the plan, their 
        accrual rate under the defined benefit plan exceeds 
        their equivalent accrual rate under the defined 
        contribution plan;
         The plan consists of broadly available 
        separate defined benefit and defined contribution 
        plans, that is, the defined benefit plan and the 
        defined contribution plan would separately satisfy 
        simplified versions of the minimum coverage and 
        nondiscriminatory amount requirements; or
         The plan satisfies a minimum aggregate 
        allocation gateway, under which each nonhighly 
        compensated employee has an aggregate allocation rate 
        (consisting of allocations under the defined 
        contribution plan and equivalent allocations under the 
        defined benefit plan) of (a) at least one-third of the 
        highest aggregate allocation rate for any nonhighly 
        compensated employee, or (b) if less, at least five 
        percent in the case of a highest nonhighly compensated 
        employee's rate up to 25 percent, increased by one 
        percentage point for each five-percentage-point 
        increment (or portion thereof) above 25 percent, 
        subject to a maximum of 7.5 percent.
            Benefits, rights, and features
    Each benefit, right, or feature offered under the plan 
generally must be available to a group of employees that has a 
ratio percentage that satisfies the minimum coverage 
requirements, including the reasonable classification 
requirement if applicable, except that the average benefit 
percentage test does not have to be met, even if the ratio 
percentage is less than 70 percent.

Multiple-employer and section 403(b) plans

    A multiple-employer plan generally is a single plan 
maintained by two or more unrelated employers, that is, 
employers that are not treated as a single employer under the 
aggregation rules for related entities.\256\ The plan coverage 
and other nondiscrimination requirements are applied separately 
to the portions of a multiple-employer plan covering employees 
of different employers.\257\
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    \256\Sec. 413(c). Multiple-employer status does not apply if the 
plan is a multiemployer plan, defined under sec. 414(f) as a plan 
maintained pursuant to one or more collective bargaining agreements 
with two or more unrelated employers and to which the employers are 
required to contribute under the collective bargaining agreement(s). 
Multiemployer plans are also known as Taft-Hartley plans.
    \257\Treas. Reg. sec. 1.413-2(a)(3)(ii)-(iii).
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    Certain tax-exempt charitable organizations may offer their 
employees a tax-deferred annuity plan (``section 403(b) 
plan).\258\ The nondiscrimination requirements, other than the 
requirements applicable to elective deferrals, generally apply 
to section 403(b) plans of private tax-exempt organizations. 
For purposes of applying the nondiscrimination requirements to 
a section 403(b) plan, subject to mandatory disaggregation, a 
qualified retirement plan may be combined with the section 
403(b) plan and treated as a single plan.\259\ However, a 
section 403(b) plan and qualified retirement plan may not be 
treated as a single plan for purposes of applying the 
nondiscrimination requirements to the qualified retirement 
plan.
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    \258\Sec. 403(b). These plans are available to employers that are 
tax-exempt under section 501(c)(3), as well as to educational 
institutions of State or local governments.
    \259\Treas. Reg. sec. 1.410(b)-7(f).
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Closed and frozen defined benefit plans

    A defined benefit plan may be amended to limit 
participation in the plan to individuals who are employees as 
of a certain date. That is, employees hired after that date are 
not eligible to participate in the plan. Such a plan is 
sometimes referred to as a ``closed'' defined benefit plan 
(that is, closed to new entrants). In such a case, it is common 
for the employer also to maintain a defined contribution plan 
and to provide employer matching or nonelective contributions 
only to employees not covered by the defined benefit plan or at 
a higher rate to such employees.
    Over time, the group of employees continuing to accrue 
benefits under the defined benefit plan may come to consist 
more heavily of highly compensated employees, for example, 
because of greater turnover among nonhighly compensated 
employees or because increasing compensation causes nonhighly 
compensated employees to become highly compensated. In that 
case, the defined benefit plan may have to be combined with the 
defined contribution plan and tested on a benefit accrual 
basis. However, under the regulations, if none of the threshold 
conditions is met, testing on a benefits basis may not be 
available. Notwithstanding the regulations, recent IRS guidance 
provides relief for a limited period, allowing certain closed 
defined benefit plans to be aggregated with a defined 
contribution plan and tested on an aggregate equivalent 
benefits basis without meeting any of the threshold 
conditions.\260\ When the group of employees continuing to 
accrue benefits under a closed defined benefit plan consists 
more heavily of highly compensated employees, the benefits, 
rights, and features provided under the plan may also fail the 
tests under the existing nondiscrimination rules.
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    \260\Notice 2014-5, 2014-2 I.R.B. 276, extended by Notice 2015-28, 
2015-14 14 I.R.B. 848, Notice 2016-57, 2016-40 I.R.B. 432, and Notice 
2017-45, 2017-38 I.R.B. 232. Proposed regulations revising the 
nondiscrimination requirements for closed plans were also issued 
earlier this year, subject to various conditions. 81 Fed. Reg. 4976 
(January 29, 2016).
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    In some cases, if a defined benefit plan is amended to 
cease future accruals for all participants, referred to as a 
``frozen'' defined benefit plan, additional contributions to a 
defined contribution plan may be provided for participants, in 
particular for older participants, in order to make up in part 
for the loss of the benefits they expected to earn under the 
defined benefit plan (``make-whole'' contributions). As a 
practical matter, testing on a benefit accrual basis may be 
required in that case, but may not be available because the 
defined contribution plan does not meet any of the threshold 
conditions.

                           REASONS FOR CHANGE

    Some employers sponsoring defined benefit plans have 
determined that new employees prefer other types of 
compensation to defined benefit plans and have therefore closed 
their plans to new entrants. Existing employees continue to 
earn benefits under the plan, consistent with their 
expectations as to their compensation and retirement income, 
which is particularly important for employees close to 
retirement. However, without greater flexibility in the 
nondiscrimination rules, employers may be forced to freeze 
their defined benefit plans, thus preventing employees from 
earning their expected benefits. When a defined benefit plan is 
frozen, make-whole contributions can offset some of the 
resulting benefit loss for employees. In that case, too, 
greater flexibility in the nondiscrimination rules is needed. 
The Committee wishes to provide such flexibility in order to 
protect benefits for older, longer-service employees.

                        EXPLANATION OF PROVISION

Closed or frozen defined benefit plans

            In general
    Under the provision, nondiscrimination relief applies with 
respect to benefits, rights, and features for a closed class of 
participants (``closed class''),\261\ and with respect to 
benefit accruals for a closed class, under a defined benefit 
plan that meets the requirements described below (referred to 
herein as an ``applicable'' defined benefit plan). In addition, 
the provision treats a closed or frozen applicable defined 
benefit plan as meeting the minimum participation requirements 
if the plan met the requirements as of the effective date of 
the plan amendment by which the plan was closed or frozen.
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    \261\References under the provision to a closed class of 
participants and similar references to a closed class include 
arrangements under which one or more classes of participants are 
closed, except that one or more classes of participants closed on 
different dates are not aggregated for purposes of determining the date 
any such class was closed.
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    If a portion of an applicable defined benefit plan eligible 
for relief under the provision is spun off to another employer, 
and if the spun-off plan continues to satisfy any ongoing 
requirements applicable for the relevant relief as described 
below, the relevant relief for the spun-off plan will continue 
with respect to the other employer.
            Benefits, rights, or features for a closed class
    Under the provision, an applicable defined benefit plan 
that provides benefits, rights, or features to a closed class 
does not fail the nondiscrimination requirements by reason of 
the composition of the closed class, or the benefits, rights, 
or features provided to the closed class, if (1) for the plan 
year as of which the class closes and the two succeeding plan 
years, the benefits, rights, and features satisfy the 
nondiscrimination requirements without regard to the relief 
under the provision, but taking into account the special 
testing rules described below,\262\ and (2) after the date as 
of which the class was closed, any plan amendment modifying the 
closed class or the benefits, rights, and features provided to 
the closed class does not discriminate significantly in favor 
of highly compensated employees.
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    \262\Other testing options available under present law are also 
available for this purpose.
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    For purposes of requirement (1) above, the following 
special testing rules apply:
           In applying the plan coverage transition 
        rule for business acquisitions, dispositions, and 
        similar transactions, the closing of the class of 
        participants is not treated as a significant change in 
        coverage;
           Two or more plans do not fail to be eligible 
        to be a treated as a single plan solely by reason of 
        having different plan years;\263\ and
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    \263\This rule applies also for purposes applying the plan coverage 
and other nondiscrimination requirements to an applicable defined 
benefit plan and one or more defined contributions that, under the 
provision, may be treated as a single plan as described below.
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           Changes in employee population are 
        disregarded to the extent attributable to individuals 
        who become employees or cease to be employees, after 
        the date the class is closed, by reason of a merger, 
        acquisition, divestiture, or similar event.
            Benefit accruals for a closed class
    Under the provision, an applicable defined benefit plan 
that provides benefits to a closed class may be aggregated, 
that is, treated as a single plan, and tested on a benefit 
accrual basis with one or more defined contribution plans 
(without having to satisfy the threshold conditions under 
present law) if (1) for the plan year as of which the class 
closes and the two succeeding plan years, the plan satisfies 
the plan coverage and nondiscrimination requirements without 
regard to the relief under the provision, but taking into 
account the special testing rules described above,\264\ and (2) 
after the date as of which the class was closed, any plan 
amendment modifying the closed class or the benefits provided 
to the closed class does not discriminate significantly in 
favor of highly compensated employees.
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    \264\Other testing options available under present law are also 
available for this purpose.
---------------------------------------------------------------------------
    Under the provision, defined contribution plans that may be 
aggregated with an applicable defined benefit plan and treated 
as a single plan include the portion of one or more defined 
contribution plans consisting of matching contributions, an 
ESOP, or matching or nonelective contributions under a section 
403(b) plan. If an applicable defined benefit plan is 
aggregated with the portion of a defined contribution plan 
consisting of matching contributions, any portion of the 
defined contribution plan consisting of elective deferrals must 
also be aggregated. In addition, the matching contributions are 
treated in the same manner as nonelective contributions, 
including for purposes of permitted disparity.
            Applicable defined benefit plan
    An applicable defined benefit plan to which relief under 
the provision applies is a defined benefit plan under which the 
class was closed (or the plan frozen) before April 5, 2017, or 
that meets the following alternative conditions: (1) taking 
into account any predecessor plan, the plan has been in effect 
for at least five years as of the date the class is closed (or 
the plan is frozen) and (2) under the plan, during the five-
year period preceding that date, (a) for purposes of the relief 
provided with respect to benefits, rights, and features for a 
closed class, there has not been a substantial increase in the 
coverage or value of the benefits, rights, or features, or (b) 
for purposes of the relief provided with respect to benefit 
accruals for a closed class or the minimum participation 
requirements, there has not been a substantial increase in the 
coverage or benefits under the plan.
    For purposes of (2)(a) above, a plan is treated as having a 
substantial increase in coverage or value of benefits, rights, 
or features only if, during the applicable five-year period, 
either the number of participants covered by the benefits, 
rights, or features on the date the period ends is more than 50 
percent greater than the number on the first day of the plan 
year in which the period began, or the benefits, rights, and 
features have been modified by one or more plan amendments in 
such a way that, as of the date the class is closed, the value 
of the benefits, rights, and features to the closed class as a 
whole is substantially greater than the value as of the first 
day of the five-year period, solely as a result of the 
amendments.
    For purposes of (2)(b) above, a plan is treated as having 
had a substantial increase in coverage or benefits only if, 
during the applicable five-year period, either the number of 
participants benefiting under the plan on the date the period 
ends is more than 50 percent greater than the number of 
participants on the first day of the plan year in which the 
period began, or the average benefit provided to participants 
on the date the period ends is more than 50 percent greater 
than the average benefit provided on the first day of the plan 
year in which the period began. In applying this requirement, 
the average benefit provided to participants under the plan is 
treated as having remained the same between the two relevant 
dates if the benefit formula applicable to the participants has 
not changed between the dates and, if the benefit formula has 
changed, the average benefit under the plan is considered to 
have increased by more than 50 percent only if the target 
normal cost for all participants benefiting under the plan for 
the plan year in which the five-year period ends exceeds the 
target normal cost for all such participants for that plan year 
if determined using the benefit formula in effect for the 
participants for the first plan year in the five-year period by 
more than 50 percent.\265\ In applying these rules, a multiple-
employer plan is treated as a single plan, rather than as 
separate plans separately covering the employees of each 
participating employer.
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    \265\Under the funding requirements applicable to defined benefit 
plans, target normal cost for a plan year (defined in section 
430(b)(1)(A)(i)) is generally the sum of the present value of the 
benefits expected to be earned under the plan during the plan year plus 
the amount of plan-related expenses to be paid from plan assets during 
the plan year. Under the provision, in applying this average benefit 
rule to certain defined benefit plans maintained by cooperative 
organizations and charities, referred to as CSEC plans (defined in 
section 414(y)), which are subject to different funding requirements, 
the CSEC plan's normal cost under section 433(j)(1)(B) is used instead 
of target normal cost.
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    In applying these standards, any increase in coverage or 
value, or in coverage or benefits, whichever is applicable, is 
generally disregarded if it is attributable to coverage and 
value, or coverage and benefits, provided to employees who (1) 
became participants as a result of a merger, acquisition, or 
similar event that occurred during the 7-year period preceding 
the date the class was closed, or (2) became participants by 
reason of a merger of the plan with another plan that had been 
in effect for at least five years as of the date of the merger 
and, in the case of benefits, rights, or features for a closed 
class, under the merger, the benefits, rights, or features 
under one plan were conformed to the benefits, rights, or 
features under the other plan prospectively.

Make-whole contributions under a defined contribution plan

    Under the provision, a defined contribution plan is 
permitted to be tested on an equivalent benefit accrual basis 
(without having to satisfy the threshold conditions under 
present law) if the following requirements are met:
           The plan provides make-whole contributions 
        to a closed class of participants whose accruals under 
        a defined benefit plan have been reduced or ended 
        (``make-whole class'');
           For the plan year of the defined 
        contribution plan as of which the make-whole class 
        closes and the two succeeding plan years, the make-
        whole class satisfies the nondiscriminatory 
        classification requirement under the plan coverage 
        rules, taking into account the special testing rules 
        described above;
           After the date as of which the class was 
        closed, any amendment to the defined contribution plan 
        modifying the make-whole class or the allocations, 
        benefits, rights, and features provided to the make-
        whole class does not discriminate significantly in 
        favor of highly compensated employees; and
           Either the class was closed before April 5, 
        2017, or the defined benefit plan is an applicable 
        defined benefit plan under the alternative conditions 
        applicable for purposes of the relief provided with 
        respect to benefit accruals for a closed class.
    With respect to one or more defined contribution plans 
meeting the requirements above, in applying the plan coverage 
and nondiscrimination requirements, the portion of the plan 
providing make-whole or other nonelective contributions may 
also be aggregated and tested on an equivalent benefit accrual 
basis with the portion of one or more other defined 
contribution plans consisting of matching contributions, an 
ESOP, or matching or nonelective contributions under a section 
403(b) plan. If the plan is aggregated with the portion of a 
defined contribution plan consisting of matching contributions, 
any portion of the defined contribution plan consisting of 
elective deferrals must also be aggregated. In addition, the 
matching contributions are treated in the same manner as 
nonelective contributions, including for purposes of permitted 
disparity.
    Under the provision, ``make-whole contributions'' generally 
means nonelective contributions for each employee in the make-
whole class that are reasonably calculated, in a consistent 
manner, to replace some or all of the retirement benefits that 
the employee would have received under the defined benefit plan 
and any other plan or qualified cash or deferred arrangement 
under a section 401(k) plan if no change had been made to the 
defined benefit plan and other plan or arrangement.\266\ 
However, under a special rule, in the case of a defined 
contribution plan that provides benefits, rights, or features 
to a closed class of participants whose accruals under a 
defined benefit plan have been reduced or eliminated, the plan 
will not fail to satisfy the nondiscrimination requirements 
solely by reason of the composition of the closed class, or the 
benefits, rights, or features provided to the closed class, if 
the defined contribution plan and defined benefit plan 
otherwise meet the requirements described above but for the 
fact that the make-whole contributions under the defined 
contribution plan are made in whole or in part through matching 
contributions.
---------------------------------------------------------------------------
    \266\For this purpose, consistency is not required with respect to 
employees who were subject to different benefit formulas under the 
defined benefit plan.
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    If a portion of a defined contribution plan eligible for 
relief under the provision is spun off to another employer, and 
if the spun-off plan continues to satisfy any ongoing 
requirements applicable for the relevant relief as described 
above, the relevant relief for the spun-off plan will continue 
with respect to the other employer.

                             EFFECTIVE DATE

    The provision is generally effective on the date of 
enactment without regard to whether any plan modifications 
referred to in the provision are adopted or effective before, 
on, or after the date of enactment. However, at the election of 
a plan sponsor, the provision will apply to plan years 
beginning after December 31, 2013. For purposes of the 
provision, a closed class of participants under a defined 
benefit plan is treated as being closed before April 5, 2017, 
if the plan sponsor's intention to create the closed class is 
reflected in formal written documents and communicated to 
participants before that date. In addition, a plan does not 
fail to be eligible for the relief under the provision solely 
because (1) in the case of benefits, rights, or features for a 
closed class under a defined benefit plan, the plan was amended 
before the date of enactment to eliminate one or more benefits, 
rights, or features and is further amended after the date of 
enactment to provide the previously eliminated benefits, 
rights, or features to a closed class of participants, or (2) 
in the case of benefit accruals for a closed class under a 
defined benefit plan or application of the minimum benefit 
requirements to a closed or frozen defined benefit plan, the 
plan was amended before the date of the enactment to cease all 
benefit accruals and is further amended after the date of 
enactment to provide benefit accruals to a closed class of 
participants. In either case, the relevant relief applies only 
if the plan otherwise meets the requirements for the relief, 
and, in applying the relevant relief, the date the class of 
participants is closed is the effective date of the later 
amendment.

        G. Estate, Gift, and Generation-Skipping Transfer Taxes

  1. Increase in estate and gift tax exemption, followed by repeal of 
estate and generation-skipping transfer taxes and reduction in gift tax 
  rate (secs. 1601 and 1602 of the bill, secs. 2010, 2056A, 2502, and 
       2505 of the Code, and new secs. 2210 and 2664 of the Code)

                              PRESENT LAW

In general

    A gift tax is imposed on certain lifetime transfers, and an 
estate tax is imposed on certain transfers at death. A 
generation-skipping transfer tax generally is imposed on 
transfers, either directly or in trust or similar arrangement, 
to a ``skip person'' (i.e., a beneficiary in a generation more 
than one generation younger than that of the transferor). 
Transfers subject to the generation-skipping transfer tax 
include direct skips, taxable terminations, and taxable 
distributions.
    Income tax rules determine the recipient's tax basis in 
property acquired from a decedent or by gift. Gifts and 
bequests generally are excluded from the recipient's gross 
income.\267\
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    \267\Sec. 102.
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Common features of the estate, gift, and generation-skipping transfer 
        taxes

            Unified credit (exemption) and tax rates
    Unified credit.--A unified credit is available with respect 
to taxable transfers by gift and at death.\268\ The unified 
credit offsets tax, computed using the applicable estate and 
gift tax rates, on a specified amount of transfers, referred to 
as the applicable exclusion amount, or exemption amount. The 
exemption amount was set at $5 million for 2011 and is indexed 
for inflation for later years.\269\ For 2017, the inflation-
indexed exemption amount is $5.49 million.\270\ Exemption used 
during life to offset taxable gifts reduces the amount of 
exemption that remains at death to offset the value of a 
decedent's estate. An election is available under which 
exemption that is not used by a decedent may be used by the 
decedent's surviving spouse (exemption portability).
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    \268\Sec. 2010.
    \269\For 2011 and later years, the gift and estate taxes were 
reunified, meaning that the gift tax exemption amount was increased to 
equal the estate tax exemption amount.
    \270\For 2017, the $5.49 exemption amount results in a unified 
credit of $2,141,800, after applying the applicable rates set forth in 
section 2001(c).
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    Common tax rate table.--A common tax-rate table with a top 
marginal tax rate of 40 percent is used to compute gift tax and 
estate tax. The 40-percent rate applies to transfers in excess 
of $1 million (to the extent not exempt). Because the exemption 
amount currently shields the first $5.49 million in gifts and 
bequests from tax, transfers in excess of the exemption amount 
generally are subject to tax at the highest marginal rate (40 
percent).
    Generation-skipping transfer tax exemption and rate.--The 
generation-skipping transfer tax is a separate tax that can 
apply in addition to either the gift tax or the estate tax. The 
tax rate and exemption amount for generation-skipping transfer 
tax purposes, however, are set by reference to the estate tax 
rules. Generation-skipping transfer tax is imposed using a flat 
rate equal to the highest estate tax rate (40 percent). Tax is 
imposed on cumulative generation-skipping transfers in excess 
of the generation-skipping transfer tax exemption amount in 
effect for the year of the transfer. The generation-skipping 
transfer tax exemption for a given year is equal to the estate 
tax exemption amount in effect for that year (currently $5.49 
million).
    Transfers between spouses.--A 100-percent marital deduction 
generally is permitted for the value of property transferred 
between spouses.\271\ In addition, transfers of ``qualified 
terminable interest property'' also are eligible for the 
marital deduction. Qualified terminable interest property is 
property: (1) that passes from the decedent, (2) in which the 
surviving spouse has a ``qualifying income interest for life,'' 
and (3) to which an election under these rules applies. A 
qualifying income interest for life exists if: (1) the 
surviving spouse is entitled to all the income from the 
property (payable annually or at more frequent intervals) or 
has the right to use the property during the spouse's life, and 
(2) no person has the power to appoint any part of the property 
to any person other than the surviving spouse.
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    \271\Secs. 2056 and 2523.
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    A marital deduction generally is denied for property 
passing to a surviving spouse who is not a citizen of the 
United States. A marital deduction is permitted, however, for 
property passing to a qualified domestic trust of which the 
noncitizen surviving spouse is a beneficiary. A qualified 
domestic trust is a trust that has as its trustee at least one 
U.S. citizen or U.S. corporation. No corpus may be distributed 
from a qualified domestic trust unless the U.S. trustee has the 
right to withhold any estate tax imposed on the distribution.
    Tax is imposed on (1) any distribution from a qualified 
domestic trust before the date of the death of the noncitizen 
surviving spouse and (2) the value of the property remaining in 
a qualified domestic trust on the date of death of the 
noncitizen surviving spouse. The tax is computed as an 
additional estate tax on the estate of the first spouse to die.
    Transfers to charity.--Contributions to section 501(c)(3) 
charitable organizations and certain other organizations may be 
deducted from the value of a gift or from the value of the 
assets in an estate for Federal gift or estate tax 
purposes.\272\ The effect of the deduction generally is to 
remove the full fair market value of assets transferred to 
charity from the gift or estate tax base; unlike the income tax 
charitable deduction, there are no percentage limits on the 
deductible amount. For estate tax purposes, the charitable 
deduction is limited to the value of the transferred property 
that is required to be included in the gross estate.\273\ A 
charitable contribution of a partial interest in property, such 
as a remainder or future interest, generally is not deductible 
for gift or estate tax purposes.\274\
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    \272\Secs. 2055 and 2522.
    \273\Sec. 2055(d).
    \274\Secs. 2055(e)(2) and 2522(c)(2).
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The estate tax

            Overview
    The Code imposes a tax on the transfer of the taxable 
estate of a decedent who is a citizen or resident of the United 
States.\275\ The taxable estate is determined by deducting from 
the value of the decedent's gross estate any deductions 
provided for in the Code. After applying tax rates to determine 
a tentative amount of estate tax, certain credits are 
subtracted to determine estate tax liability.\276\
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    \275\Sec. 2001(a).
    \276\More mechanically, the taxable estate is combined with the 
value of adjusted taxable gifts made during the decedent's life 
(generally, post-1976 gifts), before applying tax rates to determine a 
tentative total amount of tax. The portion of the tentative tax 
attributable to lifetime gifts is then subtracted from the total 
tentative tax to determine the gross estate tax, i.e., the amount of 
estate tax before considering available credits. Credits are then 
subtracted to determine the estate tax liability.
    This method of computation was designed to ensure that a taxpayer 
only gets one run up through the rate brackets for all lifetime gifts 
and transfers at death, at a time when the thresholds for applying the 
higher marginal rates exceeded the exemption amount. However, the 
higher ($5.49 million) present-law exemption amount effectively renders 
the lower rate brackets irrelevant, because the top marginal rate 
bracket applies to all transfers in excess of $1 million. In other 
words, all transfers that are not exempt by reason of the $5.49 million 
exemption amount are taxed at the highest marginal rate of 40 percent.
---------------------------------------------------------------------------
    Because the estate tax shares a common unified credit 
(exemption) and tax rate table with the gift tax, the exemption 
amounts and tax rates are described together above, along with 
certain other common features of these taxes.
            Gross estate
    A decedent's gross estate includes, to the extent provided 
for in other sections of the Code, the date-of-death value of 
all of a decedent's property, real or personal, tangible or 
intangible, wherever situated.\277\ In general, the value of 
property for this purpose is the fair market value of the 
property as of the date of the decedent's death, although an 
executor may elect to value certain property as of the date 
that is six months after the decedent's death (the alternate 
valuation date).\278\
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    \277\Sec. 2031(a).
    \278\Sec. 2032.
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    The gross estate includes not only property directly owned 
by the decedent, but also other property in which the decedent 
had a beneficial interest at the time of his or her death.\279\ 
The gross estate also includes certain transfers made by the 
decedent prior to his or her death, including: (1) certain 
gifts made within three years prior to the decedent's 
death;\280\ (2) certain transfers of property in which the 
decedent retained a life estate;\281\ (3) certain transfers 
taking effect at death;\282\ and (4) revocable transfers.\283\ 
In addition, the gross estate also includes property with 
respect to which the decedent had, at the time of death, a 
general power of appointment (generally, the right to determine 
who will have beneficial ownership).\284\ The value of a life 
insurance policy on the decedent's life is included in the 
gross estate if the proceeds are payable to the decedent's 
estate or the decedent had incidents of ownership with respect 
to the policy at the time of his or her death.\285\
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    \279\Sec. 2033.
    \280\Sec. 2035.
    \281\Sec. 2036.
    \282\Sec. 2037.
    \283\Sec. 2038.
    \284\Sec. 2041.
    \285\Sec. 2042.
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            Deductions from the gross estate
    A decedent's taxable estate is determined by subtracting 
from the value of the gross estate any deductions provided for 
in the Code.
    Marital and charitable transfers.--As described above, 
transfers to a surviving spouse or to charity generally are 
deductible for estate tax purposes. The effect of the marital 
and charitable deductions generally is to remove assets 
transferred to a surviving spouse or to charity from the estate 
tax base.
    State death taxes.--An estate tax deduction is permitted 
for death taxes (e.g., any estate, inheritance, legacy, or 
succession taxes) actually paid to any State or the District of 
Columbia, in respect of property included in the gross estate 
of the decedent.\286\ Such State taxes must have been paid and 
claimed before the later of: (1) four years after the filing of 
the estate tax return; or (2) (a) 60 days after a decision of 
the U.S. Tax Court determining the estate tax liability becomes 
final, (b) the expiration of the period of extension to pay 
estate taxes over time under section 6166, or (c) the 
expiration of the period of limitations in which to file a 
claim for refund or 60 days after a decision of a court in 
which such refund suit has become final.
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    \286\Sec. 2058.
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    Other deductions.--A deduction is available for funeral 
expenses, estate administration expenses, and claims against 
the estate, including certain taxes.\287\ A deduction also is 
available for uninsured casualty and theft losses incurred 
during the settlement of the estate.\288\
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    \287\Sec. 2053.
    \288\Sec. 2054.
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            Credits against tax
    After accounting for allowable deductions, a gross amount 
of estate tax is computed. Estate tax liability is then 
determined by subtracting allowable credits from the gross 
estate tax.
    Unified credit.--The most significant credit allowed for 
estate tax purposes is the unified credit, which is discussed 
in greater detail above.\289\ For 2017, the value of the 
unified credit is $2,141,800, which has the effect of exempting 
$5.49 million in transfers from tax. The unified credit 
available at death is reduced by the amount of unified credit 
used to offset gift tax on gifts made during the decedent's 
life.
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    \289\Sec. 2010.
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    Other credits.--Estate tax credits also are allowed for: 
(1) gift tax paid on certain pre-1977 gifts (before the estate 
and gift tax computations were integrated);\290\ (2) estate tax 
paid on certain prior transfers (to limit the estate tax burden 
when estate tax is imposed on transfers of the same property in 
two estates by reason of deaths in rapid succession);\291\ and 
(3) certain foreign death taxes paid (generally, where the 
property is situated in a foreign country but included in the 
decedent's U.S. gross estate).\292\
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    \290\Sec. 2012.
    \291\Sec. 2013.
    \292\Sec. 2014. In certain cases, an election may be made to deduct 
foreign death taxes. See section 2053(d).
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            Provisions affecting small and family-owned businesses and 
                    farms
    Special-use valuation.--An executor can elect to value for 
estate tax purposes certain ``qualified real property'' used in 
farming or another qualifying closely-held trade or business at 
its current-use value, rather than its fair market value.\293\ 
The maximum reduction in value for such real property is 
$750,000 (adjusted for inflation occurring after 1997; the 
inflation-adjusted amount for 2017 is $1,120,000). In general, 
real property generally qualifies for special-use valuation 
only if (1) at least 50 percent of the adjusted value of the 
decedent's gross estate (including both real and personal 
property) consists of a farm or closely-held business property 
in the decedent's estate and (2) at least 25 percent of the 
adjusted value of the gross estate consists of farm or closely 
held business real property. In addition, the property must be 
used in a qualified use (e.g., farming) by the decedent or a 
member of the decedent's family for five of the eight years 
before the decedent's death.
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    \293\Sec. 2032A.
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    If, after a special-use valuation election is made, the 
heir who acquired the real property ceases to use it in its 
qualified use within 10 years of the decedent's death, an 
additional estate tax is imposed to recapture the entire 
estate-tax benefit of the special-use valuation.\294\
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    \294\Prior to 2004, an estate also was permitted to deduct the 
adjusted value of a qualified family-owned business interest of the 
decedent, up to $675,000. Sec. 2057. A qualified family-owned business 
interest generally was defined as any interest in a trade or business 
(regardless of the form in which it is held) with a principal place of 
business in the United States if the decedent's family owns at least 50 
percent of the trade or business, two families own 70 percent, or three 
families own 90 percent, as long as the decedent's family owns at least 
30 percent of the trade or business. To qualify for the exclusion, the 
decedent (or a member of the decedent's family) must have owned and 
materially participated in the trade or business for at least five of 
the eight years preceding the decedent's date of death. In addition, at 
least one qualified heir (or member of the qualified heir's family) was 
required to have materially participated in the trade or business for 
at least 10 years following the decedent's death. The qualified family-
owned business rules provided a graduated recapture based on the number 
of years after the decedent's death within which a disqualifying event 
occurred.
    The qualified family-owned business deduction and the unified 
credit effective exemption amount were coordinated. If the maximum 
deduction amount of $675,000 is elected, then the unified credit 
effective exemption amount is $625,000, for a total of $1.3 million. If 
the qualified family-owned business deduction is less than $675,000, 
then the unified credit effective exemption amount is equal to 
$625,000, increased by the difference between $675,000 and the amount 
of the qualified family-owned business deduction. However, the unified 
credit effective exemption amount cannot be increased above such amount 
in effect for the taxable year. Because of the coordination between the 
qualified family-owned business deduction and the unified credit 
effective exemption amount, the qualified family-owned business 
deduction did not provide a benefit in any year in which the applicable 
exclusion amount exceeded $1.3 million.
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    Installment payment of estate tax for closely held 
businesses.--Under present law, the estate tax generally is due 
within nine months of a decedent's death. However, an executor 
generally may elect to pay estate tax attributable to an 
interest in a closely held business in two or more installments 
(but no more than 10).\295\ An estate is eligible for payment 
of estate tax in installments if the value of the decedent's 
interest in a closely held business exceeds 35 percent of the 
decedent's adjusted gross estate (i.e., the gross estate less 
certain deductions). If the election is made, the estate may 
defer payment of principal and pay only interest for the first 
five years, followed by up to 10 annual installments of 
principal and interest. This provision effectively extends the 
time for paying estate tax by 14 years from the original due 
date of the estate tax. A special two-percent interest rate 
applies to the amount of deferred estate tax attributable to 
the first $1 million (adjusted annually for inflation occurring 
after 1998; the inflation-adjusted amount for 2017 is 
$1,490,000) in taxable value of a closely held business. The 
interest rate applicable to the amount of estate tax 
attributable to the taxable value of the closely held business 
in excess of $1 million (adjusted for inflation) is equal to 45 
percent of the rate applicable to underpayments of tax under 
section 6621 of the Code (i.e., 45 percent of the Federal 
short-term rate plus three percentage points).\296\ Interest 
paid on deferred estate taxes is not deductible for estate or 
income tax purposes.
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    \295\Sec. 6166.
    \296\The interest rate on this portion adjusts with the Federal 
short-term rate.
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The Gift Tax

            Overview
    The Code imposes a tax for each calendar year on the 
transfer of property by gift during such year by any 
individual, whether a resident or nonresident of the United 
States.\297\ The amount of taxable gifts for a calendar year is 
determined by subtracting from the total amount of gifts made 
during the year: (1) the gift tax annual exclusion (described 
below); and (2) allowable deductions.
---------------------------------------------------------------------------
    \297\Sec. 2501(a).
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    Gift tax for the current taxable year is determined by: (1) 
computing a tentative tax on the combined amount of all taxable 
gifts for the current and all prior calendar years using the 
common gift tax and estate tax rate table; (2) computing a 
tentative tax only on all prior-year gifts; (3) subtracting the 
tentative tax on prior-year gifts from the tentative tax 
computed for all years to arrive at the portion of the total 
tentative tax attributable to current-year gifts; and, finally, 
(4) subtracting the amount of unified credit not consumed by 
prior-year gifts.
    Because the gift tax shares a common unified credit 
(exemption) and tax rate table with the estate tax, the 
exemption amounts and tax rates are described together above, 
along with certain other common features of these taxes.
            Transfers by gift
    The gift tax applies to a transfer by gift regardless of 
whether: (1) the transfer is made outright or in trust; (2) the 
gift is direct or indirect; or (3) the property is real or 
personal, tangible or intangible.\298\ For gift tax purposes, 
the value of a gift of property is the fair market value of the 
property at the time of the gift.\299\ Where property is 
transferred for less than full consideration, the amount by 
which the value of the property exceeds the value of the 
consideration is considered a gift and is included in computing 
the total amount of a taxpayer's gifts for a calendar 
year.\300\
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    \298\Sec. 2511(a).
    \299\Sec. 2512(a).
    \300\Sec. 2512(b).
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    For a gift to occur, a donor generally must relinquish 
dominion and control over donated property. For example, if a 
taxpayer transfers assets to a trust established for the 
benefit of his or her children, but retains the right to revoke 
the trust, the taxpayer may not have made a completed gift, 
because the taxpayer has retained dominion and control over the 
transferred assets. A completed gift made in trust, on the 
other hand, often is treated as a gift to the trust 
beneficiaries.
    By reason of statute, certain transfers are not treated as 
transfers by gift for gift tax purposes. These include, for 
example, certain transfers for educational and medical 
purposes,\301\ transfers to section 527 political 
organizations,\302\ and transfers to tax-exempt organizations 
described in sections 501(c)(4), (5), or (6).\303\
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    \301\Sec. 2503(e).
    \302\Sec. 2501(a)(4).
    \303\Sec. 2501(a)(6).
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            Taxable gifts
    As stated above, the amount of a taxpayer's taxable gifts 
for the year is determined by subtracting from the total amount 
of the taxpayer's gifts for the year the gift tax annual 
exclusion and any available deductions.
    Gift tax annual exclusion.--Under present law, donors of 
lifetime gifts are provided an annual exclusion of $14,000 per 
donee in 2017 (indexed for inflation from the 1997 annual 
exclusion amount of $10,000) for gifts of present interests in 
property during the taxable year.\304\ If the non-donor spouse 
consents to split the gift with the donor spouse, then the 
annual exclusion is $28,000 per donee in 2017. In general, 
unlimited transfers between spouses are permitted without 
imposition of a gift tax. Special rules apply to the 
contributions to a qualified tuition program (``529 Plan'') 
including an election to treat a contribution that exceeds the 
annual exclusion as a contribution made ratably over a five-
year period beginning with the year of the contribution.\305\
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    \304\Sec. 2503(b).
    \305\Sec. 529(c)(2).
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    Marital and charitable deductions.--As described above, 
transfers to a surviving spouse or to charity generally are 
deductible for gift tax purposes. The effect of the marital and 
charitable deductions generally is to remove assets transferred 
to a surviving spouse or to charity from the gift tax base.

The generation-skipping transfer tax

    A generation-skipping transfer tax generally is imposed (in 
addition to the gift tax or the estate tax) on transfers, 
either directly or in trust or similar arrangement, to a ``skip 
person'' (i.e., a beneficiary in a generation more than one 
generation below that of the transferor). Transfers subject to 
the generation-skipping transfer tax include direct skips, 
taxable terminations, and taxable distributions.
            Exemption and tax rate
    An exemption generally equal to the estate tax exemption 
amount ($5.49 million for 2017) is provided for each person 
making generation-skipping transfers. The exemption may be 
allocated by a transferor (or his or her executor) to 
transferred property, and in some cases is automatically 
allocated. The allocation of generation-skipping transfer tax 
exemption effectively reduces the tax rate on a generation-
skipping transfer.
    The tax rate on generation-skipping transfers is a flat 
rate of tax equal to the maximum estate and gift tax rate (40 
percent) multiplied by the ``inclusion ratio.'' The inclusion 
ratio with respect to any property transferred indicates the 
amount of ``generation-skipping transfer tax exemption'' 
allocated to a trust (or to property transferred in a direct 
skip) relative to the total value of property transferred.\306\ 
If, for example, a taxpayer transfers $5 million in property to 
a trust and allocates $5 million of exemption to the transfer, 
the inclusion ratio is zero, and the applicable tax rate on any 
subsequent generation-skipping transfers from the trust is zero 
percent (40 percent multiplied by the inclusion ratio of zero). 
If, however, the taxpayer allocated only $2.5 million of 
exemption to the transfer, the inclusion ratio is 0.5, and the 
applicable tax rate on any subsequent generation-skipping 
transfers from the trust is 20 percent (40 percent multiplied 
by the inclusion ratio of 0.5). If the taxpayer allocates no 
exemption to the transfer, the inclusion ratio is one, and the 
applicable tax rate on any subsequent generation-skipping 
transfers from the trust is 40 percent (40 percent multiplied 
by the inclusion ratio of one).
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    \306\The inclusion ratio is one minus the applicable fraction. The 
applicable fraction is the amount of exemption allocated to a trust (or 
to a direct skip) divided by the value of assets transferred.
---------------------------------------------------------------------------
            Generation-skipping transfers
    Generation-skipping transfer tax generally is imposed at 
the time of a generation-skipping transfer--a direct skip, a 
taxable termination, or a taxable distribution.
    A direct skip is any transfer subject to estate or gift tax 
of an interest in property to a skip person. A skip person may 
be a natural person or certain trusts. All persons assigned to 
the second or more remote generation below the transferor are 
skip persons (e.g., grandchildren and great-grandchildren). 
Trusts are skip persons if (1) all interests in the trust are 
held by skip persons, or (2) no person holds an interest in the 
trust and at no time after the transfer may a distribution 
(including distributions and terminations) be made to a non-
skip person.
    A taxable termination is a termination (by death, lapse of 
time, release of power, or otherwise) of an interest in 
property held in trust unless, immediately after such 
termination, a non-skip person has an interest in the property, 
or unless at no time after the termination may a distribution 
(including a distribution upon termination) be made from the 
trust to a skip person.
    A taxable distribution is a distribution from a trust to a 
skip person (other than a taxable termination or direct skip). 
If a transferor allocates generation-skipping transfer tax 
exemption to a trust prior to the taxable distribution, 
generation-skipping transfer tax may be avoided.

Income tax basis in property received

            In general
    Gain or loss, if any, on the disposition of property is 
measured by the taxpayer's amount realized (i.e., gross 
proceeds received) on the disposition, less the taxpayer's 
basis in such property. Basis generally represents a taxpayer's 
investment in property with certain adjustments required after 
acquisition. For example, basis is increased by the cost of 
capital improvements made to the property and decreased by 
depreciation deductions taken with respect to the property.
    A gift or bequest of appreciated (or loss) property is not 
an income tax realization event for the transferor. The Code 
provides special rules for determining a recipient's basis in 
assets received by lifetime gift or from a decedent.
            Basis in property received by lifetime gift
    Under present law, property received from a donor of a 
lifetime gift generally takes a carryover basis. ``Carryover 
basis'' means that the basis in the hands of the donee is the 
same as it was in the hands of the donor. The basis of property 
transferred by lifetime gift also is increased, but not above 
fair market value, by any gift tax paid by the donor. The basis 
of a lifetime gift, however, generally cannot exceed the 
property's fair market value on the date of the gift. If a 
donor's basis in property is greater than the fair market value 
of the property on the date of the gift, then, for purposes of 
determining loss on a subsequent sale of the property, the 
donee's basis is the property's fair market value on the date 
of the gift.
            Basis in property acquired from a decedent
    Property acquired from a decedent's estate generally takes 
a stepped-up basis. ``Stepped-up basis'' means that the basis 
of property acquired from a decedent's estate generally is the 
fair market value on the date of the decedent's death (or, if 
the alternate valuation date is elected, the earlier of six 
months after the decedent's death or the date the property is 
sold or distributed by the estate). Providing a fair market 
value basis eliminates the recognition of income on any 
appreciation of the property that occurred prior to the 
decedent's death and eliminates the tax benefit from any 
unrealized loss.
    In community property states, a surviving spouse's one-half 
share of community property held by the decedent and the 
surviving spouse (under the community property laws of any 
State, U.S. possession, or foreign country) generally is 
treated as having passed from the decedent and, thus, is 
eligible for stepped-up basis. Thus, both the decedent's one-
half share and the surviving spouse's one-half share are 
stepped up to fair market value. This rule applies if at least 
one-half of the whole of the community interest is includible 
in the decedent's gross estate.
    Stepped-up basis treatment generally is denied to certain 
interests in foreign entities. Stock in a passive foreign 
investment company (including those for which a mark-to-market 
election has been made) generally takes a carryover basis, 
except that stock of a passive foreign investment company for 
which a decedent shareholder had made a qualified electing fund 
election is allowed a stepped-up basis. Stock owned by a 
decedent in a domestic international sales corporation (or 
former domestic international sales corporation) takes a 
stepped-up basis reduced by the amount (if any) which would 
have been included in gross income under section 995(c) as a 
dividend if the decedent had lived and sold the stock at its 
fair market value on the estate tax valuation date (i.e., 
generally the date of the decedent's death unless an alternate 
valuation date is elected).

                           REASONS FOR CHANGE

    The Committee believes the Federal estate and generation-
skipping transfer taxes harm taxpayers and the economy and 
therefore should be repealed. A tax on capital, such as the 
estate tax, motivates wealth holders to reduce savings and 
increase spending during life, rather than passing it to the 
next generation, ultimately increasing the consumption gap 
between the wealthy and poor. A tax on capital also causes 
investors to provide less capital to workers, thereby reducing 
wages in the long run.
    The Committee is particularly concerned about the effect of 
the estate tax on the owners of farms and family businesses, 
which create jobs and support our economy. The estate tax hits 
such entrepreneurs especially hard, forcing families of 
deceased owners to make the difficult decision to sell all or 
part of the farm or business or take out costly loans to 
satisfy the estate tax liability.

                        EXPLANATION OF PROVISION

    The provision doubles the estate and gift tax exemption 
amount for decedents dying and gifts made after December 31, 
2017. This is accomplished by increasing the basic exclusion 
amount provided in section 2010(c)(3) of the Code from $5 
million to $10 million. The $10 million amount is indexed for 
inflation occurring after 2011.
    For estates of decedents dying and generation-skipping 
transfers made after December 31, 2024, the provision repeals 
the estate tax and the generation-skipping transfer tax. The 
provision includes a transition rule for assets placed in a 
qualified domestic trust by a decedent who died before the 
effective date of the provision. Specifically, estate tax will 
not be imposed on: (1) distributions before the death of a 
surviving spouse from the trust more than 10 years after the 
date of enactment; or (2) assets remaining in the qualified 
domestic trust upon the death of the surviving spouse. The top 
marginal gift tax rate is reduced to 35 percent for gifts made 
after December 31, 2024.
    The provision generally retains the present law rules for 
determining the income tax basis of assets acquired by gift and 
assets acquired from a decedent. As a result, property received 
from a donor of a lifetime gift generally will continue to take 
a carryover basis, and property acquired from a decedent's 
estate generally will continue to take a stepped-up basis.

                             EFFECTIVE DATE

    The doubling of the estate and gift tax exemption is 
effective for estates of decedents dying, generation-skipping 
transfers, and gifts made after December 31, 2017. The repeal 
of the estate and generation-skipping transfer taxes, and the 
reduction in the gift tax rate to 35 percent, are effective for 
estates of decedents dying, generation-skipping transfers, and 
gifts made after December 31, 2024.

                TITLE II--ALTERNATIVE MINIMUM TAX REPEAL

1. Repeal of alternative minimum tax (sec. 2001 of the bill and sec. 55 
                              of the Code)

                              PRESENT LAW

Individual alternative minimum tax

            In general
    An alternative minimum tax (``AMT'') is imposed on an 
individual, estate, or trust in an amount by which the 
tentative minimum tax exceeds the regular income tax for the 
taxable year. For taxable years beginning in 2017, the 
tentative minimum tax is the sum of (1) 26 percent of so much 
of the taxable excess as does not exceed $187,800 ($93,900 in 
the case of a married individual filing a separate return) and 
(2) 28 percent of the remaining taxable excess. The breakpoints 
are indexed for inflation. The taxable excess is so much of the 
alternative minimum taxable income (``AMTI'') as exceeds the 
exemption amount. The maximum tax rates on net capital gain and 
dividends used in computing the regular tax are used in 
computing the tentative minimum tax. AMTI is the taxable income 
adjusted to take account of specified tax preferences and 
adjustments.
    The exemption amounts for taxable years beginning in 2017 
are: (1) $84,500 in the case of married individuals filing a 
joint return and surviving spouses; (2) $54,300 in the case of 
other unmarried individuals; (3) $42,250 in the case of married 
individuals filing separate returns; and (4) $24,100 in the 
case of an estate or trust. For taxable years beginning in 
2017, the exemption amounts are phased out by an amount equal 
to 25 percent of the amount by which the individual's AMTI 
exceeds (1) $160,900 in the case of married individuals filing 
a joint return and surviving spouses, (2) $120,700 in the case 
of other unmarried individuals, and (3) $80,450 in the case of 
married individuals filing separate returns or an estate or a 
trust. The amounts are indexed for inflation.
    AMTI is the taxpayer's taxable income increased by certain 
preference items and adjusted by determining the tax treatment 
of certain items in a manner that negates the deferral of 
income resulting from the regular tax treatment of those items.
            Preference items in computing AMTI
    The minimum tax preference items are:
    1. The excess of the deduction for percentage depletion 
over the adjusted basis of each mineral property (other than 
oil and gas properties) at the end of the taxable year.
    2. The amount by which excess intangible drilling costs 
(i.e., expenses in excess the amount that would have been 
allowable if amortized over a 10-year period) exceed 65 percent 
of the net income from oil, gas, and geothermal properties. 
This preference applies to independent producers only to the 
extent it reduces the producer's AMTI (determined without 
regard to this preference and the net operating loss deduction) 
by more than 40 percent.
    3. Tax-exempt interest income on private activity bonds 
(other than qualified 501(c)(3) bonds, certain housing bonds, 
and bonds issued in 2009 and 2010) issued after August 7, 1986.
    4. Accelerated depreciation or amortization on certain 
property placed in service before January 1, 1987.
    5. Seven percent of the amount excluded from income under 
section 1202 (relating to gains on the sale of certain small 
business stock).
    In addition, losses from any tax shelter farm activity or 
passive activities are not taken into account in computing 
AMTI.
            Adjustments in computing AMTI
    The adjustments that individuals must make to compute AMTI 
are:
    1. Depreciation on property placed in service after 1986 
and before January 1, 1999, is computed by using the generally 
longer class lives prescribed by the alternative depreciation 
system of section 168(g) and either (a) the straight-line 
method in the case of property subject to the straight-line 
method under the regular tax or (b) the 150-percent declining 
balance method in the case of other property. Depreciation on 
property placed in service after December 31, 1998, is computed 
by using the regular tax recovery periods and the AMT methods 
described in the previous sentence. Depreciation on property 
acquired after September 10, 2001, which is allowed an 
additional allowance under section 168(k) for the regular tax 
is computed without regard to any AMT adjustments.
    2. Mining exploration and development costs are capitalized 
and amortized over a 10-year period.
    3. Taxable income from a long-term contract (other than a 
home construction contract) is computed using the percentage of 
completion method of accounting.
    4. Depreciation on property placed in service after 1986 
and before January 1, 1999, is computed by using the generally 
longer class lives prescribed by the alternative depreciation 
system of section 168(g) and either (a) the straight-line 
method in the case of property subject to the straight-line 
method under the regular tax or (b) the 150-percent declining 
balance method in the case of other property. Depreciation on 
property placed in service after December 31, 1998, is computed 
by using the regular tax recovery periods and the AMT methods 
described in the previous sentence. Depreciation on property 
acquired after September 10, 2001, which is allowed an 
additional allowance under section 168(k) for the regular tax 
is computed without regard to any AMT adjustments.
    5. Mining exploration and development costs are capitalized 
and amortized over a 10-year period.
    6. Taxable income from a long-term contract (other than a 
home construction contract) is computed using the percentage of 
completion method of accounting.
    7. The amortization deduction allowed for pollution control 
facilities placed in service before January 1, 1999 (generally 
determined using 60-month amortization for a portion of the 
cost of the facility under the regular tax), is calculated 
under the alternative depreciation system (generally, using 
longer class lives and the straight-line method). The 
amortization deduction allowed for pollution control facilities 
placed in service after December 31, 1998, is calculated using 
the regular tax recovery periods and the straight-line method.
    8. Miscellaneous itemized deductions are not allowed.
    9. Itemized deductions for State, local, and foreign real 
property taxes; State and local personal property taxes; State, 
local, and foreign income, war profits, and excess profits 
taxes; and State and local sales taxes are not allowed.
    10. Medical expenses are allowed only to the extent they 
exceed ten percent of the taxpayer's adjusted gross income.
    11. Deductions for interest on home equity loans are not 
allowed.
    12. The standard deduction and the deduction for personal 
exemptions are not allowed.
    13. The amount allowable as a deduction for circulation 
expenditures is capitalized and amortized over a three-year 
period.
    14. The amount allowable as a deduction for research and 
experimentation expenditures from passive activities is 
capitalized and amortized over a 10-year period.
    15. The regular tax rules relating to incentive stock 
options do not apply.
            Other rules
    The taxpayer's net operating loss deduction generally 
cannot reduce the taxpayer's AMTI by more than 90 percent of 
the AMTI (determined without the net operating loss deduction).
    The alternative minimum tax foreign tax credit reduces the 
tentative minimum tax.
    The various nonrefundable business credits allowed under 
the regular tax generally are not allowed against the AMT. 
Certain exceptions apply.
    If an individual is subject to AMT in any year, the amount 
of tax exceeding the taxpayer's regular tax liability is 
allowed as a credit (the ``AMT credit'') in any subsequent 
taxable year to the extent the taxpayer's regular tax liability 
exceeds his or her tentative minimum tax liability in such 
subsequent year. The AMT credit is allowed only to the extent 
that the taxpayer's AMT liability is the result of adjustments 
that are timing in nature. The individual AMT adjustments 
relating to itemized deductions and personal exemptions are not 
timing in nature, and no minimum tax credit is allowed with 
respect to these items.
    An individual may elect to write off certain expenditures 
paid or incurred with respect of circulation expenses, research 
and experimental expenses, intangible drilling and development 
expenditures, development expenditures, and mining exploration 
expenditures over a specified period (three years in the case 
of circulation expenses, 60 months in the case of intangible 
drilling and development expenditures, and 10 years in case of 
other expenditures). The election applies for purposes of both 
the regular tax and the alternative minimum tax.

Corporate alternative minimum tax

            In general
    An AMT is also imposed on a corporation to the extent the 
corporation's tentative minimum tax exceeds its regular tax. 
This tentative minimum tax is computed at the rate of 20 
percent on the AMTI in excess of a $40,000 exemption amount 
that phases out. The exemption amount is phased out by an 
amount equal to 25 percent of the amount that the corporation's 
AMTI exceeds $150,000.
    AMTI is the taxpayer's taxable income increased by certain 
preference items and adjusted by determining the tax treatment 
of certain items in a manner that negates the deferral of 
income resulting from the regular tax treatment of those items.
    A corporation with average gross receipts of less than $7.5 
million for the prior three taxable years is exempt from the 
corporate minimum tax. The $7.5 million threshold is reduced to 
$5 million for the corporation's first three-taxable year 
period.
            Preference items in computing AMTI
    The corporate minimum tax preference items are:
    1. The excess of the deduction for percentage depletion 
over the adjusted basis of the property at the end of the 
taxable year. This preference does not apply to percentage 
depletion allowed with respect to oil and gas properties.
    2. The amount by which excess intangible drilling costs 
arising in the taxable year exceed 65 percent of the net income 
from oil, gas, and geothermal properties. This preference does 
not apply to an independent producer to the extent the 
preference would not reduce the producer's AMTI by more than 40 
percent.
    3. Tax-exempt interest income on private activity bonds 
(other than qualified 501(c)(3) bonds, certain housing bonds, 
and bonds issued in 2009 and 2010) issued after August 7, 1986.
    4. Accelerated depreciation or amortization on certain 
property placed in service before January 1, 1987.
            Adjustments in computing AMTI
    The adjustments that corporations must make in computing 
AMTI are:
    1. Depreciation on property placed in service after 1986 
and before January 1, 1999, must be computed by using the 
generally longer class lives prescribed by the alternative 
depreciation system of section 168(g) and either (a) the 
straight-line method in the case of property subject to the 
straight-line method under the regular tax or (b) the 150-
percent declining balance method in the case of other property. 
Depreciation on property placed in service after December 31, 
1998, is computed by using the regular tax recovery periods and 
the AMT methods described in the previous sentence. 
Depreciation on property which is allowed ``bonus 
depreciation'' for the regular tax is computed without regard 
to any AMT adjustments.
    2. Mining exploration and development costs must be 
capitalized and amortized over a 10-year period.
    3. Taxable income from a long-term contract (other than a 
home construction contract) must be computed using the 
percentage of completion method of accounting.
    4. The amortization deduction allowed for pollution control 
facilities placed in service before January 1, 1999 (generally 
determined using 60-month amortization for a portion of the 
cost of the facility under the regular tax), must be calculated 
under the alternative depreciation system (generally, using 
longer class lives and the straight-line method). The 
amortization deduction allowed for pollution control facilities 
placed in service after December 31, 1998, is calculated using 
the regular tax recovery periods and the straight-line method.
    5. The special rules applicable to Merchant Marine 
construction funds are not applicable.
    6. The special deduction allowable under section 833(b) for 
Blue Cross and Blue Shield organizations is not allowed.
    7. The adjusted current earnings adjustment applies, as 
described below.
            Adjusted current earning (``ACE'') adjustment
    The adjusted current earnings adjustment is the amount 
equal to 75 percent of the amount by which the adjusted current 
earnings of a corporation exceed its AMTI (determined without 
the ACE adjustment and the alternative tax net operating loss 
deduction). In determining ACE the following rules apply:
    1. For property placed in service before 1994, depreciation 
generally is determined using the straight-line method and the 
class life determined under the alternative depreciation 
system.
    2. Amounts excluded from gross income under the regular tax 
but included for purposes of determining earnings and profits 
are generally included in determining ACE.
    3. The inside build-up of a life insurance contract is 
included in ACE (and the related premiums are deductible).
    4. Intangible drilling costs of integrated oil companies 
must be capitalized and amortized over a 60-month period.
    5. The regular tax rules of section 173 (allowing 
circulation expenses to be amortized) and section 248 (allowing 
organizational expenses to be amortized) do not apply.
    6. Inventory must be calculated using the FIFO, rather than 
LIFO, method.
    7. The installment sales method generally may not be used.
    8. No loss may be recognized on the exchange of any pool of 
debt obligations for another pool of debt obligations having 
substantially the same effective interest rates and maturities.
    9. Depletion (other than for oil and gas properties) must 
be calculated using the cost, rather than the percentage, 
method.
    10. In certain cases, the assets of a corporation that has 
undergone an ownership change must be stepped down to their 
fair market values.
            Other rules
    The taxpayer's net operating loss carryover generally 
cannot reduce the taxpayer's AMT liability by more than 90 
percent of AMTI determined without this deduction.
    The various nonrefundable business credits allowed under 
the regular tax generally are not allowed against the AMT. 
Certain exceptions apply.
    If a corporation is subject to AMT in any year, the amount 
of AMT is allowed as an AMT credit in any subsequent taxable 
year to the extent the taxpayer's regular tax liability exceeds 
its tentative minimum tax in the subsequent year. Corporations 
are allowed to claim a limited amount of AMT credits in lieu of 
bonus depreciation.
    A corporation may elect to write off certain expenditures 
paid or incurred with respect of circulation expenses, research 
and experimental expenses, intangible drilling and development 
expenditures, development expenditures, and mining exploration 
expenditures over a specified period (three years in the case 
of circulation expenses, 60 months in the case of intangible 
drilling and development expenditures, and 10 years in case of 
other expenditures). The election applies for purposes of both 
the regular tax and the alternative minimum tax.

                           REASONS FOR CHANGE

    The requirement that taxpayers compute their income for 
purposes of both the regular income tax and the AMT is one of 
the most far-reaching complexities of the Code. The AMT is 
particularly burdensome for individuals with small businesses, 
because they often do not know whether they will be affected 
until they file their taxes and therefore must maintain a 
reserve that cannot be used to invest in their businesses.

                        EXPLANATION OF PROVISION

    The provision repeals the individual and corporate 
alternative minimum tax.
    The provision allows the AMT credit to offset the 
taxpayer's regular tax liability for any taxable year. In 
addition, the AMT credit is refundable for any taxable year 
beginning after 2018 and before 2023 in an amount equal to 50 
percent (100 percent in the case of taxable years beginning in 
2022) of the excess of the minimum tax credit for the taxable 
year over the amount of the credit allowable for the year 
against regular tax liability. Thus, the full amount of the 
minimum tax credit will be allowed in taxable years beginning 
before 2023.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2017.
    In determining the alternative minimum taxable income for 
taxable years beginning before January 1, 2018, the net 
operating loss deduction carryback from taxable years beginning 
after December 31, 2017, are determined without regard to any 
AMT adjustments or preferences.
    The repeal of the election to write off certain 
expenditures over a specified period applies to amounts paid or 
incurred after December 31, 2017.

                     TITLE III--BUSINESS TAX REFORM

                              A. Tax Rates

 1. Reduction in corporate tax rate (sec. 3001 of the bill and sec. 11 
                              of the Code)

                              PRESENT LAW

In general

    Corporate taxable income is subject to tax under a four-
step graduated rate structure.\307\ The top corporate tax rate 
is 35 percent on taxable income in excess of $10 million. The 
corporate taxable income brackets and tax rates are as set 
forth in the table below.
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    \307\Sec. 11(a) and (b)(1).

------------------------------------------------------------------------
                                                             Tax rate
                     Taxable Income                          (percent)
------------------------------------------------------------------------
Not over $50,000........................................              15
Over $50,000 but not over $75,000.......................              25
Over $75,000 but not over $10,000,000...................              34
Over $10,000,000........................................              35
------------------------------------------------------------------------

    An additional five-percent tax is imposed on a 
corporation's taxable income in excess of $100,000. The maximum 
additional tax is $11,750. Also, a second additional three-
percent tax is imposed on a corporation's taxable income in 
excess of $15 million. The maximum second additional tax is 
$100,000.
    Certain personal service corporations pay tax on their 
entire taxable income at the rate of 35 percent.\308\
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    \308\Sec. 11(b)(2).
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    Present law provides that, if the maximum corporate tax 
rate exceeds 35 percent, the maximum rate on a corporation's 
net capital gain will be 35 percent.\309\
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    \309\Sec. 1201(a).
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Dividends received deduction

    Corporations are allowed a deduction with respect to 
dividends received from other taxable domestic 
corporations.\310\ The amount of the deduction is generally 
equal to 70 percent of the dividend received.
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    \310\Sec. 243(a). Such dividends are taxed at a maximum rate of 
10.5 percent (30 percent of the top corporate tax rate of 35 percent).
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    In the case of any dividend received from a 20-percent 
owned corporation, the amount of the deduction is equal to 80 
percent of the dividend received.\311\ The term ``20-percent 
owned corporation'' means any corporation if 20 percent or more 
of the stock of such corporation (by vote and value) is owned 
by the taxpayer. For this purpose, certain preferred stock is 
not taken into account.
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    \311\Sec. 243(c). Such dividends are taxed at a maximum rate of 7 
percent (20 percent of the top corporate tax rate of 35 percent).
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    In the case of a dividend received from a corporation that 
is a member of the same affiliated group, a corporation is 
generally allowed a deduction equal to 100 percent of the 
dividend received.\312\
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    \312\Sec. 243(a)(3) and (b)(1). For this purpose, the term 
``affiliated group'' generally has the meaning given such term by 
section 1504(a). Sec. 243(b)(2).
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                           REASONS FOR CHANGE

    The United States has one of the highest statutory 
corporate tax rates among developed countries. The Committee 
believes that lowering the corporate tax rate is necessary to 
ensure domestic corporations remain globally competitive with 
their counterparts domiciled in the United States' largest 
international competitors. The average corporate income tax 
rate among nations in the Organisation for Economic Co-
operation and Development is 22.5 percent. A low competitive 
corporate tax rate also contributes to making the United States 
an attractive location for foreign corporations to invest. In 
addition, a lower corporate tax rate means corporations will 
have more resources to invest in growing their businesses and 
creating jobs.

                        EXPLANATION OF PROVISION

    The provision eliminates the graduated corporate rate 
structure and instead taxes corporate taxable income at 20 
percent.
    Personal service corporations are taxed at 25 percent.
    The provision repeals the maximum corporate tax rate on net 
capital gain as obsolete.
    The provision reduces the 70 percent dividends received 
deduction to 50 percent and the 80 percent dividends received 
deduction to 65 percent.\313\
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    \313\Such dividends would be taxed at a maximum rate of 10 percent 
(50 percent of the top corporate tax rate of 20 percent) and 7 percent 
(35 percent of the top corporate tax rate of 20 percent), respectively.
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    For taxpayers subject to the normalization method of 
accounting (e.g., regulated public utilities), the provision 
provides for the normalization of excess deferred tax reserves 
resulting from the reduction of corporate income tax rates 
(with respect to prior depreciation or recovery allowances 
taken on assets placed in service before the date of 
enactment).

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2017.

                            B. Cost Recovery

 1. Increased expensing (sec. 3101 of the bill and sec. 168(k) of the 
                                 Code)

                              PRESENT LAW

    A taxpayer generally must capitalize the cost of property 
used in a trade or business or held for the production of 
income and recover such cost over time through annual 
deductions for depreciation or amortization.\314\ Tangible 
property generally is depreciated under the modified 
accelerated cost recovery system (``MACRS''), which determines 
depreciation for different types of property based on an 
assigned applicable depreciation method, recovery period,\315\ 
and convention.\316\
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    \314\See secs. 263(a) and 167. However, where property is not used 
exclusively in a taxpayer's business, the amount eligible for a 
deduction must be reduced by the amount related to personal use. See, 
e.g., section 280A.
    \315\The applicable recovery period for an asset is determined in 
part by statute and in part by historic Treasury guidance. Exercising 
authority granted by Congress, the Secretary issued Rev. Proc. 87-56, 
1987-2 C.B. 674, laying out the framework of recovery periods for 
enumerated classes of assets. The Secretary clarified and modified the 
list of asset classes in Rev. Proc. 88-22, 1988-1 C.B. 785. In November 
1988, Congress revoked the Secretary's authority to modify the class 
lives of depreciable property. Rev. Proc. 87-56, as modified, remains 
in effect except to the extent that the Congress has, since 1988, 
statutorily modified the recovery period for certain depreciable 
assets, effectively superseding any administrative guidance with regard 
to such property.
    \316\Sec. 168.
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Bonus depreciation

    An additional first-year depreciation deduction is allowed 
equal to 50 percent of the adjusted basis of qualified property 
acquired and placed in service before January 1, 2020 (January 
1, 2021, for longer production period property\317\ and certain 
aircraft).\318\\319\ The 50-percent allowance is phased down 
for property placed in service after December 31, 2017 (after 
December 31, 2018 for longer production period property and 
certain aircraft). The bonus depreciation percentage rates are 
as follows.
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    \317\As defined in section 168(k)(2)(B).
    \318\As defined in section 168(k)(2)(C).
    \319\Sec. 168(k). The additional first-year depreciation deduction 
is generally subject to the rules regarding whether a cost must be 
capitalized under section 263A.

------------------------------------------------------------------------
                                       Bonus Depreciation Percentage
                                 ---------------------------------------
                                                       Longer Production
     Placed in Service Year       Qualified Property    Period Property
                                      in General          and Certain
                                                           Aircraft
------------------------------------------------------------------------
2017............................  50 percent........  50 percent
2018............................  40 percent........  50 percent\320\
2019............................  30 percent........  40 percent
2020............................  n/a...............  30 percent\321\
------------------------------------------------------------------------

    The additional first-year depreciation deduction is allowed 
for both the regular tax and the alternative minimum tax 
(``AMT''),\322\ but is not allowed in computing earnings and 
profits.\323\ The basis of the property and the depreciation 
allowances in the year of purchase and later years are 
appropriately adjusted to reflect the additional first-year 
depreciation deduction.\324\ The amount of the additional 
first-year depreciation deduction is not affected by a short 
taxable year.\325\ The taxpayer may elect out of the additional 
first-year depreciation for any class of property for any 
taxable year.\326\
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    \320\It is intended that for longer production period property 
placed in service in 2018, 50 percent applies to the entire adjusted 
basis. Similarly, for longer production period property placed in 
service in 2019, 40 percent applies to the entire adjusted basis. A 
technical correction may be necessary with respect to longer production 
period property placed in service in 2018 and 2019 so that the statute 
reflects this intent.
    \321\In the case of longer production period property described in 
section 168(k)(2)(B) and placed in service in 2020, 30 percent applies 
to the adjusted basis attributable to manufacture, construction, or 
production before January 1, 2020, and the remaining adjusted basis 
does not qualify for bonus depreciation. Thirty percent applies to the 
entire adjusted basis of certain aircraft described in section 
168(k)(2)(C) and placed in service in 2020.
    \322\Sec. 168(k)(2)(G). See also Treas. Reg. sec. 1.168(k)-1(d).
    \323\Sec. 312(k)(3) and Treas. Reg. sec. 1.168(k)-1(f)(7).
    \324\Sec. 168(k)(1)(B).
    \325\Ibid.
    \326\Sec. 168(k)(7). For the definition of a class of property, see 
Treas. Reg. sec. 1.168(k)-1(e)(2).
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    The interaction of the additional first-year depreciation 
allowance with the otherwise applicable depreciation allowance 
may be illustrated as follows. Assume that in 2017 a taxpayer 
purchases new depreciable property and places it in 
service.\327\ The property's cost is $10,000, and it is five-
year property subject to the 200 percent declining balance 
method and half-year convention. The amount of additional 
first-year depreciation allowed is $5,000. The remaining $5,000 
of the cost of the property is depreciable under the rules 
applicable to five-year property.
---------------------------------------------------------------------------
    \327\Assume that the cost of the property is not eligible for 
expensing under section 179 or Treas. Reg. sec. 1.263(a)-1(f).
---------------------------------------------------------------------------
    Thus, $1,000 also is allowed as a depreciation deduction in 
2017.\328\ The total depreciation deduction with respect to the 
property for 2017 is $6,000. The remaining $4,000 adjusted 
basis of the property generally is recovered through otherwise 
applicable depreciation rules.
---------------------------------------------------------------------------
    \328\$1,000 results from the application of the half-year 
convention and the 200 percent declining balance method to the 
remaining $5,000.
---------------------------------------------------------------------------
            Qualified property
    Property qualifying for the additional first-year 
depreciation deduction must meet all of the following 
requirements.\329\ First, the property must be: (1) property to 
which MACRS applies with an applicable recovery period of 20 
years or less; (2) water utility property;\330\ (3) computer 
software other than computer software covered by section 197; 
or (4) qualified improvement property.\331\ Second, the 
original use\332\ of the property must commence with the 
taxpayer.\333\ Third, the taxpayer must acquire the property 
within the applicable time period (as described below). 
Finally, the property must be placed in service before January 
1, 2020. As noted above, an extension of the placed-in-service 
date of one year (i.e., before January 1, 2021) is provided for 
certain property with a recovery period of 10 years or longer, 
certain transportation property, and certain aircraft.\334\
---------------------------------------------------------------------------
    \329\Requirements relating to actions taken before 2008 are not 
described herein since they have little (if any) remaining effect.
    \330\As defined in section 168(e)(5).
    \331\The additional first-year depreciation deduction is not 
available for any property that is required to be depreciated under the 
alternative depreciation system of MACRS. Sec. 168(k)(2)(D)(i).
    \332\The term ``original use'' means the first use to which the 
property is put, whether or not such use corresponds to the use of such 
property by the taxpayer. If in the normal course of its business a 
taxpayer sells fractional interests in property to unrelated third 
parties, then the original use of such property begins with the first 
user of each fractional interest (i.e., each fractional owner is 
considered the original user of its proportionate share of the 
property). Treas. Reg. sec. 1.168(k)-1(b)(3).
    \333\A special rule applies in the case of certain leased property. 
In the case of any property that is originally placed in service by a 
person and that is sold to the taxpayer and leased back to such person 
by the taxpayer within three months after the date that the property 
was placed in service, the property would be treated as originally 
placed in service by the taxpayer not earlier than the date that the 
property is used under the leaseback. If property is originally placed 
in service by a lessor, such property is sold within three months after 
the date that the property was placed in service, and the user of such 
property does not change, then the property is treated as originally 
placed in service by the taxpayer not earlier than the date of such 
sale. Sec. 168(k)(2)(E)(ii) and (iii).
    \334\Property qualifying for the extended placed-in-service date 
must have an estimated production period exceeding one year and a cost 
exceeding $1 million. Transportation property generally is defined as 
tangible personal property used in the trade or business of 
transporting persons or property. Certain aircraft which is not 
transportation property, other than for agricultural or firefighting 
uses, also qualifies for the extended placed-inservice date, if at the 
time of the contract for purchase, the purchaser made a nonrefundable 
deposit of the lesser of 10 percent of the cost or $100,000, and which 
has an estimated production period exceeding four months and a cost 
exceeding $200,000.
---------------------------------------------------------------------------
    To qualify, property must be acquired (1) before January 1, 
2020, or (2) pursuant to a binding written contract which was 
entered into before January 1, 2020. With respect to property 
that is manufactured, constructed, or produced by the taxpayer 
for use by the taxpayer, the taxpayer must begin the 
manufacture, construction, or production of the property before 
January 1, 2020.\335\ Property that is manufactured, 
constructed, or produced for the taxpayer by another person 
under a contract that is entered into prior to the manufacture, 
construction, or production of the property is considered to be 
manufactured, constructed, or produced by the taxpayer.\336\ 
For property eligible for the extended placed-in-service date, 
a special rule limits the amount of costs eligible for the 
additional first-year depreciation. With respect to such 
property, only the portion of the basis that is properly 
attributable to the costs incurred before January 1, 2020 
(``progress expenditures'') is eligible for the additional 
first-year depreciation deduction.\337\
---------------------------------------------------------------------------
    \335\Sec. 168(k)(2)(E)(i).
    \336\Treas. Reg. sec. 1.168(k)-1(b)(4)(iii).
    \337\Sec. 168(k)(2)(B)(ii). For purposes of determining the amount 
of eligible progress expenditures, rules similar to section 46(d)(3) as 
in effect prior to the Tax Reform Act of 1986 apply.
---------------------------------------------------------------------------
            Qualified improvement property
    Qualified improvement property is any improvement to an 
interior portion of a building that is nonresidential real 
property if such improvement is placed in service after the 
date such building was first placed in service.\338\ Qualified 
improvement property does not include any improvement for which 
the expenditure is attributable to the enlargement of the 
building, any elevator or escalator, or the internal structural 
framework of the building.
---------------------------------------------------------------------------
    \338\Sec. 168(k)(3).
---------------------------------------------------------------------------

Election to accelerate AMT credits in lieu of bonus depreciation

    A corporation otherwise eligible for additional first-year 
depreciation may elect to claim additional AMT credits in lieu 
of claiming additional depreciation with respect to qualified 
property.\339\ In the case of a corporation making this 
election, the straight line method is used for the regular tax 
and the AMT with respect to qualified property.\340\
---------------------------------------------------------------------------
    \339\Sec. 168(k)(4).
    \340\Sec. 168(k)(4)(A)(ii).
---------------------------------------------------------------------------
    A corporation making an election increases the tax 
liability limitation under section 53(c) on the use of minimum 
tax credits by the bonus depreciation amount. The aggregate 
increase in credits allowable by reason of the increased 
limitation is treated as refundable.
    The bonus depreciation amount generally is equal to 20 
percent of bonus depreciation for qualified property that could 
be claimed as a deduction absent an election under this 
provision.\341\ As originally enacted, the bonus depreciation 
amount for all taxable years was limited to the lesser of (1) 
$30 million or (2) six percent of the minimum tax credits 
allocable to the adjusted net minimum tax imposed for taxable 
years beginning before January 1, 2006. However, extensions of 
this provision have provided that this limitation applies 
separately to property subject to each extension.
---------------------------------------------------------------------------
    \341\For this purpose, bonus depreciation is the difference between 
(i) the aggregate amount of depreciation determined if section 
168(k)(1) applied to all qualified property placed in service during 
the taxable year and (ii) the amount of depreciation that would be so 
determined if section 168(k)(1) did not so apply. This determination is 
made using the most accelerated depreciation method and the shortest 
life otherwise allowable for each property.
---------------------------------------------------------------------------
    For taxable years ending after December 31, 2015, the bonus 
depreciation amount for a taxable year (as defined under 
present law with respect to all qualified property) is limited 
to the lesser of (1) 50 percent of the minimum tax credit for 
the first taxable year ending after December 31, 2015 
(determined before the application of any tax liability 
limitation) or (2) the minimum tax credit for the taxable year 
allocable to the adjusted net minimum tax imposed for taxable 
years ending before January 1, 2016 (determined before the 
application of any tax liability limitation and determined on a 
first-in, first-out basis).
    All corporations treated as a single employer under section 
52(a) are treated as one taxpayer for purposes of the 
limitation, as well as for electing the application of this 
provision.\342\
---------------------------------------------------------------------------
    \342\Sec. 168(k)(4)(B)(iii).
---------------------------------------------------------------------------
    In the case of a corporation making an election which is a 
partner in a partnership, for purposes of determining the 
electing partner's distributive share of partnership items, 
bonus depreciation does not apply to any qualified property and 
the straight line method is used with respect to that 
property.\343\
---------------------------------------------------------------------------
    \343\Sec. 168(k)(4)(D)(ii).
---------------------------------------------------------------------------
    In the case of a partnership having a single corporate 
partner owning (directly or indirectly) more than 50 percent of 
the capital and profits interests in the partnership, each 
partner takes into account its distributive share of 
partnership depreciation in determining its bonus depreciation 
amount.\344\
---------------------------------------------------------------------------
    \344\Sec. 168(k)(4)(D)(iii).
---------------------------------------------------------------------------

Special rules

            Passenger automobiles
    The limitation under section 280F on the amount of 
depreciation deductions allowed with respect to certain 
passenger automobiles is increased in the first year by $8,000 
for automobiles that qualify (and for which the taxpayer does 
not elect out of the additional first-year deduction).\345\ The 
$8,000 amount is phased down from $8,000 by $1,600 per calendar 
year beginning in 2018. Thus, the section 280F increase amount 
for property placed in service during 2018 is $6,400, and 
during 2019 is $4,800. While the underlying section 280F 
limitation is indexed for inflation,\346\ the section 280F 
increase amount is not indexed for inflation. The increase does 
not apply to a taxpayer who elects to accelerate AMT credits in 
lieu of bonus depreciation for a taxable year.
---------------------------------------------------------------------------
    \345\Sec. 168(k)(2)(F).
    \346\Sec. 280F(d)(7).
---------------------------------------------------------------------------
            Certain plants bearing fruits and nuts
    A special election is provided for certain plants bearing 
fruits and nuts.\347\ Under the election, the applicable 
percentage of the adjusted basis of a specified plant which is 
planted or grafted after December 31, 2015, and before January 
1, 2020, is deductible for regular tax and AMT purposes in the 
year planted or grafted by the taxpayer, and the adjusted basis 
is reduced by the amount of the deduction.\348\ The percentage 
is 50 percent for 2017, 40 percent for 2018, and 30 percent for 
2019. A specified plant is any tree or vine that bears fruits 
or nuts, and any other plant that will have more than one yield 
of fruits or nuts and generally has a preproductive period of 
more than two years from planting or grafting to the time it 
begins bearing fruits or nuts.\349\ The election is revocable 
only with the consent of the Secretary, and if the election is 
made with respect to any specified plant, such plant is not 
treated as qualified property eligible for bonus depreciation 
in the subsequent taxable year in which it is placed in 
service.
---------------------------------------------------------------------------
    \347\See sec. 168(k)(5).
    \348\Any amount deducted under this election is not subject to 
capitalization under section 263A.
    \349\A specified plant does not include any property that is 
planted or grafted outside the United States.
---------------------------------------------------------------------------
            Long-term contracts
    In general, in the case of a long-term contract, the 
taxable income from the contract is determined under the 
percentage-of-completion method.\350\ Solely for purposes of 
determining the percentage of completion under section 
460(b)(1)(A), the cost of qualified property with a MACRS 
recovery period of seven years or less is taken into account as 
a cost allocated to the contract as if bonus depreciation had 
not been enacted for property placed in service before January 
1, 2020 (January 1, 2021, in the case of longer production 
period property).\351\
---------------------------------------------------------------------------
    \350\Sec. 460.
    \351\Sec. 460(c)(6). Other dates involving prior years are not 
described herein.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that providing full expensing for 
certain business assets lowers the cost of capital for tangible 
property used in a trade or business. With lower costs of 
capital, the Committee believes that businesses will be 
encouraged to purchase equipment and other assets, which will 
promote capital investment and provide economic growth. The 
Committee also believes that full expensing for certain 
business assets will eliminate depreciation recordkeeping 
requirements for such assets.

                        EXPLANATION OF PROVISION

Full expensing for certain business assets

    The provision extends and modifies the additional first-
year depreciation deduction through 2022 (through 2023 for 
longer production period property and certain aircraft). The 
50-percent allowance is increased to 100 percent for property 
acquired and placed in service after September 27, 2017, and 
before January 1, 2023 (January 1, 2024, for longer production 
period property and certain aircraft), as well as for specified 
plants planted or grafted after September 27, 2017, and before 
January 1, 2023.
            Special rules
    The $8,000 increase amount in the limitation on the 
depreciation deductions allowed with respect to certain 
passenger automobiles is increased to $16,000 for passenger 
automobiles acquired and placed in service after September 27, 
2017, and before January 1, 2023.
    The provision extends the special rule under the 
percentage-of-completion method for the allocation of bonus 
depreciation to a long-term contract for property placed in 
service before January 1, 2023 (January 1, 2024, in the case of 
longer production period property).

Application to used property

    The provision removes the requirement that the original use 
of qualified property must commence with the taxpayer. Thus, 
the provision applies to purchases of used as well as new 
items. To prevent abuses, the additional first-year 
depreciation deduction applies only to property purchased in an 
arm's-length transaction. It does not apply to property 
received as a gift or from a decedent.\352\ In the case of 
trade-ins, like-kind exchanges, or involuntary conversions, it 
applies only to any money paid in addition to the traded-in 
property or in excess of the adjusted basis of the replaced 
property.\353\ It does not apply to property acquired in a 
nontaxable exchange such as a reorganization, to property 
acquired from a member of the taxpayer's family, including a 
spouse, ancestors, and lineal descendants, or from another 
related entity as defined in section 267, nor to property 
acquired from a person who controls, is controlled by, or is 
under common control with, the taxpayer.\354\ Thus it does not 
apply, for example, if one member of an affiliated group of 
corporations purchases property from another member, or if an 
individual who controls a corporation purchases property from 
that corporation.
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    \352\By reference to section 179(d)(2)(C). See also Treas. Reg. 
sec. 1.179-4(c)(1)(iv).
    \353\By reference to section 179(d)(3). See also Treas. Reg. sec. 
1.179-4(d).
    \354\By reference to section 179(d)(2)(A) and (B). See also Treas. 
Reg. sec. 1.179-4(c).
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Exception for certain businesses not subject to limitation on interest 
        expense

    The provision excludes from the definition of qualified 
property any property used in a real property trade or 
business, i.e., any real property development, redevelopment, 
construction, reconstruction, acquisition, conversion, rental, 
operation, management, leasing, or brokerage trade or 
business.\355\
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    \355\As defined in section 3301 of the bill (Interest), by cross 
reference to section 469(c)(7)(C). Note that a mortgage broker who is a 
broker of financial instruments is not in a real property trade or 
business for this purpose. See,  e.g., CCA 201504010 (December 17, 
2014).
---------------------------------------------------------------------------
    The provision also excludes from the definition of 
qualified property any property used in the trade or business 
of certain regulated public utilities, i.e., the trade or 
business of the furnishing or sale of (1) electrical energy, 
water, or sewage disposal services, (2) gas or steam through a 
local distribution system, or (3) transportation of gas or 
steam by pipeline, if the rates for such furnishing or sale, as 
the case may be, have been established or approved by a State 
or political subdivision thereof, by any agency or 
instrumentality of the United States, or by a public service or 
public utility commission or other similar body of any State or 
political subdivision thereof.\356\
---------------------------------------------------------------------------
    \356\As defined in section 3301 of the bill (Interest).
---------------------------------------------------------------------------
    In addition, the provision excludes from the definition of 
qualified property any property used in a trade or business 
that has had floor plan financing indebtedness,\357\ unless the 
taxpayer with such trade or business is not a tax shelter 
prohibited from using the cash method and is exempt from the 
interest limitation rules in section 3301 of the bill by 
meeting the $25 million gross receipts test of section 448(c).
---------------------------------------------------------------------------
    \357\As defined in section 3301 of the bill (Interest).
---------------------------------------------------------------------------

Election to accelerate AMT credits in lieu of bonus depreciation

    As a conforming amendment to the repeal of AMT,\358\ the 
provision repeals the election to accelerate AMT credits in 
lieu of bonus depreciation.
---------------------------------------------------------------------------
    \358\See section 2001 of the bill (Repeal of alternative minimum 
tax).
---------------------------------------------------------------------------

Transition rule

    The present-law phase-down of bonus depreciation is 
maintained for property acquired before September 28, 2017, and 
placed in service after September 27, 2017. Under the 
provision, in the case of property acquired and adjusted basis 
incurred before September 28, 2017, the bonus depreciation 
rates are as follows.

  PHASE-DOWN FOR PORTION OF BASIS OF QUALIFIED PROPERTY ACQUIRED BEFORE
                           SEPTEMBER 28, 2017
------------------------------------------------------------------------
                                     Bonus Depreciation Percentage
                             -------------------------------------------
   Placed in Service Year                             Longer Production
                               Qualified Property    Period Property and
                                   in General         Certain Aircraft
------------------------------------------------------------------------
2017........................  50 percent..........  50 percent.
2018........................  40 percent..........  50 percent.
2019........................  30 percent..........  40 percent.
2020........................  n/a.................  30 percent.
------------------------------------------------------------------------

    Similarly, the section 280F increase amount in the 
limitation on the depreciation deductions allowed with respect 
to certain passenger automobiles acquired before September 28, 
2017, and placed in service after September 27, 2017, is $8,000 
for 2017, $6,400 for 2018, and $4,800 for 2019.

                             EFFECTIVE DATE

    The provision generally applies to property acquired\359\ 
and placed in service after September 27, 2017, and to 
specified plants planted or grafted after such date.
---------------------------------------------------------------------------
    \359\Property is not treated as acquired after the date on which a 
written binding contract is entered into for such acquisition.
---------------------------------------------------------------------------
    A transition rule provides that, for a taxpayer's first 
taxable year ending after September 27, 2017, the taxpayer may 
elect to apply section 168 without regard to the amendments 
made by this provision.
    In the case of any taxable year that includes any portion 
of the period beginning on September 28, 2017, and ending on 
December 31, 2017, the amount of any net operating loss for 
such taxable year which may be treated as a net operating loss 
carryback is determined without regard to the amendments made 
by this provision.\360\
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    \360\See section 3302 of the bill (Modification of net operating 
loss deduction).
---------------------------------------------------------------------------

                       C. Small Business Reforms

 1. Expansion of section 179 expensing (sec. 3201 of the bill and sec. 
                            179 of the code)

                              PRESENT LAW

    A taxpayer generally must capitalize the cost of property 
used in a trade or business or held for the production of 
income and recover such cost over time through annual 
deductions for depreciation or amortization.\361\ Tangible 
property generally is depreciated under the modified 
accelerated cost recovery system (``MACRS''), which determines 
depreciation for different types of property based on an 
assigned applicable depreciation method, recovery period,\362\ 
and convention.\363\
---------------------------------------------------------------------------
    \361\See secs. 263(a) and 167. However, where property is not used 
exclusively in a taxpayer's business, the amount eligible for a 
deduction must be reduced by the amount related to personal use. See, 
e.g., section 280A.
    \362\The applicable recovery period for an asset is determined in 
part by statute and in part by historic Treasury guidance. Exercising 
authority granted by Congress, the Secretary issued Rev. Proc. 87-56, 
1987-2 C.B. 674, laying out the framework of recovery periods for 
enumerated classes of assets. The Secretary clarified and modified the 
list of asset classes in Rev. Proc. 88-22, 1988-1 C.B. 785. In November 
1988, Congress revoked the Secretary's authority to modify the class 
lives of depreciable property. Rev. Proc. 87-56, as modified, remains 
in effect except to the extent that the Congress has, since 1988, 
statutorily modified the recovery period for certain depreciable 
assets, effectively superseding any administrative guidance with regard 
to such property.
    \363\Sec. 168.
---------------------------------------------------------------------------

Election to expense certain depreciable business assets

    A taxpayer may elect under section 179 to deduct (or 
``expense'') the cost of qualifying property, rather than to 
recover such costs through depreciation deductions, subject to 
limitation. The maximum amount a taxpayer may expense is 
$500,000 of the cost of qualifying property placed in service 
for the taxable year.\364\ The $500,000 amount is reduced (but 
not below zero) by the amount by which the cost of qualifying 
property placed in service during the taxable year exceeds 
$2,000,000.\365\ The $500,000 and $2,000,000 amounts are 
indexed for inflation for taxable years beginning after 
2015.\366\
---------------------------------------------------------------------------
    \364\Sec. 179(b)(1).
    \365\Sec. 179(b)(2).
    \366\Sec. 179(b)(6).
---------------------------------------------------------------------------
    In general, qualifying property is defined as depreciable 
tangible personal property that is purchased for use in the 
active conduct of a trade or business.\367\ Qualifying property 
also includes off-the-shelf computer software and qualified 
real property (i.e., qualified leasehold improvement property, 
qualified restaurant property, and qualified retail improvement 
property).\368\ Qualifying property excludes any property 
described in section 50(b) (i.e., certain property not eligible 
for the investment tax credit).\369\
---------------------------------------------------------------------------
    \367\Passenger automobiles subject to the section 280F limitation 
are eligible for section 179 expensing only to the extent of the dollar 
limitations in section 280F. For sport utility vehicles above the 6,000 
pound weight rating, which are not subject to the limitation under 
section 280F, the maximum cost that may be expensed for any taxable 
year under section 179 is $25,000. Sec. 179(b)(5).
    \368\Sec. 179(d)(1)(A)(ii) and (f).
    \369\Sec. 179(d)(1) flush language.
---------------------------------------------------------------------------
    The amount eligible to be expensed for a taxable year may 
not exceed the taxable income for such taxable year that is 
derived from the active conduct of a trade or business 
(determined without regard to this provision).\370\ Any amount 
that is not allowed as a deduction because of the taxable 
income limitation may be carried forward to succeeding taxable 
years (subject to limitations).
---------------------------------------------------------------------------
    \370\Sec. 179(b)(3).
---------------------------------------------------------------------------
    No general business credit under section 38 is allowed with 
respect to any amount for which a deduction is allowed under 
section 179.\371\ If a corporation makes an election under 
section 179 to deduct expenditures, the full amount of the 
deduction does not reduce earnings and profits. Rather, the 
expenditures that are deducted reduce corporate earnings and 
profits ratably over a five-year period.\372\
---------------------------------------------------------------------------
    \371\Sec. 179(d)(9).
    \372\Sec. 312(k)(3)(B).
---------------------------------------------------------------------------
    An expensing election is made under rules prescribed by the 
Secretary.\373\ In general, any election or specification made 
with respect to any property may not be revoked except with the 
consent of the Commissioner. However, an election or 
specification under section 179 may be revoked by the taxpayer 
without consent of the Commissioner.
---------------------------------------------------------------------------
    \373\Sec. 179(c)(1).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that section 179 expensing provides 
two important benefits for small businesses. First, it lowers 
the cost of capital for tangible property used in a trade or 
business. With a lower cost of capital, the Committee believes 
small businesses will invest in more equipment and employ more 
workers. Second, it eliminates depreciation recordkeeping 
requirements with respect to expensed property. In order to 
increase the value of these benefits and the number of eligible 
taxpayers that may receive these benefits, the provision 
increases both the amount allowed to be expensed under section 
179 and the amount of the phase-out threshold. In addition, in 
order to counteract the negative effect of inflation on the 
limit and phase-out threshold of this provision for small 
businesses, the provision indexes such amounts for inflation.
    The Committee also believes that qualified energy efficient 
heating and air-conditioning property should be included in the 
section 179 expensing provision to facilitate investment by 
small businesses in this type of real property.

                        EXPLANATION OF PROVISION

    The provision increases the maximum amount a taxpayer may 
expense under section 179 to $5,000,000, and increases the 
phase-out threshold amount to $20,000,000 for five taxable 
years, i.e., for taxable years beginning in 2018, 2019, 2020, 
2021 and 2022. Thus, the provision provides that the maximum 
amount a taxpayer may expense, for taxable years beginning 
after 2017 and before 2023, is $5,000,000 of the cost of 
qualifying property placed in service for the taxable year. The 
$5,000,000 amount is reduced (but not below zero) by the amount 
by which the cost of qualifying property placed in service 
during the taxable year exceeds $20,000,000. The $5,000,000 and 
$20,000,000 amounts are indexed for inflation for taxable years 
beginning after 2018.
    The provision also expands the definition of qualified real 
property under section 179 to include qualified energy 
efficient heating and air-conditioning property acquired and 
placed in service by the taxpayer after November 2, 2017. For 
purposes of the provision, qualified energy efficient heating 
and air-conditioning property means any depreciable section 
1250 property that is (i) installed as part of a building's 
heating, cooling, ventilation, or hot water system, and (ii) 
within the scope of Standard 90.1-2007 of the American Society 
of Heating, Refrigerating, and Air-Conditioning Engineers and 
the Illuminating Engineering Society of North America (as in 
effect on the day before the date of the adoption of Standard 
90.1-2010 of such Societies) or any successor standard.

                             EFFECTIVE DATE

    The increased dollar limitations under section 179 apply to 
taxable years beginning after December 31, 2017.
    The expansion of qualified real property to include 
qualified energy efficient heating and air-conditioning 
property applies to property acquired\374\ and placed in 
service after November 2, 2017.
---------------------------------------------------------------------------
    \374\Property is not treated as acquired after the date on which a 
written binding contract is entered into for such acquisition.
---------------------------------------------------------------------------

  2. Small business accounting method reform and simplification (sec. 
    3202 of the bill and secs. 263A, 448, 460, and 471 of the Code)

                              PRESENT LAW

General rule for methods of accounting

    Section 446 generally allows a taxpayer to select the 
method of accounting to be used to compute taxable income, 
provided that such method clearly reflects the income of the 
taxpayer. The term ``method of accounting'' includes not only 
the overall method of accounting used by the taxpayer, but also 
the accounting treatment of any one item.\375\ Permissible 
overall methods of accounting include the cash receipts and 
disbursements method (``cash method''), an accrual method, or 
any other method (including a hybrid method) permitted under 
regulations prescribed by the Secretary.\376\ Examples of any 
one item for which an accounting method may be adopted include 
cost recovery,\377\ revenue recognition,\378\ and timing of 
deductions.\379\ For each separate trade or business, a 
taxpayer is entitled to adopt any permissible method, subject 
to certain restrictions.\380\
---------------------------------------------------------------------------
    \375\Treas. Reg. sec. 1.446-1(a)(1).
    \376\Sec. 446(c).
    \377\See, e.g., secs. 167 and 168.
    \378\See, e.g., secs. 451 and 460.
    \379\See, e.g., secs. 461 and 467.
    \380\Sec. 446(d); Treas. Reg. sec. 1.446-1(d).
---------------------------------------------------------------------------
    A taxpayer filing its first return may adopt any 
permissible method of accounting in computing taxable income 
for such year.\381\ Except as otherwise provided, section 
446(e) requires taxpayers to secure consent of the Secretary 
before changing a method of accounting. The regulations under 
this section provide rules for determining: (1) what a method 
of accounting is, (2) how an adoption of a method of accounting 
occurs, and (3) how a change in method of accounting is 
effectuated.\382\
---------------------------------------------------------------------------
    \381\Treas. Reg. sec. 1.446-1(e)(1).
    \382\Treas. Reg. sec. 1.446-1(e).
---------------------------------------------------------------------------

Cash and accrual methods

    Taxpayers using the cash method generally recognize items 
of income when actually or constructively received and items of 
expense when paid. The cash method is administratively easy and 
provides the taxpayer flexibility in the timing of income 
recognition. It is the method generally used by most individual 
taxpayers, including farm and nonfarm sole proprietorships.
    Taxpayers using an accrual method generally accrue items of 
income when all the events have occurred that fix the right to 
receive the income and the amount of the income can be 
determined with reasonable accuracy.\383\ Taxpayers using an 
accrual method of accounting generally may not deduct items of 
expense prior to when all events have occurred that fix the 
obligation to pay the liability, the amount of the liability 
can be determined with reasonable accuracy, and economic 
performance has occurred.\384\ Accrual methods of accounting 
generally result in a more accurate measure of economic income 
than does the cash method. The accrual method is often used by 
businesses for financial accounting purposes.
---------------------------------------------------------------------------
    \383\See, e.g., sec. 451.
    \384\See, e.g., sec. 461.
---------------------------------------------------------------------------
    A C corporation, a partnership that has a C corporation as 
a partner, or a tax-exempt trust or corporation with unrelated 
business income generally may not use the cash method. 
Exceptions are made for farming businesses, qualified personal 
service corporations, and the aforementioned entities to the 
extent their average annual gross receipts do not exceed $5 
million for all prior years (including the prior taxable years 
of any predecessor of the entity) (the ``gross receipts 
test''). The cash method may not be used by any tax 
shelter.\385\ In addition, the cash method generally may not be 
used if the purchase, production, or sale of merchandise is an 
income producing factor.\386\ Such taxpayers generally are 
required to keep inventories and use an accrual method with 
respect to inventory items.\387\
---------------------------------------------------------------------------
    \385\Secs. 448(a)(3) and (d)(3) and 461(i)(3) and (4). For this 
purpose, a tax shelter includes: (1) any enterprise (other than a C 
corporation) if at any time interests in such enterprise have been 
offered for sale in any offering required to be registered with any 
Federal or State agency having the authority to regulate the offering 
of securities for sale; (2) any syndicate (within the meaning of 
section 1256(e)(3)(B)); or (3) any tax shelter as defined in section 
6662(d)(2)(C)(ii). In the case of a farming trade or business, a tax 
shelter includes any tax shelter as defined in section 
6662(d)(2)(C)(ii) or any partnership or any other enterprise other than 
a corporation which is not an S corporation engaged in the trade or 
business of farming, (1) if at any time interests in such partnership 
or enterprise have been offered for sale in any offering required to be 
registered with any Federal or State agency having authority to 
regulate the offering of securities for sale or (2) if more than 35 
percent of the losses during any period are allocable to limited 
partners or limited entrepreneurs.
    \386\Treas. Reg. secs. 1.446-1(c)(2) and 1.471-1.
    \387\Sec. 471 and Treas. Reg. secs. 1.446-1(c)(2) and 1.471-1.
---------------------------------------------------------------------------
    A farming business is defined as a trade or business of 
farming, including operating a nursery or sod farm, or the 
raising or harvesting of trees bearing fruit, nuts, or other 
crops, timber, or ornamental trees.\388\ Such farming 
businesses are not precluded from using the cash method 
regardless of whether they meet the gross receipts test. 
However, section 447 generally requires a farming C corporation 
(and any farming partnership if a corporation is a partner in 
such partnership) to use an accrual method of accounting. 
Section 447 does not apply to nursery or sod farms, to the 
raising or harvesting of trees (other than fruit and nut 
trees), nor to farming C corporations meeting a gross receipts 
test with a $1 million threshold. For family farm C 
corporations, the threshold under the gross receipts test is 
$25 million.
---------------------------------------------------------------------------
    \388\Sec. 448(d)(1).
---------------------------------------------------------------------------
    A qualified personal service corporation is a corporation: 
(1) substantially all of whose activities involve the 
performance of services in the fields of health, law, 
engineering, architecture, accounting, actuarial science, 
performing arts, or consulting, and (2) substantially all of 
the stock of which is owned by current or former employees 
performing such services, their estates, or heirs.\389\ 
Qualified personal service corporations are allowed to use the 
cash method without regard to whether they meet the gross 
receipts test.
---------------------------------------------------------------------------
    \389\Sec. 448(d)(2).
---------------------------------------------------------------------------

Accounting for inventories

    In general, for Federal income tax purposes, taxpayers must 
account for inventories if the production, purchase, or sale of 
merchandise is an income-producing factor to the taxpayer.\390\ 
Treasury regulations also provide that in any case in which the 
use of inventories is necessary to clearly reflect income, the 
accrual method must be used with regard to purchases and 
sales.\391\ However, an exception is provided for taxpayers 
whose average annual gross receipts do not exceed $1 
million.\392\ A second exception is provided for taxpayers in 
certain industries whose average annual gross receipts do not 
exceed $10 million and that are not otherwise prohibited from 
using the cash method under section 448.\393\ Such taxpayers 
may account for inventory as materials and supplies that are 
not incidental (i.e., ``non-incidental materials and 
supplies'').\394\
---------------------------------------------------------------------------
    \390\Sec. 471(a) and Treas. Reg. sec. 1.471-1.
    \391\Treas. Reg. sec. 1.446-1(c)(2).
    \392\Rev. Proc. 2001-10, 2001-1 C.B. 272.
    \393\Rev. Proc. 2002-28, 2002-1 C.B. 815.
    \394\Treas. Reg. sec. 1.162-3(a)(1). A deduction is generally 
permitted for the cost of non-incidental materials and supplies in the 
taxable year in which they are first used or are consumed in the 
taxpayer's operations.
---------------------------------------------------------------------------
    In those circumstances in which a taxpayer is required to 
account for inventory, the taxpayer must maintain inventory 
records to determine the cost of goods sold during the taxable 
period. Cost of goods sold generally is determined by adding 
the taxpayer's inventory at the beginning of the period to the 
purchases made during the period and subtracting from that sum 
the taxpayer's inventory at the end of the period.
    Because of the difficulty of accounting for inventory on an 
item-by-item basis, taxpayers often use conventions that assume 
certain item or cost flows. Among these conventions are the 
first-in, first-out (``FIFO'') method, which assumes that the 
items in ending inventory are those most recently acquired by 
the taxpayer, and the last-in, first-out (``LIFO'') method, 
which assumes that the items in ending inventory are those 
earliest acquired by the taxpayer.

Uniform capitalization

    The uniform capitalization rules require certain direct and 
indirect costs allocable to real or tangible personal property 
produced by the taxpayer to be included in either inventory or 
capitalized into the basis of such property, as 
applicable.\395\ For real or personal property acquired by the 
taxpayer for resale, section 263A generally requires certain 
direct and indirect costs allocable to such property to be 
included in inventory.
---------------------------------------------------------------------------
    \395\Sec. 263A.
---------------------------------------------------------------------------
    Section 263A provides a number of exceptions to the general 
uniform capitalization requirements. One such exception exists 
for certain small taxpayers who acquire property for resale and 
have $10 million or less of average annual gross receipts;\396\ 
such taxpayers are not required to include additional section 
263A costs in inventory. Another exception exists for taxpayers 
who raise, harvest, or grow trees.\397\ Under this exception, 
section 263A does not apply to trees raised, harvested, or 
grown by the taxpayer (other than trees bearing fruit, nuts, or 
other crops, or ornamental trees) and any real property 
underlying such trees. Similarly, the uniform capitalization 
rules do not apply to any plant having a preproductive period 
of two years or less or to any animal, which is produced by a 
taxpayer in a farming business (unless the taxpayer is required 
to use an accrual method of accounting under section 447 or 
448(a)(3)).\398\ Freelance authors, photographers, and artists 
also are exempt from section 263A for any qualified creative 
expenses.\399\
---------------------------------------------------------------------------
    \396\Sec. 263A(b)(2)(B). No exception is available for small 
taxpayers who produce property subject to section 263A. However, a de 
minimis rule under Treasury regulations treats producers with total 
indirect costs of $200,000 or less as having no additional indirect 
costs beyond those normally capitalized for financial accounting 
purposes. Treas. Reg. sec. 1.263A-2(b)(3)(iv).
    \397\Sec. 263A(c)(5).
    \398\Sec. 263A(d).
    \399\Sec. 263A(h). Qualified creative expenses are defined as 
amounts paid or incurred by an individual in the trade or business of 
being a writer, photographer, or artist. However, such term does not 
include any expense related to printing, photographic plates, motion 
picture files, video tapes, or similar items.
---------------------------------------------------------------------------

Accounting for long-term contracts

    In general, in the case of a long-term contract, the 
taxable income from the contract is determined under the 
percentage-of-completion method.\400\ Under this method, the 
taxpayer must include in gross income for the taxable year an 
amount equal to the product of (1) the gross contract price and 
(2) the percentage of the contract completed during the taxable 
year.\401\ The percentage of the contract completed during the 
taxable year is determined by comparing costs allocated to the 
contract and incurred before the end of the taxable year with 
the estimated total contract costs.\402\ Costs allocated to the 
contract typically include all costs (including depreciation) 
that directly benefit or are incurred by reason of the 
taxpayer's long-term contract activities.\403\ The allocation 
of costs to a contract is made in accordance with 
regulations.\404\ Costs incurred with respect to the long-term 
contract are deductible in the year incurred, subject to 
general accrual method of accounting principles and 
limitations.\405\
---------------------------------------------------------------------------
    \400\Sec. 460(a).
    \401\See Treas. Reg. sec. 1.460-4. This calculation is done on a 
cumulative basis. Thus, the amount included in gross income in a 
particular year is that proportion of the expected contract price that 
the amount of costs incurred through the end of the taxable year bears 
to the total expected costs, reduced by the amounts of gross contract 
price included in gross income in previous taxable years.
    \402\Sec. 460(b)(1).
    \403\Sec. 460(c).
    \404\Treas. Reg. sec. 1.460-5.
    \405\Treas. Reg. secs. 1.460-4(b)(2)(iv) and 1.460-1(b)(8).
---------------------------------------------------------------------------
    An exception from the requirement to use the percentage-of-
completion method is provided for certain construction 
contracts (``small construction contracts''). Contracts within 
this exception are those contracts for the construction or 
improvement of real property if the contract: (1) is expected 
(at the time such contract is entered into) to be completed 
within two years of commencement of the contract and (2) is 
performed by a taxpayer whose average annual gross receipts for 
the prior three taxable years do not exceed $10 million.\406\ 
Thus, long-term contract income from small construction 
contracts must be reported consistently using the taxpayer's 
exempt contract method.\407\ Permissible exempt contract 
methods include the completed contract method, the exempt-
contract percentage-of-completion method, the percentage-of-
completion method, or any other permissible method.\408\
---------------------------------------------------------------------------
    \406\Secs. 460(e)(1)(B) and (4).
    \407\Since such contracts involve the construction of real 
property, they are subject to the interest capitalization rules without 
regard to their duration. See Treas. Reg. sec. 1.263A-8.
    \408\Treas. Reg. sec. 1.460-4(c)(1).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the present law accounting 
method rules impose overly complex recordkeeping requirements 
that increase compliance costs for small businesses, as such 
rules have non-uniform small business exception requirements, 
rely on varying forms of gross receipts tests with widely 
different exception thresholds, and vary depending on the 
classification of a taxpayer's business activities. The 
Committee believes that using an accrual method, along with 
keeping inventory records, applying the uniform capitalization 
rules, and using the percentage-of-completion method, is more 
complicated than the cash method and any difference in income 
for a small business may be relatively small, such that either 
method may clearly reflect the income of a small business. In 
addition, the Committee believes that the cash method may 
address liquidity concerns of small businesses in that it 
measures income when the taxpayer is most likely to have the 
cash to pay any tax. The Committee also believes that the 
ability of small businesses to use simplified methods of 
accounting for inventory and certain construction contracts 
generally will be practical and administratively convenient for 
such taxpayers. In addition, the Committee believes that the 
uniform capitalization rules are relatively complex and any 
potential distortion to income caused by not applying such 
rules is not material enough to warrant the application of 
unduly burdensome rules to small businesses.
    The Committee believes that a uniform definition of small 
business for determining applicable accounting method rules and 
consistent application of a gross receipts test will simplify 
tax administration and taxpayer compliance. An increase in the 
gross receipts test to $25 million will materially increase the 
number of business entities that are able to obtain relief from 
complex tax accounting rules. Many rules under present law 
prohibit a taxpayer from taking advantage of a small business 
accounting method exception if they ever fail to meet the 
relevant gross receipts test. The Committee believes that such 
taxpayers should be allowed to avail themselves of simplified 
accounting methods if they subsequently are able to meet the 
gross receipts test. Finally, the Committee believes that 
indexing the threshold for inflation will ensure that the small 
business definition remains an accurate reflection of the 
appropriate level of gross receipts for exempting entities from 
certain tax accounting rules.

                        EXPLANATION OF PROVISION

    The provision expands the universe of taxpayers that may 
use the cash method of accounting. Under the provision, the 
cash method of accounting may be used by taxpayers, other than 
tax shelters, that satisfy the gross receipts test, regardless 
of whether the purchase, production, or sale of merchandise is 
an income-producing factor. The gross receipts test allows 
taxpayers with annual average gross receipts that do not exceed 
$25 million for the three prior taxable-year period (the ``$25 
million gross receipts test'') to use the cash method. The $25 
million amount is indexed for inflation for taxable years 
beginning after 2018.
    The provision expands the universe of farming C 
corporations (and farming partnerships with a C corporation 
partner) that may use the cash method to include any farming C 
corporation (or farming partnership with a C corporation 
partner) that meets the $25 million gross receipts test.
    The provision retains the exceptions from the required use 
of the accrual method for qualified personal service 
corporations and taxpayers other than C corporations. Thus, 
qualified personal service corporations, partnerships without C 
corporation partners, S corporations, and other passthrough 
entities are allowed to use the cash method without regard to 
whether they meet the $25 million gross receipts test, so long 
as the use of such method clearly reflects income.\409\
---------------------------------------------------------------------------
    \409\Consistent with present law, the cash method generally may not 
be used by taxpayers, other than those that meet the $25 million gross 
receipts test, if the purchase, production, or sale of merchandise is 
an income-producing factor. In addition, the cash method may not be 
used by a tax shelter.
---------------------------------------------------------------------------
    In addition, the provision also exempts certain taxpayers 
from the requirement to keep inventories. Specifically, 
taxpayers that meet the $25 million gross receipts test are not 
required to account for inventories under section 471,\410\ but 
rather may use a method of accounting for inventories that 
either (1) treats inventories as non-incidental materials and 
supplies,\411\ or (2) conforms to the taxpayer's financial 
accounting treatment of inventories.\412\
---------------------------------------------------------------------------
    \410\In the case of a sole proprietorship, the $25 million gross 
receipts test is applied as if the sole proprietorship is a corporation 
or partnership.
    \411\Consistent with present law, a deduction is generally 
permitted for the cost of non-incidental materials and supplies in the 
taxable year in which they are first used or are consumed in the 
taxpayer's operations. See Treas. Reg. sec. 1.162-3(a)(1).
    \412\The taxpayer's financial accounting treatment of inventories 
is determined by reference to the method of accounting used in the 
taxpayer's applicable financial statement (as defined in section 3202 
of the bill (Small business accounting method reform and 
simplification)) or, if the taxpayer does not have an applicable 
financial statement, the method of accounting used in the taxpayer's 
book and records prepared in accordance with the taxpayer's accounting 
procedures.
---------------------------------------------------------------------------
    The provision expands the exception for small taxpayers 
from the uniform capitalization rules. Under the provision, any 
producer or reseller that meets the $25 million gross receipts 
test is exempted from the application of section 263A.\413\ The 
provision retains the exemptions from the uniform 
capitalization rules that are not based on a taxpayer's gross 
receipts.
---------------------------------------------------------------------------
    \413\In the case of a sole proprietorship, the $25 million gross 
receipts test is applied as if the sole proprietorship is a corporation 
or partnership.
---------------------------------------------------------------------------
    Finally, the provision expands the exception for small 
construction contracts from the requirement to use the 
percentage-of-completion method. Under the provision, contracts 
within this exception are those contracts for the construction 
or improvement of real property if the contract: (1) is 
expected (at the time such contract is entered into) to be 
completed within two years of commencement of the contract and 
(2) is performed by a taxpayer that (for the taxable year in 
which the contract was entered into) meets the $25 million 
gross receipts test.\414\
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    \414\In the case of a sole proprietorship, the $25 million gross 
receipts test is applied as if the sole proprietorship is a corporation 
or partnership.
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    Under the provision, a taxpayer who fails the $25 million 
gross receipts test would not be eligible for any of the 
aforementioned exceptions (i.e., from the accrual method, from 
keeping inventories, from applying the uniform capitalization 
rules, or from using the percentage-of-completion method) for 
such taxable year.

                             EFFECTIVE DATE

    The provisions to expand the universe of taxpayers, 
including farming C corporations, eligible to use the cash 
method, exempt certain taxpayers from the requirement to keep 
inventories, and expand the exception from the uniform 
capitalization rules apply to taxable years beginning after 
December 31, 2017. Application of these rules is a change in 
the taxpayer's method of accounting for purposes of section 
481.
    The provision to expand the exception for small 
construction contracts from the requirement to use the 
percentage-of-completion method applies to contracts entered 
into after December 31, 2017, in taxable years ending after 
such date. Application of this rule is a change in the 
taxpayer's method of accounting for purposes of section 481. 
Application of the exception for small construction contracts 
from the requirement to use the percentage-of-completion method 
is applied on a cutoff basis for all similarly classified 
contracts (hence there is no adjustment under section 481(a) 
for contracts entered into before January 1, 2018).

 3. Small business exception from limitation on deduction of business 
      interest (sec. 3203 of the bill and sec. 163(j) of the Code)

    For present law, reasons for change, explanation of 
provision, and effective date for the small business exception 
from the limitation on the deduction of business interest, see 
section 3301 of the bill (Interest).

    4. Modification of treatment of S corporation conversions to C 
corporations (sec. 3204 of the bill and secs. 481 and 1371 of the Code)

                              PRESENT LAW

Changes in accounting method

            Cash and accrual methods in general
    Taxpayers using the cash method generally recognize items 
of income when actually or constructively received and items of 
expense when paid. The cash method is administratively easy and 
provides the taxpayer flexibility in the timing of income 
recognition. It is the method generally used by most individual 
taxpayers, including farm and nonfarm sole proprietorships.
    Taxpayers using an accrual method generally accrue items of 
income when all the events have occurred that fix the right to 
receive the income and the amount of the income can be 
determined with reasonable accuracy.\415\ Taxpayers using an 
accrual method of accounting generally may not deduct items of 
expense prior to when all events have occurred that fix the 
obligation to pay the liability, the amount of the liability 
can be determined with reasonable accuracy, and economic 
performance has occurred.\416\ Accrual methods of accounting 
generally result in a more accurate measure of economic income 
than does the cash method. The accrual method is often used by 
businesses for financial accounting purposes.
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    \415\See, e.g., sec. 451.
    \416\See, e.g., sec. 461.
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    A C corporation, a partnership that has a C corporation as 
a partner, or a tax-exempt trust or corporation with unrelated 
business income generally may not use the cash method. 
Exceptions are made for farming businesses,\417\ qualified 
personal service corporations,\418\ and the aforementioned 
entities to the extent their average annual gross receipts do 
not exceed $5 million for all prior years (including the prior 
taxable years of any predecessor of the entity) (the ``gross 
receipts test'').\419\ The cash method may not be used by any 
tax shelter.\420\ In addition, the cash method generally may 
not be used if the purchase, production, or sale of merchandise 
is an income producing factor.\421\ Such taxpayers generally 
are required to keep inventories and use an accrual method with 
respect to inventory items.\422\
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    \417\A farming business is defined as a trade or business of 
farming, including operating a nursery or sod farm, or the raising or 
harvesting of trees bearing fruit, nuts, or other crops, timber, or 
ornamental trees. Sec. 448(d)(1).
    \418\A qualified personal service corporation is a corporation (1) 
substantially all of whose activities involve the performance of 
services in the fields of health, law, engineering, architecture, 
accounting, actuarial science, performing arts, or consulting, and (2) 
substantially all of the stock of which is owned by current or former 
employees performing such services, their estates, or heirs. Sec. 
448(d)(2).
    \419\The gross receipts test is modified to apply to taxpayers with 
annual average gross receipts that do not exceed $25 million for the 
three prior taxable-year period as part of this bill. See section 3202 
of the bill (Small business accounting method reform and 
simplification).
    \420\Secs. 448(a)(3) and (d)(3) and 461(i)(3) and (4). For this 
purpose, a tax shelter includes: (1) any enterprise (other than a C 
corporation) if at any time interests in such enterprise have been 
offered for sale in any offering required to be registered with any 
Federal or State agency having the authority to regulate the offering 
of securities for sale; (2) any syndicate (within the meaning of 
section 1256(e)(3)(B)); or (3) any tax shelter as defined in section 
6662(d)(2)(C)(ii). In the case of a farming trade or business, a tax 
shelter includes any tax shelter as defined in section 
6662(d)(2)(C)(ii) or any partnership or any other enterprise other than 
a corporation which is not an S corporation engaged in the trade or 
business of farming, (1) if at any time interests in such partnership 
or enterprise have been offered for sale in any offering required to be 
registered with any Federal or State agency having authority to 
regulate the offering of securities for sale or (2) if more than 35 
percent of the losses during any period are allocable to limited 
partners or limited entrepreneurs.
    \421\Treas. Reg. secs. 1.446-1(c)(2) and 1.471-1.
    \422\Sec. 471 and Treas. Reg. secs. 1.446-1(c)(2) and 1.471-1. 
However, section 3202 of the bill (Small business accounting method 
reform and simplification) provides an exemption from the requirement 
to use inventories for taxpayers that meet the $25 million gross 
receipts test provided in such section. Accordingly, under the bill, 
such taxpayers are thus also eligible to use the cash method.
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            Procedures for changing a method of accounting
    A taxpayer filing its first return may adopt any 
permissible method of accounting in computing taxable income 
for such year.\423\ Except as otherwise provided, section 
446(e) requires taxpayers to secure consent of the Secretary 
before changing a method of accounting. The regulations under 
this section provide rules for determining: (1) what a method 
of accounting is, (2) how an adoption of a method of accounting 
occurs, and (3) how a change in method of accounting is 
effectuated.\424\
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    \423\Treas. Reg. sec. 1.446-1(e)(1).
    \424\Treas. Reg. sec. 1.446-1(e).
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    Section 481 prescribes the rules to be followed in 
computing taxable income in cases where the taxable income of 
the taxpayer is computed under a different method than the 
prior year (e.g., when changing from the cash method to an 
accrual method). In computing taxable income for the year of 
change, the taxpayer must take into account those adjustments 
which are determined to be necessary solely by reason of such 
change in order to prevent items of income or expense from 
being duplicated or omitted.\425\ The year of change is the 
taxable year for which the taxable income of the taxpayer is 
computed under a different method than the prior year.\426\ 
Congress has provided the Secretary with the authority to 
prescribe the timing and manner in which such adjustments are 
taken into account in computing taxable income.\427\ Net 
adjustments that decrease taxable income generally are taken 
into account entirely in the year of change, and net 
adjustments that increase taxable income generally are taken 
into account ratably during the four-taxable-year period 
beginning with the year of change.\428\
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    \425\Sec. 481(a)(2) and Treas. Reg. sec. 1.481-1(a)(1).
    \426\Treas. Reg. sec. 1.481-1(a)(1).
    \427\Sec. 481(c). While Treasury regulations generally provide that 
the entire adjustments required by section 481(a) are taken into 
account entirely in the year of change, the Secretary has provided the 
Commissioner with the authority to provide additional guidance 
regarding the taxable year or years in which the adjustments are taken 
into account. See Treas. Reg. sec. 1.481-1(c)(2).
    \428\See Section 7.03 of Rev. Proc. 2015-13, 2015-5 I.R.B 419.
---------------------------------------------------------------------------

Post-termination distributions

    Under present law, in the case of an S corporation that 
converts to a C corporation, distributions of cash by the C 
corporation to its shareholders during the post-termination 
transition period (to the extent of the amount in the 
accumulated adjustment account) are tax-free to the 
shareholders and reduce the adjusted basis of the stock.\429\ 
The post-termination transition period is generally the one-
year period after the S corporation election terminates.\430\
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    \429\Sec. 1371(e)(1).
    \430\Sec. 1377(b).
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                           REASONS FOR CHANGE

    The Committee recognizes that, with the significant 
modifications to the tax code with respect to both S 
corporations and C corporations in this bill, taxpayers that 
previously elected to be taxed as S corporations may prefer 
instead to be taxed as C corporations. The Committee 
acknowledges that the revocation of an S election may require 
certain taxpayers to change from the cash method to an accrual 
method, and may have other effects on the taxpayer. 
Accordingly, the Committee believes that it is important to 
provide rules to ease the transition from S corporation to C 
corporation for the affected taxpayers.

                        EXPLANATION OF PROVISION

    Under the provision, any section 481(a) adjustment of an 
eligible terminated S corporation attributable to the 
revocation of its S corporation election (i.e., a change from 
the cash method to an accrual method) is taken into account 
ratably during the six-taxable-year period beginning with the 
year of change.\431\ An eligible terminated S corporation is 
any C corporation which (1) is an S corporation the day before 
the enactment of this bill, (2) during the two-year period 
beginning on the date of such enactment revokes its S 
corporation election under section 1362(a), and (3) all of the 
owners of which on the date the S corporation election is 
revoked are the same owners (and in identical proportions) as 
the owners on the date of such enactment.
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    \431\Section 3202 of the bill (Small business accounting method 
reform and simplification) expand the universe of partnerships and C 
corporations eligible to use the cash method to include partnerships or 
C corporations with annual average gross receipts that do not exceed 
$25 million for the three prior taxable-year period. Accordingly, an 
eligible terminated S corporation with annual average gross receipts 
that do not exceed $25 million that used the cash method prior to 
revoking its S corporation election may be eligible to remain on the 
cash method as a C corporation.
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    Under the provision, in the case of a distribution of money 
by an eligible terminated S corporation, the accumulated 
adjustments account shall be allocated to such distribution, 
and the distribution shall be chargeable to accumulated 
earnings and profits, in the same ratio as the amount of the 
accumulated adjustments account bears to the amount the 
accumulated earnings and profits.

                             EFFECTIVE DATE

    The provision is effective upon enactment.

       D. Reform of Business-related Exclusions, Deductions, etc.

    1. Interest (sec. 3301 of the bill and sec. 163(j) of the Code)

                              PRESENT LAW

Interest deduction

    Interest paid or accrued by a business generally is 
deductible in the computation of taxable income subject to a 
number of limitations.\432\
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    \432\Sec. 163(a). In addition to the limitations discussed herein, 
other limitations include: denial of the deduction for the disqualified 
portion of the original issue discount on an applicable high yield 
discount obligation (sec. 163(e)(5)), denial of deduction for interest 
on certain obligations not in registered form (sec. 163(f)), reduction 
of the deduction for interest on indebtedness with respect to which a 
mortgage credit certificate has been issued under section 25 (sec. 
163(g)), disallowance of deduction for personal interest (sec. 163(h)), 
disallowance of deduction for interest on debt with respect to certain 
life insurance contracts (sec. 264), and disallowance of deduction for 
interest relating to tax-exempt income (sec. 265). Interest may also be 
subject to capitalization. See, e.g., sections 263A(f) and 461(g).
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    Interest is generally deducted by a taxpayer as it is paid 
or accrued, depending on the taxpayer's method of accounting. 
For all taxpayers, if an obligation is issued with original 
issue discount (``OID''), a deduction for interest is allowable 
over the life of the obligation on a yield to maturity 
basis.\433\ Generally, OID arises where interest on a debt 
instrument is not calculated based on a qualified rate and 
required to be paid at least annually.
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    \433\Sec. 163(e). But see section 267 (dealing in part with 
interest paid to a related or foreign party).
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Investment interest expense

    In the case of a taxpayer other than a corporation, the 
deduction for interest on indebtedness that is allocable to 
property held for investment (``investment interest'') is 
limited to the taxpayer's net investment income for the taxable 
year.\434\ Disallowed investment interest is carried forward to 
the next taxable year.
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    \434\Sec. 163(d).
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    Net investment income is investment income net of 
investment expenses. Investment income generally consists of 
gross income from property held for investment, and investment 
expense includes all deductions directly connected with the 
production of investment income (e.g., deductions for 
investment management fees) other than deductions for interest. 
Investment income includes only so much of the taxpayer's net 
capital gain and qualified dividend income as the taxpayer 
elects to take into account as investment income.
    The two-percent floor on miscellaneous itemized deductions 
allows taxpayers to deduct investment expenses connected with 
investment income only to the extent such deductions exceed two 
percent of the taxpayer's adjusted gross income (``AGI'').\435\ 
Miscellaneous itemized deductions\436\ that are not investment 
expenses are disallowed first before any investment expenses 
are disallowed.\437\
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    \435\Sec. 67(a).
    \436\Miscellaneous itemized deductions include itemized deductions 
of individuals other than certain specific itemized deductions. Sec. 
67(b). Miscellaneous itemized deductions generally include, for 
example, investment management fees and certain employee business 
expenses, but specifically do not include, for example, interest, 
taxes, casualty and theft losses, charitable contributions, medical 
expenses, or other listed itemized deductions.
    \437\H.R. Rep. No. 841, 99th Cong., 2d Sess., p. II-154, Sept. 18, 
1986 (Conf. Rep.) (``In computing the amount of expenses that exceed 
the 2-percent floor, expenses that are not investment expenses are 
intended to be disallowed before any investment expenses are 
disallowed.'').
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    For purposes of the investment interest limitation, debt is 
allocated under a tracing approach to expenditures in 
accordance with the use of the debt proceeds, and interest on 
the debt is allocated in the same manner.\438\ Thus, generally, 
the disallowance of a deduction for investment interest depends 
on the individual's use of the proceeds of the debt. For 
example, if an individual pledges corporate stock held for 
investment as security for a loan and uses the debt proceeds to 
purchase a car for personal use, interest expense on the debt 
is allocated to the personal expenditure to purchase the car 
and is treated as nondeductible personal interest rather than 
investment interest.
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    \438\Temp. Treas. Reg. sec. 1.163-8T(c).
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Earnings stripping

    Section 163(j) may disallow a deduction for disqualified 
interest paid or accrued by a corporation in a taxable year if 
two threshold tests are satisfied: the payor's debt-to-equity 
ratio exceeds 1.5 to 1.0 (the safe harbor ratio) and the 
payor's net interest expense exceeds 50 percent of its adjusted 
taxable income (generally, taxable income computed without 
regard to deductions for net interest expense, net operating 
losses, domestic production activities under section 199, 
depreciation, amortization, and depletion). Disqualified 
interest includes interest paid or accrued to: (1) related 
parties when no Federal income tax is imposed with respect to 
such interest;\439\ (2) unrelated parties in certain instances 
in which a related party guarantees the debt; or (3) to a real 
estate investment trust (``REIT'') by a taxable REIT subsidiary 
of that trust.\440\ Interest amounts disallowed under these 
rules can be carried forward indefinitely.\441\ In addition, 
any excess limitation (i.e., the excess, if any, of 50 percent 
of the adjusted taxable income of the payor over the payor's 
net interest expense) can be carried forward three years.\442\
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    \439\If a tax treaty reduces the rate of tax on interest paid or 
accrued by the taxpayer, the interest is treated as interest on which 
no Federal income tax is imposed to the extent of the same proportion 
of such interest as the rate of tax imposed without regard to the 
treaty, reduced by the rate of tax imposed by the treaty, bears to the 
rate of tax imposed without regard to the treaty. Sec. 163(j)(5)(B).
    \440\Sec. 163(j)(3).
    \441\Sec. 163(j)(1)(B).
    \442\Sec. 163(j)(2)(B)(ii).
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                           REASONS FOR CHANGE

    The Committee believes that the general deductibility of 
interest payments on debt may result in companies undertaking 
more leverage than they would in the absence of the tax system. 
The effective marginal tax rate on debt-financed investment is 
lower than that on equity-financed investment.\443\ Limiting 
the deductibility of interest along with reducing the corporate 
tax rate narrows the disparity in the effective marginal tax 
rates based on different sources of financing. This leads to a 
more efficient capital structure for firms. The Committee 
believes that it is necessary to apply the limitation on the 
deductibility of interest to businesses regardless of the form 
in which such businesses are organized so as not to create 
distortions in the choice of entity.
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    \443\For a discussion of effective marginal tax rates on 
investment, see Joint Committee on Taxation, Economic Growth and Tax 
Policy (JCX-19-17), May 16, 2017, p. 15ff.
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    The Committee believes that limitations on the 
deductibility of interest should be applied to those businesses 
with the greatest levels of leverage. Such firms may pose the 
greatest societal costs in times of financial distress. Smaller 
firms are likely to impose smaller costs on the economy than 
larger firms. Additionally, smaller firms have limited access 
to public equity capital markets as compared to larger firms. 
Thus, the Committee believes it is appropriate to limit the 
interest deduction of only the largest taxpayers.
    The Committee understands that some taxpayers who do not 
consistently incur excessive amounts of leverage may 
nonetheless at times incur an amount of interest expense that 
is large in relation to its taxable income. For instance, a bad 
year in a business cycle might reduce taxable income to the 
point where a limitation based on taxable income takes effect. 
Furthermore, earnings attributable to investments financed by 
debt and interest payments associated with such debt may arise 
in different periods. For that reason, the Committee believes 
taxpayers should be able to average annual results, and so 
believes the carryforward of denied interest deductions is 
appropriate for a period of time.
    The Committee recognizes that certain types of trades or 
businesses have particular characteristics that warrant special 
rules related to interest deductibility.

                        EXPLANATION OF PROVISION

In general

    In the case of any taxpayer for any taxable year, the 
deduction for business interest is limited to the sum of (1) 
business interest income; (2) 30 percent of the adjusted 
taxable income of the taxpayer for the taxable year; and (3) 
the floor plan financing interest of the taxpayer for the 
taxable year. The amount of any business interest not allowed 
as a deduction for any taxable year may be carried forward for 
up to five years beyond the year in which the business interest 
was paid or accrued, treating business interest as allowed as a 
deduction on a first-in, first-out basis. The limitation 
applies at the taxpayer level. In the case of a group of 
affiliated corporations that file a consolidated return, the 
limitation applies at the consolidated tax return filing level.
    Business interest means any interest paid or accrued on 
indebtedness properly allocable to a trade or business. Any 
amount treated as interest for purposes of the Internal Revenue 
Code is interest for purposes of the provision. Business 
interest income means the amount of interest includible in the 
gross income of the taxpayer for the taxable year which is 
properly allocable to a trade or business. Business interest 
does not include investment interest, and business interest 
income does not include investment income, within the meaning 
of section 163(d).\444\
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    \444\Section 163(d) applies in the case of a taxpayer other than a 
corporation. Thus, a corporation has neither investment interest nor 
investment income within the meaning of section 163(d). Thus, interest 
income and interest expense of a corporation is properly allocable to a 
trade or business, unless such trade or business is otherwise 
explicitly excluded from the application of the provision.
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    Adjusted taxable income means the taxable income of the 
taxpayer computed without regard to (1) any item of income, 
gain, deduction, or loss which is not properly allocable to a 
trade or business; (2) any business interest or business 
interest income; (3) the amount of any net operating loss 
deduction; and (4) any deduction allowable for depreciation, 
amortization, or depletion.\445\ The Secretary may provide 
other adjustments to the computation of adjusted taxable 
income.
---------------------------------------------------------------------------
    \445\Any deduction allowable for depreciation, amortization, or 
depletion includes any deduction allowable for any amount treated as 
depreciation, amortization, or depletion under present law.
---------------------------------------------------------------------------
    Floor plan financing interest means interest paid or 
accrued on floor plan financing indebtedness. Floor plan 
financing indebtedness means indebtedness used to finance the 
acquisition of motor vehicles held for sale to retail customers 
and secured by the inventory so acquired. A motor vehicle means 
a motor vehicle that is an automobile, a truck, a recreational 
vehicle, a motorcycle, a boat, farm machinery or equipment, or 
construction machinery or equipment.
    By including business interest income and floor plan 
financing interest in the limitation, the rule operates to 
allow floor plan financing interest to be fully deductible and 
to limit the deduction for net interest expense (less floor 
plan financing interest) to 30 percent of adjusted taxable 
income. That is, a deduction for business interest is permitted 
to the full extent of business interest income and any floor 
plan financing interest. To the extent that business interest 
exceeds business interest income and floor plan financing 
interest, the deduction for the net interest expense is limited 
to 30 percent of adjusted taxable income.
    It is generally intended that, similar to present law, 
section 163(j) apply after the application of provisions that 
subject interest to deferral, capitalization, or other 
limitation. Thus, section 163(j) applies to interest deductions 
that are deferred, for example under section 163(e) or section 
267(a)(3)(B), in the taxable year to which such deductions are 
deferred. Section 163(j) applies after section 263A is applied 
to capitalize interest and after, for example, section 265 or 
section 279 is applied to disallow interest.

Application to passthrough entities

            In general
    In the case of any partnership, the limitation is applied 
at the partnership level. Any deduction for business interest 
is taken into account in determining the nonseparately stated 
taxable income or loss of the partnership.\446\ To prevent 
double counting, special rules are provided for the 
determination of the adjusted taxable income of each partner of 
the partnership. Similarly, to allow for additional interest 
deduction by a partner in the case of an excess amount of 
unused adjusted taxable income limitation of the partnership, 
special rules apply. Similar rules apply with respect to any S 
corporation and its shareholders.
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    \446\This amount is the ``Ordinary business income or loss'' 
reflected on Form 1065 (U.S. Return of Partnership Income). The 
partner's distributive share is reflected in Box 1 of Schedule K-1 
(Form 1065).
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            Double counting rule
    The adjusted taxable income of each partner (or 
shareholder, as the case may be) is determined without regard 
to such partner's distributive share of the nonseparately 
stated income or loss of such partnership. In the absence of 
such a rule, the same dollars of adjusted taxable income of a 
partnership could generate additional interest deductions as 
the income is passed through to the partners.
    Example 1.--ABC is a partnership owned 50-50 by XYZ 
Corporation and an individual. ABC generates $200 of 
noninterest income. Its only expense is $60 of business 
interest. Under the provision the deduction for business 
interest is limited to 30 percent of adjusted taxable income, 
that is, 30 percent * $200 = $60. ABC deducts $60 of business 
interest and reports ordinary business income of $140. XYZ's 
distributive share of the ordinary business income of ABC is 
$70. XYZ has net taxable income of zero from its other 
operations, none of which is attributable to interest income 
and without regard to its business interest expense. XYZ has 
business interest expense of $25. In the absence of any special 
rule, the $70 of taxable income from its interest in ABC would 
permit the deduction of up to an additional $21 of interest (30 
percent * $70 = $21), resulting in a deduction disallowance of 
only $4. XYZ's $100 share of ABC's adjusted taxable income 
would generate $51 of interest deductions. If XYZ were instead 
a passthrough entity, additional deductions could be available 
at each tier.
    The double counting rule provides that XYZ has adjusted 
taxable income computed without regard to the $70 distributive 
share of the nonseparately stated income of ABC. As a result, 
XYZ has adjusted taxable income of $0. XYZ's deduction for 
business interest is limited to 30 percent * $0 = $0, resulting 
in a deduction disallowance of $25.
            Additional deduction limit
    The limit on the amount allowed as a deduction for business 
interest is increased by a partner's distributive share of the 
partnership's excess amount of unused adjusted taxable income 
limitation. The excess amount with respect to any partnership 
is the excess (if any) of 30 percent of the adjusted taxable 
income of the partnership over the amount (if any) by which the 
business interest of the partnership (reduced by floor plan 
financing interest) exceeds the business interest income of the 
partnership. This allows a partner of a partnership to deduct 
more interest expense the partner may have paid or incurred to 
the extent the partnership could have deducted more business 
interest.
    Example 2.--The facts are the same as in Example 1 except 
ABC has only $40 of business interest. As in Example 1, ABC has 
a limit on its interest deduction of $60. The excess amount for 
ABC is $60 -$40 = $20. XYZ's distributive share of the excess 
amount from ABC partnership is $10. XYZ's deduction for 
business interest is limited to 30 percent of its adjusted 
taxable income plus its distributive share of the excess amount 
from ABC partnership (30 percent * $0 + $10 = $10). As a result 
of the rule, XYZ may deduct $10 of business interest and has an 
interest deduction disallowance of $15.

Carryforward of disallowed business interest

    The amount of any business interest not allowed as a 
deduction for any taxable year is treated as business interest 
paid or accrued in the succeeding taxable year. Business 
interest may be carried forward for up to five years. 
Carryforwards are determined on a first-in, first-out basis. It 
is intended that the provision be administered in a way to 
prevent trafficking in carryforwards.
    A coordination rule is provided with the limitation on 
deduction of interest by domestic corporations in international 
financial reporting groups.\447\ Whichever rule imposes the 
lower limitation on deduction of business interest with respect 
to the taxable year (and therefore the greatest amount of 
interest to be carried forward) governs.
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    \447\See section 4302 of the bill (Limitation on deduction of 
interest by domestic corporations which are members of an international 
financial reporting group).
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    Any carryforward of disallowed business interest is an item 
taken into account in the case of certain corporate 
acquisitions described in section 381 and is subject to 
limitation under section 382.

Exceptions

    The limitation does not apply to any taxpayer that meets 
the $25 million gross receipts test of section 448(c), that is, 
if the average annual gross receipts for the three-taxable-year 
period ending with the prior taxable year does not exceed $25 
million.\448\ Aggregation rules apply to determine the amount 
of a taxpayer's gross receipts under the gross receipts test of 
section 448(c).
---------------------------------------------------------------------------
    \448\In the case of a sole proprietorship, the $25 million gross 
receipts test is applied as if the sole proprietorship were a 
corporation or partnership.
---------------------------------------------------------------------------
    The trade or business of performing services as an employee 
is not treated as a trade or business for purposes of the 
limitation. As a result, for example, the wages of an employee 
are not counted in the adjusted taxable income of the taxpayer 
for purposes of determining the limitation.
    The limitation does not apply to a real property trade or 
business as defined in section 469(c)(7)(C). Any real property 
development, redevelopment, construction, reconstruction, 
acquisition, conversion, rental, operation, management, 
leasing, or brokerage trade or business is not treated as a 
trade or business for purposes of the limitation. As a result, 
for example, interest expense paid or incurred in a real 
property trade or business is not business interest subject to 
limitation and is generally deductible in the computation of 
taxable income.
    The limitation does not apply to certain regulated public 
utilities. Specifically, the trade or business of the 
furnishing or sale of (1) electrical energy, water, or sewage 
disposal services, (2) gas or steam through a local 
distribution system, or (3) transportation of gas or steam by 
pipeline, if the rates for such furnishing or sale, as the case 
may be, have been established or approved by a State or 
political subdivision thereof, by any agency or instrumentality 
of the United States, or by a public service or public utility 
commission or other similar body of any State or political 
subdivision thereof is not treated as a trade or business for 
purposes of the limitation.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2017.

2. Modification of net operating loss deduction (sec. 3302 of the bill 
                       and sec. 172 of the Code)

                              PRESENT LAW

    A net operating loss (``NOL'') generally means the amount 
by which a taxpayer's business deductions exceed its gross 
income.\449\ In general, an NOL may be carried back two years 
and carried over 20 years to offset taxable income in such 
years.\450\ NOLs offset taxable income in the order of the 
taxable years to which the NOL may be carried.\451\
---------------------------------------------------------------------------
    \449\Sec. 172(c).
    \450\Sec. 172(b)(1)(A).
    \451\Sec. 172(b)(2).
---------------------------------------------------------------------------
    Different carryback periods apply with respect to NOLs 
arising in different circumstances. Extended carryback periods 
are allowed for NOLs attributable to specified liability losses 
and certain casualty and disaster losses.\452\ Limitations are 
placed on the carryback of excess interest losses attributable 
to corporate equity reduction transactions.\453\
---------------------------------------------------------------------------
    \452\Sec. 172(b)(1)(C) and (E).
    \453\Sec. 172(b)(1)(D).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that, except in limited 
circumstances of disaster losses for farms and small 
businesses, NOLs should be carried forward, but not back. 
Further, with the elimination of carrybacks, the Committee 
believes that NOL carryovers should be adjusted to account for 
time value of money to preserve its value. The Committee also 
believes that taxpayers should pay some income tax in years in 
which the taxpayer has taxable income (determined without 
regard to the NOL deduction). Therefore, the Committee believes 
that the NOL deduction should be limited to 90 percent of 
taxable income (determined without regard to the deduction).

                        EXPLANATION OF PROVISION

    The provision limits the NOL deduction to 90 percent of 
taxable income (determined without regard to the deduction). 
Carryovers to other years are adjusted to take account of this 
limitation, and may be carried forward indefinitely. In 
addition, NOL carryovers attributable to losses arising in 
taxable years beginning after December 31, 2017, are increased 
annually to take into account the time value of money.
    The provision repeals the two-year carryback and the 
special carryback provisions, but provides a one-year carryback 
in the case of certain disaster losses incurred in the trade or 
business of farming, or by certain small businesses.\454\ For 
this purpose, small business means a corporation, partnership, 
or sole proprietorship whose average annual gross receipts for 
the three taxable-year period ending with such taxable year 
does not exceed $5,000,000. Aggregation rules apply to 
determine gross receipts.
---------------------------------------------------------------------------
    \454\Notwithstanding the amendments made by the provision and 
section 1304 of the bill (Repeal of deduction for personal casualty 
losses), the provision retains the present-law three-year carryback for 
the portion of the NOL for any taxable year which is a net disaster 
loss to which section 504(b) of the Disaster Tax Relief and Airport and 
Airway Extension Act of 2017 (Pub. L. No. 115-63) applies (i.e., a net 
disaster loss arising from hurricane Harvey, Irma, or Maria).
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The provision allowing indefinite carryovers and modifying 
carrybacks generally applies to losses arising in taxable years 
beginning after December 31, 2017.\455\
---------------------------------------------------------------------------
    \455\See section 3101 of the bill (Increased expensing) for a 
limitation on the amount of any NOL which may be treated as an NOL 
carryback in the case of any year which includes any portion of the 
period beginning September 28, 2017 and ending December 31, 2017.
---------------------------------------------------------------------------
    The provision limiting the NOL deduction applies to taxable 
years beginning after December 31, 2017.
    The annual increase in carryover amounts applies to taxable 
years beginning after December 31, 2017.

3. Like-kind exchanges of real property (sec. 3303 of the bill and sec. 
                           1031 of the Code)

                              PRESENT LAW

    An exchange of property, like a sale, generally is a 
taxable event. However, no gain or loss is recognized if 
property held for productive use in a trade or business or for 
investment is exchanged for property of a ``like kind'' which 
is to be held for productive use in a trade or business or for 
investment.\456\ In general, section 1031 does not apply to any 
exchange of stock in trade (i.e., inventory) or other property 
held primarily for sale; stocks, bonds, or notes; other 
securities or evidences of indebtedness or interest; interests 
in a partnership; certificates of trust or beneficial 
interests; or choses in action.\457\ Section 1031 also does not 
apply to certain exchanges involving livestock\458\ or foreign 
property.\459\
---------------------------------------------------------------------------
    \456\Sec. 1031(a)(1).
    \457\Sec. 1031(a)(2). A chose in action is a right that can be 
enforced by legal action.
    \458\Sec. 1031(e).
    \459\Sec. 1031(h).
---------------------------------------------------------------------------
    For purposes of section 1031, the determination of whether 
property is of a ``like kind'' relates to the nature or 
character of the property and not its grade or quality, i.e., 
the nonrecognition rules do not apply to an exchange of one 
class or kind of property for property of a different class or 
kind (e.g., section 1031 does not apply to an exchange of real 
property for personal property).\460\ The different classes of 
property are: (1) depreciable tangible personal property;\461\ 
(2) intangible or nondepreciable personal property;\462\ and 
(3) real property.\463\ However, the rules with respect to 
whether real estate is ``like kind'' are applied more liberally 
than the rules governing like-kind exchanges of depreciable, 
intangible, or nondepreciable personal property. For example, 
improved real estate and unimproved real estate generally are 
considered to be property of a ``like kind'' as this 
distinction relates to the grade or quality of the real 
estate,\464\ while depreciable tangible personal properties 
must be either within the same General Asset Class\465\ or 
within the same Product Class.\466\
---------------------------------------------------------------------------
    \460\Treas. Reg. sec. 1.1031(a)-1(b).
    \461\For example, an exchange of a personal computer classified 
under asset class 00.12 of Rev. Proc. 87-56, 1987-2 C.B. 674, for a 
printer classified under the same asset class of Rev. Proc. 87-56 would 
be treated as property of a like kind. However, an exchange of an 
airplane classified under asset class 00.21 of Rev. Proc. 87-56 for a 
heavy general purpose truck classified under asset class 00.242 of Rev. 
Proc. 87-56 would not be treated as property of a like kind. See Treas. 
Reg. sec. 1.1031(a)-2(b)(7).
    \462\For example, an exchange of a copyright on a novel for a 
copyright on a different novel would be treated as property of a like 
kind. See Treas. Reg. sec. 1.1031(a)-2(c)(3). However, the goodwill or 
going concern value of one business is not of a like kind to the 
goodwill or going concern value of a different business. See Treas. 
Reg. sec. 1.1031(a)-2(c)(2). The Internal Revenue Service (``IRS'') has 
ruled that intangible assets such as trademarks, trade names, 
mastheads, and customer-based intangibles that can be separately 
described and valued apart from goodwill qualify as property of a like 
kind under section 1031. See Chief Counsel Advice 200911006, February 
12, 2009.
    \463\Treas. Reg. sec. 1.1031(a)-1(b) and (c).
    \464\Treas. Reg. sec. 1.1031(a)-1(b).
    \465\Treasury Regulation section 1.1031(a)-2(b)(2) provides the 
following list of General Asset Classes, based on asset classes 00.11 
through 00.28 and 00.4 of Rev. Proc. 87-56, 1987-2 C.B. 674: (i) Office 
furniture, fixtures, and equipment (asset class 00.11), (ii) 
Information systems (computers and peripheral equipment) (asset class 
00.12), (iii) Data handling equipment, except computers (asset class 
00.13), (iv) Airplanes (airframes and engines), except those used in 
commercial or contract carrying of passengers or freight, and all 
helicopters (airframes and engines) (asset class 00.21), (v) 
Automobiles, taxis (asset class 00.22), (vi) Buses (asset class 00.23), 
(vii) Light general purpose trucks (asset class 00.241), (viii) Heavy 
general purpose trucks (asset class 00.242), (ix) Railroad cars and 
locomotives, except those owned by railroad transportation companies 
(asset class 00.25), (x) Tractor units for use over-the-road (asset 
class 00.26), (xi) Trailers and trailer-mounted containers (asset class 
00.27), (xii) Vessels, barges, tugs, and similar water-transportation 
equipment, except those used in marine construction (asset class 
00.28), and (xiii) Industrial steam and electric generation and/or 
distribution systems (asset class 00.4).
    \466\Property within a product class consists of depreciable 
tangible personal property that is described in a 6-digit product class 
within Sectors 31, 32, and 33 (pertaining to manufacturing industries) 
of the North American Industry Classification System (``NAICS''), set 
forth in Executive Office of the President, Office of Management and 
Budget, North American Industry Classification System, United States, 
2002 (NAICS Manual), as periodically updated. Treas. Reg. sec. 
1.1031(a)-2(b)(3).
---------------------------------------------------------------------------
    The nonrecognition of gain in a like-kind exchange applies 
only to the extent that like-kind property is received in the 
exchange. Thus, if an exchange of property would meet the 
requirements of section 1031, but for the fact that the 
property received in the transaction consists not only of the 
property that would be permitted to be exchanged on a tax-free 
basis, but also other non-qualifying property or money 
(``additional consideration''), then the gain to the recipient 
of the other property or money is required to be recognized, 
but not in an amount exceeding the fair market value of such 
other property or money.\467\ Additionally, any such gain 
realized on a section 1031 exchange as a result of additional 
consideration being involved constitutes ordinary income to the 
extent that the gain is subject to the recapture provisions of 
sections 1245 and 1250.\468\ No losses may be recognized from a 
like-kind exchange.\469\
---------------------------------------------------------------------------
    \467\Sec. 1031(b). For example, if a taxpayer holding land A having 
a basis of $40,000 and a fair market value of $100,000 exchanges the 
property for land B worth $90,000 plus $10,000 in cash, the taxpayer 
would recognize $10,000 of gain on the transaction, which would be 
includable in income. The remaining $50,000 of gain would be deferred 
until the taxpayer disposes of land B in a taxable sale or exchange.
    \468\Secs. 1245(b)(4) and 1250(d)(4). For example, if a taxpayer 
holding section 1245 property A with an original cost basis of $11,000, 
an adjusted basis of $10,000, and a fair market value of $15,000 
exchanges the property for section 1245 property B with a fair market 
value of $14,000 plus $1,000 in cash, the taxpayer would recognize 
$1,000 of ordinary income on the transaction. The remaining $4,000 of 
gain would be deferred until the taxpayer disposes of section 1245 
property B in a taxable sale or exchange.
    \469\Sec. 1031(c).
---------------------------------------------------------------------------
    If section 1031 applies to an exchange of properties, the 
basis of the property received in the exchange is equal to the 
basis of the property transferred. This basis is increased to 
the extent of any gain recognized as a result of the receipt of 
other property or money in the like-kind exchange, and 
decreased to the extent of any money received by the 
taxpayer.\470\ The holding period of qualifying property 
received includes the holding period of the qualifying property 
transferred, but the nonqualifying property received is 
required to begin a new holding period.\471\
---------------------------------------------------------------------------
    \470\Sec. 1031(d). Thus, in the example noted above, the taxpayer's 
basis in B would be $40,000 (the taxpayer's transferred basis of 
$40,000, increased by $10,000 in gain recognized, and decreased by 
$10,000 in money received).
    \471\Sec. 1223(1).
---------------------------------------------------------------------------
    A like-kind exchange also does not require that the 
properties be exchanged simultaneously. Rather, the property to 
be received in the exchange must be received not more than 180 
days after the date on which the taxpayer relinquishes the 
original property (but in no event later than the due date 
(including extensions) of the taxpayer's income tax return for 
the taxable year in which the transfer of the relinquished 
property occurs). In addition, the taxpayer must identify the 
property to be received within 45 days after the date on which 
the taxpayer transfers the property relinquished in the 
exchange.\472\
---------------------------------------------------------------------------
    \472\Sec. 1031(a)(3).
---------------------------------------------------------------------------
    The Treasury Department has issued regulations\473\ and 
revenue procedures\474\ providing guidance and safe harbors for 
taxpayers engaging in deferred like-kind exchanges.
---------------------------------------------------------------------------
    \473\Treas. Reg. sec. 1.1031(k)-1(a) through (o).
    \474\See Rev. Proc. 2000-37, 2000-40 I.R.B. 308, as modified by 
Rev. Proc. 2004-51, 2004-33 I.R.B. 294.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The definition of like-kind property has been modified 
legislatively over the years to address issues relating to 
targeted types of property. With the provisions in the bill of 
increased and expanded expensing under sections 168(k) and 179 
for tangible personal property and certain building 
improvements,\475\ the Committee believes that section 1031 
should be limited to exchanges of real property not held 
primarily for sale.
---------------------------------------------------------------------------
    \475\See sections 3101 (Increased expensing) and 3201 (Expansion of 
section 179 expensing) of the bill.
---------------------------------------------------------------------------

                        EXPLANATION OF PROVISION

    The provision modifies the provision providing for 
nonrecognition of gain in the case of like-kind exchanges by 
limiting its application to real property that is not held 
primarily for sale.\476\
---------------------------------------------------------------------------
    \476\It is intended that real property eligible for like-kind 
exchange treatment under present law will continue to be eligible for 
like-kind exchange treatment under the provision. For example, a like-
kind exchange of real property includes an exchange of shares in a 
mutual ditch, reservoir, or irrigation company described in section 
501(c)(12)(A) if at the time of the exchange such shares have been 
recognized by the highest court or statute of the State in which the 
company is organized as constituting or representing real property or 
an interest in real property. Similarly, improved real estate and 
unimproved real estate are generally considered to be property of a 
like kind (see Treas. Reg. sec. 1.1031(a)-1(b)).
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The provision generally applies to exchanges completed 
after December 31, 2017. However, an exception is provided for 
any exchange if the property disposed of by the taxpayer in the 
exchange is disposed of on or before December 31, 2017, or the 
property received by the taxpayer in the exchange is received 
on or before such date.

4. Revision of treatment of contributions to capital (sec. 3304 of the 
                     bill and sec. 118 of the Code)

                              PRESENT LAW

    The gross income of a corporation does not include any 
contribution to its capital.\477\ For purposes of this rule, a 
contribution to the capital of a corporation does not include 
any contribution in aid of construction or any other 
contribution from a customer or potential customer.\478\ A 
special rule allows certain contributions in aid of 
construction received by a regulated public utility that 
provides water or sewerage disposal services to be treated as a 
tax-free contribution to the capital of the utility.\479\ No 
deduction or credit is allowed for, or by reason of, any 
expenditure that constitutes a contribution that is treated as 
a tax-free contribution to the capital of the utility.\480\
---------------------------------------------------------------------------
    \477\Sec. 118(a).
    \478\Sec. 118(b).
    \479\Sec. 118(c)(1).
    \480\Sec. 118(c)(4).
---------------------------------------------------------------------------
    If property is acquired by a corporation as a contribution 
to capital and is not contributed by a shareholder as such, the 
adjusted basis of the property is zero.\481\ If the 
contribution consists of money, the corporation must first 
reduce the basis of any property acquired with the contributed 
money within the following 12-month period, and then reduce the 
basis of other property held by the corporation.\482\ 
Similarly, the adjusted basis of any property acquired by a 
utility with a contribution in aid of construction is 
zero.\483\
---------------------------------------------------------------------------
    \481\Sec. 362(c)(1).
    \482\Sec. 362(c)(2). See also Treas. Reg. sec. 1.362-2.
    \483\Sec. 118(c)(4).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that a contribution to corporation's 
capital is properly treated as income to the recipient unless 
the contributor receives in exchange an ownership interest of 
commensurate value to the contribution. The Committee also 
believes that removing a special rule that applies only to 
certain contributions to a corporation by nonshareholders helps 
achieve the goal of similar treatment of similarly situated 
taxpayers. The Committee further believes that treating 
contributions to capital by nonshareholders as income to the 
corporation will remove a Federal tax subsidy for State and 
local governments to offer incentives to businesses as a way of 
encouraging them to locate operations in a particular 
jurisdiction. If taxpayers in a particular State or locality 
wish to provide such financial inducements to businesses, they 
should be able to do so, but they should bear the cost of such 
financial inducements without passing on a portion of those 
costs to all Federal taxpayers.

                        EXPLANATION OF PROVISION

    The provision repeals the provision of the Internal Revenue 
Code under which, generally, a corporation's gross income does 
not include contributions of capital to the corporation.
    The provision provides that a contribution to capital, 
other than a contribution of money or property made in exchange 
for stock of a corporation or any interest in an entity, is 
included in gross income of the corporation. For example, a 
contribution of municipal land by a municipality that is not in 
exchange for stock (or for a partnership interest or other 
interest) of equivalent value is considered a contribution to 
capital that is includable in gross income. By contrast, a 
municipal tax abatement for locating a business in a particular 
municipality is not considered a contribution to capital.
    The provision further provides that a contribution of 
capital in exchange for stock is not includible in the gross 
income of the corporation to the extent that the fair market 
value of any money or other property contributed does not 
exceed the fair market value of stock received. It is intended 
that, for this purpose, the fair market value of any property 
contributed is calculated net of any liabilities to which the 
property is subject and net of any liabilities or obligations 
of the transferor assumed or taken subject to by the entity in 
connection with the transaction. When valuing stock or equity 
received, taxpayers may disregard discounts for lack of control 
and the effect of limited liquidity on valuation.
    The provision does not change the application of the 
meaningless gesture doctrine, described in Lessinger v. 
Commissioner, 872 F.2d 519 (2d. Cir. 1989) and related cases, 
as well as in administrative guidance.\484\ Thus, under the 
provision, whether incremental shares of stock are issued when 
the existing shareholder or shareholders of a corporation make 
a pro-rata contribution to the capital of the corporation is 
not determinative of whether the contribution is included in 
income of the corporation.
---------------------------------------------------------------------------
    \484\Rev. Rul. 64-155, 1964-1 CB 138.
---------------------------------------------------------------------------
    The fair market value requirement generally will be 
satisfied in any arm's length transaction in which stock is 
issued in consideration for cash. Thus, for example, in a 
public offering, if the price of the stock was determined on an 
arm's length basis, the fact the stock trades immediately after 
its issuance at a price below the issue price will not result 
in contribution to capital treatment.
    Finally, the provision provides rules clarifying the 
contributee's basis in the property contributed.

                             EFFECTIVE DATE

    The provision applies to contributions made, and 
transactions entered into, after the date of enactment.

 5. Repeal of deduction for local lobbying expenses (sec. 3305 of the 
                   bill and sec. 162(e) of the Code)

                              PRESENT LAW

In general

    A taxpayer generally is allowed a deduction for ordinary 
and necessary expenses paid or incurred in carrying on any 
trade or business.\485\ However, section 162(e) denies a 
deduction for amounts paid or incurred in connection with (1) 
influencing legislation,\486\ (2) participation in, or 
intervention in, any political campaign on behalf of (or in 
opposition to) any candidate for public office, (3) any attempt 
to influence the general public, or segments thereof, with 
respect to elections, legislative matters, or referendums, or 
(4) any direct communication with a covered executive branch 
official\487\ in an attempt to influence the official actions 
or positions of such official. Expenses paid or incurred in 
connection with lobbying and political activities (such as 
research for, or preparation, planning, or coordination of, any 
previously described activity) also are not deductible.\488\
---------------------------------------------------------------------------
    \485\Sec. 162(a).
    \486\The term ``influencing legislation'' means any attempt to 
influence any legislation through communication with any member or 
employee of a legislative body, or with any government official or 
employee who may participate in the formulation of legislation. The 
term ``legislation'' includes actions with respect to Acts, bills, 
resolutions, or similar items by the Congress, any State legislature, 
any local council, or similar governing body, or by the public in a 
referendum, initiative, constitutional amendment, or similar procedure. 
Secs. 162(e)(4) and 4911(e)(2).
    \487\The term ``covered executive branch official'' means (1) the 
President, (2) the Vice President, (3) any officer or employee of the 
White House Office of the Executive Office of the President, and the 
two most senior level officers of each of the other agencies in such 
Executive Office, (4) any individual servicing in a position in level I 
of the Executive Schedule under section 5312 of title 5, United States 
Code, (5) any other individual designated by the President as having 
Cabinet-level status, and (6) any immediate deputy of an individual 
described in (4) or (5). Sec. 162(e)(6).
    \488\Sec. 162(e)(5)(C).
---------------------------------------------------------------------------

Exceptions

            Local legislation
    Notwithstanding the above, a deduction is allowed for 
ordinary and necessary expenses incurred in connection with any 
legislation of any local council or similar governing body 
(``local legislation'').\489\ With respect to local 
legislation, the exception permits a deduction for amounts paid 
or incurred in carrying on any trade or business (1) in direct 
connection with appearances before, submission of statements 
to, or sending communications to the committees or individual 
members of such council or body with respect to legislation or 
proposed legislation of direct interest to the taxpayer, or (2) 
in direct connection with communication of information between 
the taxpayer and an organization of which the taxpayer is a 
member with respect to any such legislation or proposed 
legislation which is of direct interest to the taxpayer and 
such organization, and (3) that portion of the dues paid or 
incurred with respect to any organization of which the taxpayer 
is a member which is attributable to the expenses of the 
activities described in (1) or (2) carried on by such 
organization.\490\
---------------------------------------------------------------------------
    \489\Sec. 162(e)(2)(A).
    \490\Sec. 162(e)(2)(B).
---------------------------------------------------------------------------
    For purposes of this exception, legislation of an Indian 
tribal government is treated in the same manner as local 
legislation.\491\
---------------------------------------------------------------------------
    \491\Sec. 162(e)(7).
---------------------------------------------------------------------------
            De minimis
    For taxpayers with $2,000 or less of in-house expenditures 
related to lobbying and political activities, a de minimis 
exception is provided that permits a deduction.\492\
---------------------------------------------------------------------------
    \492\Sec. 162(e)(5)(B).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that Federal tax law should not draw 
a distinction between the deductibility of local and non-local 
lobbying expenses. The Committee further believes that ending 
the deductibility of local lobbying expenses eliminates a 
Federal tax subsidy for efforts to influence local legislation. 
Finally, the Committee believes that elimination of this 
distinction furthers its general goal of simplification of 
Federal tax law.

                        EXPLANATION OF PROVISION

    The provision repeals the exception for amounts paid or 
incurred related to lobbying local councils or similar 
governing bodies, including Indian tribal governments. Thus, 
the general disallowance rules applicable to lobbying and 
political expenditures will apply to costs incurred related to 
such local legislation.

                             EFFECTIVE DATE

    The provision applies to amounts paid or incurred after 
December 31, 2017.

 6. Repeal of deduction for income attributable to domestic production 
      activities (sec. 3306 of the bill and sec. 199 of the Code)

                              PRESENT LAW

    Section 199 provides a deduction from taxable income (or, 
in the case of an individual, adjusted gross income\493\) that 
is equal to nine percent of the lesser of the taxpayer's 
qualified production activities income or taxable income 
(determined without regard to the section 199 deduction) for 
the taxable year.\494\ For corporations subject to the 35-
percent corporate income tax rate, the nine-percent deduction 
effectively reduces the corporate income tax rate to slightly 
less than 32 percent on qualified production activities 
income.\495\ A similar reduction applies to the graduated rates 
applicable to individuals with qualifying domestic production 
activities income.
---------------------------------------------------------------------------
    \493\For this purpose, adjusted gross income is determined after 
application of sections 86, 135, 137, 219, 221, 222, and 469, without 
regard to the section 199 deduction. Sec. 199(d)(2).
    \494\Sec. 199(a). In the case of oil related qualified production 
activities income, the deduction from taxable income is equal to six 
percent of the lesser of the taxpayer's oil related qualified 
production activities income, qualified production activities income, 
or taxable income. Sec. 199(d)(9).
    \495\This example assumes the deduction does not exceed the wage 
limitation discussed below.
---------------------------------------------------------------------------
    In general, qualified production activities income is equal 
to domestic production gross receipts reduced by the sum of: 
(1) the costs of goods sold that are allocable to those 
receipts; and (2) other expenses, losses, or deductions which 
are properly allocable to those receipts.\496\
---------------------------------------------------------------------------
    \496\Sec. 199(c)(1). In computing qualified production activities 
income, the domestic production activities deduction itself is not an 
allocable deduction. Sec. 199(c)(1)(B)(ii). See Treas. Reg. secs. 
1.199-1 through 1.199-9 where the Secretary has prescribed rules for 
the proper allocation of items of income, deduction, expense, and loss 
for purposes of determining qualified production activities income.
---------------------------------------------------------------------------
    Domestic production gross receipts generally are gross 
receipts of a taxpayer that are derived from: (1) any sale, 
exchange, or other disposition, or any lease, rental, or 
license, of qualifying production property\497\ that was 
manufactured, produced, grown or extracted by the taxpayer in 
whole or in significant part within the United States;\498\ (2) 
any sale, exchange, or other disposition, or any lease, rental, 
or license, of qualified film\499\ produced by the taxpayer; 
(3) any sale, exchange, or other disposition, or any lease, 
rental, or license, of electricity, natural gas, or potable 
water produced by the taxpayer in the United States; (4) 
construction of real property performed in the United States by 
a taxpayer in the ordinary course of a construction trade or 
business; or (5) engineering or architectural services 
performed in the United States for the construction of real 
property located in the United States.\500\
---------------------------------------------------------------------------
    \497\Qualifying production property generally includes any tangible 
personal property, computer software, and sound recordings. Sec. 
199(c)(5).
    \498\When used in the Code in a geographical sense, the term 
``United States'' generally includes only the States and the District 
of Columbia. Sec. 7701(a)(9). A special rule for determining domestic 
production gross receipts, however, provides that for taxable years 
beginning after December 31, 2005, and before January 1, 2018, in the 
case of any taxpayer with gross receipts from sources within the 
Commonwealth of Puerto Rico, the term ``United States'' includes the 
Commonwealth of Puerto Rico, but only if all of the taxpayer's Puerto 
Rico-sourced gross receipts are taxable under the Federal income tax 
for individuals or corporations for such taxable year. Secs. 
199(d)(8)(A) and (C), as extended by section 4401 of the bill 
(Extension of deduction allowable with respect to income attributable 
to domestic production activities in Puerto Rico). In computing the 50-
percent wage limitation, the taxpayer is permitted to take into account 
wages paid to bona fide residents of Puerto Rico for services performed 
in Puerto Rico. Sec. 199(d)(8)(B).
    \499\Qualified film includes any motion picture film or videotape 
(including live or delayed television programming, but not including 
certain sexually explicit productions) if 50 percent or more of the 
total compensation relating to the production of the film (including 
compensation in the form of residuals and participations) constitutes 
compensation for services performed in the United States by actors, 
production personnel, directors, and producers. Sec. 199(c)(6).
    \500\Sec. 199(c)(4)(A).
---------------------------------------------------------------------------
    The amount of the deduction for a taxable year is limited 
to 50 percent of the W-2 wages paid by the taxpayer, and 
properly allocable to domestic production gross receipts, 
during the calendar year that ends in such taxable year.\501\
---------------------------------------------------------------------------
    \501\Sec. 199(b)(1). For purposes of the provision, ``W-2 wages'' 
include the sum of the amounts of wages as defined in section 3401(a) 
and elective deferrals that the taxpayer properly reports to the Social 
Security Administration with respect to the employment of employees of 
the taxpayer during the calendar year ending during the taxpayer's 
taxable year. Elective deferrals include elective deferrals as defined 
in section 402(g)(3), amounts deferred under section 457, and 
designated Roth contributions as defined in section 402A. See sec. 
199(b)(2)(A). The wage limitation for qualified films includes any 
compensation for services performed in the United States by actors, 
production personnel, directors, and producers and is not restricted to 
W-2 wages. Sec. 199(b)(2)(D).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes the reduction in corporate rate and 
creation of a maximum rate on business income of individuals 
will enhance the ability of all domestic businesses to compete 
in the global marketplace and enable small businesses to 
maintain their position as the primary source of new jobs in 
this country. Therefore, while the Committee believes that the 
deduction for income attributable to domestic production 
activities has generally helped domestic manufacturing firms by 
improving the cash flow of domestic manufacturers and making 
investments in domestic manufacturing facilities more 
attractive, there is no longer a need for such deduction. 
Finally, the Committee believes that elimination of deduction 
for income attributable to domestic production activities 
furthers the Committee's general goal of simplification of the 
tax code.

                        EXPLANATION OF PROVISION

    The provision repeals section 199 for taxable years 
beginning after December 31, 2017.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2017.

7. Entertainment, etc. expenses (sec. 3307 of the bill and sec. 274 of 
                               the Code)

                              PRESENT LAW

In general

    No deduction is allowed with respect to (1) an activity 
generally considered to be entertainment, amusement, or 
recreation (``entertainment''), unless the taxpayer establishes 
that the item was directly related to (or, in certain cases, 
associated with) the active conduct of the taxpayer's trade or 
business, or (2) a facility (e.g., an airplane) used in 
connection with such activity.\502\ If the taxpayer establishes 
that entertainment expenses are directly related to (or 
associated with) the active conduct of its trade or business, 
the deduction generally is limited to 50 percent of the amount 
otherwise deductible.\503\ Similarly, a deduction for any 
expense for food or beverages generally is limited to 50 
percent of the amount otherwise deductible.\504\ In addition, 
no deduction is allowed for membership dues with respect to any 
club organized for business, pleasure, recreation, or other 
social purpose.\505\
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    \502\Sec. 274(a)(1).
    \503\Sec. 274(n)(1)(B).
    \504\Sec. 274(n)(1)(A).
    \505\Sec. 274(a)(3).
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    There are a number of exceptions to the general rule 
disallowing deduction of entertainment expenses and the rules 
limiting deductions to 50 percent of the otherwise deductible 
amount. Under one such exception, those rules do not apply to 
expenses for goods, services, and facilities to the extent that 
the expenses are reported by the taxpayer as compensation and 
as wages to an employee.\506\ Those rules also do not apply to 
expenses for goods, services, and facilities to the extent that 
the expenses are includible in the gross income of a recipient 
who is not an employee (e.g., a nonemployee director) as 
compensation for services rendered or as a prize or award.\507\ 
The exceptions apply only to the extent that amounts are 
properly reported by the company as compensation and wages or 
otherwise includible in income. In no event can the amount of 
the deduction exceed the amount of the taxpayer's actual cost, 
even if a greater amount (i.e., fair market value) is 
includible in income.\508\
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    \506\Sec. 274(e)(2)(A). See below for a discussion of the recent 
modification of this rule for certain individuals.
    \507\Sec. 274(e)(9).
    \508\Treas. Reg. sec. 1.162-25T(a).
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    Those deduction disallowance rules also do not apply to 
expenses paid or incurred by the taxpayer, in connection with 
the performance of services for another person (other than an 
employer), under a reimbursement or other expense allowance 
arrangement if the taxpayer accounts for the expenses to such 
person.\509\ Another exception applies for expenses for 
recreational, social, or similar activities primarily for the 
benefit of employees other than certain owners and highly 
compensated employees.\510\ An exception applies also to the 50 
percent deduction limit for food and beverages provided to crew 
members of certain commercial vessels and certain oil or gas 
platform or drilling rig workers.\511\
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    \509\Sec. 274(e)(3).
    \510\Sec. 274(e)(4).
    \511\Sec. 274(n)(2)(E).
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Expenses treated as compensation

    Except as otherwise provided, gross income includes 
compensation for services, including fees, commissions, fringe 
benefits, and similar items.\512\ In general, an employee (or 
other service provider) must include in gross income the amount 
by which the fair market value of a fringe benefit exceeds the 
sum of the amount (if any) paid by the individual and the 
amount (if any) specifically excluded from gross income.\513\ 
Treasury regulations provide detailed rules regarding the 
valuation of certain fringe benefits, including flights on an 
employer-provided aircraft. In general, the value of a non-
commercial flight generally is determined under the base 
aircraft valuation formula, also known as the Standard Industry 
Fare Level formula or ``SIFL.''\514\ If the SIFL valuation 
rules do not apply, the value of a flight on an employer-
provided aircraft generally is equal to the amount that an 
individual would have to pay in an arm's-length transaction to 
charter the same or a comparable aircraft for that period for 
the same or a comparable flight.\515\
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    \512\Sec. 61(a)(1).
    \513\Treas. Reg. sec. 1.61-21(b)(1).
    \514\Treas. Reg. sec. 1.61-21(g)(5).
    \515\Treas. Reg. sec. 1.61-21(b)(6).
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    In the context of an employer providing an aircraft to 
employees for nonbusiness (e.g., vacation) flights, the 
exception for expenses treated as compensation has been 
interpreted as not limiting the company's deduction for 
expenses attributable to the operation of the aircraft to the 
amount of compensation reportable to its employees.\516\ The 
result of that interpretation is often a deduction several 
times larger than the amount required to be included in income. 
Further, in many cases, the individual including amounts 
attributable to personal travel in income directly benefits 
from the enhanced deduction, resulting in a net deduction for 
the personal use of the company aircraft.
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    \516\Sutherland Lumber-Southwest, Inc. v. Commissioner, 114 T.C. 
197 (2000), aff'd, 255 F.3d 495 (8th Cir. 2001).
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    The exceptions for expenses treated as compensation or 
otherwise includible income were subsequently modified in the 
case of specified individuals such that the exceptions apply 
only to the extent of the amount of expenses treated as 
compensation or includible in income of the specified 
individual.\517\ Specified individuals are individuals who, 
with respect to an employer or other service recipient (or a 
related party), are subject to the requirements of section 
16(a) of the Securities Exchange Act of 1934, or would be 
subject to such requirements if the employer or service 
recipient (or related party) were an issuer of equity 
securities referred to in section 16(a).\518\
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    \517\Sec. 274(e)(2)(B)(i). See also Treas. Reg. sec. 1.274-9(a).
    \518\Sec. 274(e)(2)(B)(ii). See also Treas. Reg. sec. 1.274-9(b).
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    As a result, in the case of specified individuals, no 
deduction is allowed with respect to expenses for (1) a 
nonbusiness activity generally considered to be entertainment, 
amusement or recreation, or (2) a facility (e.g., an airplane) 
used in connection with such activity to the extent that such 
expenses exceed the amount treated as compensation or 
includible in income to the specified individual. For example, 
a company's deduction attributable to aircraft operating costs 
and other expenses for a specified individual's vacation use of 
a company aircraft is limited to the amount reported as 
compensation to the specified individual. However, in the case 
of other employees or service providers, the company's 
deduction is not limited to the amount treated as compensation 
or includible in income.\519\
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    \519\See Treas. Reg. sec. 1.274-10(a)(2).
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Excludable fringe benefits

    Certain employer-provided fringe benefits are excluded from 
an employee's gross income and wages for employment tax 
purposes, including de minimis fringes and qualified 
transportation fringes.\520\ A de minimis fringe generally 
means any property or service the value of which is (taking 
into account the frequency with which similar fringes are 
provided by the employer) so small as to make accounting for it 
unreasonable or administratively impracticable.\521\ Qualified 
transportation fringes include qualified parking (i.e., on or 
near the employer's business premises or on or near a location 
from which the employee commutes to work by public transit), 
transit passes, vanpool benefits, and qualified bicycle 
commuting reimbursements.\522\ On-premises athletic facilities 
are gyms or other athletic facilities located on the employer's 
premises, operated by the employer, and substantially all the 
use of which is by employees of the employer, their spouses, 
and their dependent children.\523\
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    \520\Secs. 132(a), 3121(a)(20), 3231(e)(5), 3306(b)(16), and 
3401(a)(19).
    \521\Sec. 132(e)(1). Examples include occasional personal use of an 
employer's copying machine, occasional parties or meals for employees 
and their guests, local telephone calls, and coffee, doughnuts and soft 
drinks. Treas. Reg. sec. 1.132-6(e)(1).
    \522\Sec. 132(f)(1), (5). The qualified transportation fringe 
exclusions are subject to monthly limits. Sec. 132(f)(2).
    \523\Section 132(j)(4).
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                           REASONS FOR CHANGE

    The Committee believes that the difficulty in determining 
whether entertainment expenses are directly related to, or 
associated with, a trade or business creates uncertainty for 
taxpayers and the potential for significant abuse. The 
Committee therefore believes that a tax deduction for 
entertainment-related expenses should be permitted only to the 
extent such items are reported as employee compensation. The 
Committee also aligns the treatment of the employer's deduction 
for transportation and gym benefits, and amenities provided to 
an employee that are primarily personal in nature and not 
directly related to a trade or business, with other similar 
taxable items.

                        EXPLANATION OF PROVISION

    The provision provides that no deduction is allowed with 
respect to (1) an activity generally considered to be 
entertainment, amusement or recreation, (2) membership dues 
with respect to any club organized for business, pleasure, 
recreation or other social purposes, (3) a de minimis fringe 
that is primarily personal in nature and involving property or 
services that are not directly related to the taxpayer's trade 
or business, (4) a facility or portion thereof used in 
connection with any of the above items, (5) a qualified 
transportation fringe, including costs of operating a facility 
used for qualified parking, and (6) an on-premises athletic 
facility provided by an employer to its employees, including 
costs of operating such a facility. Thus, the provision repeals 
the present-law exception to the deduction disallowance for 
entertainment, amusement, or recreation that is directly 
related to (or, in certain cases, associated with) the active 
conduct of the taxpayer's trade or business (and the related 
rule applying a 50 percent limit to such deductions). The 
provision also repeals the present-law exception for 
recreational, social, or similar activities primarily for the 
benefit of employees. However, taxpayers may still, generally, 
deduct 50 percent of the food and beverage expenses associated 
with operating their trade or business (e.g., meals consumed by 
employees on work travel).
    Under the provision, in the case of all individuals (not 
just specified individuals), the exceptions to the general 
entertainment expense disallowance rule for expenses treated as 
compensation or includible in income apply only to the extent 
of the amount of expenses treated as compensation or includible 
in income. Thus, under those exceptions, no deduction is 
allowed with respect to expenses for (1) a nonbusiness activity 
generally considered to be entertainment, amusement or 
recreation, or (2) a facility (e.g., an airplane) used in 
connection with such activity to the extent that such expenses 
exceed the amount treated as compensation or includible in 
income. As under present law, the exceptions apply only if 
amounts are properly reported by the company as compensation 
and wages or otherwise includible in income.
    The provision amends the present-law exception for 
reimbursed expenses. The provision disallows a deduction for 
amounts paid or incurred by a taxpayer in connection with the 
performance of services for another person (other than an 
employee) under a reimbursement or other expense allowance 
arrangement if the person for whom the services are performed 
is a tax-exempt entity\524\ or the arrangement is designated by 
the Secretary as having the effect of avoiding the 50 percent 
deduction disallowance.
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    \524\As defined in section 168(h)(2)(A), i.e., Federal, State and 
local government entities, organizations (other than certain 
cooperatives) exempt from income tax, any foreign person or entity, and 
any Indian tribal government.
---------------------------------------------------------------------------
    The provision clarifies that the exception to the 50 
percent deduction limit for food or beverages applies to any 
expense excludible from the gross income of the recipient 
related to meals furnished for the convenience of the employer. 
The provision thereby repeals as deadwood the special 
exceptions for food or beverages provided to crew members of 
certain commercial vessels and certain oil or gas platform or 
drilling rig workers.

                             EFFECTIVE DATE

    The provision applies to amounts paid or incurred after 
December 31, 2017.

  8. Unrelated business taxable income increased by amount of certain 
fringe benefit expenses for which deduction is disallowed (sec. 3308 of 
                   the bill and sec. 512 of the Code)

                              PRESENT LAW

Tax exemption for certain organizations

    Section 501(a) exempts certain organizations from Federal 
income tax. Such organizations include: (1) tax-exempt 
organizations described in section 501(c) (including among 
others section 501(c)(3) charitable organizations and section 
501(c)(4) social welfare organizations); (2) religious and 
apostolic organizations described in section 501(d); and (3) 
trusts forming part of a pension, profit-sharing, or stock 
bonus plan of an employer described in section 401(a).

Unrelated business income tax, in general

    The unrelated business income tax (``UBIT'') generally 
applies to income derived from a trade or business regularly 
carried on by the organization that is not substantially 
related to the performance of the organization's tax-exempt 
functions.\525\ An organization that is subject to UBIT and 
that has $1,000 or more of gross unrelated business taxable 
income must report that income on Form 990-T (Exempt 
Organization Business Income Tax Return).
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    \525\Secs. 511-514.
---------------------------------------------------------------------------
    Most exempt organizations may operate an unrelated trade or 
business so long as the organization remains primarily engaged 
in activities that further its exempt purposes. Therefore, an 
organization may engage in a substantial amount of unrelated 
business activity without jeopardizing its exempt status. A 
section 501(c)(3) (charitable) organization, however, may not 
operate an unrelated trade or business as a substantial part of 
its activities.\526\ Therefore, the unrelated trade or business 
activity of a section 501(c)(3) organization must be 
insubstantial.
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    \526\Treas. Reg. sec. 1.501(c)(3)-1(e).
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    An organization determines its unrelated business taxable 
income by subtracting from its gross unrelated business income 
deductions directly connected with the unrelated trade or 
business.\527\ Under regulations, in determining unrelated 
business taxable income, an organization that operates multiple 
unrelated trades or businesses aggregates income from all such 
activities and subtracts from the aggregate gross income the 
aggregate of deductions.\528\ As a result, an organization may 
use a loss from one unrelated trade or business to offset gain 
from another, thereby reducing total unrelated business taxable 
income.
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    \527\Sec. 512(a).
    \528\Treas. Reg. sec. 1.512(a)-1(a).
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Organizations subject to tax on unrelated business income

    Most exempt organizations are subject to the tax on 
unrelated business income. Specifically, organizations subject 
to the unrelated business income tax generally include: (1) 
organizations exempt from tax under section 501(a), including 
organizations described in section 501(c) (except for U.S. 
instrumentalities and certain charitable trusts); (2) qualified 
pension, profit-sharing, and stock bonus plans described in 
section 401(a); and (3) certain State colleges and 
universities.\529\
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    \529\Sec. 511(a)(2).
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Exclusions from Unrelated Business Taxable Income

    Certain types of income are specifically exempt from 
unrelated business taxable income, such as dividends, interest, 
royalties, and certain rents,\530\ unless derived from debt-
financed property or from certain 50-percent controlled 
subsidiaries.\531\ Other exemptions from UBIT are provided for 
activities in which substantially all the work is performed by 
volunteers, for income from the sale of donated goods, and for 
certain activities carried on for the convenience of members, 
students, patients, officers, or employees of a charitable 
organization. In addition, special UBIT provisions exempt from 
tax activities of trade shows and State fairs, income from 
bingo games, and income from the distribution of low-cost items 
incidental to the solicitation of charitable contributions. 
Organizations liable for tax on unrelated business taxable 
income may be liable for alternative minimum tax determined 
after taking into account adjustments and tax preference items.
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    \530\Secs. 511-514.
    \531\Sec. 512(b)(13).
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                           REASONS FOR CHANGE

    As part of its broader tax reform effort, the Committee 
believes that certain nontaxable fringe benefits should not be 
deductible by employers if not includible in income of 
employees. The Committee believes that aligning the tax 
treatment between for-profit and tax-exempt employers with 
respect to nontaxable transportation and gym benefits provided 
to employees will make the tax system simpler and fairer for 
all businesses. In addition, broadening the tax base will allow 
for lower tax rates that will benefit all taxpayers.

                        EXPLANATION OF PROVISION

    Under the provision, unrelated business taxable income 
includes any expenses paid or incurred by a tax exempt 
organization for qualified transportation fringe benefits (as 
defined in section 132(f)), a parking facility used in 
connection with qualified parking (as defined in section 
132(f)(5)(C)), or any on-premises athletic facility (as defined 
in section 132(j)(4)(B)), provided such amounts are not 
deductible under section 274.

                             EFFECTIVE DATE

    The provision is effective for amounts paid or incurred 
after December 31, 2017.

9. limitation on deduction for FDIC premiums (sec. 3309 of the bill and 
                         sec. 162 of the Code)

                              PRESENT LAW

    Corporations organized under the laws of any of the 50 
States (and the District of Columbia) generally are subject to 
the U.S. corporate income tax on their worldwide taxable 
income. The taxable income of a C corporation\532\ generally 
comprises gross income less allowable deductions. A taxpayer 
generally is allowed a deduction for ordinary and necessary 
expenses paid or incurred in carrying on any trade or 
business.\533\
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    \532\Corporations subject to tax are commonly referred to as C 
corporations after subchapter C of the Code, which sets forth corporate 
tax rules. Certain specialized entities that invest primarily in real 
estate related assets (real estate investment trusts) or in stock and 
securities (regulated investment companies) and that meet other 
requirements, generally including annual distribution of 90 percent of 
their income, are allowed to deduct their distributions to 
shareholders, thus generally paying little or no corporate-level tax 
despite otherwise being subject to subchapter C.
    \533\Sec. 162(a). However, certain exceptions apply. No deduction 
is allowed for (1) any charitable contribution or gift that would be 
allowable as a deduction under section 170 were it not for the 
percentage limitations, the dollar limitations, or the requirements as 
to the time of payment, set forth in such section; (2) any illegal 
bribe, illegal kickback, or other illegal payment; (3) certain lobbying 
and political expenditures; (4) any fine or similar penalty paid to a 
government for the violation of any law; (5) two-thirds of treble 
damage payments under the antitrust laws; (6) certain foreign 
advertising expenses; (7) certain amounts paid or incurred by a 
corporation in connection with the reacquisition of its stock or of the 
stock of any related person; or (8) certain applicable employee 
remuneration.
---------------------------------------------------------------------------
    Corporations that make a valid election pursuant to section 
1362 of subchapter S of the Code, referred to as S 
corporations, generally are not subject to corporate-level 
income tax on its items of income and loss. Instead, an S 
corporation passes through to shareholders its items of income 
and loss. The shareholders separately take into account their 
shares of these items on their individual income tax returns.

Banks, thrifts, and credit unions

            In general
    Financial institutions are subject to the same Federal 
income tax rules and rates as are applied to other corporations 
or entities, with specified exceptions.
            C corporation banks and thrifts
    A bank is generally taxed for Federal income tax purposes 
as a C corporation. For this purpose a bank generally means a 
corporation, a substantial portion of whose business is 
receiving deposits and making loans and discounts, or 
exercising certain fiduciary powers.\534\ A bank for this 
purpose generally includes domestic building and loan 
associations, mutual stock or savings banks, and certain 
cooperative banks that are commonly referred to as 
thrifts.\535\
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    \534\Sec. 581. See also Treas. Reg. sec. 1.581-1(a).
    \535\While the general principles for determining the taxable 
income of a corporation are applicable to a mutual savings bank, a 
building and loan association, and a cooperative bank, there are 
certain exceptions and special rules for such institutions. Treas. Reg. 
sec. 1.581-2(a).
---------------------------------------------------------------------------
            S corporation banks
    A bank is generally eligible to elect S corporation status 
under section 1362, provided it meets the other requirements 
for making this election and it does not use the reserve method 
of accounting for bad debts as described in section 585.\536\
---------------------------------------------------------------------------
    \536\Sec. 1361(b)(2)(A).
---------------------------------------------------------------------------
            Special bad debt loss rules for small banks
    Section 166 provides a deduction for any debt that becomes 
worthless (wholly or partially) within a taxable year. The 
reserve method of accounting for bad debts, repealed in 
1986\537\ for most taxpayers, is allowed under section 585 for 
any bank (as defined in section 581) other than a large bank. 
For this purpose, a bank is a large bank if, for the taxable 
year (or for any preceding taxable year after 1986), the 
average adjusted basis of all its assets (or the assets of the 
controlled group of which it is a member) exceeds $500 million. 
Deductions for reserves are taken in lieu of a worthless debt 
deduction under section 166. Accordingly, a small bank is able 
to take deductions for additions to a bad debt reserve. 
Additions to the reserve are determined under an experience 
method that generally looks to the ratio of (1) the total bad 
debts sustained during the taxable year and the five preceding 
taxable years to (2) the sum of the loans outstanding at the 
close of such taxable years.\538\
---------------------------------------------------------------------------
    \537\Tax Reform Act of 1986, Pub. L. No. 99-514.
    \538\Sec. 585(b)(2).
---------------------------------------------------------------------------
            Credit unions
    Credit unions are exempt from Federal income taxation.\539\ 
The exemption is based on their status as not-for-profit mutual 
or cooperative organizations (without capital stock) operated 
for the benefit of their members, who generally must share a 
common bond. The definition of common bond has been expanded to 
permit greater use of credit unions.\540\ While significant 
differences between the rules under which credit unions and 
banks operate have existed in the past, most of those 
differences have disappeared over time.\541\
---------------------------------------------------------------------------
    \539\Sec. 501(c)(14)(A). For a discussion of the history of and 
reasons for Federal tax exemption, see United States Department of the 
Treasury, Comparing Credit Unions with Other Depository Institutions, 
Report 3070, January 15, 2001, available at https://www.treasury.gov/
press-center/press-releases/Documents/report30702.doc.
    \540\The Credit Union Membership Access Act, Pub. L. No. 105-219, 
allows multiple common bond credit unions. The legislation in part 
responds to National Credit Union Administration v. First National Bank 
& Trust Co., 522 U.S. 479 (1998), which interpreted the permissible 
membership of tax-exempt credit unions narrowly.
    \541\The Treasury Department has concluded that any remaining 
regulatory differences do not raise competitive equity concerns between 
credit unions and banks. United States Department of the Treasury, 
Comparing Credit Unions with Other Depository Institutions, Report 
3070, January 15, 2001, p. 2, available at https://www.treasury.gov/
press-center/press-releases/Documents/report30702.doc.
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FDIC premiums

    The Federal Deposit Insurance Corporation (``FDIC'') 
provides deposit insurance for banks and savings institutions. 
To maintain its status as an insured depository institution, a 
bank must pay semiannual assessments into the deposit insurance 
fund (``DIF''). Assessments for deposit insurance are treated 
as ordinary and necessary business expenses. These assessments, 
also known as premiums, are deductible once the all events test 
for the premium is satisfied.\542\
---------------------------------------------------------------------------
    \542\Technical Advice Memorandum 199924060, March 5, 1999, and Rev. 
Rul. 80-230, 1980-2 C.B. 169, 1980.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that this provision is necessary to 
correct for the fact that, when the FDIC determines the 
assessments necessary to maintain an adequate balance in the 
DIF, it does so on a pretax basis and does not take into 
account the deductibility of the premium payments. These 
deductions diminish the General Fund and effectively result in 
a General Fund transfer to the DIF.

                        EXPLANATION OF PROVISION

    No deduction is allowed for the applicable percentage of 
any FDIC premium paid or incurred by the taxpayer. For 
taxpayers with total consolidated assets of $50 billion or 
more, the applicable percentage is 100 percent. Otherwise, the 
applicable percentage is the ratio of the excess of total 
consolidated assets over $10 billion to $40 billion. For 
example, for a taxpayer with total consolidated assets of $20 
billion, no deduction is allowed for 25 percent of FDIC 
premiums. The provision does not apply to taxpayers with total 
consolidated assets (as of the close of the taxable year) that 
do not exceed $10 billion.
    FDIC premium means any assessment imposed under section 
7(b) of the Federal Deposit Insurance Act.\543\ The term total 
consolidated assets has the meaning given such term under 
section 165 of the Dodd-Frank Wall Street Reform and Consumer 
Protection Act.\544\
---------------------------------------------------------------------------
    \543\12 U.S.C. sec. 1817(b).
    \544\Pub. L. No. 111-203.
---------------------------------------------------------------------------
    For purposes of determining a taxpayer's total consolidated 
assets, members of an expanded affiliated group are treated as 
a single taxpayer. An expanded affiliated group means an 
affiliated group as defined in section 1504(a), determined by 
substituting ``more than 50 percent'' for ``at least 80 
percent'' each place it appears and without regard to the 
exceptions from the definition of includible corporation for 
insurance companies and foreign corporations. A partnership or 
any other entity other than a corporation is treated as a 
member of an expanded affiliated group if such entity is 
controlled by members of such group.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2017.

    10. Repeal of rollover of publicly traded securities gain into 
specialized small business investment companies (sec. 3310 of the bill 
                       and sec. 1044 of the Code)

                              PRESENT LAW

    A corporation or individual may elect to roll over tax-free 
any capital gain realized on the sale of publicly-traded 
securities to the extent of the taxpayer's cost of purchasing 
common stock or a partnership interest in a specialized small 
business investment company within 60 days of the sale.\545\ 
The amount of gain that an individual may elect to roll over 
under this provision for a taxable year is limited to (1) 
$50,000 or (2) $500,000 reduced by the gain previously excluded 
under this provision.\546\ For corporations, these limits are 
$250,000 and $1 million, respectively.\547\
---------------------------------------------------------------------------
    \545\Sec. 1044(a).
    \546\Sec. 1044(b)(1).
    \547\Sec. 1044(b)(2).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the repeal of many existing tax 
incentives, including the election described above to roll over 
tax-free capital gain realized on the sale of publicly-traded 
securities, makes the system simpler and fairer for all 
individuals, families, and businesses, and allows for lower tax 
rates. The Committee further believes that the repeal of this 
provision is a necessary part of its larger tax reform effort.

                        EXPLANATION OF PROVISION

    The provision repeals the election described above to roll 
over tax-free capital gain realized on the sale of publicly-
traded securities.

                             EFFECTIVE DATE

    The provision applies to sales after December 31, 2017.

11. Certain self-created property not treated as a capital asset (sec. 
              3311 of the bill and sec. 1221 of the Code)

                              PRESENT LAW

    In general, property held by a taxpayer (whether or not 
connected with his trade or business) is considered a capital 
asset.\548\ Certain assets, however, are specifically excluded 
from the definition of capital asset. Such excluded assets are: 
inventory property, property of a character subject to 
depreciation (including real property),\549\ certain self-
created intangibles, accounts or notes receivable acquired in 
the ordinary course of business (e.g., for providing services 
or selling property), publications of the U.S. Government 
received by a taxpayer other than by purchase at the price 
offered to the public, commodities derivative financial 
instruments held by a commodities derivatives dealer unless 
established to the satisfaction of the Secretary that any such 
instrument has no connection to the activities of such dealer 
as a dealer and clearly identified as such before the close of 
the day on which it was acquired, originated, or entered into, 
hedging transactions clearly identified as such, and supplies 
regularly used or consumed by the taxpayer in the ordinary 
course of a trade or business of the taxpayer.\550\
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    \548\Sec. 1221(a).
    \549\The net gain from the sale, exchange, or involuntary 
conversion of certain property used in the taxpayer's trade or business 
(in excess of depreciation recapture) is treated as long-term capital 
gain. Sec. 1231. However, net gain from such property is treated as 
ordinary income to the extent that losses from such property in the 
previous five years were treated as ordinary losses. Sec. 1231(c).
    \550\Sec. 1221(a)(1)-(8).
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    Self-created intangibles subject to the exception are 
copyrights, literary, musical, or artistic compositions, 
letters or memoranda, or similar property which is held either 
by the taxpayer who created the property, or (in the case of a 
letter, memorandum, or similar property) a taxpayer for whom 
the property was produced.\551\ For the purpose of determining 
gain, a taxpayer with a substituted or transferred basis from 
the taxpayer who created the property, or for whom the property 
was created, also is subject to the exception.\552\ However, a 
taxpayer may elect to treat musical compositions and copyrights 
in musical works as capital assets.\553\
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    \551\Sec. 1221(a)(3)(A) and (B).
    \552\Sec. 1221(a)(3)(C).
    \553\Sec. 1221(b)(3). Thus, if a taxpayer who owns musical 
compositions or copyrights in musical works that the taxpayer created 
(or if a taxpayer to which the musical compositions or copyrights have 
been transferred by the works' creator in a substituted basis 
transaction) elects the application of this provision, gain from a sale 
of the compositions or copyrights is treated as capital gain, not 
ordinary income.
---------------------------------------------------------------------------
    Since the intent of Congress is that profits and losses 
arising from everyday business operations be characterized as 
ordinary income and loss, the general definition of capital 
asset is narrowly applied and the categories of exclusions are 
broadly interpreted.\554\
---------------------------------------------------------------------------
    \554\Corn Products Refining Co. v. Commissioner, 350 U.S. 46, 52 
(1955).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The rationale underlying the treatment of a copyright, 
artistic work, and similar property in the hands of the person 
who created it (or in the possession of a person who received 
the property as a gift from the person who created it) is that 
the holder of the property is, in effect, engaged in the 
business of creating and selling the copyright or similar 
property (or is selling the property created by the personal 
efforts of another who gave the individual the property). Thus, 
gain arising from the sale of such property is treated as 
ordinary income derived as compensation for personal services 
rendered by the person (or the contributor), rather than as 
capital gain from the sale of property held as a capital asset. 
The Committee believes that a patent, invention, model or 
design, and a secret formula or process are essentially similar 
to copyrights and similar property created by the personal 
efforts of the taxpayer (or of the person who gave the property 
to the taxpayer), and should, therefore, be classified in the 
same manner for purposes of the tax law. The Committee believes 
that one who sells a patent, invention, model or design, or 
secret formula or process created by or for the person should 
not be treated as receiving capital gain on the sale when the 
product being sold is, in effect, the result of personal 
efforts.

                        EXPLANATION OF PROVISION

    This provision amends section 1221(a)(3), resulting in the 
exclusion of a patent, invention, model or design (whether or 
not patented), and a secret formula or process which is held 
either by the taxpayer who created the property or a taxpayer 
with a substituted or transferred basis from the taxpayer who 
created the property (or for whom the property was created) 
from the definition of a ``capital asset.'' Thus, gains or 
losses from the sale or exchange of a patent, invention, model 
or design (whether or not patented), or a secret formula or 
process which is held either by the taxpayer who created the 
property or a taxpayer with a substituted or transferred basis 
from the taxpayer who created the property (or for whom the 
property was created) will not receive capital gain treatment.

                             EFFECTIVE DATE

    The provision applies to dispositions after December 31, 
2017.

 12. Repeal of special rule for sale or exchange of patents (sec. 3312 
                 of the bill and sec. 1235 of the Code)

                              PRESENT LAW

    Section 1235 provides that a transfer\555\ of all 
substantial rights to a patent, or an undivided interest 
therein which includes a part of all such rights, by any holder 
shall be considered the sale or exchange of a capital asset 
held for more than one year, regardless of whether or not 
payments in consideration of such transfer are (1) payable 
periodically over a period generally conterminous with the 
transferee's use of the patent, or (2) contingent on the 
productivity, use, or disposition of the property 
transferred.\556\
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    \555\A transfer by gift, inheritance, or devise is not included.
    \556\Sec. 1235(a).
---------------------------------------------------------------------------
    A holder is defined as (1) any individual whose efforts 
created such property, or (2) any other individual who has 
acquired his interest in such property in exchange for 
consideration in money or money's worth paid to such creator 
prior to actual reduction to practice of the invention covered 
by the patent, if such individual is neither the employer of 
such creator nor related (as defined) to such creator.\557\
---------------------------------------------------------------------------
    \557\Sec. 1235(b).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that certain self-created 
intangibles should not be treated as capital assets and that 
income derived from such intangibles should be ordinary in 
character. The special rule for the sale or exchange of 
patents, which treats the gain as capital, is inconsistent with 
that belief.

                        EXPLANATION OF PROVISION

    The provision repeals section 1235. Thus, the holder of a 
patented invention may not transfer his or her rights to the 
patent and treat amounts received as proceeds from the sale of 
a capital asset. It is intended that the determination of 
whether a transfer is a sale or exchange of a capital asset 
that produces capital gain, or a transaction that produces 
ordinary income, will be determined under generally applicable 
principles.\558\
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    \558\See also section 3311 of the bill (Certain self-created 
property not treated as a capital asset).
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                             EFFECTIVE DATE

    The provision applies to dispositions after December 31, 
2017.

 13. Repeal of technical termination of partnerships (sec. 3313 of the 
                   bill and sec. 708(b) of the Code)

                              PRESENT LAW

    A partnership is considered as terminated under specified 
circumstances.\559\ Special rules apply in the case of the 
merger, consolidation, or division of a partnership.\560\
---------------------------------------------------------------------------
    \559\Sec. 708(b)(1).
    \560\Sec. 708(b)(2). Mergers, consolidations, and divisions of 
partnerships take either an assets-over form or an assets-up form 
pursuant to Treas. Reg. sec. 1.708-1(c).
---------------------------------------------------------------------------
    A partnership is treated as terminated if no part of any 
business, financial operation, or venture of the partnership 
continues to be carried on by any of its partners in a 
partnership.\561\
---------------------------------------------------------------------------
    \561\Sec. 708(b)(1)(A).
---------------------------------------------------------------------------
    A partnership is also treated as terminated if within any 
12-month period, there is a sale or exchange of 50 percent or 
more of the total interest in partnership capital and 
profits.\562\ This is sometimes referred to as a technical 
termination. Under regulations, the technical termination gives 
rise to a deemed contribution of all the partnership's assets 
and liabilities to a new partnership in exchange for an 
interest in the new partnership, followed by a deemed 
distribution of interests in the new partnership to the 
purchasing partners and the other remaining partners.\563\
---------------------------------------------------------------------------
    \562\Sec. 708(b)(1)(B).
    \563\Treas. Reg. sec. 1.708-1(b)(4).
---------------------------------------------------------------------------
    The effect of a technical termination is not necessarily 
the end of the partnership's existence, but rather the 
termination of some tax attributes. Upon a technical 
termination, the partnership's taxable year closes, potentially 
resulting in short taxable years.\564\ Partnership-level 
elections generally cease to apply following a technical 
termination.\565\ A technical termination generally results in 
the restart of partnership depreciation recovery periods.
---------------------------------------------------------------------------
    \564\Sec. 706(c)(1); Treas. Reg. sec. 1.708-1(b)(3).
    \565\Partnership level elections include, for example, the section 
754 election to adjust basis on a transfer or distribution, as well as 
other elections that determine the partnership's tax treatment of 
partnership items. A list of elections can be found at William S. 
McKee, William F. Nelson, and Robert L. Whitmire, Federal Taxation of 
Partnerships and Partners, 4th edition, para. 9.01[7], pp. 9-42--9-44.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee is concerned that partnership technical 
terminations are being used electively to change partnership-
level elections and attributes in a way which otherwise would 
not be permitted. Following these elective terminations, the 
partnership remains in existence and can continue to do 
business, but with refreshed tax attributes. Because of the 
perceived abuse of the technical termination rule, the 
Committee believes its repeal will improve tax administration 
and increase taxpayer compliance.

                        EXPLANATION OF PROVISION

    The provision repeals the section 708(b)(1)(B) rule 
providing for technical terminations of partnerships. The 
provision does not change the present-law rule of section 
708(b)(1)(A) that a partnership is considered as terminated if 
no part of any business, financial operation, or venture of the 
partnership continues to be carried on by any of its partners 
in a partnership.

                             EFFECTIVE DATE

    The provision applies to partnership taxable years 
beginning after December 31, 2017.

  14. Recharacterization of certain gains in the case of partnership 
  profits interests held in connection with performance of investment 
    services (sec. 3314 of the bill and secs. 1 and 83 of the Code)

                              PRESENT LAW

Partnership profits interest for services

    A profits interest in a partnership is the right to receive 
future profits in the partnership but does not generally 
include any right to receive money or other property upon the 
immediate liquidation of the partnership. The treatment of the 
receipt of a profits interest in a partnership (sometimes 
referred to as a carried interest) in exchange for the 
performance of services has been the subject of controversy. 
Though courts have differed, in some instances, a taxpayer 
receiving a profits interest for performing services has not 
been taxed upon the receipt of the partnership interest.\566\
---------------------------------------------------------------------------
    \566\Only a handful of cases have addressed this issue. Though one 
case required the value to be included currently, where value was 
easily determined by a sale of the profits interest soon after receipt 
(Diamond v. Commissioner, 56 T.C. 530 (1971), aff'd 492 F.2d 286 (7th 
Cir. 1974)), a more recent case concluded that partnership profits 
interests were not includable on receipt, because the profits interests 
were speculative and without fair market value (Campbell v. 
Commissioner, 943 F. 2d 815 (8th Cir. 1991)).
---------------------------------------------------------------------------
    In 1993, the Internal Revenue Service, referring to the 
litigation of the tax treatment of receiving a partnership 
profits interest and the results in the cases, issued 
administrative guidance that the IRS generally would treat the 
receipt of a partnership profits interest for services as not a 
taxable event for the partnership or the partner.\567\ Under 
this guidance, this treatment does not apply, however, if: (1) 
the profits interest relates to a substantially certain and 
predictable stream of income from partnership assets, such as 
income from high-quality debt securities or a high-quality net 
lease; (2) within two years of receipt, the partner disposes of 
the profits interest; or (3) the profits interest is a limited 
partnership interest in a publicly traded partnership. More 
recent administrative guidance\568\ clarifies that this 
treatment applies with respect to substantially unvested 
profits interests provided the service partner takes into 
income his distributive share of partnership income, and the 
partnership does not deduct any amount either on grant or on 
vesting of the profits interest.\569\
---------------------------------------------------------------------------
    \567\Rev. Proc. 93-27 (1993-2 C.B. 343), citing the Diamond and 
Campbell cases, supra.
    \568\Rev. Proc. 2001-43 (2001-2 C.B. 191). This result applies 
under the guidance even if the interest is substantially nonvested on 
the date of grant.
    \569\A similar result would occur under the ``safe harbor'' 
election under proposed regulations regarding the application of 
section 83 to the compensatory transfer of a partnership interest. REG-
105346-03, 70 Fed. Reg. 29675 (May 24, 2005).
---------------------------------------------------------------------------
    By contrast, a partnership capital interest received for 
services is includable in the partner's income under generally 
applicable rules relating to the receipt of property for the 
performance of services.\570\ A partnership capital interest 
for this purpose is an interest that would entitle the 
receiving partner to a share of the proceeds if the 
partnership's assets were sold at fair market value and the 
proceeds were distributed in liquidation.\571\
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    \570\Secs. 61 and 83; Treas. Reg. sec. 1.721-1(b)(1); see U.S. v. 
Frazell, 335 F.2d 487 (5th Cir. 1964), cert. denied, 380 U.S. 961 
(1965).
    \571\Rev. Proc. 93-27, 1993-2 C.B. 343.
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Property received for services under section 83

            In general
    Section 83 governs the amount and timing of income and 
deductions attributable to transfers of property in connection 
with the performance of services. If property is transferred in 
connection with the performance of services, the person 
performing the services (the ``service provider'') generally 
must recognize income for the taxable year in which the 
property is first substantially vested (i.e., transferable or 
not subject to a substantial risk of forfeiture).\572\ The 
amount includible in the service provider's income is the 
excess of the fair market value of the property over the amount 
(if any) paid for the property. A deduction is allowed to the 
person for whom such services are performed (the ``service 
recipient'') equal to the amount included in gross income by 
the service provider.\573\ The deduction is allowed for the 
taxable year of the service recipient in which or with which 
ends the taxable year in which the amount is included in the 
service provider's income.
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    \572\The Department of Treasury has issued proposed regulations 
regarding the application of section 83 to the compensatory transfer of 
a partnership interest. 70 Fed. Reg. 29675 (May 24, 2005). The proposed 
regulations provide that a partnership interest is ``property'' for 
purposes of section 83. Thus, a compensatory transfer of a partnership 
interest is includible in the service provider's gross income at the 
time that it first becomes substantially vested (or, in the case of a 
substantially nonvested partnership interest, at the time of grant if a 
section 83(b) election is made). However, because the fair market value 
of a compensatory partnership interest is often difficult to determine, 
the proposed regulations also permit a partnership and a partner to 
elect a safe harbor under which the fair market value of a compensatory 
partnership interest is treated as being equal to the liquidation value 
of that interest. Therefore, in the case of a true profits interest in 
a partnership (one under which the partner would be entitled to nothing 
if the partnership were liquidated immediately following the grant), 
under the proposed regulations, the grant of a substantially vested 
profits interest (or, if a section 83(b) election is made, the grant of 
a substantially nonvested profits interest) results in no income 
inclusion under section 83 because the fair market value of the 
property received by the service provider is zero. The proposed safe 
harbor is subject to a number of conditions. For example, the election 
cannot be made retroactively and must apply to all compensatory 
partnership transfers that occur during the period that the election is 
in effect.
    \573\Sec. 83(h).
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    Property that is subject to a substantial risk of 
forfeiture and that is not transferable is generally referred 
to as ``substantially nonvested.'' Property is subject to a 
substantial risk of forfeiture if the individual's right to the 
property is conditioned on the future performance (or 
refraining from performance) of substantial services. In 
addition, a substantial risk of forfeiture exists if the right 
to the property is subject to a condition other than the 
performance of services, provided that the condition relates to 
a purpose of the transfer and there is a substantial 
possibility that the property will be forfeited if the 
condition does not occur.
            Section 83(b) election
    Under section 83(b), even if the property is substantially 
nonvested at the time of transfer, the service provider may 
nevertheless elect within 30 days of the transfer to recognize 
income for the taxable year of the transfer. Such an election 
is referred to as a ``section 83(b) election.'' The service 
provider makes an election by filing with the IRS a written 
statement that includes the fair market value of the property 
at the time of transfer and the amount (if any) paid for the 
property. The service provider must also provide a copy of the 
statement to the service recipient.

Passthrough tax treatment of partnerships

    The character of partnership items passes through to the 
partners, as if the items were realized directly by the 
partners.\574\ Thus, for example, long-term capital gain of the 
partnership is treated as long-term capital gain in the hands 
of the partners.
---------------------------------------------------------------------------
    \574\Sec. 702.
---------------------------------------------------------------------------
    A partner holding a partnership interest includes in income 
its distributive share (whether or not actually distributed) of 
partnership items of income and gain, including capital gain 
eligible for the lower tax rates. A partner's basis in the 
partnership interest is increased by any amount of gain thus 
included and is decreased by losses. These basis adjustments 
prevent double taxation of partnership income to the partner, 
preserving the partnership's tax status as a passthrough 
entity. Money distributed to the partner by the partnership is 
taxed to the extent the amount exceeds the partner's basis in 
the partnership interest.

Net long-term capital gain

    In the case of an individual, estate, or trust, any 
adjusted net capital gain which otherwise would be taxed at the 
10- or 15-percent rate is not taxed. Any adjusted net capital 
gain which otherwise would be taxed at rates over 15 percent 
and below 39.6 percent is taxed at a 15-percent rate. Any 
adjusted net capital gain which otherwise would be taxed at a 
39.6-percent rate is taxed at a 20-percent rate.\575\
---------------------------------------------------------------------------
    \575\Sec. 1. Other rates apply to certain types of gain. The 
unrecaptured section 1250 gain is taxed at a maximum rate of 25 
percent, and 28-percent rate gain is taxed at a maximum rate of 28 
percent. Any amount of unrecaptured section 1250 gain or 28-percent 
rate gain otherwise taxed at a 10- or 15-percent rate is taxed at the 
otherwise applicable rate. In addition, a tax is imposed on net 
investment income in the case of an individual, estate, or trust. In 
the case of an individual, the tax is 3.8 percent of the lesser of net 
investment income, which includes gains and dividends, or the excess of 
modified adjusted gross income over the threshold amount. The threshold 
amount is $250,000 in the case of a joint return or surviving spouse, 
$125,000 in the case of a married individual filing a separate return, 
and $200,000 in the case of any other individual.
---------------------------------------------------------------------------
    In general, gain or loss reflected in the value of an asset 
is not recognized for income tax purposes until a taxpayer 
disposes of the asset. On the sale or exchange of a capital 
asset,\576\ any gain generally is included in income.
---------------------------------------------------------------------------
    \576\Sec. 1221. A capital asset generally means any property except 
(1) inventory, stock in trade, or property held primarily for sale to 
customers in the ordinary course of the taxpayer's trade or business, 
(2) depreciable or real property used in the taxpayer's trade or 
business, (3) specified literary or artistic property, (4) business 
accounts or notes receivable, (5) certain U.S. publications, (6) 
certain commodity derivative financial instruments, (7) hedging 
transactions, and (8) business supplies. In addition, the net gain from 
the disposition of certain property used in the taxpayer's trade or 
business is treated as long-term capital gain. Gain from the 
disposition of depreciable personal property is not treated as capital 
gain to the extent of all previous depreciation allowances. Gain from 
the disposition of depreciable real property is generally not treated 
as capital gain to the extent of the depreciation allowances in excess 
of the allowances available under the straight-line method of 
depreciation.
---------------------------------------------------------------------------
    Short-term capital gain means gain from the sale or 
exchange of a capital asset held for not more than one year, if 
and to the extent such gain is taken into account in computing 
gross income. Net short-term capital loss means the excess of 
short term capital losses for the taxable year over the short-
term capital gains for the taxable year.
    Net long-term capital gain means the excess of long-term 
capital gains for the taxable year over the long-term capital 
losses for the taxable year.
    Net capital gain is the excess of the net long-term capital 
gain for the taxable year over the net short-term capital loss 
for the year. Gain or loss is treated as long-term if the asset 
is held for more than one year.
    The adjusted net capital gain of an individual is the net 
capital gain reduced (but not below zero) by the sum of the 28-
percent rate gain and the unrecaptured section 1250 gain. The 
net capital gain is reduced by the amount of gain that the 
individual treats as investment income for purposes of 
determining the investment interest limitation.\577\
---------------------------------------------------------------------------
    \577\Sec. 163(d).
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                           REASONS FOR CHANGE

    The Committee is concerned about Federal tax issues arising 
from the use of carried interests in asset management 
businesses. In these arrangements, the investment fund 
typically is a partnership. The investors are limited partners 
that contribute capital to acquire fund assets, and the fund 
manager is the general partner of the investment fund 
partnership. The general partner is itself a partnership of 
individuals with investment management expertise. The fund 
manager receives management fees along with a carried interest. 
The arrangement requires the performance of services by 
individuals whose professional skill as fund managers generates 
capital income for investors in the fund.
    Because the character of a partnership's income passes 
through to partners, income from a carried interest may take 
the form of long-term or short-term capital gain realized by 
the underlying investment fund as the fund sells off investment 
assets. Long-term capital gain allocated to individual partners 
may represent compensation for their services as fund managers.
    The Committee believes that the lower rates that apply to 
long-term capital gain from sales or exchanges of capital 
assets of partnerships should not be available to holders of 
applicable partnership interests unless an extended holding 
period requirement has been met. Therefore, the Committee bill 
imposes a three-year holding period (not the generally 
applicable one-year holding period) in the case of long-term 
capital gain from applicable partnership interests. If the 
holder of an applicable partnership interest is allocated gain 
from the sale of property held for less than three years, that 
gain is treated as short-term capital gain and is subject to 
tax at the rates applicable to ordinary income. The Committee 
believes that providing a three-year holding period requirement 
on certain capital gains for holders of applicable partnership 
interests strikes the right balance for economic growth and 
fairness without stifling investment.

                        EXPLANATION OF PROVISION

General rule

    The provision provides for a three-year holding period in 
the case of certain net long-term capital gain with respect to 
any applicable partnership interest held by the taxpayer.
    Section 83 (relating to property transferred in connection 
with performance of services) does not apply to the transfer of 
a partnership interest to which the provision applies.

Short-term capital gain

    The provision treats as short-term capital gain taxed at 
ordinary income rates the amount of the taxpayer's net long-
term capital gain with respect to an applicable partnership 
interest for the taxable year that exceeds the amount of such 
gain calculated as if a three-year (not one-year) holding 
period applies. In making this calculation, the provision takes 
account of long-term capital losses calculated as if a three-
year holding period applies.
    A special rule provides that, as provided in regulations or 
other guidance issued by the Secretary, this rule does not 
apply to income or gain attributable to any asset that is not 
held for portfolio investment on behalf of third party 
investors. Third party investor means a person (1) who holds an 
interest in the partnership that is not property held in 
connection with an applicable trade or business (defined below) 
with respect to that person, and (2) who is not and has not 
been actively engaged in directly or indirectly providing 
substantial services for the partnership or any applicable 
trade or business (and is (or was) not related to a person so 
engaged). A related person for this purpose is a family member 
(within the meaning of attribution rules\578\) or colleague, 
that is a person who performed a service within the current 
calendar year or the preceding three calendar years in any 
applicable trade or business in which or for which the taxpayer 
performed a service.
---------------------------------------------------------------------------
    \578\Sec. 318(a)(1).
---------------------------------------------------------------------------

Applicable partnership interest

    An applicable partnership interest is any interest in a 
partnership that, directly or indirectly, is transferred to (or 
held by) the taxpayer in connection with performance of 
services in any applicable trade or business. The services may 
be performed by the taxpayer or by any other related person or 
persons in any applicable trade or business. It is intended 
that partnership interests shall not fail to be treated as 
transferred or held in connection with the performance of 
services merely because the taxpayer also made contributions to 
the partnership, and the Treasury Department is directed to 
provide guidance implementing this intent. An applicable 
partnership interest does not include an interest held by a 
person who is employed by another entity that is conducting a 
trade or business (which is not an applicable trade or 
business) and who provides services only to the other entity.
    An applicable partnership interest does not include an 
interest in a partnership directly or indirectly held by a 
corporation. For example, if two corporations form a 
partnership to conduct a joint venture for developing and 
marketing a pharmaceutical product, the partnership interests 
held by the two corporations are not applicable partnership 
interests.
    An applicable partnership interest does not include any 
capital interest in a partnership giving the taxpayer a right 
to share in partnership capital commensurate with the amount of 
capital contributed (as of the time the partnership interest 
was received), or commensurate with the value of the 
partnership interest that is taxed under section 83 on receipt 
or vesting of the partnership interest. For example, in the 
case of a partner who holds a capital interest in the 
partnership with respect to capital he or she contributed to 
the partnership, if the partnership agreement provides that the 
partner's share of partnership capital is commensurate with the 
amount of capital he or she contributed (as of the time the 
partnership interest was received) compared to total 
partnership capital, the partnership interest is not an 
applicable partnership interest to that extent.
            Applicable trade or business
    An applicable trade or business means any activity 
(regardless of whether the activity are conducted in one or 
more entities) that consists in whole or in part of the 
following: (1) raising or returning capital, and either (2) 
investing in (or disposing of) specified assets (or identifying 
specified assets for investing or disposition), or (3) 
developing specified assets.
    Developing specified assets takes place, for example, if it 
is represented to investors, lenders, regulators, or others 
that the value, price, or yield of a portfolio business may be 
enhanced or increased in connection with choices or actions of 
a service provider or of others acting in concert with or at 
the direction of a service provider. Services performed as an 
employee of an applicable trade or business are treated as 
performed in an applicable trade or business for purposes of 
this rule. Merely voting shares owned does not amount to 
development; for example, a mutual fund that merely votes 
proxies received with respect to shares of stock it holds is 
not engaged in development.
            Specified assets
    Under the provision, specified assets means securities 
(generally as defined under rules for mark-to-market accounting 
for securities dealers), commodities (as defined under rules 
for mark-to-market accounting for commodities dealers), real 
estate held for rental or investment, cash or cash equivalents, 
options or derivative contracts with respect to such 
securities, commodities, real estate, cash or cash equivalents, 
as well as an interest in a partnership to the extent of the 
partnership's proportionate interest in the foregoing. A 
security for this purpose means any (1) share of corporate 
stock, (2) partnership interest or beneficial ownership 
interest in a widely held or publicly traded partnership or 
trust, (3) note, bond, debenture, or other evidence of 
indebtedness, (4) interest rate, currency, or equity notional 
principal contract, (5) interest in, or derivative financial 
instrument in, any such security or any currency (regardless of 
whether section 1256 applies to the contract), and (6) position 
that is not such a security and is a hedge with respect to such 
a security and is clearly identified. A commodity for this 
purpose means any (1) commodity that is actively traded, (2) 
notional principal contract with respect to such a commodity, 
(3) interest in, or derivative financial instrument in, such a 
commodity or notional principal contract, or (4) position that 
is not such a commodity and is a hedge with respect to such a 
commodity and is clearly identified. For purposes of the 
provision, real estate held for rental or investment does not 
include, for example, real estate on which the holder operates 
an active farm.
    A partnership interest, for purposes of determining the 
proportionate interest of a partnership in any specified asset, 
includes any partnership interest that is not otherwise treated 
as a security for purposes of the provision (for example, an 
interest in a partnership that is not widely held or publicly 
traded). For example, assume that a hedge fund acquires an 
interest in an operating business conducted in the form of a 
non-publicly traded partnership that is not widely held; the 
partnership interest is a specified asset for purposes of the 
provision.

Transfer of applicable partnership interest to related person

    If a taxpayer transfers any applicable partnership 
interest, directly or indirectly, to a person related to the 
taxpayer, then the taxpayer includes in gross income as short-
term capital gain so much of the taxpayer's net long-term 
capital gain attributable to the sale or exchange of an asset 
held for not more than three years as is allocable to the 
interest. The amount included as short-term capital gain on the 
transfer is reduced by the amount treated as short-term capital 
gain on the transfer for the taxable year under the general 
rule of the provision (that is, amounts are not double-
counted). A related person for this purpose is a family member 
(within the meaning of attribution rules)\579\ or colleague, 
that is a person who performed a service within the current 
calendar year or the preceding three calendar years in any 
applicable trade or business in which or for which the taxpayer 
performed a service.
---------------------------------------------------------------------------
    \579\Sec. 318(a)(1).
---------------------------------------------------------------------------

Reporting requirement

    The Secretary is directed to require reporting (at the time 
in the manner determined by the Secretary) necessary to carry 
out the purposes of the provision. The penalties otherwise 
applicable to a failure to report to partners under section 
6031(b) apply to failure to report under this requirement.

Regulatory authority

    The Treasury Department is directed to issue regulations or 
other guidance necessary to carry out the provision. Such 
guidance is to address prevention of the abuse of the purposes 
of the provision, including through the allocation of income to 
tax-indifferent parties. Guidance is also to provide for the 
application of the provision in the case of tiered structures 
of entities.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2017.

 15. Amortization of research and experimental expenditures (sec. 3315 
                 of the bill and sec. 174 of the Code)

                              PRESENT LAW

    Business expenses associated with the development or 
creation of an asset having a useful life extending beyond the 
current year generally must be capitalized and depreciated over 
such useful life.\580\ Taxpayers, however, may elect to deduct 
currently the amount of certain reasonable research or 
experimentation expenditures paid or incurred in connection 
with a trade or business.\581\ Taxpayers may choose to forgo a 
current deduction, capitalize their research expenditures, and 
recover them ratably over the useful life of the research, but 
in no case over a period of less than 60 months.\582\ 
Taxpayers, alternatively, may elect to amortize their research 
expenditures over a period of 10 years.\583\ Research and 
experimental expenditures deductible under section 174 are not 
subject to capitalization under either section 263(a)\584\ or 
section 263A.\585\
---------------------------------------------------------------------------
    \580\Secs. 167 and 263(a).
    \581\Secs. 174(a) and (e).
    \582\Sec. 174(b). Taxpayers generating significant short-term 
losses often choose to defer the deduction for their research and 
experimentation expenditures under this section. Additionally, section 
174 amounts are excluded from the definition of ``start-up 
expenditures'' under section 195 (section 195 generally provides that 
start-up expenditures in excess of $5,000 either are not deductible or 
are amortizable over a period of not less than 180 months once an 
active trade or business begins). So as not to generate significant 
losses before beginning their trade or business, a taxpayer may choose 
to defer the deduction and amortize its section 174 costs beginning 
with the month in which the taxpayer first realizes benefits from the 
expenditures.
    \583\Secs. 174(f)(2) and 59(e). This special 10-year election is 
available to mitigate the effect of the alternative minimum tax 
adjustment for research expenditures set forth in section 56(b)(2). 
Taxpayers with significant losses also may elect to amortize their 
otherwise deductible research and experimentation expenditures to 
reduce amounts that could be subject to expiration under the net 
operating loss carryforward regime.
    \584\Sec. 263(a)(1)(B).
    \585\Sec. 263A(c)(2).
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    Amounts defined as research or experimental expenditures 
under section 174 generally include all costs incurred in the 
experimental or laboratory sense related to the development or 
improvement of a product.\586\ In particular, qualifying costs 
are those incurred for activities intended to discover 
information that would eliminate uncertainty concerning the 
development or improvement of a product.\587\ Uncertainty 
exists when information available to the taxpayer is not 
sufficient to ascertain the capability or method for 
developing, improving, and/or appropriately designing the 
product.\588\ The determination of whether expenditures qualify 
as deductible research expenses depends on the nature of the 
activity to which the costs relate, not the nature of the 
product or improvement being developed or the level of 
technological advancement the product or improvement 
represents. Examples of qualifying costs include salaries for 
those engaged in research or experimentation efforts, amounts 
incurred to operate and maintain research facilities (e.g., 
utilities, depreciation, rent), and expenditures for materials 
and supplies used and consumed in the course of research or 
experimentation (including amounts incurred in conducting 
trials).\589\ In addition, under administrative guidance, the 
costs of developing computer software have been accorded 
treatment similar to research expenditures.\590\
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    \586\Treas. Reg. sec. 1.174-2(a)(1) and (2). Product is defined to 
include any pilot model, process, formula, invention, technique, 
patent, or similar property, and includes products to be used by the 
taxpayer in its trade or business as well as products to be held for 
sale, lease, or license. Treas. Reg. sec. 1.174-2(a)(11), Example 10, 
provides an example of new process development costs eligible for 
section 174 treatment.
    \587\Treas. Reg. sec. 1.174-2(a)(1).
    \588\Ibid.
    \589\ See Treas. Reg. sec. 1.174-4(c). The definition of research 
and experimental expenditures also includes the costs of obtaining a 
patent, such as attorneys' fees incurred in making and perfecting a 
patent. Treas. Reg. sec. 1.174-2(a)(1).
    \590\Rev. Proc. 2000-50, 2000-2 C.B. 601.
---------------------------------------------------------------------------
    Research or experimental expenditures under section 174 do 
not include expenditures for quality control testing; 
efficiency surveys; management studies; consumer surveys; 
advertising or promotions; the acquisition of another's patent, 
model, production or process; or research in connection with 
literary, historical, or similar projects.\591\ For purposes of 
section 174, quality control testing means testing to determine 
whether particular units of materials or products conform to 
specified parameters, but does not include testing to determine 
if the design of the product is appropriate.\592\
---------------------------------------------------------------------------
    \591\Treas. Reg. sec. 1.174-2(a)(6).
    \592\Treas. Reg. sec. 1.174-2(a)(7).
---------------------------------------------------------------------------
    Generally, no current deduction under section 174 is 
allowable for expenditures for the acquisition or improvement 
of land or of depreciable or depletable property used in 
connection with any research or experimentation.\593\ In 
addition, no current deduction is allowed for research expenses 
incurred for the purpose of ascertaining the existence, 
location, extent, or quality of any deposit of ore or other 
mineral, including oil and gas.\594\
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    \593\Sec. 174(c).
    \594\Sec. 174(d). Special rules apply with respect to geological 
and geophysical costs (section 167(h)), qualified tertiary injectant 
expenses (section 193), intangible drilling costs (sections 263(c) and 
291(b)), and mining exploration and development costs (sections 616 and 
617).
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                           REASONS FOR CHANGE

    The Committee recognizes that research and experimentation 
expenditures have a useful life beyond the tax year in which 
the expenditures are incurred, and that the tangible and 
intangible property created through research and 
experimentation activities provide value to a business beyond a 
single tax year. The Committee also acknowledges that the costs 
of developing software closely resemble the types of research 
and experimental expenditures that fall within the purview of 
section 174, and therefore should be accorded similar 
treatment. For these reasons, the Committee believes research 
expenses, including software development costs, should be 
amortized over a period beyond the current year. Further, the 
Committee believes that research and experimentation 
expenditures that are attributable to research conducted 
outside of the United States should be amortized over a longer 
period so as to encourage research and experimental activities 
inside the United States.

                        EXPLANATION OF PROVISION

    Under the provision, amounts defined as specified research 
or experimental expenditures are required to be capitalized and 
amortized ratably over a five-year period, beginning with the 
midpoint of the taxable year in which the specified research or 
experimental expenditures were paid or incurred. Specified 
research or experimental expenditures which are attributable to 
research that is conducted outside of the United States\595\ 
are required to be capitalized and amortized ratably over a 
period of 15 years, beginning with the midpoint of the taxable 
year in which such expenditures were paid or incurred. 
Specified research or experimental expenditures subject to 
capitalization include expenditures for software development.
---------------------------------------------------------------------------
    \595\For this purpose, the term ``United States'' includes the 
United States, the Commonwealth of Puerto Rico, and any possession of 
the United States.
---------------------------------------------------------------------------
    Specified research or experimental expenditures do not 
include expenditures for land or for depreciable or depletable 
property used in connection with the research or 
experimentation, but do include the depreciation and depletion 
allowances of such property. Also excluded are exploration 
expenditures incurred for ore or other minerals (including oil 
and gas).
    In the case of retired, abandoned, or disposed property 
with respect to which specified research or experimental 
expenditures are paid or incurred, any remaining basis may not 
be recovered in the year of retirement, abandonment, or 
disposal, but instead must continue to be amortized over the 
remaining amortization period.
    As part of the repeal of the alternative minimum tax, 
taxpayers may no longer elect to amortize their research or 
experimental expenditures over a period of 10 years.\596\
---------------------------------------------------------------------------
    \596\See section 2001 of the bill (Repeal of alternative minimum 
tax).
---------------------------------------------------------------------------
    It is the intent of the Committee that application of this 
rule shall be treated as a change in the taxpayer's method of 
accounting for purposes of section 481, initiated by the 
taxpayer, and made with the consent of the Secretary. It is the 
intent of the Committee that this rule be applied on a cutoff 
basis to research and experimental expenditures paid or 
incurred in taxable years beginning after December 31, 2022 
(hence there is no adjustment under section 481(a) for research 
and experimental expenditures paid or incurred in taxable years 
beginning before January 1, 2023).

                             EFFECTIVE DATE

    The provision applies to amounts paid or incurred in 
taxable years beginning after December 31, 2022.

 16. Uniform treatment of expenses in contingency fee cases (sec. 3316 
              of the bill and new sec. 162(q) of the Code)

                              PRESENT LAW

    The Code provides that a taxpayer may deduct all ordinary 
and necessary expenses paid or incurred during the taxable year 
in carrying on a trade or business.\597\
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    \597\Sec. 162(a); Treas. Reg. sec. 1.162-1(a).
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    A current deduction for an expense for which there is a 
right or expectation of reimbursement may be disallowed because 
these payments are not expenses of the taxpayer and are instead 
in the nature of an advance or a loan. The extent to which the 
right must be established has varied. Some cases have denied 
the current deduction because the right of reimbursement was 
fixed,\598\ others have allowed the current deduction because 
the right of reimbursement was uncertain,\599\ and other cases 
have denied the current deduction if the taxpayer's right to 
reimbursement was subject to a contingency.
---------------------------------------------------------------------------
    \598\Charles Baloian Company, Inc. v. Commissioner, 68 T.C. 620, 
626, 628 (1977); Manocchio v. Commissioner, 710 F.2d 1400, 1402 (9th 
Cir. 1983); Glendinning, McLeish & Co.  v. Commissioner, 61 F.2d 950, 
952 (2d Cir. 1932); Webbe v. Commissioner, T.C. Memo. 1987-426, aff'd, 
902 F.2d 688 (8th Cir. 1990).
    \599\ George K. Herman Chevrolet, Inc. v. Commissioner, 39 T.C. 
846, 853 (1963); Allegheny Corporation v. Commissioner, 28 T.C. 298, 
305 (1957), acq., 1957-2 C.B. 3; Electric Tachometer Corporation v. 
Commissioner, 37 T.C. 158, 161-162 (1961), acq., 1962-2 C.B. 4.
---------------------------------------------------------------------------
    Courts have held that an attorney representing clients on a 
contingent fee basis may not currently deduct advances to or 
expenses paid on behalf of the clients as ordinary and 
necessary business expenses.\600\ The amounts in these cases 
were to be repaid from any recovery. Courts have also held that 
even if reimbursement is due only under certain circumstances, 
generally no immediate deduction is allowable.\601\
---------------------------------------------------------------------------
    \600\ Burnett v. Commissioner, 356 F.2d 755, 760 (5th Cir.), cert. 
denied, 385 U.S. 832 (1966); Herrick v. Commissioner, 63 T.C. 562, 567, 
568 (1975); Canelo v. Commissioner, 53 T.C. 217, 225 (1969), aff'd, 447 
F.2d 484 (9th Cir. 1971), acq. 1971-2 C.B. 2, nonacq. in part, 1982-2 
C.B. 2; Silverton v. Commissioner, T.C. Memo. 1977-198, aff'd, 647 F.2d 
172 (9th Cir.), cert. denied, 454 U.S. 1033 (1981); Watts v. 
Commissioner, T.C. Memo. 1968-183.
    \601\ Boccardo v. Commissioner, 12 Cl Ct. 184 (1987); Boccardo v. 
Commissioner, 65 T.C.M. 2739 (1993).
---------------------------------------------------------------------------
    However, the Ninth Circuit reached the opposite conclusion 
and held that attorneys who represent clients in ``gross fee'' 
contingency fee cases are not extending loans to clients and 
therefore may treat litigation costs, such as court fees and 
witness expenses, as deductible business expenses under the 
Code.\602\ The IRS does not follow this decision, except in the 
Ninth Circuit, based on the fact that amounts advanced by 
attorneys will be reimbursed by the client and therefore are 
not deductible business expenses.\603\
---------------------------------------------------------------------------
    \602\Boccardo v. Commissioner, 56 F.3d 1016 (9th Cir. 1995), rev'g 
65 T.C.M. 2739 (1993).
    \603\1997 FSA LEXIS 442 (June 2, 1997).
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                           REASONS FOR CHANGE

    The Committee believes that amounts advanced by attorneys 
in ``gross fee'' cases are loans and therefore should not be 
treated as deductible expenses. The Committee further believes 
this change is necessary to provide uniform treatment of 
expenses in contingency fee cases.

                        EXPLANATION OF PROVISION

    The provision denies attorneys an otherwise-allowable 
deduction for litigation costs paid under arrangements that are 
primarily on a contingent fee basis until the contingency ends.
    The provision effects a legislative override of the opinion 
in the Ninth Circuit Court of Appeals in Boccardo v. 
Commissioner, 56 F.3d 1016 (9th Cir. 1995). No inference 
regarding the tax treatment of these costs under present law is 
intended.

                             EFFECTIVE DATE

    The provision applies to expenses and costs paid or 
incurred in taxable years beginning after the date of 
enactment.

                     E. Reform of Business Credits

1. Repeal of credit for clinical testing expenses for certain drugs for 
rare diseases or conditions (sec. 3401 of the bill and sec. 45C of the 
                                 Code)

                              PRESENT LAW

    Section 45C provides a 50-percent business tax credit for 
qualified clinical testing expenses incurred in testing of 
certain drugs for rare diseases or conditions, generally 
referred to as ``orphan drugs.'' Qualified clinical testing 
expenses are costs incurred to test an orphan drug after the 
drug has been approved for human testing by the Food and Drug 
Administration (``FDA'') but before the drug has been approved 
for sale by the FDA.\604\ A rare disease or condition is 
defined as one that (1) affects fewer than 200,000 persons in 
the United States, or (2) affects more than 200,000 persons, 
but for which there is no reasonable expectation that 
businesses could recoup the costs of developing a drug for such 
disease or condition from sales in the United States of the 
drug.\605\
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    \604\Sec. 45C(b).
    \605\Sec. 45C(d).
---------------------------------------------------------------------------
    Amounts included in computing the credit under this section 
are excluded from the computation of the research credit under 
section 41.\606\
---------------------------------------------------------------------------
    \606\Sec. 45C(c).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the repeal of many existing tax 
incentives, including the orphan drug credit, makes the system 
simpler and fairer for all individuals, families, and 
businesses, and allows for lower tax rates. The Committee 
further believes that the repeal of this provision is an 
important part of its larger tax reform effort.

                        EXPLANATION OF PROVISION

    The provision repeals the credit for qualified clinical 
testing expenses.

                             EFFECTIVE DATE

    The provision applies to amounts paid or incurred in 
taxable years beginning after December 31, 2017. 604 Sec. 
45C(b). 605 Sec. 45C(d). 606 Sec. 45C(c).

2. Repeal of employer-provided child care credit (sec. 3402 of the bill 
                       and sec. 45F of the Code)

                              PRESENT LAW

    Taxpayers are eligible for a tax credit equal to 25 percent 
of qualified expenditures for employee child care and 10 
percent of qualified expenditures for child care resource and 
referral services. The maximum total credit that may be claimed 
by a taxpayer may not exceed $150,000 per taxable year. The 
credit is part of the general business credit.\607\
---------------------------------------------------------------------------
    \607\Sec. 38(b)(15).
---------------------------------------------------------------------------
    Qualified child care expenditures generally include costs 
paid or incurred: (1) to acquire, construct, rehabilitate, or 
expand property that is to be used as part of the taxpayer's 
qualified child care facility;\608\ (2) for the operation of 
the taxpayer's qualified child care facility, including the 
costs of training and certain compensation for employees of the 
child care facility, and scholarship programs; or (3) under a 
contract with a qualified child care facility to provide child 
care services to employees of the taxpayer. To be a qualified 
child care facility, the principal use of the facility must be 
for child care (unless it is the principal residence of the 
taxpayer), and the facility must meet all applicable State and 
local laws and regulations, including any licensing laws.
---------------------------------------------------------------------------
    \608\In addition, a depreciation deduction (or amortization in lieu 
of depreciation) must be allowable with respect to the property and the 
property must not be part of the principal residence of the taxpayer or 
any employee of the taxpayer.
---------------------------------------------------------------------------
    Qualified child care expenditures for resource and referral 
services include amounts paid under contract to provide child 
care resource and referral services to a taxpayer's employees.

                           REASONS FOR CHANGE

    The Committee believes that the repeal of many existing tax 
incentives, including the employer-provided child care credit, 
makes the system simpler and fairer for all individuals, 
families, and businesses, and allows for lower tax rates. The 
Committee further believes that the repeal of this provision is 
an important part of its larger tax reform effort.

                        EXPLANATION OF PROVISION

    The provision repeals the credit for qualified child care 
expenditures and qualified child care expenditures for resource 
and referral services.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2017.

 3. Repeal of rehabilitation credit (sec. 3403 of the bill and sec. 47 
                              of the Code)

                              PRESENT LAW

    Section 47 provides a two-tier tax credit for 
rehabilitation expenditures.
    A 20-percent credit is provided for qualified 
rehabilitation expenditures with respect to a certified 
historic structure. For this purpose, a certified historic 
structure means any building that is listed in the National 
Register, or that is located in a registered historic district 
and is certified by the Secretary of the Interior to the 
Secretary of the Treasury as being of historic significance to 
the district.
    A 10-percent credit is provided for qualified 
rehabilitation expenditures with respect to a qualified 
rehabilitated building, which generally means a building that 
was first placed in service before 1936. A pre-1936 building 
must meet requirements with respect to retention of existing 
external walls and internal structural framework of the 
building in order for expenditures with respect to it to 
qualify for the 10-percent credit. A building is treated as 
having met the substantial rehabilitation requirement under the 
10-percent credit only if the rehabilitation expenditures 
during the 24-month period selected by the taxpayer and ending 
within the taxable year exceed the greater of (1) the adjusted 
basis of the building (and its structural components), or (2) 
$5,000.
    The provision requires the use of straight-line 
depreciation or the alternative depreciation system in order 
for rehabilitation expenditures to be treated as qualified 
under the provision.

                           REASONS FOR CHANGE

    The Committee believes that the repeal of many existing tax 
incentives, including the rehabilitation credit, makes the 
system simpler and fairer for all individuals, families, and 
businesses, and allows for lower tax rates. The Committee 
further believes that the repeal of this provision is an 
important part of its larger tax reform effort.

                        EXPLANATION OF PROVISION

    The provision repeals the rehabilitation credit.

                             EFFECTIVE DATE

    The provision applies to amounts paid or incurred after 
December 31, 2017. A transition rule provides that in the case 
of qualified rehabilitation expenditures (within the meaning of 
present law), with respect to any building owned or leased by 
the taxpayer at all times on and after January 1, 2018, the 24-
month period selected by the taxpayer (under section 
47(c)(1)(C)) is to begin not later than the end of the 180-day 
period beginning on the date of the enactment of the Act, and 
the amendments made by the provision apply to such expenditures 
paid or incurred after the end of the taxable year in which 
such 24-month period ends.

  4. Repeal of work opportunity tax credit (sec. 3404 of the bill and 
                          sec. 51 of the Code)

                              PRESENT LAW

In general

     The work opportunity tax credit is available on an 
elective basis for employers hiring individuals from one or 
more of ten targeted groups. The amount of the credit available 
to an employer is determined by the amount of qualified wages 
paid by the employer. Generally, qualified wages consist of 
wages attributable to services rendered by a member of a 
targeted group during the one-year period beginning with the 
day the individual begins work for the employer (two years in 
the case of an individual in the long-term family assistance 
recipient category).

Targeted groups eligible for the credit

    Generally, an employer is eligible for the credit only for 
qualified wages paid to members of a targeted group. These 
targeted groups are: (1) Families receiving TANF; (2) Qualified 
veterans; (3) Qualified ex-felons; (4) Designated community 
residents; (5) Vocational rehabilitation referrals; (6) 
Qualified summer youth employees; (7) Qualified food and 
nutrition recipients; (8) Qualified SSI recipients; (9) Long-
term family assistance recipients; and (10) Qualified long-term 
unemployment recipients.

Qualified wages

    Generally, qualified wages are defined as cash wages paid 
by the employer to a member of a targeted group. The employer's 
deduction for wages is reduced by the amount of the credit.
    For purposes of the credit, generally, wages are defined by 
reference to the FUTA definition of wages contained in section 
3306(b) (without regard to the dollar limitation therein 
contained). Special rules apply in the case of certain 
agricultural labor and certain railroad labor.

Calculation of the credit

    The credit available to an employer for qualified wages 
paid to members of all targeted groups (except for long-term 
family assistance recipients and qualified veterans) equals 40 
percent (25 percent for employment of 400 hours or less) of 
qualified first-year wages. Generally, qualified first-year 
wages are qualified wages (not in excess of $6,000) 
attributable to service rendered by a member of a targeted 
group during the one-year period beginning with the day the 
individual began work for the employer. Therefore, the maximum 
credit per employee is $2,400 (40 percent of the first $6,000 
of qualified first-year wages). With respect to qualified 
summer youth employees, the maximum credit is $1,200 (40 
percent of the first $3,000 of qualified first-year wages). 
Except for long-term family assistance recipients, no credit is 
allowed for second-year wages.
    In the case of long-term family assistance recipients, the 
credit equals 40 percent (25 percent for employment of 400 
hours or less) of $10,000 for qualified first-year wages and 50 
percent of the first $10,000 of qualified second-year wages. 
Generally, qualified second-year wages are qualified wages (not 
in excess of $10,000) attributable to service rendered by a 
member of the long-term family assistance category during the 
one-year period beginning on the day after the one-year period 
beginning with the day the individual began work for the 
employer. Therefore, the maximum credit per employee is $9,000 
(40 percent of the first $10,000 of qualified first-year wages 
plus 50 percent of the first $10,000 of qualified second-year 
wages).
    In the case of a qualified veterans, the credit is 
calculated as follows: (1) in the case of a qualified veteran 
who was eligible to receive assistance under a supplemental 
nutritional assistance program (for at least a three-month 
period during the year prior to the hiring date) the employer 
is entitled to a maximum credit of 40 percent of $6,000 of 
qualified first-year wages; (2) in the case of a qualified 
veteran who is entitled to compensation for a service connected 
disability, who is hired within one year of discharge, the 
employer is entitled to a maximum credit of 40 percent of 
$12,000 of qualified first-year wages; (3) in the case of a 
qualified veteran who is entitled to compensation for a service 
connected disability, and who has been unemployed for an 
aggregate of at least six months during the one-year period 
ending on the hiring date, the employer is entitled to a 
maximum credit of 40 percent of $24,000 of qualified first-year 
wages; (4) in the case of a qualified veteran unemployed for at 
least four weeks but less than six months (whether or not 
consecutive) during the one-year period ending on the date of 
hiring, the maximum credit equals 40 percent of $6,000 of 
qualified first-year wages; and (5) in the case of a qualified 
veteran unemployed for at least six months (whether or not 
consecutive) during the one-year period ending on the date of 
hiring, the maximum credit equals 40 percent of $14,000 of 
qualified first-year wages.

Expiration

    The work opportunity tax credit is not available with 
respect to wages paid to individuals who begin work for an 
employer after December 31, 2019.

                           REASONS FOR CHANGE

    The Committee believes that the repeal of many existing tax 
incentives, including the work opportunity tax credit, makes 
the system simpler and fairer for all individuals, families, 
and businesses, and allows for lower tax rates. The Committee 
further believes that the repeal of this provision is a 
necessary part of its larger tax reform effort.

                        EXPLANATION OF PROVISION

    The provision repeals the work opportunity tax credit.

                             EFFECTIVE DATE

     The provision applies to amounts paid or incurred to 
individuals who begin work for the employer after December 31, 
2017.

 5. Repeal of deduction for certain unused business credits (sec. 3405 
                 of the bill and sec. 196 of the Code)

                              PRESENT LAW

    The general business credit (``GBC'') consists of various 
individual tax credits allowed with respect to certain 
qualified expenditures and activities.\609\ In general, the 
various individual tax credits contain provisions that prohibit 
``double benefits,'' either by denying deductions in the case 
of expenditure-related credits or by requiring income 
inclusions in the case of activity-related credits. Unused 
credits may be carried back one year and carried forward 20 
years.\610\
---------------------------------------------------------------------------
    \609\Sec. 38.
    \610\Sec. 39.
---------------------------------------------------------------------------
    Section 196 allows a deduction to the extent that certain 
portions of the GBC expire unused after the end of the carry 
forward period. In general, 100 percent of the unused credit is 
allowed as a deduction in the taxable year after such credit 
expired. However, with respect to the investment credit 
determined under section 46 (other than the rehabilitation 
credit) and the research credit determined under section 41(a) 
(for a taxable year beginning before January 1, 1990), section 
196 limits the deduction to 50 percent of such unused 
credits.\611\
---------------------------------------------------------------------------
    \611\Sec. 196(d).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the repeal of many existing tax 
incentives, including the deduction for certain unused business 
credits, makes the system simpler and fairer for all 
individuals, families, and businesses, and allows for lower tax 
rates. The Committee further believes that the repeal of this 
provision is a necessary part of its larger tax reform effort.

                        EXPLANATION OF PROVISION

    This provision repeals the deduction for certain unused 
business credits.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2017.

  6. Termination of new markets tax credit (sec. 3406 of the bill and 
                         sec. 45D of the Code)

                              PRESENT LAW

    Section 45D provides a new markets tax credit for qualified 
equity investments made to acquire stock in a corporation, or a 
capital interest in a partnership, that is a qualified 
community development entity (``CDE'').\612\ The amount of the 
credit allowable to the investor (either the original purchaser 
or a subsequent holder) is (1) a five-percent credit for the 
year in which the equity interest is purchased from the CDE and 
for each of the following two years, and (2) a six-percent 
credit for each of the following four years.\613\ The credit is 
determined by applying the applicable percentage (five or six 
percent) to the amount paid to the CDE for the investment at 
its original issue, and is available to the taxpayer who holds 
the qualified equity investment on the date of the initial 
investment or on the respective anniversary date that occurs 
during the taxable year.\614\ The credit is recaptured if at 
any time during the seven-year period that begins on the date 
of the original issue of the investment the entity (1) ceases 
to be a qualified CDE, (2) the proceeds of the investment cease 
to be used as required, or (3) the equity investment is 
redeemed.\615\
---------------------------------------------------------------------------
    \612\Section 45D was added by section 121(a) of the Community 
Renewal Tax Relief Act of 2000, Pub. L. No. 106-554.
    \613\Sec. 45D(a)(2).
    \614\Sec. 45D(a)(3).
    \615\Sec. 45D(g).
---------------------------------------------------------------------------
    A qualified CDE is any domestic corporation or partnership: 
(1) whose primary mission is serving or providing investment 
capital for low-income communities or low-income persons; (2) 
that maintains accountability to residents of low-income 
communities by their representation on any governing board of 
or any advisory board to the CDE; and (3) that is certified by 
the Secretary as being a qualified CDE.\616\ A qualified equity 
investment means stock (other than nonqualified preferred 
stock) in a corporation or a capital interest in a partnership 
that is acquired at its original issue directly (or through an 
underwriter) from a CDE for cash, and includes an investment of 
a subsequent purchaser if such investment was a qualified 
equity investment in the hands of the prior holder.\617\ 
Substantially all of the investment proceeds must be used by 
the CDE to make qualified low-income community investments and 
the investment must be designated as a qualified equity 
investment by the CDE. For this purpose, qualified low-income 
community investments include: (1) capital or equity 
investments in, or loans to, qualified active low-income 
community businesses; (2) certain financial counseling and 
other services to businesses and residents in low-income 
communities; (3) the purchase from another CDE of any loan made 
by such entity that is a qualified low-income community 
investment; or (4) an equity investment in, or loan to, another 
CDE.\618\
---------------------------------------------------------------------------
    \616\Sec. 45D(c).
    \617\Sec. 45D(b).
    \618\Sec. 45D(d).
---------------------------------------------------------------------------
    A ``low-income community'' is a population census tract 
with either (1) a poverty rate of at least 20 percent or (2) 
median family income which does not exceed 80 percent of the 
greater of metropolitan area median family income or statewide 
median family income (for a non-metropolitan census tract, does 
not exceed 80 percent of statewide median family income). In 
the case of a population census tract located within a high 
migration rural county, low-income is defined by reference to 
85 percent (as opposed to 80 percent) of statewide median 
family income.\619\ For this purpose, a high migration rural 
county is any county that, during the 20-year period ending 
with the year in which the most recent census was conducted, 
has a net out-migration of inhabitants from the county of at 
least 10 percent of the population of the county at the 
beginning of such period.
---------------------------------------------------------------------------
    \619\Sec. 45D(e).
---------------------------------------------------------------------------
    The Secretary is authorized to designate ``targeted 
populations'' as low-income communities for purposes of the new 
markets tax credit.\620\ For this purpose, a ``targeted 
population'' is defined by reference to section 103(20) of the 
Riegle Community Development and Regulatory Improvement Act of 
1994\621\ (the ``Act'') to mean individuals, or an identifiable 
group of individuals, including an Indian tribe, who are low-
income persons or otherwise lack adequate access to loans or 
equity investments. Section 103(17) of the Act provides that 
``low income'' means (1) for a targeted population within a 
metropolitan area, less than 80 percent of the area median 
family income; and (2) for a targeted population within a non-
metropolitan area, less than the greater of 80 percent of the 
area median family income or 80 percent of the statewide non-
metropolitan area median family income. A targeted population 
is not required to be within any census tract. In addition, a 
population census tract with a population of less than 2,000 is 
treated as a low-income community for purposes of the credit if 
such tract is within an empowerment zone, the designation of 
which is in effect under section 1391, and is contiguous to one 
or more low-income communities.
---------------------------------------------------------------------------
    \620\Sec. 45D(e)(2).
    \621\Pub. L. No. 103-325.
---------------------------------------------------------------------------
    A qualified active low-income community business is defined 
as a business that satisfies, with respect to a taxable year, 
the following requirements: (1) at least 50 percent of the 
total gross income of the business is derived from the active 
conduct of trade or business activities in any low-income 
community; (2) a substantial portion of the tangible property 
of the business is used in a low-income community; (3) a 
substantial portion of the services performed for the business 
by its employees is performed in a low-income community; and 
(4) less than five percent of the average of the aggregate 
unadjusted bases of the property of the business is 
attributable to certain financial property or to certain 
collectibles.\622\
---------------------------------------------------------------------------
    \622\Sec. 45D(d)(2).
---------------------------------------------------------------------------
    The maximum annual amount of qualified equity investments 
is $3.5 billion for calendar years 2010 through 2019. No amount 
of unused allocation limitation may be carried to any calendar 
year after 2024.

                           REASONS FOR CHANGE

    The Committee believes that the repeal of many existing tax 
incentives, including the new markets tax credit, makes the 
system simpler and fairer for all individuals, families, and 
businesses, and allows for lower tax rates. The Committee 
further believes that the repeal of this provision is an 
important part of its larger tax reform effort.

                        EXPLANATION OF PROVISION

    This provision provides that the new markets tax credit 
limitation is zero for calendar year 2018 and thereafter and no 
amount of unused allocation limitation may be carried to any 
calendar year after 2022.

                             EFFECTIVE DATE

    The provision applies to calendar years beginning after 
December 31, 2017.

  7. Repeal of credit for expenditures to provide access to disabled 
      individuals (sec. 3407 of the bill and sec. 44 of the Code)

                              PRESENT LAW

    Section 44 provides a 50-percent credit for eligible access 
expenditures paid or incurred by an eligible small business for 
the taxable year. The credit is limited to eligible access 
expenditures exceeding $250 but not exceeding 10,500. The 
credit is part of the general business credit.\623\
---------------------------------------------------------------------------
    \623\Sec. 38(b)(17).
---------------------------------------------------------------------------
    Eligible access expenditures generally means amounts paid 
or incurred by an eligible small business to comply with 
requirements under the Americans with Disabilities Act of 
1990.\624\ These expenditures\625\ include: (1) removal of 
architectural, communication, physical or transportation 
barriers which prevent a business from being usable or 
accessible to individuals with disabilities;\626\ (2) provision 
of qualified interpreters or other effective methods of making 
aurally-delivered materials available to individuals with 
hearing impairments; (3) provision of qualified readers, taped 
texts, or other effective methods of making visually-delivered 
materials available to individuals with visual impairments; (4) 
acquisition or modification of equipment or devices for 
individuals with disabilities; or (5) provision of other 
similar services, modifications, materials, or equipment.
---------------------------------------------------------------------------
    \624\As in effect on November 5, 1990. Sec. 44(c)(1).
    \625\These expenditures must be reasonable and necessary, excluding 
those unnecessary to accomplish listed purposes, and meet standards set 
forth by the Secretary and the Architectural and Transportation 
Barriers Compliance Board. Sec. 44(c)(3) and (5).
    \626\Expenses related to this removal are not eligible in 
connection with facilities placed in service after November 5, 1990. 
Sec. 44(c)(4).
---------------------------------------------------------------------------
    An eligible small business means any person that elects 
application of section 44 and, during the preceding taxable 
year, (1) had gross receipts not exceeding $1,000,000 or (2) 
employed not more than 30 full-time employees.\627\
---------------------------------------------------------------------------
    \627\ For this definition, an employee is considered full-time if 
employed at least 30 hours per week for 20 or more calendar weeks in 
the taxable year.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the repeal of many existing tax 
incentives, including the credit for eligible access 
expenditures, makes the system simpler and fairer for all 
individuals, families, and businesses, and allows for lower tax 
rates. The Committee further believes that the repeal of this 
provision is an important part of its larger tax reform effort.

                        EXPLANATION OF PROVISION

    The provision repeals the credit for eligible access 
expenditures.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2017.

8. Modification of credit for portion of employer social security taxes 
paid with respect to employee tips (sec. 3408 of the bill and sec. 45B 
                              of the Code)

                              PRESENT LAW

Credit

    Certain food or beverage establishments may elect to claim 
a business tax credit equal to an employer's taxes under the 
Federal Insurance Contributions Act (``FICA'')\628\ paid on 
tips in excess of those treated as wages for purposes of 
meeting the minimum wage requirements of the Fair Labor 
Standards Act (the ``FLSA'') as in effect on January 1, 
2007.\629\ The credit applies only with respect to FICA taxes 
paid on tips received from customers in connection with the 
providing, delivering, or serving of food or beverages for 
consumption if the tipping of employees delivering or serving 
food or beverages by customers is customary. The credit is 
available whether or not the tips are reported or a percentage 
of gross receipts is allocated (described below). No deduction 
is allowed for any amount taken into account in determining the 
tip credit. A taxpayer may elect not to have the credit apply 
for a taxable year.
---------------------------------------------------------------------------
    \628\FICA taxes consist of social security (OASDI, or old age, 
survivor, and disability insurance) and hospital (Medicare) taxes 
imposed on employers and employees with respect to wages paid to 
employees under sections 3101-3128.
    \629\Sec. 45B. As of January 1, 2007, the Federal minimum wage 
under the FLSA was $5.15 per hour. In the case of tipped employees, the 
FLSA provided that the minimum wage could be reduced to $2.13 per hour 
(that is, the employer is only required to pay cash equal to $2.13 per 
hour) if the combination of tips and cash income equaled the Federal 
minimum wage.
---------------------------------------------------------------------------

Reporting and allocation requirements

    Employees are required to report monthly tips to their 
employer.\630\ Certain large\631\ food or beverage 
establishments are required to report to the IRS and employees 
various information including gross receipts of the 
establishment, and to allocate among employees who customarily 
receive tip income an amount equal to eight percent of gross 
receipts in excess of the amount of tips reported by such 
employees.\632\ Employee tip income that is reported by 
employees is treated as employer-provided wages subject to 
FICA.
---------------------------------------------------------------------------
    \630\Sec. 6053(a).
    \631\A large establishment for this purpose is one which normally 
employed more than 10 employees on a typical business day during the 
preceding calendar year.
    \632\Sec. 6053(c).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that updating the minimum wage 
threshold on which the FICA tip credit is determined, as well 
as requiring consistent reporting and tip allocations by 
businesses eligible for the credit, will encourage compliance 
and consistency among those food or beverage establishments 
that elect to claim the FICA tip credit.

                        EXPLANATION OF PROVISION

    The provision revises the amount of the credit for FICA 
taxes an employer pays on tips, as an amount equal to the 
employer's FICA taxes paid on tips in excess of those treated 
as minimum wages under the FLSA without regard to the January 
1, 2007 date. For 2017, this amount is $7.25. In addition, the 
credit is permitted only if the employer satisfies the 
reporting requirements of section 6053(c) to the IRS and 
employees, and allocates among employees who customarily 
receive tip income an amount equal to 10 percent (rather than 
eight percent) of gross receipts in excess of the amount of 
tips reported by such employees. The claiming of the credit 
remains elective. However, if any size eligible food or 
beverage establishment elects to claim the FICA tip credit for 
any taxable year after the provision takes effect, the 
establishment must satisfy this reporting and 10-percent 
allocation requirement for that taxable year. Reporting and 
allocation requirements for food and beverage establishments 
that elect not to claim the credit remain unchanged.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2017.

                           F. Energy Credits

   1. Modifications to credit for electricity produced from certain 
  renewable resources (sec. 3501 of the bill and sec. 45 of the Code)

                              PRESENT LAW

In general

    An income tax credit is allowed for the production of 
electricity from qualified energy resources at qualified 
facilities (the ``renewable electricity production 
credit'').\633\ Qualified energy resources comprise wind, 
closed-loop biomass, open-loop biomass, geothermal energy, 
municipal solid waste, qualified hydropower production, and 
marine and hydrokinetic renewable energy. Qualified facilities 
are, generally, facilities that generate electricity using 
qualified energy resources. To be eligible for the credit, 
electricity produced from qualified energy resources at 
qualified facilities must be sold by the taxpayer to an 
unrelated person.
---------------------------------------------------------------------------
    \633\Sec. 45. In addition to the renewable electricity production 
credit, section 45 also provides income tax credits for the production 
of Indian coal and refined coal at qualified facilities.

    SUMMARY OF CREDIT FOR ELECTRICITY PRODUCED FROM CERTAIN RENEWABLE
                                RESOURCES
------------------------------------------------------------------------
                                     Credit amount
  Eligible electricity production      for 2017
        activity (sec. 45)            (cents per         Expiration1
                                    kilowatt-hour)
------------------------------------------------------------------------
Wind..............................             2.4  December 31, 2019.
Closed-loop biomass...............             2.4  December 31, 2016.
Open-loop biomass (including                   1.2  December 31, 2016.
 agricultural livestock waste
 nutrient facilities).
Geothermal........................             2.4  December 31, 2016.
Municipal solid waste (including               1.2  December 31, 2016.
 landfill gas facilities and trash
 combustion facilities).
Qualified hydropower..............             1.2  December 31, 2016.
Marine and hydrokinetic...........             1.2  December 31, 2016.
------------------------------------------------------------------------
1Expires for property the construction of which begins after this date.

    The credit rate, initially set at 1.5 cents per kilowatt-
hour (reduced by one-half for certain renewable resources) is 
adjusted annually for inflation.\634\ In general, the credit is 
available for electricity produced during the first 10 years 
after a facility has been placed in service.
---------------------------------------------------------------------------
    \634\The most recent inflation adjustment factors can be found in 
IRS Notice 2017-33, I.R.B. 2017-22, May 30, 2017.
---------------------------------------------------------------------------
    Taxpayers may also elect to get a 30-percent investment tax 
credit in lieu of this production tax credit.\635\
---------------------------------------------------------------------------
    \635\Sec. 48(a)(5).
---------------------------------------------------------------------------

Phase-down for wind facilities

    In the case of wind facilities, the available production 
tax credit or investment tax credit is reduced by 20 percent 
for facilities the construction of which begins in 2017, by 40 
percent for facilities the construction of which begins in 
2018, and by 60 percent for facilities the construction of 
which begins in 2019.

Special rules for determining when the construction of a facility 
        begins

    In general, a taxpayer may establish the beginning of 
construction of a facility by beginning physical work of a 
significant nature (the ``physical work test'').\636\ 
Alternatively, a taxpayer may establish the beginning of 
construction by meeting the safe harbor test which generally 
requires that the taxpayer have paid or incurred five percent 
of the total cost of constructing the facility (the ``five 
percent safe harbor'').\637\ Both methods require that a 
taxpayer make continuous progress towards completion once 
construction has begun.\638\ To demonstrate that continuous 
progress is being made, taxpayers relying on the physical work 
test must show that the project is undergoing ``continuous 
construction,'' and taxpayer relying on the five percent safe 
harbor must show ``continuous effort'' to complete the 
project.\639\ Collectively, these two tests are referred to as 
the ``continuity requirement.''\640\
---------------------------------------------------------------------------
    \636\IRS Notice 2013-29, 2013-20 I.R.B. 1085, April 14, 2013.
    \637\Ibid.
    \638\Ibid. See also, Notice 2016-31, 2016-23 I.R.B. 1025, May 5, 
2016.
    \639\Ibid.
    \640\Notice 2016-31, 2016-23 I.R.B. 1025, May 5, 2016.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that many existing tax incentives 
need to be repealed or otherwise limited as part of its larger 
tax reform effort to broaden the tax base, close loopholes and 
grow the economy. With this in mind, the Committee believes 
that it is appropriate to impose additional limits on the 
renewable power credit in order to make the tax system simpler 
and fairer for all individuals, families, and businesses, and 
to allow for lower tax rates. In addition, the Committee 
believes that codifying existing guidance regarding when the 
construction of a renewable power facility begins will provide 
increased certainty to taxpayers engaging in renewable power 
projects.

                        EXPLANATION OF PROVISION

    The provision eliminates the inflation adjustment for wind 
facilities the construction of which begins after the date of 
enactment. Such facilities are entitled to a credit of 1.5 
cents per kilowatt-hour (i.e., the statutory credit rate 
unadjusted for inflation). Credits remain subject to the phase-
down based on the year construction begins.
    The provision includes a special rule for determining the 
beginning of construction, which is intended to codify Treasury 
guidance for determining when construction of a facility has 
begun, including the physical work test, the five percent safe 
harbor, and the continuity requirement.

                             EFFECTIVE DATE

    The provision terminating the inflation adjustment is 
effective for taxable years ending after the date of enactment.
    The provision codifying existing guidance for determining 
when construction has begun is effective for taxable years 
beginning before, on, or after the date of enactment.

 2. Modification of the energy investment tax credit (sec. 3502 of the 
                     bill and sec. 48 of the Code)

                              PRESENT LAW

            In general
    A permanent, nonrefundable, 10-percent business energy 
credit\641\ is allowed for the cost of new property that is 
equipment that either (1) uses solar energy to generate 
electricity, to heat or cool a structure, or to provide solar 
process heat or (2) is used to produce, distribute, or use 
energy derived from a geothermal deposit, but only, in the case 
of electricity generated by geothermal power, up to the 
electric transmission stage. Property used to generate energy 
for the purposes of heating a swimming pool is not eligible 
solar energy property.
---------------------------------------------------------------------------
    \641\Sec. 48.
---------------------------------------------------------------------------
    In addition to the permanent credit, temporary investment 
credits are available for a variety of renewable and 
alternative energy property. The rules governing these 
temporary credits are described below.
    The energy credit is a component of the general business 
credit.\642\ An unused general business credit generally may be 
carried back one year and carried forward 20 years.\643\ The 
taxpayer's basis in the property is reduced by one-half of the 
amount of the credit claimed. For projects whose construction 
time is expected to equal or exceed two years, the credit may 
be claimed as progress expenditures are made on the project, 
rather than during the year the property is placed in service. 
The credit is allowed against the alternative minimum tax.
---------------------------------------------------------------------------
    \642\Sec. 38(b)(1).
    \643\Sec. 39.
---------------------------------------------------------------------------
            Solar energy property
    The credit rate for solar energy property is increased to 
30 percent in the case of property the construction of which 
begins before January 1, 2020. The rate is increased to 26 
percent in the case of property the construction of which 
begins in calendar year 2020. The rate is increased to 22 
percent in the case of property the construction of which 
begins in calendar year 2021. To qualify for the enhanced 
credit rates, the property must be placed in service before 
January 1, 2024.
    Additionally, equipment that uses fiber-optic distributed 
sunlight (``fiber optic solar'') to illuminate the inside of a 
structure is solar energy property eligible for the 30-percent 
credit, but only for property placed in service before January 
1, 2017.
            Fuel cell property and microturbine property
    The energy credit applies to qualified fuel cell power 
plant property, but only for periods prior to January 1, 2017. 
The credit rate is 30 percent.
    A qualified fuel cell power plant is an integrated system 
composed of a fuel cell stack assembly and associated balance 
of plant components that (1) converts a fuel into electricity 
using electrochemical means, and (2) has an electricity-only 
generation efficiency of greater than 30 percent and a capacity 
of at least one-half kilowatt. The credit may not exceed $1,500 
for each 0.5 kilowatt of capacity.
    The energy credit applies to qualifying stationary 
microturbine power plant property for periods prior to January 
1, 2017. The credit is limited to the lesser of 10 percent of 
the basis of the property or $200 for each kilowatt of 
capacity.
    A qualified stationary microturbine power plant is an 
integrated system comprised of a gas turbine engine, a 
combustor, a recuperator or regenerator, a generator or 
alternator, and associated balance of plant components that 
converts a fuel into electricity and thermal energy. Such 
system also includes all secondary components located between 
the existing infrastructure for fuel delivery and the existing 
infrastructure for power distribution, including equipment and 
controls for meeting relevant power standards, such as voltage, 
frequency, and power factors. Such system must have an 
electricity-only generation efficiency of not less than 26 
percent at International Standard Organization conditions and a 
capacity of less than 2,000 kilowatts.
            Geothermal heat pump property
    The energy credit applies to qualified geothermal heat pump 
property placed in service prior to January 1, 2017. The credit 
rate is 10 percent. Qualified geothermal heat pump property is 
equipment that uses the ground or ground water as a thermal 
energy source to heat a structure or as a thermal energy sink 
to cool a structure.
            Small wind property
    The energy credit applies to qualified small wind energy 
property placed in service prior to January 1, 2017. The credit 
rate is 30 percent. Qualified small wind energy property is 
property that uses a qualified wind turbine to generate 
electricity. A qualifying wind turbine means a wind turbine of 
100 kilowatts of rated capacity or less.
            Combined heat and power property
    The energy credit applies to combined heat and power 
(``CHP'') property placed in service prior to January 1, 2017. 
The credit rate is 10 percent.
    CHP property is property: (1) that uses the same energy 
source for the simultaneous or sequential generation of 
electrical power, mechanical shaft power, or both, in 
combination with the generation of steam or other forms of 
useful thermal energy (including heating and cooling 
applications); (2) that has an electrical capacity of not more 
than 50 megawatts or a mechanical energy capacity of not more 
than 67,000 horsepower or an equivalent combination of 
electrical and mechanical energy capacities; (3) that produces 
at least 20 percent of its total useful energy in the form of 
thermal energy that is not used to produce electrical or 
mechanical power, and produces at least 20 percent of its total 
useful energy in the form of electrical or mechanical power (or 
a combination thereof); and (4) the energy efficiency 
percentage of which exceeds 60 percent. CHP property does not 
include property used to transport the energy source to the 
generating facility or to distribute energy produced by the 
facility.
    The otherwise allowable credit with respect to CHP property 
is reduced to the extent the property has an electrical 
capacity or mechanical capacity in excess of any applicable 
limits. Property in excess of the applicable limit (15 
megawatts or a mechanical energy capacity of more than 20,000 
horsepower or an equivalent combination of electrical and 
mechanical energy capacities) is permitted to claim a fraction 
of the otherwise allowable credit. The fraction is equal to the 
applicable limit divided by the capacity of the property. For 
example, a 45 megawatt property would be eligible to claim 15/
45ths, or one third, of the otherwise allowable credit. Again, 
no credit is allowed if the property exceeds the 50 megawatt or 
67,000 horsepower limitations described above.
    Additionally, systems whose fuel source is at least 90 
percent open-loop biomass and that would qualify for the credit 
but for the failure to meet the efficiency standard are 
eligible for a credit that is reduced in proportion to the 
degree to which the system fails to meet the efficiency 
standard. For example, a system that would otherwise be 
required to meet the 60-percent efficiency standard, but which 
only achieves 30-percent efficiency, would be permitted a 
credit equal to one-half of the otherwise allowable credit 
(i.e., a 5-percent credit).
            Election of energy credit in lieu of section 45 production 
                    tax credit
    A taxpayer may make an irrevocable election to have the 
property used in certain qualified renewable power facilities 
be treated as energy property eligible for a 30-percent 
investment credit under section 48. For this purpose, qualified 
facilities are facilities otherwise eligible for the renewable 
electricity production tax credit with respect to which no 
credit under section 45 has been allowed. A taxpayer electing 
to treat a facility as energy property may not claim the 
production credit under section 45. The 30-percent credit rate 
phases down in calendar years 2017, 2018, and 2019.

                           REASONS FOR CHANGE

    In an effort to harmonize existing energy credits as part 
of tax reform, the Committee believes that the energy 
investment tax credit should have the same phase-down period 
and expiration date for otherwise credit-eligible property.

                        EXPLANATION OF PROVISION

    The provision extends the energy credit for fiber optic 
solar, fuel cell, microturbine, geothermal heat pump, small 
wind, and combined heat and power property. In each case, the 
credit is extended for property the construction of which 
begins before January 1, 2022. In the case of fiber optic 
solar, fuel cell, and small wind property, the credit rate is 
reduced to 26 percent for property the construction of which 
begins in calendar year 2020 and to 22 percent for property the 
construction of which begins in calendar year 2021. Qualified 
property must be placed in service before January 1, 2024.
    The provision terminates the permanent credits for solar 
and geothermal property the construction of which begins after 
December 31, 2027.
    The provision adds a special rule for determining the 
beginning of construction of qualified property. Under the 
provision, the construction of any facility, modification, 
improvement, addition, or other property is not treated as 
beginning before any date unless there is a continuous program 
of construction which begins before such date and ends on the 
date that such property is placed in service.

                             EFFECTIVE DATE

    The provision generally applies to periods after December 
31, 2016, under rules similar to the rules of section 48(m), as 
in effect on the day before the date of enactment of the 
Revenue Reconciliation Act of 1990. The extension of the credit 
for combined heat and power system property applies to property 
placed in service after December 31, 2016. The reduced credit 
rates and the termination of the permanent credits are 
effective on the date of the enactment of the provision. The 
special rule for determining the beginning of construction of 
qualified property applies to taxable years beginning before, 
on, or after the date of enactment of the provision.

  3. Extension and phaseout of residential energy efficient property 
        credit (sec. 3503 of the bill and sec. 25D of the Code)

                              PRESENT LAW

In general

    Section 25D provides a personal tax credit for the purchase 
of qualified solar electric property and qualified solar water 
heating property that is used exclusively for purposes other 
than heating swimming pools and hot tubs. The credit is equal 
to 30 percent of qualifying expenditures.
    Section 25D also provides a 30 percent credit for the 
purchase of qualified geothermal heat pump property, qualified 
small wind energy property, and qualified fuel cell power 
plants. The credit for any fuel cell may not exceed $500 for 
each 0.5 kilowatt of capacity.
    The credit is nonrefundable. The credit with respect to all 
qualifying property may be claimed against the alternative 
minimum tax.
    With the exception of solar property, the credit expires 
for property placed in service after December 31, 2016. In the 
case of qualified solar electric property and solar water 
heating property, the credit expires for property placed in 
service after December 31, 2021. In addition, the credit rate 
for such solar property is reduced to 26 percent for property 
placed in service in calendar year 2020 and to 22 percent for 
property placed in service in calendar year 2021.

Qualified property

    Qualified solar electric property is property that uses 
solar energy to generate electricity for use in a dwelling 
unit. Qualifying solar water heating property is property used 
to heat water for use in a dwelling unit located in the United 
States and used as a residence if at least half of the energy 
used by such property for such purpose is derived from the sun.
    A qualified fuel cell power plant is an integrated system 
comprised of a fuel cell stack assembly and associated balance 
of plant components that (1) converts a fuel into electricity 
using electrochemical means, (2) has an electricity-only 
generation efficiency of greater than 30 percent, and (3) has a 
nameplate capacity of at least 0.5 kilowatt. The qualified fuel 
cell power plant must be installed on or in connection with a 
dwelling unit located in the United States and used by the 
taxpayer as a principal residence.
    Qualified small wind energy property is property that uses 
a wind turbine to generate electricity for use in a dwelling 
unit located in the United States and used as a residence by 
the taxpayer.
    Qualified geothermal heat pump property means any equipment 
which (1) uses the ground or ground water as a thermal energy 
source to heat the dwelling unit or as a thermal energy sink to 
cool such dwelling unit, (2) meets the requirements of the 
Energy Star program which are in effect at the time that the 
expenditure for such equipment is made, and (3) is installed on 
or in connection with a dwelling unit located in the United 
States and used as a residence by the taxpayer.

Additional rules

    The depreciable basis of the property is reduced by the 
amount of the credit. Expenditures for labor costs allocable to 
onsite preparation, assembly, or original installation of 
property eligible for the credit are eligible expenditures.
    Special proration rules apply in the case of jointly owned 
property, condominiums, and tenant-stockholders in cooperative 
housing corporations. If less than 80 percent of the property 
is used for nonbusiness purposes, only that portion of 
expenditures that is used for nonbusiness purposes is taken 
into account.

                           REASONS FOR CHANGE

    In an effort to harmonize existing energy credits as part 
of tax reform, the Committee believes that the residential 
energy efficient property credit should have the same phase-
down period and expiration date for all otherwise credit-
eligible property.

                        EXPLANATION OF PROVISION

    The provision extends the residential energy efficient 
property credit with respect to non-solar qualified property 
through December 31, 2021. The credit rate for such property is 
reduced to 26 percent for property placed in service in 
calendar year 2020 and to 22 percent for property placed in 
service in calendar year 2021.

                             EFFECTIVE DATE

    The provision applies to property placed in service after 
December 31, 2016.

 4. Repeal of enhanced oil recovery credit (sec. 3504 of the bill and 
                          sec. 43 of the Code)

                              PRESENT LAW

    Section 43 provides a 15-percent credit for expenses 
associated with an enhanced oil recovery (``EOR'') project. 
Qualified EOR costs consist of the following designated 
expenses associated with an EOR project: (1) amounts paid for 
depreciable tangible property; (2) intangible drilling and 
development expenses; (3) tertiary injectant expenses; and (4) 
construction costs for certain Alaskan natural gas treatment 
facilities. An EOR project is generally a project that involves 
increasing the amount of recoverable domestic crude oil through 
the use of one or more tertiary recovery methods (as defined in 
section 193(b)(3)), such as injecting steam or carbon dioxide 
into a well to effect oil displacement. The credit is reduced 
as the price of oil exceeds a certain threshold.

                           REASONS FOR CHANGE

    The Committee believes that the repeal of many existing tax 
incentives, including the enhanced oil recovery credit, makes 
the system simpler and fairer for all individuals, families, 
and businesses, and allows for lower tax rates. The Committee 
further believes that the repeal of this provision is an 
important part of its larger tax reform effort.

                        EXPLANATION OF PROVISION

    The provision repeals the enhanced oil recovery credit.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2017.

5. Repeal of credit for producing oil and gas from marginal wells (sec. 
               3505 of the bill and sec. 45I of the Code)

                              PRESENT LAW

    Section 45I provides a $3-per-barrel credit for the 
production of crude oil and a $0.50 credit per 1,000 cubic feet 
of qualified natural gas production. In both cases, the credit 
is available only for production from a ``qualified marginal 
well.''
    A qualified marginal well is defined as a domestic well: 
(1) production from which is treated as marginal production for 
purposes of the Code's percentage depletion rules; or (2) that 
during the taxable year had average daily production of not 
more than 25 barrel equivalents and produces water at a rate of 
not less than 95 percent of total well effluent. The maximum 
amount of production on which credit could be claimed is 1,095 
barrels or barrel equivalents.
    The credit is not available to production occurring if the 
reference price of oil exceeds $18 ($2.00 for natural gas). The 
credit is reduced proportionately for reference prices between 
$15 and $18 ($1.67 and $2.00 for natural gas).
    The credit is treated as a general business credit. Unused 
credits can be carried back for up to five years rather than 
the generally applicable carryback period of one year. The 
credit is indexed for inflation.

                           REASONS FOR CHANGE

    The Committee believes that the repeal of many existing tax 
incentives, including the credit for producing oil and gas from 
marginal wells, makes the system simpler and fairer for all 
individuals, families, and businesses, and allows for lower tax 
rates. The Committee further believes that the repeal of this 
provision is an important part of its larger tax reform effort.

                        EXPLANATION OF PROVISION

    The provision repeals the credit for producing oil and gas 
from marginal wells.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2017.

 6. Modification of credit for production from advanced nuclear power 
      facilities (sec. 3506 of the bill and sec. 45J of the Code)

                              PRESENT LAW

    Taxpayers producing electricity at a qualifying advanced 
nuclear power facility may claim a credit equal to 1.8 cents 
per kilowatt-hour of electricity produced for the eight-year 
period starting when the facility is placed in service.\644\ 
The aggregate amount of credit that a taxpayer may claim in any 
year during the eight-year period is subject to limitation 
based on allocated capacity and an annual limitation as 
described below.
---------------------------------------------------------------------------
    \644\Sec. 45J. The 1.8-cents credit amount is reduced, but not 
below zero, if the annual average contract price per kilowatt-hour of 
electricity generated from advanced nuclear power facilities in the 
preceding year exceeds eight cents per kilowatt-hour. The eight-cent 
price comparison level is indexed for inflation after 1992 (12.6 cents 
for 2017).
---------------------------------------------------------------------------
    An advanced nuclear facility is any nuclear facility for 
the production of electricity, the reactor design for which was 
approved after 1993 by the Nuclear Regulatory Commission. For 
this purpose, a qualifying advanced nuclear facility does not 
include any facility for which a substantially similar design 
for a facility of comparable capacity was approved before 1994.
    A qualifying advanced nuclear facility is an advanced 
nuclear facility for which the taxpayer has received an 
allocation of megawatt capacity from the Secretary of the 
Treasury (``the Secretary'') and is placed in service before 
January 1, 2021. The taxpayer may only claim credit for 
production of electricity equal to the ratio of the allocated 
capacity that the taxpayer receives from the Secretary to the 
rated nameplate capacity of the taxpayer's facility. For 
example, if the taxpayer receives an allocation of 750 
megawatts of capacity from the Secretary and the taxpayer's 
facility has a rated nameplate capacity of 1,000 megawatts, 
then the taxpayer may claim three-quarters of the otherwise 
allowable credit, or 1.35 cents per kilowatt-hour, for each 
kilowatt-hour of electricity produced at the facility (subject 
to the annual limitation described below). The credit is 
restricted to 6,000 megawatts of national capacity. Once that 
limitation has been reached, the Secretary may make no 
additional allocations. Treasury guidance required allocation 
applications to be filed before February 1, 2014.\645\
---------------------------------------------------------------------------
    \645\I.R.S. Notice 2013-68.
---------------------------------------------------------------------------
    A taxpayer operating a qualified facility may claim no more 
than $125 million in tax credits per 1,000 megawatts of 
allocated capacity in any one year of the eight-year credit 
period. If the taxpayer operates a 1,350 megawatt rated 
nameplate capacity system and has received an allocation from 
the Secretary for 1,350 megawatts of capacity eligible for the 
credit, the taxpayer's annual limitation on credits that may be 
claimed is equal to 1.35 times $125 million, or $168.75 
million. If the taxpayer operates a facility with a nameplate 
rated capacity of 1,350 megawatts, but has received an 
allocation from the Secretary for 750 megawatts of credit 
eligible capacity, then the two limitations apply such that the 
taxpayer may claim a credit effectively equal to one cent per 
kilowatt-hour of electricity produced (calculated as described 
above) subject to an annual credit limitation of $93.75 million 
in credits (three-quarters of $125 million).
    The credit is part of the general business credit.

                           REASONS FOR CHANGE

    The Committee is concerned that some advanced nuclear power 
credits that would otherwise be available to taxpayers may go 
unused. Specifically, the Committee wants to ensure the full 
utilization of all 6,000 megawatts of credit-eligible advanced 
nuclear power national capacity by requiring unutilized 
capacity to be reallocated. In addition, the Committee wants to 
ensure that tax-exempt entities receiving credit allocations 
may elect to transfer those credits to other participants in an 
advanced nuclear power project. The Committee therefore 
believes that some modifications to the advanced nuclear power 
credit are necessary.

                        EXPLANATION OF PROVISION

    The provision modifies the national megawatt capacity 
limitation for the advanced nuclear power production credit. To 
the extent any amount of the 6,000 megawatts of authorized 
capacity remains unutilized, the provision requires the 
Secretary to allocate such capacity first to facilities placed 
in service before the year 2021, to the extent such facilities 
did not receive an allocation equal to their full nameplate 
capacity, and then to facilities placed in service after such 
date in the order in which such facilities are placed in 
service. The provision provides that the present-law placed-in-
service sunset date of January 1, 2021, does not apply with 
respect to allocations of such unutilized national megawatt 
capacity.
    The provision also allows qualified public entities to 
elect to forgo credits to which they otherwise would be 
entitled in favor of an eligible project partner. Qualified 
public entities are defined as (1) a Federal, State, or local 
government of any political subdivision, agency, or 
instrumentality thereof; (2) a mutual or cooperative electric 
company; or (3) a not-for-profit electric utility which has or 
had received a loan or loan guarantee under the Rural 
Electrification Act of 1936.\646\ An eligible project partner 
under the provision generally includes any person who designed 
or constructed the nuclear power plant, participates in the 
provision of nuclear steam or nuclear fuel to the power plant, 
or has an ownership interest in the facility. In the case of a 
facility owned by a partnership, where the credit is determined 
at the partnership level, any electing qualified public entity 
is treated as the taxpayer with respect to such entity's 
distributive share of such credits, and any other partner is an 
eligible project partner.
---------------------------------------------------------------------------
    \646\7 U.S.C. sec. 901 et seq.
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The provision requiring the allocation of unutilized 
national megawatt capacity limitation is effective on the date 
of enactment. The provision allowing an election by qualified 
public entities to forgo credits in favor of an eligible 
project partner is effective for taxable years beginning after 
the date of enactment.

                            G. Bond Reforms

  1. Termination of private activity bonds (sec. 3601 of the bill and 
                         sec. 103 of the Code)

                              PRESENT LAW

In general

    Under present law, gross income generally does not include 
interest paid on State or local bonds.\647\ State and local 
bonds are classified generally as either governmental bonds or 
private activity bonds. Governmental bonds are bonds which are 
primarily used to finance governmental functions or that are 
repaid with governmental funds. Private activity bonds are 
bonds with respect to which the State or local government 
serves as a conduit providing financing to nongovernmental 
persons (e.g., private businesses or individuals). The 
exclusion from income for State and local bonds only applies to 
private activity bonds if the bonds are issued for certain 
permitted purposes (``qualified private activity bonds'').
---------------------------------------------------------------------------
    \647\Sec. 103.
---------------------------------------------------------------------------

Private activity bonds

    Present law provides three main tests for determining 
whether a State or local bond is in substance a private 
activity bond, the two-part private business test, the five-
percent unrelated or disproportionate use test, and the private 
loan test.
            Private business test
    Private business use and private payments result in State 
and local bonds being private activity bonds if both parts of 
the two-part private business test are satisfied--
        1.  More than 10 percent of the bond proceeds is to be 
        used (directly or indirectly) by a private business 
        (the ``private business use test''); and
        2.  More than 10 percent of the debt service on the 
        bonds is secured by an interest in property to be used 
        in a private business use or to be derived from 
        payments in respect of such property (the ``private 
        payment test'').
    Private business use generally includes any use by a 
business entity (including the Federal government), which 
occurs pursuant to terms not generally available to the general 
public. For example, if bond-financed property is leased to a 
private business (other than pursuant to certain short-term 
leases for which safe harbors are provided under Treasury 
regulations), bond proceeds used to finance the property are 
treated as used in a private business use, and rental payments 
are treated as securing the payment of the bonds. Private 
business use also can arise when a governmental entity 
contracts for the operation of a governmental facility by a 
private business under a management contract that does not 
satisfy Treasury regulatory safe harbors regarding the types of 
payments made to the private operator and the length of the 
contract.
            Five-percent unrelated or disproportionate business use 
                    test
    A second standard to determine whether a bond is to be 
treated as a private activity bond is the five percent 
unrelated or disproportionate business use test. Under this 
test the private business use and private payment test 
(described above) are separately applied substituting five 
percent for 10 percent and generally only taking into account 
private business use and private payments that are not related 
or not proportionate to the government use of the bond 
proceeds. For example, while a bond issue that finances a new 
State or local government office building may include a 
cafeteria, the issue may become a private activity bond if the 
size of the cafeteria is excessive (as determined under this 
rule).
            Private loan test
    The third standard for determining whether a State or local 
bond is a private activity bond is whether an amount exceeding 
the lesser of (1) five percent of the bond proceeds or (2) $5 
million is used (directly or indirectly) to finance loans to 
private persons. Private loans include both business and other 
(e.g., personal) uses and payments by private persons; however, 
in the case of business uses and payments, all private loans 
also constitute private business uses and payments subject to 
the private business test. Present law provides that the 
substance of a transaction governs in determining whether the 
transaction gives rise to a private loan. In general, any 
transaction which transfers tax ownership of property to a 
private person is treated as a private loan.
            Special limit on certain output facilities
    A special rule for output facilities treats bonds as 
private activity bonds if more than $15 million of the proceeds 
of the bond issue are used to finance an output facility (an 
output facility includes electric and gas generation, 
transmission and related facilities but not a facility for the 
furnishing of water).\648\
---------------------------------------------------------------------------
    \648\Sec. 141(b)(4).
---------------------------------------------------------------------------
            Special volume cap requirement for larger transactions
    A special volume cap requirement for larger transactions 
treats bonds as private activity bonds if the nonqualified 
amount of private business use or private payments exceeds $15 
million (even if that amount is within the general 10-percent 
private business limitation for governmental bonds) unless the 
issuer obtains a private activity bond volume allocation.\649\
---------------------------------------------------------------------------
    \649\Sec. 141(b)(5).
---------------------------------------------------------------------------

Qualified private activity bonds

    As stated, interest on private activity bonds is taxable 
unless the bonds meet the requirements for qualified private 
activity bonds. Qualified private activity bonds permit States 
or local governments to act as conduits providing tax-exempt 
financing for certain private activities. The definition of 
qualified private activity bonds includes an exempt facility 
bond, or qualified mortgage, veterans' mortgage, small issue, 
redevelopment, 501(c)(3), or student loan bond.\650\ The 
definition of exempt facility bond includes bonds issued to 
finance certain transportation facilities (airports, ports, 
mass commuting, and high-speed intercity rail facilities); 
qualified residential rental projects; privately owned and/or 
operated utility facilities (sewage, water, solid waste 
disposal, and local district heating and cooling facilities, 
certain private electric and gas facilities, and hydroelectric 
dam enhancements); public/private educational facilities; 
qualified green building and sustainable design projects; and 
qualified highway or surface freight transfer facilities.\651\
---------------------------------------------------------------------------
    \650\Sec. 141(e).
    \651\Sec. 142(a).
---------------------------------------------------------------------------
    In most cases, the aggregate volume of these tax-exempt 
private activity bonds is restricted by annual aggregate volume 
limits imposed on bonds issued by issuers within each State. 
For 2017, the State volume limit is the greater of $100 
multiplied by the State population, or $305.32 million.\652\
---------------------------------------------------------------------------
    \652\Sec. 3.20 of Rev. Proc. 2016-55, 2016-2 C.B. 707.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the Federal government should 
not subsidize the borrowing costs of private businesses, 
allowing them to pay lower interest rates, while competitors 
with similar creditworthiness that are unable to avail 
themselves of qualified private activity bonds must pay a 
higher interest rate on the debt they issue. The Committee 
believes that if taxpayers in a State or locality decide to 
subsidize private businesses those taxpayers should bear the 
cost of those subsidies, instead of all Federal taxpayers 
bearing a portion of the cost.

                        EXPLANATION OF PROVISION

    The provision repeals the exception from the exclusion from 
gross income for interest paid on qualified private activity 
bonds issued after December 31, 2017. Thus, such interest on 
private activity bond issued after such date is includible in 
the gross income of the taxpayer.\653\
---------------------------------------------------------------------------
    \653\The provisions do not apply to any previously issued bond, nor 
would the provisions prevent State and local governments from issuing 
private activity bonds in the future; the provisions merely remove the 
Federal tax subsidy for newly issued bonds. The bill also terminates 
section 25 of the Code as it relates to credits associated with 
mortgage credit certificates issued after December 31, 2017. See 
section 1102 of the bill (Repeal of nonrefundable credits).
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The provision applies to bonds issued after December 31, 
2017.

 2. Repeal of advance refunding bonds (sec. 3602 of the bill and sec. 
                          149(d) of the Code)

                              PRESENT LAW

    Section 103 generally provides that gross income does not 
include interest received on State or local bonds. State and 
local bonds are classified generally as either governmental 
bonds or private activity bonds. Governmental bonds are bonds 
the proceeds of which are primarily used to finance 
governmental facilities or the debt is repaid with governmental 
funds. Private activity bonds are bonds in which the State or 
local government serves as a conduit providing financing to 
nongovernmental persons (e.g., private businesses or 
individuals).\654\ Bonds issued to finance the activities of 
charitable organizations described in section 501(c)(3) 
(``qualified 501(c)(3) bonds'') are one type of private 
activity bond. The exclusion from income for interest on State 
and local bonds only applies if certain Code requirements are 
met.
---------------------------------------------------------------------------
    \654\Sec. 141.
---------------------------------------------------------------------------
    The exclusion for income for interest on State and local 
bonds applies to refunding bonds but there are limits on 
advance refunding bonds. A refunding bond is defined as any 
bond used to pay principal, interest, or redemption price on a 
prior bond issue (the refunded bond). Different rules apply to 
current as opposed to advance refunding bonds. A current 
refunding occurs when the refunded bond is redeemed within 90 
days of issuance of the refunding bonds. Conversely, a bond is 
classified as an advance refunding if it is issued more than 90 
days before the redemption of the refunded bond.\655\ Proceeds 
of advance refunding bonds are generally invested in an escrow 
account and held until a future date when the refunded bond may 
be redeemed.
---------------------------------------------------------------------------
    \655\Sec. 149(d)(5).
---------------------------------------------------------------------------
    Although there is no statutory limitation on the number of 
times that tax-exempt bonds may be currently refunded, the Code 
limits advance refundings. Generally, governmental bonds and 
qualified 501(c)(3) bonds may be advance refunded one 
time.\656\ Private activity bonds, other than qualified 
501(c)(3) bonds, may not be advance refunded at all.\657\ 
Furthermore, in the case of an advance refunding bond that 
results in interest savings (e.g., a high interest rate to low 
interest rate refunding), the refunded bond must be redeemed on 
the first call date 90 days after the issuance of the refunding 
bond that results in debt service savings.\658\
---------------------------------------------------------------------------
    \656\Sec. 149(d)(3). Bonds issued before 1986 and pursuant to 
certain transition rules contained in the Tax Reform Act of 1986 may be 
advance refunded more than one time in certain cases.
    \657\Sec. 149(d)(2).
    \658\Sec. 149(d)(3)(A)(iii) and (B); Treas. Reg. sec. 1.149(d)-
1(f)(3). A ``call'' provision provides the issuer of a bond with the 
right to redeem the bond prior to the stated maturity.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The ability to issue advance refunding bonds allows State 
and local governments to issue and have outstanding two sets of 
Federally subsidized debt associated with the same activity. 
The Committee believes that a single activity should have a 
maximum of only one set of Federally subsidized debt, and so 
believes removing the ability to issue tax-advantaged advance 
refunding bonds is appropriate.

                        EXPLANATION OF PROVISION

    The provision repeals the exclusion from gross income for 
interest on a bond issued to advance refund another bond.

                             EFFECTIVE DATE

    The provision applies to advance refunding bonds issued 
after December 31, 2017.

  3. Repeal of tax credit bonds (sec. 3603 of the bill and secs. 54A, 
             54B, 54C, 54D, 54E, 54F and 6431 of the Code)

                              PRESENT LAW

In general

    Tax-credit bonds provide tax credits to investors to 
replace a prescribed portion of the interest cost. The 
borrowing subsidy generally is measured by reference to the 
credit rate set by the Treasury Department. Current tax-credit 
bonds include qualified tax credit bonds, which have certain 
common general requirements, and include new clean renewable 
energy bonds, qualified energy conservation bonds, qualified 
zone academy bonds, and qualified school construction 
bonds.\659\
---------------------------------------------------------------------------
    \659\The authority to issue two other types of tax-credit bonds, 
recovery zone economic development bonds and Build America Bonds, 
expired on January 1, 2011.
---------------------------------------------------------------------------

Qualified tax-credit bonds

            General rules applicable to qualified tax-credit bonds\660\
---------------------------------------------------------------------------
    \660\Certain other rules apply to qualified tax credit bonds, such 
as maturity limitations, reporting requirements, spending rules, and 
rules relating to arbitrage. Separate rules apply in the case of tax-
credit bonds which are not qualified tax-credit bonds (i.e., ``recovery 
zone economic development bonds,'' and ``Build America Bonds'').
---------------------------------------------------------------------------
    Unlike tax-exempt bonds, qualified tax-credit bonds 
generally are not interest-bearing obligations. Rather, the 
taxpayer holding a qualified tax-credit bond on a credit 
allowance date is entitled to a tax credit. The amount of the 
credit is determined by multiplying the bond's credit rate by 
the face amount on the holder's bond. The credit rate for an 
issue of qualified tax credit bonds is determined by the 
Secretary and is estimated to be a rate that permits issuance 
of the qualified tax-credit bonds without discount and interest 
cost to the qualified issuer.\661\ The credit accrues quarterly 
and is includible in gross income (as if it were an interest 
payment on the bond), and can be claimed against regular income 
tax liability and alternative minimum tax liability. Unused 
credits may be carried forward to succeeding taxable years. In 
addition, credits may be separated from the ownership of the 
underlying bond similar to how interest coupons can be stripped 
for interest-bearing bonds.
---------------------------------------------------------------------------
    \661\However, for new clean renewable energy bonds and qualified 
energy conservation bonds, the applicable credit rate is 70 percent of 
the otherwise applicable rate.
---------------------------------------------------------------------------
            New clean renewable energy bonds
    New clean renewable energy bonds (``New CREBs'') may be 
issued by qualified issuers to finance qualified renewable 
energy facilities.\662\ Qualified renewable energy facilities 
are facilities that: (1) qualify for the tax credit under 
section 45 (other than Indian coal and refined coal production 
facilities), without regard to the placed-in-service date 
requirements of that section; and (2) are owned by a public 
power provider, governmental body, or cooperative electric 
company.
---------------------------------------------------------------------------
    \662\Sec. 54C.
---------------------------------------------------------------------------
    The term ``qualified issuers'' includes: (1) public power 
providers; (2) a governmental body; (3) cooperative electric 
companies; (4) a not-for-profit electric utility that has 
received a loan or guarantee under the Rural Electrification 
Act; and (5) clean renewable energy bond lenders. There was 
originally a national limitation for New CREBs of $800 million. 
The national limitation was then increased by an additional 
$1.6 billion in 2009. As with other tax credit bonds, a 
taxpayer holding New CREBs on a credit allowance date is 
entitled to a tax credit. However, the credit rate on New CREBs 
is set by the Secretary at a rate that is 70 percent of the 
rate that would permit issuance of such bonds without discount 
and interest cost to the issuer.\663\
---------------------------------------------------------------------------
    \663\Given the differences in credit quality and other 
characteristics of individual issuers, the Secretary cannot set credit 
rates in a manner that will allow each issuer to issue tax credit bonds 
at par.
---------------------------------------------------------------------------
            Qualified energy conservation bonds
    Qualified energy conservation bonds may be used to finance 
qualified conservation purposes.
    The term ``qualified conservation purpose'' means:
          1. Capital expenditures incurred for purposes of: (a) 
        reducing energy consumption in publicly owned buildings 
        by at least 20 percent; (b) implementing green 
        community programs;\664\ (c) rural development 
        involving the production of electricity from renewable 
        energy resources; or (d) any facility eligible for the 
        production tax credit under section 45 (other than 
        Indian coal and refined coal production facilities);
---------------------------------------------------------------------------
    \664\Capital expenditures to implement green community programs 
include grants, loans, and other repayment mechanisms to implement such 
programs. For example, States may issue these tax credit bonds to 
finance retrofits of existing private buildings through loans and/or 
grants to individual homeowners or businesses, or through other 
repayment mechanisms. Other repayment mechanisms can include periodic 
fees assessed on a government bill or utility bill that approximates 
the energy savings of energy efficiency or conservation retrofits. 
Retrofits can include heating, cooling, lighting, water-saving, storm 
water-reducing, or other efficiency measures.
---------------------------------------------------------------------------
          2. Expenditures with respect to facilities or grants 
        that support research in: (a) development of cellulosic 
        ethanol or other nonfossil fuels; (b) technologies for 
        the capture and sequestration of carbon dioxide 
        produced through the use of fossil fuels; (c) 
        increasing the efficiency of existing technologies for 
        producing nonfossil fuels; (d) automobile battery 
        technologies and other technologies to reduce fossil 
        fuel consumption in transportation; and (e) 
        technologies to reduce energy use in buildings;
          3. Mass commuting facilities and related facilities 
        that reduce the consumption of energy, including 
        expenditures to reduce pollution from vehicles used for 
        mass commuting;
          4. Demonstration projects designed to promote the 
        commercialization of: (a) green building technology; 
        (b) conversion of agricultural waste for use in the 
        production of fuel or otherwise; (c) advanced battery 
        manufacturing technologies; (d) technologies to reduce 
        peak-use of electricity; and (e) technologies for the 
        capture and sequestration of carbon dioxide emitted 
        from combusting fossil fuels in order to produce 
        electricity; and
          5. Public education campaigns to promote energy 
        efficiency (other than movies, concerts, and other 
        events held primarily for entertainment purposes).
    There was originally a national limitation on qualified 
energy conservation bonds of $800 million. The national 
limitation was then increased by an additional $2.4 billion in 
2009. As with other qualified tax credit bonds, the taxpayer 
holding qualified energy conservation bonds on a credit 
allowance date is entitled to a tax credit. The credit rate on 
the bonds is set by the Secretary at a rate that is 70 percent 
of the rate that would permit issuance of such bonds without 
discount and interest cost to the issuer.\665\
---------------------------------------------------------------------------
    \665\Given the differences in credit quality and other 
characteristics of individual issuers, the Secretary cannot set credit 
rates in a manner that will allow each issuer to issue tax credit bonds 
at par.
---------------------------------------------------------------------------
            Qualified zone academy bonds
    Qualifies zone academy bonds (``QZABs'') are defined as any 
bond issued by a State or local government, provided that (1) 
at least 95 percent of the proceeds are used for the purpose of 
renovating, providing equipment to, developing course materials 
for use at, or training teachers and other school personnel in 
a ``qualified zone academy,'' and (2) private entities have 
promised to contribute to the qualified zone academy certain 
equipment, technical assistance or training, employee services, 
or other property or services with a value equal to at least 10 
percent of the bond proceeds.
    A total of $400 million of QZABs has been authorized to be 
issued annually in calendar years 1998 through 2008. The 
authorization was increased to $1.4 billion for calendar year 
2009, and also for calendar year 2010. For each of the calendar 
years 2011 through 2016, the authorization was set at $400 
million.
            Qualified school construction bonds
    Qualified school construction bonds must meet three 
requirements: (1) 100 percent of the available project proceeds 
of the bond issue is used for the construction, rehabilitation, 
or repair of a public school facility or for the acquisition of 
land on which such a bond-financed facility is to be 
constructed; (2) the bonds are issued by a State or local 
government within which such school is located; and (3) the 
issuer designates such bonds as a qualified school construction 
bond.
    There is a national limitation on qualified school 
construction bonds of $11 billion for calendar years 2009 and 
2010, and zero after 2010. If an amount allocated is unused for 
a calendar year, it may be carried forward to the following and 
subsequent calendar years. Under a separate special rule, the 
Secretary of the Interior may allocate $200 million of school 
construction bond authority for Indian schools.

Direct-pay bonds and expired tax-credit bond provisions

    The Code provides that an issuer may elect to issue certain 
tax credit bonds as ``direct-pay bonds.'' Instead of a credit 
to the holder, with a ``direct-pay bond'' the Federal 
government pays the issuer a percentage of the interest on the 
bonds. The following tax credit bonds may be issued as direct-
pay bonds: new clean renewable energy bonds, qualified energy 
conservation bonds, and qualified school construction bonds. 
Qualified zone academy bonds may not be issued as direct-pay 
using any national zone academy bond allocation for calendar 
years after 2011 or any carryforward of such allocations. The 
ability to issue Build America Bonds and Recovery Zone bonds, 
which have direct-pay features, has expired.

                           REASONS FOR CHANGE

    The Committee believes that some tax credit bond programs 
allow for financing of activities that may be of questionable 
value to Federal taxpayers. In any case, the Committee believes 
that sufficient time has passed to allow full use of the 
allocations provided for under tax-credit bond programs and 
that terminating the issuance of new tax credit bonds is 
appropriate.

                        EXPLANATION OF PROVISION

    The provision prospectively repeals authority to issue tax-
credit bonds and direct-pay bonds.

                             EFFECTIVE DATE

    The provision applies to bonds issued after December 31, 
2017.

4. No tax-exempt bonds for professional stadiums (sec. 3604 of the bill 
                       and sec. 103 of the Code)

                              PRESENT LAW

In general

    Section 103 generally provides gross income does not 
include interest on State or local bonds. State and local bonds 
are classified generally as either governmental bonds or 
private activity bonds. Governmental bonds are bonds the 
proceeds of which are primarily used to finance governmental 
facilities or the debt is repaid with governmental funds. 
Private activity bonds are bonds in which the State or local 
government serves as a conduit providing financing to 
nongovernmental persons (e.g., private businesses or 
individuals). The exclusion from income for State and local 
bonds does not apply to private activity bonds, unless the 
bonds are issued for certain purposes (``qualified private 
activity bonds'') permitted by the Code and other Code 
requirements are met.

Private activity bond tests

            In general
    A private activity bond includes any bond that satisfies 
(1) the ``private business test'' (consisting of two 
components: a private business use test and a private security 
or payment test); or (2) ``the private loan financing 
test.''\666\
---------------------------------------------------------------------------
    \666\Sec. 141.
---------------------------------------------------------------------------
            Two-part private business test
    Under the private business test, a bond is a private 
activity bond if it is part of an issue in which:
          (1) More than 10 percent of the proceeds of the issue 
        (including use of the bond-financed property) are to be 
        used in the trade or business of any person other than 
        a governmental unit (``private business use test''); 
        and
          (2) More than 10 percent of the payment of principal 
        or interest on the issue is, directly or indirectly, 
        secured by (a) property used or to be used for a 
        private business use or (b) to be derived from payments 
        in respect of property, or borrowed money, used or to 
        be used for a private business use (``private payment 
        test'').\667\
---------------------------------------------------------------------------
    \667\The 10-percent private business test is reduced to five 
percent in the case of private business uses (and payments with respect 
to such uses) that are unrelated to any governmental use being financed 
by the issue.
---------------------------------------------------------------------------
    A bond is not a private activity bond unless both parts of 
the private business test (i.e., the private business use test 
and the private payment test) are met. For purposes of the 
private payment test, both direct and indirect payments made by 
any private person treated as using the financed property are 
taken into account. Payments by a person for the use of 
proceeds generally do not include payments for ordinary and 
necessary expenses (within the meaning of section 162) 
attributable to the operation and maintenance of financed 
property.\668\
---------------------------------------------------------------------------
    \668\Treas. Reg. sec. 1.141-4(c)(3).
---------------------------------------------------------------------------
            Private loan financing test
    A bond issue satisfies the private loan financing test if 
proceeds exceeding the lesser of $5 million or five percent of 
such proceeds are used directly or indirectly to finance loans 
to one or more nongovernmental persons.

Types of qualified private activity bonds

    The interest of qualified private activity bonds is tax 
exempt. A qualified private activity bond is a qualified 
mortgage, veterans' mortgage, small issue, student loan, 
redevelopment, 501(c)(3), or exempt facility bond.\669\ To 
qualify as an exempt facility bond, 95 percent of the net 
proceeds must be used to finance: (1) airports; (2) docks and 
wharves; (3) mass commuting facilities; (4) high-speed 
intercity rail facilities; (5) facilities for the furnishing of 
water; (6) sewage facilities; (7) solid waste disposal 
facilities; (8) hazardous waste disposal facilities; (9) 
qualified residential rental projects; (10) facilities for the 
local furnishing of electric energy or gas; (11) local district 
heating or cooling facilities; (12) environmental enhancements 
of hydroelectric generating facilities; (13) qualified public 
educational facilities; or (14) qualified green building and 
sustainable design projects.
---------------------------------------------------------------------------
    \669\Sec. 141(e).
---------------------------------------------------------------------------

Financing of sports facilities with governmental bonds

    In 1986, Congress eliminated a provision expressly allowing 
tax-exempt financing for sports facilities.\670\ Nevertheless, 
professional sports facilities continue to be financed with 
tax-exempt bonds despite the fact that privately owned sports 
teams are the primary (if not exclusive) users of such 
facilities. Present law permits the use of tax-exempt bond 
proceeds for private activities if either part of the two-part 
private business test is not met. Only if both parts of the 
private business test (private use and private payment) are met 
will the interest on such bonds be taxable. In the case of 
bond-financed professional sports facilities, issuers have 
intentionally structured the tax-exempt bond issuance and 
related transactions to fail the private payment test. In most 
of these transactions, the professional sports team is not 
required to pay for more than a small portion of its use of the 
sports facility. As a result, the private payment test is not 
met and the bonds financing the facility are not treated as 
private activity bonds, despite the existence of substantial 
private business use.
---------------------------------------------------------------------------
    \670\Sec. 1301 of the Tax Reform Act of 1986 (Pub. L. 99-514, 1986) 
(prior to amendment, sec. 103(b)(4)(B) of the Internal Revenue Code of 
1954 permitted tax-exempt financing for sports facilities).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    Congress attempted to eliminate tax-exempt financing for 
sports facilities in the Tax Reform Act of 1986. Despite that 
effort, however, such financings have continued, and the 
Committee believes it is appropriate to close the loophole that 
allows tax-exempt financing of stadiums for the benefit of 
professional sports teams.

                        EXPLANATION OF PROVISION

    The provision provides that the interest on bonds, the 
proceeds of which are to be used to finance or refinance 
capital expenditures allocable to a professional sports 
stadium, is not tax-exempt. The term ``professional sports 
stadium'' means any facility (or appurtenant real property) 
which during at least five days during any calendar year is 
used as a stadium or arena for professional sports, 
exhibitions, games, or training.

                             EFFECTIVE DATE

    The provision applies to bonds issued after November 2, 
2017.

                              H. Insurance

 1. Net operating losses of life insurance companies (sec. 3701 of the 
                     bill and sec. 810 of the Code)

                              PRESENT LAW

    A net operating loss (``NOL'') generally means the amount 
by which a taxpayer's business deductions exceed its gross 
income. In general, an NOL may be carried back two years and 
carried over 20 years to offset taxable income in such years. 
NOLs offset taxable income in the order of the taxable years to 
which the NOL may be carried.\671\
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    \671\Sec. 172(b)(2).
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    For purposes of computing the alternative minimum tax 
(``AMT''), a taxpayer's NOL deduction cannot reduce the 
taxpayer's alternative minimum taxable income (``AMTI'') by 
more than 90 percent of the AMTI.\672\
---------------------------------------------------------------------------
    \672\Sec. 56(d).
---------------------------------------------------------------------------
    In the case of a life insurance company, a deduction is 
allowed in the taxable year for operations loss carryovers and 
carrybacks, in lieu of the deduction for net operation losses 
allowed to other corporations.\673\ A life insurance company is 
permitted to treat a loss from operations (as defined under 
section 810(c)) for any taxable year as an operations loss 
carryback to each of the three taxable years preceding the loss 
year and an operations loss carryover to each of the 15 taxable 
years following the loss year.\674\
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    \673\Secs. 810, 805(a)(5).
    \674\Sec. 810(b)(1).
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                           REASONS FOR CHANGE

    The Committee believes that the treatment of loss 
carryovers of life insurance companies should not differ from 
the treatment of NOL carryovers of other corporations. 
Consequently, the Committee bill eliminates the separate life 
insurer carryover rules and applies the generally applicable 
NOL rules to life insurance companies.

                        EXPLANATION OF PROVISION

    The provision repeals the operations loss deduction for 
life insurance companies and allows the NOL deduction under 
section 172. This provides the same treatment for losses of 
life insurance companies as for losses of property and casualty 
insurance companies and of other corporations. The provision 
thus limits the companies' NOL deduction to 90 percent of 
taxable income (determined without regard to the deduction), 
provides that carryovers to other years are adjusted to take 
account of this limitation and may be carried forward 
indefinitely with interest, and repeals the present-law three-
year carryback. The NOL deduction of a life insurance company 
is determined by treating the NOL for any taxable year 
generally as the excess of the life insurance deductions for 
such taxable year over the life insurance gross income for such 
taxable year.

                             EFFECTIVE DATE

    The provision applies to losses arising in taxable years 
beginning after December 31, 2017.

 2. Repeal of small life insurance company deduction (sec. 3702 of the 
                     bill and sec. 806 of the Code)

                              PRESENT LAW

    The small life insurance company deduction for any taxable 
year is 60 percent of so much of the tentative life insurance 
company taxable income (``LICTI'') for such taxable year as 
does not exceed $3 million, reduced by 15 percent of the excess 
of tentative LICTI over $3 million. The maximum deduction that 
can be claimed by a small company is $1.8 million, and a 
company with a tentative LICTI of $15 million or more is not 
entitled to any small company deduction. A small life insurance 
company for this purpose is one with less than $500 million of 
assets.

                           REASONS FOR CHANGE

    The Committee believes that the small life insurance 
company deduction may have served as a transition rule 
effectively providing a corporate tax rate reduction to small 
life insurers in connection with 1984 changes to the rules 
governing life insurance company taxation. However, that 
purpose has been obviated by the passage of time. The Committee 
believes that in light of the reduction in the corporate income 
tax rate to 20 percent, it is appropriate to eliminate the 
small life insurance company deduction.

                        EXPLANATION OF PROVISION

    The provision repeals the small life insurance company 
deduction.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2017.

 3. Surtax on life insurance company taxable income (sec. 3703 of the 
                     bill and sec. 801 of the Code)

                              PRESENT LAW

Tax on life insurance company taxable income

    In the case of a life insurance company, income tax is 
imposed on life insurance company taxable income at the rate 
applicable to taxable income of a corporation.

Reserves

    In determining life insurance company taxable income, a 
life insurance company includes in gross income any net 
decrease in reserves, and deducts a net increase in 
reserves.\675\ Methods for determining reserves for tax 
purposes generally are based on reserves prescribed by the 
National Association of Insurance Commissioners for purposes of 
financial reporting under State regulatory rules.
---------------------------------------------------------------------------
    \675\Sec. 807.
---------------------------------------------------------------------------
    In computing the net increase or net decrease in reserves, 
six items are taken into account. These are (1) life insurance 
reserves; (2) unearned premiums and unpaid losses included in 
total reserves; (3) amounts that are discounted at interest to 
satisfy obligations under insurance and annuity contracts that 
do not involve life, accident, or health contingencies when the 
computation is made; (4) dividend accumulations and other 
amounts held at interest in connection with insurance and 
annuity contracts; (5) premiums received in advance and 
liabilities for premium deposit funds; and (6) reasonable 
special contingency reserves under contracts of group term life 
insurance or group accident and health insurance that are held 
for retired lives, premium stabilization, or a combination of 
both.
    Life insurance reserves for any contract are the greater of 
the net surrender value of the contract or the reserves 
determined under Federally prescribed rules, but may not exceed 
the statutory reserve with respect to the contract (for 
regulatory reporting). In computing the Federally prescribed 
reserve for any type of contract, the taxpayer must use the tax 
reserve method applicable to the contract, an interest rate for 
discounting of reserves to take account of the time value of 
money, and the prevailing commissioners' standard tables for 
mortality or morbidity. The assumed interest rate to be used in 
computing the Federally prescribed reserve is the greater of 
the applicable Federal interest rate or the prevailing State 
assumed interest rate.

Proration rules

    A life insurance company is subject to proration rules in 
calculating life insurance company taxable income.
    The proration rules reduce the company's deductions, 
including reserve deductions and dividends received deductions, 
if the life insurance company has tax-exempt income, deductible 
dividends received, or other similar untaxed income items, 
because deductible reserve increases can be viewed as being 
funded proportionately out of taxable and tax-exempt income.
    Under the proration rules, the net increase and net 
decrease in reserves are computed by reducing the ending 
balance of the reserve items by the policyholders' share of 
tax-exempt interest.\676\
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    \676\Secs. 807(a)(2)(B) and (b)(1)(B).
---------------------------------------------------------------------------
    Similarly, under the proration rules, a life insurance 
company is allowed a dividends-received deduction for 
intercorporate dividends from nonaffiliates only in proportion 
to the company's share of such dividends,\677\ but not for the 
policyholders' share. Fully deductible dividends from 
affiliates are excluded from the application of this proration 
formula, if such dividends are not themselves distributions 
from tax-exempt interest or from dividend income that would not 
be fully deductible if received directly by the taxpayer. In 
addition, the proration rule includes in prorated amounts the 
increase for the taxable year in policy cash values of life 
insurance policies and annuity and endowment contracts.
---------------------------------------------------------------------------
    \677\Secs. 805(a)(4), 812.
---------------------------------------------------------------------------
            Company's share and policyholder's share under proration 
                    rules
    The life insurance company proration rules provide that the 
company's share, for this purpose, means the percentage 
obtained by dividing the company's share of the net investment 
income for the taxable year by the net investment income for 
the taxable year.\678\ Net investment income means 95 percent 
of gross investment income, in the case of assets held in 
segregated asset accounts under variable contracts, and 90 
percent of gross investment income in other cases.\679\
---------------------------------------------------------------------------
    \678\Sec. 812(a).
    \679\Sec. 812(c).
---------------------------------------------------------------------------
    Gross investment income includes specified items.\680\ The 
specified items include interest (including tax-exempt 
interest), dividends, rents, royalties and other related 
specified items, short-term capital gains, and trade or 
business income. Gross investment income does not include gain 
(other than short-term capital gain to the extent it exceeds 
net long-term capital loss) that is, or is considered as, from 
the sale or exchange of a capital asset. Gross investment 
income also does not include the appreciation in the value of 
assets that is taken into account in computing the company's 
tax reserve deduction under section 817.
---------------------------------------------------------------------------
    \680\Sec. 812(d).
---------------------------------------------------------------------------
    The company's share of net investment income, for purposes 
of this calculation, is the net investment income for the 
taxable year, reduced by the sum of (a) the policy interest for 
the taxable year and (b) a portion of policyholder 
dividends.\681\ Policy interest is defined to include required 
interest at the greater of the prevailing State assumed rate or 
the applicable Federal rate (plus some other interest items). 
Present law provides that in any case where neither the 
prevailing State assumed interest rate nor the applicable 
Federal rate is used, ``another appropriate rate'' is used for 
this calculation. No statutory definition of ``another 
appropriate rate'' is provided; the law is unclear as to what 
rate or rates are appropriate for this purpose.\682\
---------------------------------------------------------------------------
    \681\Sec. 812(b)(1). This portion is defined as gross investment 
income's share of policyholder dividends.
    \682\Legislative history of section 812 mentions that the general 
concept that items of investment yield should be allocated between 
policyholders and the company was retained from prior law. H. Rep. 98-
861. Conference Report to accompany H.R. 4170, the Deficit Reduction 
Act of 1984, 98th Cong., 2d Sess., 1065 (June 23, 1984). This concept 
is referred to in Joint Committee on Taxation, General Explanation of 
the Revenue Provisions of the Deficit Reduction Act of 1984, JCS-41-84, 
p. 622, stating, ``[u]nder the Act, the formula used for purposes of 
determining the policyholders' share in based generally on the 
proration formula used under prior law in computing gain or loss from 
operations (i.e., by reference to `required interest').'' This may 
imply that a reference to pre-1984-law regulations may be appropriate. 
See Rev. Rul 2003-120, 2003-2 C.B. 1154, and Technical Advice Memoranda 
20038008 and 20339049.
---------------------------------------------------------------------------
    In 2007, the IRS issued Rev. Rul. 2007-54,\683\ 
interpreting required interest under section 812(b) to be 
calculated by multiplying the mean of a contract's beginning-
of-year and end-of-year reserves by the greater of the 
applicable Federal interest rate or the prevailing State 
assumed interest rate, for purposes of determining separate 
account reserves for variable contracts. However, Rev. Rul. 
2007-54 was suspended by Rev. Rul. 2007-61, in which the IRS 
and the Treasury Department stated that the issues would more 
appropriately be addressed by regulation.\684\ No regulations 
have been issued to date.
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    \683\2007-38 I.R.B. 604.
    \684\2007-42 I.R.B. 799.
---------------------------------------------------------------------------

Capitalization of policy acquisition expenses

    In the case of an insurance company, specified policy 
acquisition expenses for any taxable year are required to be 
capitalized, and generally are amortized over the 120-month 
period beginning with the first month in the second half of the 
taxable year.\685\
---------------------------------------------------------------------------
    \685\Sec. 848.
---------------------------------------------------------------------------
    Specified policy acquisition expenses are determined as 
that portion of the insurance company's general deductions for 
the taxable year that does not exceed a specific percentage of 
the net premiums for the taxable year on each of three 
categories of insurance contracts. For annuity contracts, the 
percentage is 1.75; for group life insurance contracts, the 
percentage is 2.05; and for all other specified insurance 
contracts, the percentage is 7.7.
    With certain exceptions, a specified insurance contract is 
any life insurance, annuity, or noncancellable accident and 
health insurance contract or combination thereof. A group life 
insurance contract is any life insurance contract that covers a 
group of individuals defined by reference to employment 
relationship, membership in an organization, or similar factor, 
the premiums for which are determined on a group basis, and the 
proceeds of which are payable to (or for the benefit of) 
persons other than the employer of the insured, an organization 
to which the insured belongs, or other similar person.

                           REASONS FOR CHANGE

    The Committee bill provides for a reduction to 20 percent 
of the rate of tax applicable to corporations, including to 
life insurance companies. In connection with the reduction in 
the corporate tax rate, the Committee believes it is timely and 
appropriate to update present-law tax provisions governing life 
insurers, including those relating to computation of life 
insurance tax reserves, life insurance proration for purposes 
of determining the dividends received deduction, and 
capitalization of policy acquisition expenses. The Committee is 
concerned that these provisions are out of date and do not 
reflect recent developments. The Committee is continuing to 
develop reforms to these provisions. In the meantime, the bill 
includes a surtax on life insurance company taxable income that 
is intended to have the same overall revenue consequences as 
reforms that were proposed in these three areas in the 
introduced version of the bill. The surtax is intended only as 
placeholder and the Committee intends to develop reforms in 
these three areas as the bill moves through the legislative 
process.

                        EXPLANATION OF PROVISION

    The provision imposes an additional eight-percent income 
tax on life insurance company taxable income.

                             EFFECTIVE DATE

    The placeholder provision is intended to apply to taxable 
years beginning after December 31, 2017.

 4. Adjustment for change in computing reserves (sec. 3704 of the bill 
                       and sec. 807 of the Code)

                              PRESENT LAW

Change in method of accounting

    In general, a taxpayer may change its method of accounting 
under section 446 with the consent of the Secretary (or may be 
required to change its method of accounting by the Secretary). 
In such instances, a taxpayer generally is required to make an 
adjustment (a ``section 481(a) adjustment'') to prevent amounts 
from being duplicated in, or omitted from, the calculation of 
the taxpayer's income. Pursuant to IRS procedures, negative 
section 481(a) adjustments generally are deducted from income 
in the year of the change whereas positive section 481(a) 
adjustments generally are required to be included in income 
ratably over four taxable years.\686\
---------------------------------------------------------------------------
    \686\See, e.g., Rev. Proc. 2015-13, 2015-5 I.R.B. 419, and Rev. 
Proc. 2017-30, 2017-18 I.R.B. 1131.
---------------------------------------------------------------------------
    However, section 807(f) explicitly provides that changes in 
the basis for determining life insurance company reserves are 
to be taken into account ratably over 10 years.

10-year spread for change in computing life insurance company reserves

    For Federal income tax purposes, a life insurance company 
includes in gross income any net decrease in reserves, and 
deducts a net increase in reserves.\687\ Methods for 
determining reserves for tax purposes generally are based on 
reserves prescribed by the National Association of Insurance 
Commissioners for purposes of financial reporting under State 
regulatory rules.
---------------------------------------------------------------------------
    \687\Sec. 807.
---------------------------------------------------------------------------
    Income or loss resulting from a change in the method of 
computing reserves is taken into account ratably over a 10-year 
period.\688\ The rule for a change in basis in computing 
reserves applies only if there is a change in basis in 
computing the Federally prescribed reserve (as distinguished 
from the net surrender value). Although life insurance tax 
reserves require the use of a Federally prescribed method, 
interest rate, and mortality or morbidity table, changes in 
other assumptions for computing statutory reserves (e.g., when 
premiums are collected and claims are paid) may cause increases 
or decreases in a company's life insurance reserves that must 
be spread over a 10-year period. Changes in the net surrender 
value of a contract are not subject to the 10-year spread 
because, apart from its use as a minimum in determining the 
amount of life insurance tax reserves, the net surrender value 
is not a reserve but a current liability.
---------------------------------------------------------------------------
    \688\Sec. 807(f).
---------------------------------------------------------------------------
    If for any taxable year the taxpayer is not a life 
insurance company, the balance of any adjustments to reserves 
is taken into account for the preceding taxable year.

                           REASONS FOR CHANGE

    The Committee believes that the treatment of changes to the 
method of computing reserves of life insurance companies should 
not differ from the treatment of changes to the method of 
accounting in the case of other corporations. Consequently, the 
Committee bill eliminates the separate rule providing a 10-year 
period for taking into account a change in the method of 
computing reserves of a life insurer.

                        EXPLANATION OF PROVISION

    Income or loss resulting from a change in method of 
computing life insurance company reserves is taken into account 
consistent with IRS procedures, generally ratably over a four-
year period, instead of over a 10-year period.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2017.

 5. Repeal of special rule for distributions to shareholders from pre-
1984 policyholders surplus account (sec. 3705 of the bill and sec. 815 
                              of the Code)

                         PRESENT AND PRIOR LAW

    Under the law in effect from 1959 through 1983, a life 
insurance company was subject to a three-phase taxable income 
computation under Federal tax law. Under the three-phase 
system, a company was taxed on the lesser of its gain from 
operations or its taxable investment income (Phase I) and, if 
its gain from operations exceeded its taxable investment 
income, 50 percent of such excess (Phase II). Federal income 
tax on the other 50 percent of the gain from operations was 
deferred, and was accounted for as part of a policyholder's 
surplus account and, subject to certain limitations, taxed only 
when distributed to stockholders or upon corporate dissolution 
(Phase III). To determine whether amounts had been distributed, 
a company maintained a shareholders surplus account, which 
generally included the company's previously taxed income that 
would be available for distribution to shareholders. 
Distributions to shareholders were treated as being first out 
of the shareholders surplus account, then out of the 
policyholders surplus account, and finally out of other 
accounts.
    The Deficit Reduction Act of 1984\689\ included provisions 
that, for 1984 and later years, eliminated further deferral of 
tax on amounts (described above) that previously would have 
been deferred under the three-phase system. Although for 
taxable years after 1983, life insurance companies may not 
enlarge their policyholders surplus account, the companies are 
not taxed on previously deferred amounts unless the amounts are 
treated as distributed to shareholders or subtracted from the 
policyholders surplus account.\690\
---------------------------------------------------------------------------
    \689\Pub. L. No. 98-369.
    \690\Sec. 815.
---------------------------------------------------------------------------
    Any direct or indirect distribution to shareholders from an 
existing policyholders surplus account of a stock life 
insurance company is subject to tax at the corporate rate in 
the taxable year of the distribution. Present law (like prior 
law) provides that any distribution to shareholders is treated 
as made (1) first out of the shareholders surplus account, to 
the extent thereof, (2) then out of the policyholders surplus 
account, to the extent thereof, and (3) finally, out of other 
accounts.
    For taxable years beginning after December 31, 2004, and 
before January 1, 2007, the application of the rules imposing 
income tax on distributions to shareholders from the 
policyholders surplus account of a life insurance company were 
suspended. Distributions in those years were treated as first 
made out of the policyholders surplus account, to the extent 
thereof, and then out of the shareholders surplus account, and 
lastly out of other accounts.

                           REASONS FOR CHANGE

    The Committee believes it is appropriate to require life 
insurers with a policyholders surplus account to be subject to 
current income taxation on any remaining amounts of income 
deferred from periods before 1984.

                        EXPLANATION OF PROVISION

    The provision repeals section 815, the rules imposing 
income tax on distributions to shareholders from the 
policyholders surplus account of a stock life insurance 
company.
    In the case of any stock life insurance company with an 
existing policyholders surplus account (as defined in section 
815 before its repeal), tax is imposed on the balance of the 
account as of December 31, 2017. A life insurance company is 
required to pay tax on the balance of the account ratably over 
the first eight taxable years beginning after December 31, 
2017.
    Specifically, the tax imposed on a life insurance company 
is the tax on the sum of life insurance company taxable income 
for the taxable year (but not less than zero) plus 1/8 of the 
balance of the existing policyholders surplus account as of 
December 31, 2017. Thus, life insurance company losses are not 
allowed to offset the amount of the policyholders surplus 
account balance subject to tax.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2017.

6. Modification of proration rules for property and casualty insurance 
       companies (sec. 3706 of the bill and sec. 832 of the Code)

    Present Law The taxable income of a property and casualty 
insurance company is determined as the sum of its gross income 
from underwriting income and investment income (as well as 
gains and other income items), reduced by allowable deductions.
    A proration rule applies to property and casualty insurance 
companies. In calculating the deductible amount of its reserve 
for losses incurred, a property and casualty insurance company 
must reduce the amount of losses incurred by 15 percent of (1) 
the insurer's tax-exempt interest, (2) the deductible portion 
of dividends received (with special rules for dividends from 
affiliates), and (3) the increase for the taxable year in the 
cash value of life insurance, endowment, or annuity contracts 
the company owns.\691\ This proration rule reflects the fact 
that reserves are generally funded in part from tax-exempt 
interest, from deductible dividends, and from other untaxed 
amounts.
---------------------------------------------------------------------------
    \691\Sec. 832(b)(5).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the rate of proration 
applicable to property and casualty insurers with respect to 
untaxed income should be adjusted to take account of the tax 
rate reduction to 20 percent that applies to income of 
corporations, including property and casualty insurers. The 
Committee bill therefore modifies the percentage applicable 
under the proration rule.

                        EXPLANATION OF PROVISION

    The provision replaces the 15-percent reduction under 
present law with a 26.25-percent reduction under the proration 
rule for property and casualty insurance companies. This change 
in the percentage takes into account the reduction in the 
corporate tax rate from 35 to 20 percent under section 3001 of 
the bill (reduction in corporate tax rate).

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2017.

    7. Modification of discounting rules for property and casualty 
  insurance companies (sec. 3707 of the bill and sec. 832 of the Code)

                              PRESENT LAW

    A property and casualty insurance company generally is 
subject to tax on its taxable income.\692\ The taxable income 
of a property and casualty insurance company is determined as 
the sum of its underwriting income and investment income (as 
well as gains and other income items), reduced by allowable 
deductions.\693\ Among the items that are deductible in 
calculating underwriting income are additions to reserves for 
losses incurred and expenses incurred.
---------------------------------------------------------------------------
    \692\Sec. 831(a).
    \693\Sec. 832.
---------------------------------------------------------------------------
    To take account of the time value of money, discounting of 
unpaid losses is required. All property and casualty loss 
reserves (unpaid losses and unpaid loss adjustment expenses) 
for each line of business (as shown on the annual statement) 
are required to be discounted for Federal income tax purposes.
    The discounted reserves are calculated using a prescribed 
interest rate which is based on the applicable Federal mid-term 
rate (``mid-term AFR''). The discount rate is the average of 
the mid-term AFRs effective at the beginning of each month over 
the 60-month period preceding the calendar year for which the 
determination is made.
    To determine the period over which the reserves are 
discounted, a prescribed loss payment pattern applies. The 
prescribed length of time is either the accident year and the 
following three calendar years, or the accident year and the 
following 10 calendar years, depending on the line of business. 
In the case of certain ``long-tail'' lines of business, the 10-
year period is extended, but not by more than five additional 
years. Thus, present law limits the maximum duration of any 
loss payment pattern to the accident year and the following 15 
years. The Treasury Department is directed to determine a loss 
payment pattern for each line of business by reference to the 
historical loss payment pattern for that line of business using 
aggregate experience reported on the annual statements of 
insurance companies, and is required to make this determination 
every five years, starting with 1987.
    Under the discounting rules, an election is provided 
permitting a taxpayer to use its own (rather than an industry-
wide) historical loss payment pattern with respect to all lines 
of business, provided that applicable requirements are met.
    Treasury publishes discount factors for each line of 
business to be applied by taxpayers for discounting 
reserves.\694\ The discount factors are published annually, 
based on (1) the interest rate applicable to the calendar year, 
and (2) the loss payment pattern for each line of business as 
determined every five years.
---------------------------------------------------------------------------
    \694\The most recent property and casualty reserve discount factors 
published by Treasury are in Rev. Proc. 2016-58, 2016-51 I.R.B. 839, 
and see Rev. Proc. 2012-44, 2012-49 I.R.B. 645.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the loss payment patterns 
prescribed by present law for property and casualty insurers do 
not accurately reflect the duration of these liabilities and 
should be extended. To ensure that the length of the period is 
reasonable from a record-keeping perspective, the period is not 
indefinite, but rather, is limited to 18 years after the 
accident year, or 25 years after the accident year for long-
tail lines of business. In the interests of neutrality of the 
tax law across taxpayers, the Committee bill repeals the 
election of a property and casualty insurer to use its own loss 
payment pattern rather than an industry loss payment pattern 
for purposes of the loss reserve discounting rules. The 
Committee believes that the interest rate applicable today for 
purposes of the loss reserve discounting rules does not 
accurately take account of the time value of money. In order to 
more accurately measure income, the rate should be based on a 
rate more closely related to property and casualty companies' 
yield on assets. Therefore, the Committee bill provides for an 
interest rate based on the corporate bond yield curve.

                        EXPLANATION OF PROVISION

    The provision modifies the reserve discounting rules 
applicable to property and casualty insurance companies. In 
general, the provision modifies the prescribed interest rate, 
extends the periods applicable under the loss payment pattern, 
and repeals the election to use a taxpayer's historical loss 
payment pattern.

Interest rate

    The provision provides that the interest rate is an annual 
rate for any calendar year to be determined by Treasury based 
on the corporate bond yield curve (rather than the mid-term AFR 
as under present law). For this purpose, the corporate bond 
yield curve means, with respect to any month, a yield curve 
that reflects the average, for the preceding 24-month period, 
of monthly yields on investment grade corporate bonds with 
varying maturities and that are in the top three quality levels 
available.\695\ Because the corporate bond yield curve provides 
for 24-month averaging, the present-law rule providing for 60-
month averaging to determine the interest rate is repealed 
under the provision. It is expected that Treasury will 
determine a 24-month average for the 24 months preceding the 
first month of the calendar year for which the determination is 
made.
---------------------------------------------------------------------------
    \695\This rule adopts the definition found in section 
430(h)(2)(D)(i) of the term ``corporate bond yield curve.'' Section 
430, which relates to minimum funding standards for single-employer 
defined benefit pension plans, includes other rules for determining an 
``effective interest rate,'' such as segment rate rules. The term 
``effective interest rate'' along with these other rules, including the 
segment rate rules, do not apply for purposes of property and casualty 
insurance reserve discounting.
---------------------------------------------------------------------------

Loss payment patterns

    The provision extends the periods applicable for 
determining loss payment patterns. Under the provision, the 
maximum duration of the loss payment pattern is determined by 
the amount of losses remaining unpaid using aggregate industry 
experience for each line of business, rather than by a set 
number of years as under present law.
    Like present law, the provision provides that Treasury 
determines a loss payment pattern for each line of business by 
reference to the historical loss payment pattern for that line 
of business using aggregate experience reported on the annual 
statements of insurance companies, and is required to make this 
determination every five years.
    Under the provision, the present-law three-year and 10-year 
periods following the accident year are extended up to a 
maximum of 15 more years for the lines of business to which 
each period applies. For lines of business to which the three-
year period applies, the amount of losses that would have been 
treated as paid in the third year after the accident year is 
treated as paid in that year and each subsequent year in an 
amount equal to the average of the amounts treated as paid in 
the first and second years (or, if less, the remaining amount). 
To the extent these unpaid losses have not been treated as paid 
before the 18th year after the accident year, they are treated 
as paid in that 18th year.
    Similarly, for lines of business to which the 10-year 
period applies, the amount of losses that would have been 
treated as paid in the 10th year following the accident year is 
treated as paid in that year and each subsequent year in an 
amount equal to the average of the amounts treated as paid in 
the seventh, eighth, and ninth years (or if less, the remaining 
amount). To the extent these unpaid losses have not been 
treated as paid before the 25th year after the accident year, 
they are treated as paid in that 25th year.
    The provision repeals the present-law rule providing that 
in the case of certain ``long-tail'' lines of business, the 10-
year period is extended, but not by more than five additional 
years. The provision does not change the lines of business to 
which the three-year, and 10-year, periods, respectively, 
apply.

Election to use own historical loss payment pattern

    The provision repeals the present-law election permitting a 
taxpayer to use its own (rather than an aggregate industry-
experience-based) historical loss payment pattern with respect 
to all lines of business.

                             EFFECTIVE DATE

    The provision generally applies to taxable years beginning 
after December 31, 2017. Under a transitional rule for the 
first taxable year beginning in 2018, the amount of unpaid 
losses and expenses unpaid (under section 832(b)(5)(B) and (6)) 
and the unpaid losses (under sections 807(c)(2) and 805(a)(1)) 
at the end of the preceding taxable year are determined as if 
the provision had applied to these items in such preceding 
taxable year, using the interest rate and loss payment patterns 
for accident years ending with calendar year 2018. Any 
adjustment is spread over eight taxable years, i.e., is 
included in the taxpayer's gross income ratably in the first 
taxable year beginning in 2018 and the seven succeeding taxable 
years. For taxable years subsequent to the first taxable year 
beginning in 2018, the provision applies to such unpaid losses 
and expenses unpaid (i.e., unpaid losses and expenses unpaid at 
the end of the taxable year preceding the first taxable year 
beginning in 2018) by using the interest rate and loss payment 
patterns applicable to accident years ending with calendar year 
2018.

8. Repeal of special estimated tax payments (sec. 3708 of the bill and 
                         sec. 847 of the Code)

                              PRESENT LAW

Allowance of additional deduction and establishment of special loss 
        discount account

    Present law allows an insurance company required to 
discount its reserves an additional deduction that is not to 
exceed the excess of (1) the amount of the undiscounted unpaid 
losses over (2) the amount of the related discounted unpaid 
losses, to the extent the amount was not deducted in a 
preceding taxable year.\696\ The provision imposes the 
requirement that a special loss discount account be established 
and maintained, and that special estimated tax payments be 
made. Unused amounts of special estimated tax payments are 
treated as a section 6655 estimated tax payment for the 16th 
year after the year for which the special estimated tax payment 
was made.
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    \696\Sec. 847.
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    The total payments by a taxpayer, including section 6655 
estimated tax payments and other tax payments, together with 
special estimated tax payments made under this provision, are 
generally the same as the total tax payments that the taxpayer 
would make if the taxpayer did not elect to have this provision 
apply, except to the extent amounts can be refunded under the 
provision in the 16th year.

Calculation of special estimated tax payments based on tax benefit 
        attributable to deduction

    More specifically, present law imposes a requirement that 
the taxpayer make special estimated tax payments in an amount 
equal to the tax benefit attributable to the additional 
deduction allowed under the provision. If amounts are included 
in gross income as a result of a reduction in the taxpayer's 
special loss discount account or the liquidation or termination 
of the taxpayer's insurance business, and an additional tax is 
due for any year as a result of the inclusion, then an amount 
of the special estimated tax payments equal to such additional 
tax is applied against such additional tax. If there is an 
adjustment reducing the amount of additional tax against which 
the special estimated tax payment was applied, then in lieu of 
any credit or refund for the reduction, a special estimated tax 
payment is treated as made in an amount equal to the amount 
that would otherwise be allowable as a credit or refund.
    The amount of the tax benefit attributable to the deduction 
is to be determined (under Treasury regulations (which have not 
been promulgated)) by taking into account tax benefits that 
would arise from the carryback of any net operating loss for 
the year as well as current year benefits. In addition, tax 
benefits for the current and carryback years are to take into 
account the benefit of filing a consolidated return with 
another insurance company without regard to the consolidation 
limitations imposed by section 1503(c).
    The taxpayer's estimated tax payments under section 6655 
are to be determined without regard to the additional deduction 
allowed under this provision and the special estimated tax 
payments. Legislative history\697\ indicates that it is 
intended that the taxpayer may apply the amount of an 
overpayment of any section 6655 estimated tax payments for the 
taxable year against the amount of the special estimated tax 
payment required under this provision. The special estimated 
tax payments under this provision are not treated as estimated 
tax payments for purposes of section 6655 (e.g., for purposes 
of calculating penalties or interest on underpayments of 
estimated tax) when such special estimated tax payments are 
made.
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    \697\See H.R. Rep. No. 100-1104, Conference Report to accompany 
H.R. 4333, the Technical and Miscellaneous Revenue Act of 1988, October 
21, 1988, p. 174.
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Refundable amount

    To the extent that a special estimated tax payment is not 
used to offset additional tax due for any of the first 15 
taxable years beginning after the year for which the payment 
was made, such special estimated tax payment is treated as an 
estimated tax payment made under section 6655 for the 16th year 
after the year for which the special estimated tax payment was 
made. If the amount of such deemed section 6655 payment, 
together with the taxpayer's other payments credited against 
tax liability for such 16th year, exceeds the tax liability for 
such year, then the excess (up to the amount of the deemed 
section 6655 payment) may be refunded to the taxpayer to the 
same extent provided under present law with respect to 
overpayments of tax.

Regulatory authority

    In addition to the regulatory authority to adjust the 
amount of special estimated tax payments in the event of a 
change in the corporate tax rate, authority is provided to 
Treasury to prescribe regulations necessary or appropriate to 
carry out the purposes of the provision.
    Such regulations include those providing for the separate 
application of the provision with respect to each accident 
year. Separate application of the provision with respect to 
each accident year (i.e., applying a vintaging methodology) may 
be appropriate under regulations to determine the amount of tax 
liability for any taxable year against which special estimated 
tax payments are applied, and to determine the amount (if any) 
of special estimated tax payments remaining after the 15th year 
which may be available to be refunded to the taxpayer.
    Regulatory authority is also provided to make such 
adjustments in the application of the provision as may be 
necessary to take into account the corporate alternative 
minimum tax. Under this regulatory authority, rules similar to 
those applicable in the case of a change in the corporate tax 
rate are intended to apply to determine the amount of special 
estimated tax payments that may be applied against tax 
calculated at the corporate alternative minimum tax rate. The 
special estimated tax payments are not treated as payments of 
regular tax for purposes of determining the taxpayer's 
alternative minimum tax liability.
    Regulations have not been promulgated under section 847.

                           REASONS FOR CHANGE

    The Committee believes that the special estimated tax 
payment rules add complexity to the tax law and do not improve 
the accuracy of income measurement of property and casualty 
insurers. The Committee bill therefore repeals these rules.

                        EXPLANATION OF PROVISION

    The provision repeals section 847. Thus, the election to 
apply section 847, the additional deduction, special loss 
discount account, special estimated tax payment, and refundable 
amount rules of present law are eliminated.
    The entire balance of an existing account is included in 
income of the taxpayer for the first taxable year beginning 
after 2017, and the entire amount of existing special estimated 
tax payments are applied against the amount of additional tax 
attributable to this inclusion. Any special estimated tax 
payments in excess of this amount are treated as estimated tax 
payments under section 6655.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2017.

                            I. Compensation

1. Modification of limitation on excessive employee remuneration (sec. 
             3801 of the bill and sec. 162(m) of the Code)

                              PRESENT LAW

In general

    An employer generally may deduct reasonable compensation 
for personal services as an ordinary and necessary business 
expense. Section 162(m) provides an explicit limitation on the 
deductibility of compensation expenses in the case of publicly 
traded corporate employers. The otherwise allowable deduction 
for compensation with respect to a covered employee of a 
publicly held corporation\698\ is limited to no more than $1 
million per year.\699\ The deduction limitation applies when 
the deduction attributable to the compensation would otherwise 
be taken.
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    \698\A corporation is treated as publicly held if it has a class of 
common equity securities that is required to be registered under 
section 12 of the Securities Exchange Act of 1934. Section 162(m)(2).
    \699\Sec. 162(m). This deduction limitation applies for purposes of 
the regular income tax and the alternative minimum tax.
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Covered employees

    Section 162(m) defines a covered employee as (1) the chief 
executive officer of the corporation (or an individual acting 
in such capacity) as of the close of the taxable year and (2) 
any employee whose total compensation is required to be 
reported to shareholders under the Securities Exchange Act of 
1934 (``Exchange Act'') by reason of being among the 
corporation's four most highly compensated officers for the 
taxable year (other than the chief executive officer).\700\ 
Treasury regulations under section 162(m) provide that whether 
an employee is the chief executive officer or among the four 
most highly compensated officers should be determined pursuant 
to the executive compensation disclosure rules promulgated 
under the Exchange Act.
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    \700\Sec. 162(m)(3).
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    In 2006, the Securities and Exchange Commission amended 
certain rules relating to executive compensation, including 
which officers' compensation must be disclosed under the 
Exchange Act. Under the new rules, such officers are (1) the 
principal executive officer (or an individual acting in such 
capacity), (2) the principal financial officer (or an 
individual acting in such capacity), and (3) the three most 
highly compensated officers, other than the principal executive 
officer or principal financial officer.
    In response to the Securities and Exchange Commission's new 
disclosure rules, the Internal Revenue Service issued updated 
guidance on identifying which employees are covered by section 
162(m).\701\ The new guidance provides that ``covered 
employee'' means any employee who is (1) as of the close of the 
taxable year, the principal executive officer (or an individual 
acting in such capacity) defined in reference to the Exchange 
Act, or (2) among the three most highly compensated 
officers\702\ for the taxable year (other than the principal 
executive officer or principal financial officer), again 
defined by reference to the Exchange Act. Thus, under current 
guidance, only four employees are covered under section 162(m) 
for any taxable year. Under Treasury regulations, the 
requirement that the individual meet the criteria as of the 
last day of the taxable year applies to both the principal 
executive officer and the three highest compensated 
officers.\703\
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    \701\Notice 2007-49, 2007-25 I.R.B. 1429.
    \702\By reason of being among the officers whose total compensation 
is required to be reported to shareholders under the Securities 
Exchange Act of 1934.
    \703\Treas. Reg. sec. 1.162-27(c)(2).
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Definition of publicly held corporation

    For purposes of the deduction disallowance of section 
162(m), a publicly held corporation means any corporation 
issuing any class of common equity securities required to be 
registered under section 12 of the Securities Exchange Act of 
1934.\704\ All U.S. publicly traded companies are subject to 
this registration requirement, including their foreign 
affiliates. A foreign company publicly traded through American 
depository receipts (``ADRs'') is also subject to this 
registration requirement if more than 50 percent of the 
issuer's outstanding voting securities are held, directly or 
indirectly, by residents of United States and either (i) the 
majority of the executive officers or directors are United 
States citizens or residents, (ii) more than 50 percent of the 
assets of the issuer are located in the United States, or (iii) 
the business of the issuer is administered principally in the 
United States. Other foreign companies are not subject to the 
registration requirement.
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    \704\Sec. 162(m)(2).
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Remuneration subject to the deduction limitation

            In general
    Unless specifically excluded, the deduction limitation 
applies to all remuneration for services, including cash and 
the cash value of all remuneration (including benefits) paid in 
a medium other than cash. If an individual is a covered 
employee for a taxable year, the deduction limitation applies 
to all compensation not explicitly excluded from the deduction 
limitation, regardless of whether the compensation is for 
services as a covered employee and regardless of when the 
compensation was earned. The $1 million cap is reduced by 
excess parachute payments (as defined in section 280G) that are 
not deductible by the corporation.\705\
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    \705\Sec. 162(m)(4)(F).
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    Certain types of compensation are not subject to the 
deduction limit and are not taken into account in determining 
whether other compensation exceeds $1 million. The following 
types of compensation are not taken into account: (1) 
remuneration payable on a commission basis;\706\ (2) 
remuneration payable solely on account of the attainment of one 
or more performance goals if certain outside director and 
shareholder approval requirements are met (``performance-based 
compensation'');\707\ (3) payments to a tax-favored retirement 
plan (including salary reduction contributions); (4) amounts 
that are excludable from the executive's gross income (such as 
employer-provided health benefits and miscellaneous fringe 
benefits);\708\ and (5) any remuneration payable under a 
written binding contract which was in effect on February 17, 
1993. In addition, remuneration does not include compensation 
for which a deduction is allowable after a covered employee 
ceases to be a covered employee. Thus, the deduction limitation 
often does not apply to deferred compensation that is otherwise 
subject to the deduction limitation (e.g., is not performance-
based compensation) because the payment of compensation is 
deferred until after termination of employment.
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    \706\Sec. 162(m)(4)(B).
    \707\Sec. 162(m)(4)(C).
    \708\Secs. 105, 106, and 132.
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            Performance-based compensation
    Compensation qualifies for the exception for performance-
based compensation only if (1) it is paid solely on account of 
the attainment of one or more performance goals, (2) the 
performance goals are established by a compensation committee 
consisting solely of two or more outside directors,\709\ (3) 
the material terms under which the compensation is to be paid, 
including the performance goals, are disclosed to and approved 
by the shareholders in a separate majority-approved vote prior 
to payment, and (4) prior to payment, the compensation 
committee certifies that the performance goals and any other 
material terms were in fact satisfied.
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    \709\A director is considered an outside director if he or she is 
not a current employee of the corporation (or related entities), is not 
a former employee of the corporation (or related entities) who is 
receiving compensation for prior services (other than benefits under a 
qualified retirement plan), was not an officer of the corporation (or 
related entities) at any time, and is not currently receiving 
compensation for personal services in any capacity (e.g., for services 
as a consultant) other than as a director.
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    Compensation (other than stock options or other stock 
appreciation rights (``SARs'')) is not treated as paid solely 
on account of the attainment of one or more performance goals 
unless the compensation is paid to the particular executive 
pursuant to a pre-established objective performance formula or 
standard that precludes discretion. A stock option or SAR with 
an exercise price not less than the fair market value, on the 
date the option or SAR is granted, of the stock subject to the 
option or SAR, generally is treated as meeting the exception 
for performance-based compensation, provided that the 
requirements for outside director and shareholder approval are 
met (without the need for certification that the performance 
standards have been met). This is the case because the amount 
of compensation attributable to the options or SARs received by 
the executive is based solely on an increase in the 
corporation's stock price. Stock-based compensation is not 
treated as performance-based if it depends on factors other 
than corporate performance.

                           REASONS FOR CHANGE

    The Committee believes that the significant exceptions to 
the limit on deductible executive compensation by publicly 
traded corporations have resulted in a shift away from cash 
compensation paid to senior executives in favor of stock 
options and other forms of performance pay. The Committee 
further believes this shift has led to perverse consequences 
resulting from the focus of such executives and businesses on 
quarterly results, rather than the long-term success of the 
company and its rank-and-file workers. Additionally, the 
Committee believes that aligning the deductibility limit 
between domestically traded publicly traded corporations and 
all foreign companies that trade ADRs in the United States, as 
well as certain private C corporations and S corporations, 
promotes fair tax treatment across similarly situated 
businesses. The Committee believes the law should be clarified 
to override administrative guidance, Notice 2007-49, 2007-25 
I.R.B. 1429, which, contrary to the statute, limits the number 
of covered employees to four.

                        EXPLANATION OF PROVISION

Definition of covered employee

    The provision revises the definition of covered employee to 
include both the principal executive officer and the principal 
financial officer. Further, an individual is a covered employee 
if the individual holds one of these positions at any time 
during the taxable year. The provision also defines as a 
covered employee the three (rather than four) most highly 
compensated officers for the taxable year (other than the 
principal executive officer or principal financial officer) who 
are required to be reported on the company's proxy statement 
(i.e., the statement required pursuant to executive 
compensation disclosure rules promulgated under the Exchange 
Act) for the taxable year (or who would be required to be 
reported on such a statement for a company not required to make 
such a report to shareholders). This includes such officers of 
a corporation not required to file a proxy statement but which 
otherwise falls within the revised definition of a publicly 
held corporation, as well as such officers of a publicly traded 
corporation that would otherwise have been required to file a 
proxy statement for the year (for example, but for the fact 
that the corporation delisted its securities or underwent a 
transaction that resulted in the nonapplication of the proxy 
statement requirement).
    In addition, if an individual is a covered employee with 
respect to a corporation for a taxable year beginning after 
December 31, 2016, the individual remains a covered employee 
for all future years. Thus, an individual remains a covered 
employee with respect to compensation otherwise deductible for 
subsequent years, including for years during which the 
individual is no longer employed by the corporation and years 
after the individual has died. Compensation does not fail to be 
compensation with respect to a covered employee and thus 
subject to the deduction limit for a taxable year merely 
because the compensation is includible in the income of, or 
paid to, another individual, such as compensation paid to a 
beneficiary after the employee's death, or to a former spouse 
pursuant to a domestic relations order.

Definition of publicly held corporation

    The provision extends the applicability of section 162(m) 
to include all domestic publicly traded corporations and all 
foreign companies publicly traded through ADRs. The proposed 
definition may include certain additional corporations that are 
not publicly traded, such as large private C or S corporations.

Performance-based compensation and commissions exceptions

    The provision eliminates the exceptions for commissions and 
performance-based compensation from the definition of 
compensation subject to the deduction limit. Thus, such 
compensation is taken into account in determining the amount of 
compensation with respect to a covered employee for a taxable 
year that exceeds $1 million and is thus not deductible under 
section 162.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2017.

2. Excise tax on excess tax-exempt organization executive compensation 
           (sec. 3802 of the bill and sec. 4960 of the Code)

                              PRESENT LAW

    Taxable employers and other service recipients generally 
may deduct reasonable compensation expenses.\710\ However, in 
some cases, compensation in excess of specific levels is not 
deductible.
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    \710\Sec. 162(a)(1).
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    A publicly held corporation generally cannot deduct more 
than $1 million of compensation (that is not compensation 
otherwise excepted from this limit) in a taxable year for each 
``covered employee.''\711\ For this purpose, a covered employee 
is the corporation's principal executive officer (or an 
individual acting in such capacity) defined in reference to the 
Securities Exchange Act of 1934 (``Exchange Act'') as of the 
close of the taxable year, or any employee whose total 
compensation is required to be reported to shareholders under 
the Exchange Act by reason of being among the corporation's 
three most highly compensated officers for the taxable year 
(other than the principal executive officer or principal 
financial officer).\712\
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    \711\Sec. 162(m)(1). Under section 162(m)(6), limits apply to 
deductions for compensation of individuals performing services for 
certain health insurance providers.
    \712\Notice 2007-49, 2007-2 I.R.B. 1429.
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    Unless an exception applies, generally a corporation cannot 
deduct that portion of the aggregate present value of a 
``parachute payment'' which equals or exceeds three times the 
``base amount'' of certain service providers. The nondeductible 
excess is an ``excess parachute payment.''\713\ A parachute 
payment is generally a payment of compensation that is 
contingent on a change in corporate ownership or control made 
to certain officers, shareholders, and highly compensated 
individuals.\714\ An individual's base amount is the average 
annualized compensation includible in the individual's gross 
income for the five taxable years ending before the date on 
which the change in ownership or control occurs.\715\ Certain 
amounts are not considered parachute payments, including 
payments under a qualified retirement plan, a simplified 
employee pension plan, or a simple retirement account.\716\
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    \713\Sec. 280G(a) and (b)(1).
    \714\Sec. 280G(b)(2) and (c).
    \715\Sec. 280G(b)(3).
    \716\Secs. 401(a), 403(a), 408(k), and 408(p).
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    These deduction limits generally do not affect a tax-exempt 
organization.

                           REASONS FOR CHANGE

    The Committee believes that tax-exempt organizations enjoy 
a tax subsidy from the Federal government because contributions 
to such organizations are generally deductible and such 
organizations are generally not subject to tax (except on 
unrelated business income). As a result, such organizations are 
subject to the requirement that they use their resources for 
specific purposes, and the Committee believes that excessive 
compensation (including excessive severance packages) paid to 
senior executives of such organizations diverts resources from 
those particular purposes. The Committee further believes that 
alignment of the tax treatment of excessive executive 
compensation (as top executives may inappropriately divert 
organizational resources into excessive compensation) between 
for-profit and tax-exempt employers furthers the Committee's 
larger tax reform effort of making the system fairer for all 
businesses.

                        EXPLANATION OF PROVISION

    Under the provision, an employer is liable for an excise 
tax equal to 20 percent of the sum of (1) any remuneration 
(other than an excess parachute payment) in excess of $1 
million paid to a covered employee by an applicable tax-exempt 
organization for a taxable year, and (2) any excess parachute 
payment (under a new definition for this purpose that relates 
solely to separation pay) paid by the applicable tax-exempt 
organization to a covered employee. Accordingly, the excise tax 
applies as a result of an excess parachute payment, even if the 
covered employee's remuneration does not exceed $1 million.
    For purposes of the provision, a covered employee is an 
employee (including any former employee) of an applicable tax-
exempt organization if the employee is one of the five highest 
compensated employees of the organization for the taxable year 
or was a covered employee of the organization (or a 
predecessor) for any preceding taxable year beginning after 
December 31, 2016. An ``applicable tax-exempt organization'' is 
an organization exempt from tax under section 501(a), an exempt 
farmers' cooperative,\717\ a Federal, State or local 
governmental entity with excludable income,\718\ or a political 
organization.\719\
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    \717\Sec. 521(b).
    \718\Sec. 115(1).
    \719\Sec. 527(e)(1).
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    Remuneration means wages as defined for income tax 
withholding purposes,\720\ but does not include any designated 
Roth contribution.\721\ Remuneration of a covered employee 
includes any remuneration paid with respect to employment of 
the covered employee by any person or governmental entity 
related to the applicable tax-exempt organization. A person or 
governmental entity is treated as related to an applicable tax-
exempt organization if the person or governmental entity (1) 
controls, or is controlled by, the organization, (2) is 
controlled by one or more persons that control the 
organization, (3) is a supported organization\722\ during the 
taxable year with respect to the organization, (4) is a 
supporting organization\723\ during the taxable year with 
respect to the organization, or (5) in the case of a voluntary 
employees' beneficiary association (``VEBA''),\724\ 
establishes, maintains, or makes contributions to the VEBA. 
However, remuneration of a covered employee that is not 
deductible by reason of the $1 million limit on deductible 
compensation is not taken into account for purposes of the 
provision.
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    \720\Sec. 3401(a).
    \721\Under section 402A(c), a designated Roth contribution is an 
elective deferral (that is, a contribution to a tax-favored employer-
sponsored retirement plan made at the election of an employee) that the 
employee designates as not being excludable from income.
    \722\Sec. 509(f)(3). A technical amendment to the provision is 
needed to reflect the correct statutory citation.
    \723\Sec. 509(a)(3).
    \724\Sec. 501(c)(9). A technical amendment to the provision is 
needed to reflect the correct statutory citation.
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    Under the provision, an excess parachute payment is the 
amount by which any parachute payment exceeds the portion of 
the base amount allocated to the payment. A parachute payment 
is a payment in the nature of compensation to (or for the 
benefit of) a covered employee if the payment is contingent on 
the employee's separation from employment and the aggregate 
present value of all such payments equals or exceeds three 
times the base amount. The base amount is the average 
annualized compensation includible in the covered employee's 
gross income for the five taxable years ending before the date 
of the employee's separation from employment. Parachute 
payments do not include payments under a qualified retirement 
plan, a simplified employee pension plan, a simple retirement 
account, a tax-deferred annuity,\725\ or an eligible deferred 
compensation plan of a State or local government employer.\726\
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    \725\Sec. 403(b).
    \726\Sec. 457(b).
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    The employer of a covered employee is liable for the excise 
tax. If remuneration of a covered employee from more than one 
employer is taken into account in determining the excise tax, 
each employer is liable for the tax in an amount that bears the 
same ratio to the total tax as the remuneration paid by that 
employer bears to the remuneration paid by all employers to the 
covered employee.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2017.

  3. Treatment of qualified equity grants (sec. 3803 of the bill and 
                 secs. 83, 3401, and 6051 of the Code)

                              PRESENT LAW

Income tax treatment of employer stock transferred to an employee

    Specific rules apply to property, including employer stock, 
transferred to an employee in connection with the performance 
of services.\727\ These rules govern the amount and timing of 
income inclusion by the employee and the amount and timing of 
the employer's compensation deduction.
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    \727\Sec. 83. Section 83 applies generally to transfers of any 
property, not just employer stock, in connection with the performance 
of services by any service provider, not just an employee. However, the 
provision described herein applies only with respect to certain 
employer stock transferred to employees.
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    Under these rules, an employee generally must recognize 
income in the taxable year in which the employee's right to the 
stock is transferable or is not subject to a substantial risk 
of forfeiture, whichever occurs earlier (referred to herein as 
``substantially vested''). Thus, if the employee's right to the 
stock is substantially vested when the stock is transferred to 
the employee, the employee recognizes income in the taxable 
year of such transfer, in an amount equal to the fair market 
value of the stock as of the date of transfer (less any amount 
paid for the stock). If at the time the stock is transferred to 
the employee, the employee's right to the stock is not 
substantially vested (referred to herein as ``nonvested''), the 
employee does not recognize income attributable to the stock 
transfer until the taxable year in which the employee's right 
becomes substantially vested. In this case, the amount 
includible in the employee's income is the fair market value of 
the stock as of the date that the employee's right to the stock 
is substantially vested (less any amount paid for the stock). 
However, if the employee's right to the stock is nonvested at 
the time the stock is transferred to employee, under section 
83(b), the employee may elect within 30 days of transfer to 
recognize income in the taxable year of transfer, referred to 
as a ``section 83(b)'' election.\728\ If a proper and timely 
election under section 83(b) is made, the amount of 
compensatory income is capped at the amount equal to the fair 
market value of the stock as of the date of transfer (less any 
amount paid for the stock). A section 83(b) election is 
available with respect to grants of ``restricted stock'' 
(nonvested stock), and does not generally apply to the grant of 
options.
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    \728\Under Treas. Reg. sec. 1.83-2, the employee makes an election 
by filing with the Internal Revenue Service a written statement that 
includes the fair market value of the property at the time of transfer 
and the amount (if any) paid for the property. The employee must also 
provide a copy of the statement to the employer.
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    In general, an employee's right to stock or other property 
is subject to a substantial risk of forfeiture if the 
employee's right to full enjoyment of the property is subject 
to a condition, such as the future performance of substantial 
services.\729\ An employee's right to stock or other property 
is transferable if the employee can transfer an interest in the 
property to any person other than the transferor of the 
property.\730\ Thus, generally, employer stock transferred to 
an employee by an employer is not transferable merely because 
the employee can sell it back to the employer.
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    \729\See section 83(c)(1) and Treas. Reg. sec. 1.83-3(c) for the 
definition of substantial risk of forfeiture.
    \730\Treas. Reg. sec. 1.83-3(d). In addition, under section 
83(c)(2), the right to stock is transferable only if any transferee's 
right to the stock would not be subject to a substantial risk of 
forfeiture.
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    In the case of stock transferred to an employee, the 
employer is allowed a deduction (to the extent a deduction for 
a business expense is otherwise allowable) equal to the amount 
included in the employee's income as a result of transfer of 
the stock.\731\ The employer deduction generally is permitted 
in the employer's taxable year in which or with which ends the 
employee's taxable year when the amount is included and 
properly reported in the employee's income.\732\
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    \731\Sec. 83(h).
    \732\Treas. Reg. sec. 1.83-6.
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    These rules do not apply to the grant of a nonqualified 
option on employer stock unless the option has a readily 
ascertainable fair market value.\733\ Instead, these rules 
apply to the transfer of employer stock by the employee on 
exercise of the option. That is, if the right to the stock is 
substantially vested on transfer (the time of exercise), income 
recognition applies for the taxable year of transfer. If the 
right to the stock is nonvested on transfer, the timing of 
income inclusion is determined under the rules applicable to 
the transfer of nonvested stock. In either case, the amount 
includible in income by the employee is the fair market value 
of the stock as of the required time of income inclusion, less 
the exercise price paid by the employee. A section 83(b) 
election generally does not apply to the grant of options. If 
upon the exercise of an option, nonvested stock is transferred 
to the employee, a section 83(b) election may apply. The 
employer's deduction is generally determined under the rules 
that apply to transfers of restricted stock, but a special 
accrual rule may apply under Treasury regulations when the 
transferred stock is substantially vested.\734\
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    \733\See section 83(e)(3) and Treas. Reg. sec. 1.83-7. A 
nonqualified option is an option on employer stock that is not a 
statutory option, discussed below.
    \734\Treas. Reg. sec. 1.83-6(a)(3).
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Employment taxes and reporting

    Employment taxes generally consist of taxes under the 
Federal Insurance Contributions Act (``FICA''), tax under the 
Federal Unemployment Tax Act (``FUTA''), and income taxes 
required to be withheld by employers from wages paid to 
employees (``income tax withholding'').\735\ Unless an 
exception applies under the applicable rules, compensation 
provided to an employee constitutes wages subject to these 
taxes.
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    \735\Secs. 3101-3128 (FICA), 3301-3311 (FUTA), and 3401-3404 
(income tax withholding). Instead of FICA taxes, railroad employers and 
employees are subject, under the Railroad Retirement Tax Act 
(``RRTA''), sections 3201-3241, to taxes equivalent to FICA taxes with 
respect to compensation as defined for RRTA purposes. Sections 3501-
3510 provide additional rules relating to all these taxes.
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    FICA imposes tax on employers and employees, generally 
based on the amount of wages paid to an employee during the 
year. Special rules as to the timing and amount of FICA taxes 
apply in the case of nonqualified deferred compensation, as 
defined for FICA purposes.\736\
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    \736\Sec. 3121(v); Treas. Reg. sec. 31.3121(v)(2).
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    The tax imposed on the employer and on the employee is each 
composed of two parts: (1) the Social Security or old age, 
survivors, and disability insurance (``OASDI'') tax equal to 
6.2 percent of covered wages up to the OASDI wage base 
($127,200 for 2017); and (2) the Medicare or hospital insurance 
(``HI'') tax equal to 1.45 percent of all covered wages.\737\ 
The employee portion of FICA tax generally must be withheld 
and, along with the employer portion, remitted to the Federal 
government by the employer. FICA tax withholding applies 
regardless of whether compensation is provided in the form of 
cash or a noncash form, such as a transfer of property 
(including employer stock) or in-kind benefits.\738\
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    \737\The employee portion of the HI tax under FICA (not the 
employer portion) is increased by an additional tax of 0.9 percent on 
wages received in excess of a threshold amount. The threshold amount is 
$250,000 in the case of a joint return, $125,000 in the case of a 
married individual filing a separate return, and $200,000 in any other 
case.
    \738\Under section 3501(b), employment taxes with respect to 
noncash fringe benefits are to be collected (or paid) by the employer 
at the time and in the manner prescribed by the Secretary of the 
Treasury (``Treasury''). Announcement 85-113, 1985-31 I.R.B. 31, 
provides guidance on the application of employment taxes with respect 
to noncash fringe benefits.
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    FUTA imposes a tax on employers of six percent of wages up 
to the FUTA wage base of $7,000.
    Income tax withholding generally applies when wages are 
paid by an employer to an employee, based on graduated 
withholding rates set out in tables published by the Internal 
Revenue Service (``IRS'').\739\ Like FICA tax withholding, 
income tax withholding applies regardless of whether 
compensation is provided in the form of cash or a noncash form, 
such as a transfer of property (including employer stock) or 
in-kind benefits.
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    \739\Sec. 3402. Specific withholding rates apply in the case of 
supplemental wages.
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    An employer is required to furnish each employee with a 
statement of compensation information for a calendar year, 
including taxable compensation, FICA wages, and withheld income 
and FICA taxes.\740\ In addition, information relating to 
certain nontaxable items must be reported, such as certain 
retirement and health plan contributions. The statement, made 
on Form W-2, Wage and Tax Statement, must be provided to each 
employee by January 31 of the succeeding year.\741\
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    \740\Secs. 6041 and 6051.
    \741\Employers send Form W-2 information to the Social Security 
Administration, which records information relating to Social Security 
and Medicare and forwards the Form W-2 information to the IRS. 
Employees include a copy of Form W-2 with their income tax returns.
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Statutory options

    Two types of statutory options apply with respect to 
employer stock: incentive stock options (``ISOs'') and options 
provided under an employee stock purchase plan (``ESPP'').\742\ 
Stock received pursuant to a statutory option is subject to 
special rules, rather than the rules for nonqualified options, 
discussed above. No amount is includible in an employee's 
income on the grant, vesting, or exercise of a statutory 
option.\743\ In addition, generally no deduction is allowed to 
the employer with respect to the option or the stock 
transferred to an employee.
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    \742\Sections 421-424 govern statutory options. Section 423(b)(5) 
requires that, under the terms of an ESPP, all employees granted 
options generally must have the same rights and privileges.
    \743\Under section 56(b)(3), this income tax treatment with respect 
to stock received on exercise of an ISO does not apply for purposes of 
the alternative minimum tax under section 55.
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    If a holding requirement is met with respect to the stock 
transferred on exercise of a statutory option and the employee 
later disposes of the stock, the employee's gain generally is 
treated as capital gain rather than ordinary income. Under the 
holding requirement, the employee must not dispose of the stock 
within two years after the date the option is granted and also 
must not dispose of the stock within one year after the date 
the option is exercised. If a disposition occurs before the end 
of the required holding period (a ``disqualifying 
disposition''), the employee recognizes ordinary income in the 
taxable year in which the disqualifying disposition occurs and 
the employer may be allowed a corresponding deduction in the 
taxable year in which such disposition occurs. The amount of 
ordinary income recognized when a disqualifying disposition 
occurs generally equals the fair market value of the stock on 
the date of exercise (that is, when the stock was transferred 
to the employee) less the exercise price paid.
    Employment taxes do not apply with respect to the grant or 
vesting of a statutory option, transfer of stock pursuant to 
the option, or a disposition (including a disqualifying 
disposition) of the stock.\744\ However, certain special 
reporting requirements apply.
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    \744\Secs. 3121(a)(22), 3306(b)(19), and the last sentence of 
section 421(b).
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Nonqualified deferred compensation

    Compensation is generally includible in an employee's 
income when paid to the employee. However, in the case of a 
nonqualified deferred compensation plan,\745\ unless the 
arrangement either is exempt from or meets the requirements of 
section 409A, the amount of deferred compensation is first 
includible in income for the taxable year when not subject to a 
substantial risk of forfeiture (as defined),\746\ even if 
payment will not occur until a later year.\747\ In general, to 
meet the requirements of section 409A, the time when 
nonqualified deferred compensation will be paid, as well as the 
amount, must be specified at the time of deferral with limits 
on further deferral after the time for payment. Various other 
requirements apply, including that payment can only occur on 
specific defined events.
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    \745\Compensation earned by an employee is generally paid to the 
employee shortly after being earned. However, in some cases, payment is 
deferred to a later period, referred to as ``deferred compensation.'' 
Deferred compensation may be provided through a plan that receives tax-
favored treatment, such as a qualified retirement plan under section 
401(a). Deferred compensation provided through a plan that is not 
eligible for tax-favored treatment is referred to as ``nonqualified'' 
deferred compensation.
    \746\Treas. Reg. sec. 1.409A-1(d).
    \747\Section 409A and the regulations thereunder provide rules for 
nonqualified deferred compensation. Compensation that fails to meet the 
requirements of section 409A is also subject to an additional income 
tax of 20% on amounts includible in income, and, along with a potential 
interest factor tax, applies to increases in the value of the failed 
compensation each year until it is paid.
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    Various exemptions from section 409A apply, including 
transfers of property subject to section 83.\748\ Nonqualified 
options are not automatically exempt from section 409A, but may 
be structured so as not to be considered nonqualified deferred 
compensation.\749\ A restricted stock unit (``RSU'') is a term 
used for an arrangement under which an employee has the right 
to receive at a specified time in the future an amount 
determined by reference to the value of one or more shares of 
employer stock. An employee's right to receive the future 
amount may be subject to a condition, such as continued 
employment for a certain period or the attainment of certain 
performance goals. The payment to the employee of the amount 
due under the arrangement is referred to as settlement of the 
RSU. The arrangement may provide for the settlement amount to 
be paid in cash or as a transfer of employer stock (or either). 
An arrangement providing RSUs is generally considered a 
nonqualified deferred compensation plan and is subject to the 
rules, including the limits, of section 409A. The employer 
deduction generally is permitted in the employer's taxable year 
in which or with which ends the employee's taxable year when 
the amount is included and properly reported in the employee's 
income.\750\
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    \748\Treas. Reg. sec. 1.409A-1(b)(6).
    \749\Treas. Reg. sec. 1.409A-1(b)(5). In addition, statutory option 
arrangements are not nonqualified deferred compensation arrangements.
    \750\Sec. 404(a)(5).
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                           REASONS FOR CHANGE

    Employer stock may provide a valuable form of employee 
compensation. In some cases, the transfer of employer stock 
with a high fair market value may result in compensation 
income, and a related tax liability, that is disproportionately 
large in comparison to an employee's regular salary or wages. 
In the case of publicly traded employer stock, an employee may 
sell some of the stock to provide funds to cover that tax 
liability. However, that approach often is not available in the 
case of a closely held company that restricts the 
transferability of its stock. This may make employer stock a 
less attractive form of compensation. In the case of stock 
options, the inability to pay the tax liability that would 
result from the stock received on exercise of the option may 
mean employees let options lapse, thus losing compensation they 
have already earned. The Committee wishes to address these 
situations by allowing employees to elect to defer recognition 
of income attributable to stock received on exercise of an 
option or settlement of an RSU until an opportunity to sell 
some of the stock arises, but in no event longer than five 
years from the date that the employee's right to the stock 
becomes substantially vested.

                        EXPLANATION OF PROVISION

In general

    The provision allows a qualified employee to elect to 
defer, for income tax purposes, the inclusion in income of the 
amount of income attributable to qualified stock transferred to 
the employee by the employer. An election to defer income 
inclusion (``inclusion deferral election'') with respect to 
qualified stock must be made no later than 30 days after the 
first time the employee's right to the stock is substantially 
vested or is transferable, whichever occurs earlier.
    If an employee elects to defer income inclusion under the 
provision, the income must be included in the employee's income 
for the taxable year that includes the earliest of (1) the 
first date the qualified stock becomes transferable, including, 
solely for this purpose, transferable to the employer;\751\ (2) 
the date the employee first becomes an excluded employee (as 
described below); (3) the first date on which any stock of the 
employer becomes readily tradable on an established securities 
market;\752\ (4) the date five years after the first date the 
employee's right to the stock becomes substantially vested; or 
(5) the date on which the employee revokes her inclusion 
deferral election.\753\
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    \751\Thus, for this purpose, the qualified stock is considered 
transferable if the employee has the ability to sell the stock to the 
employer (or any other person).
    \752\An established securities market is determined for this 
purpose by the Secretary, but does not include any market unless the 
market is recognized as an established securities market for purposes 
of another Code provision.
    \753\An inclusion deferral election is revoked at the time and in 
the manner as the Secretary provides.
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    An inclusion deferral election is made in a manner similar 
to the manner in which a section 83(b) election is made.\754\ 
The provision does not apply to income with respect to 
nonvested stock that is includible as a result of a section 
83(b) election. The provision clarifies that Section 83 (other 
than the provision), including subsection (b), shall not apply 
to RSUs. Therefore, RSUs are not eligible for a section 83(b) 
election. This is the case because, absent this provision, RSUs 
are nonqualified deferred compensation and therefore subject to 
the rules that apply to nonqualified deferred compensation.
---------------------------------------------------------------------------
    \754\Thus, as in the case of a section 83(b) election under present 
law, the employee must provide a copy of the inclusion deferral 
election to the employer.
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    An employee may not make an inclusion deferral election for 
a year with respect to qualified stock if, in the preceding 
calendar year, the corporation purchased any of its outstanding 
stock unless at least 25 percent of the total dollar amount of 
the stock so purchased is stock with respect to which an 
inclusion deferral election is in effect (``deferral stock'') 
and the determination of which individuals from whom deferral 
stock is purchased is made on a reasonable basis.\755\ For 
purposes of this requirement, stock purchased from an 
individual is not treated as deferral stock (and the purchase 
is not treated as a purchase of deferral stock) if, immediately 
after the purchase, the individual holds any deferral stock 
with respect to which an inclusion deferral election has been 
in effect for a longer period than the election with respect to 
the purchased stock. Thus, in general, in applying the purchase 
requirement, an individual's deferral stock with respect to 
which an inclusion deferral election has been in effect for the 
longest periods must be purchased first. A corporation that has 
deferral stock outstanding as of the beginning of any calendar 
year and that purchases any of its outstanding stock during the 
calendar year must report on its income tax return for the 
taxable year in which, or with which, the calendar year ends 
the total dollar amount of the outstanding stock purchased 
during the calendar year and such other information as the 
Secretary may require for purposes of administering this 
requirement.
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    \755\This requirement is met if the stock purchased by the 
corporation includes all the corporation's outstanding deferral stock.
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    A qualified employee may make an inclusion deferral 
election with respect to qualified stock attributable to a 
statutory option.\756\ In that case, the option is not treated 
as a statutory option and the rules relating to statutory 
options and related stock do not apply. In addition, an 
arrangement under which an employee may receive qualified stock 
is not treated as a nonqualified deferred compensation plan 
solely because of an employee's inclusion deferral election or 
ability to make an election.
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    \756\For purposes of the requirement that an ESPP provide employees 
with the same rights and privileges, the rules of the provision apply 
in determining which employees have the right to make an inclusion 
deferral election with respect to stock received under the ESPP.
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    Deferred income inclusion applies also for purposes of the 
employer's deduction of the amount of income attributable to 
the qualified stock. That is, if an employee makes an inclusion 
deferral election, the employer's deduction is deferred until 
the employer's taxable year in which or with which ends the 
taxable year of the employee for which the amount is included 
in the employee's income as described in (1)-(5) above.

Qualified employee and qualified stock

    Under the provision, a qualified employee means an 
individual who is not an excluded employee and who agrees, in 
the inclusion deferral election, to meet the requirements 
necessary (as determined by the Secretary) to ensure the income 
tax withholding requirements of the employer corporation with 
respect to the qualified stock (as described below) are met. 
For this purpose, an excluded employee with respect to a 
corporation is any individual (1) who was a one-percent owner 
of the corporation at any time during the 10 preceding calendar 
years,\757\ (2) who is, or has been at any prior time, the 
chief executive officer or chief financial officer of the 
corporation or an individual acting in either capacity, (3) who 
is a family member of an individual described in (1) or 
(2),\758\ or (4) who has been one of the four highest 
compensated officers of the corporation for any of the 10 
preceding taxable years.\759\
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    \757\One-percent owner status is determined under the top-heavy 
rules for qualified retirement plans, that is, section 
416(i)(1)(B)(ii).
    \758\In the case of one-percent owners, this results from 
application of the attribution rules of section 318 under section 
416(i)(1)(B)(i)(II). Family members are determined under section 
318(a)(1) and generally include an individual's spouse, children, 
grandchildren and parents.
    \759\These officers are determined on the basis of shareholder 
disclosure rules for compensation under the Securities Exchange Act of 
1934, as if such rules applied to the corporation.
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    Qualified stock is any stock of a corporation if--
           an employee receives the stock in connection 
        with the exercise of an option or in settlement of an 
        RSU, and
           the option or RSU was granted by the 
        corporation to the employee in connection with the 
        performance of services and in a year in which the 
        corporation was an eligible corporation (as described 
        below).
    However, qualified stock does not include any stock if, at 
the time the employee's right to the stock becomes 
substantially vested, the employee may sell the stock to, or 
otherwise receive cash in lieu of stock from, the corporation. 
Qualified stock can only be such if it relates to stock 
received in connection with options or RSUs, and does not 
include stock received in connection with other forms of equity 
compensation, including stock appreciation rights or restricted 
stock.
    A corporation is an eligible corporation with respect to a 
calendar year if (1) no stock of the employer corporation (or 
any predecessor) is readily tradable on an established 
securities market during any preceding calendar year,\760\ and 
(2) the corporation has a written plan under which, in the 
calendar year, not less than 80 percent of all employees who 
provide services to the corporation in the United States (or 
any U.S. possession) are granted stock options, or restricted 
stock units (``RSUs''), with the same rights and privileges to 
receive qualified stock (``80-percent requirement'').\761\ For 
this purpose, in general, the determination of rights and 
privileges with respect to stock is determined in a similar 
manner as provided under the present-law ESPP rules.\762\ 
However, employees will not fail to be treated as having the 
same rights and privileges to receive qualified stock solely 
because the number of shares available to all employees is not 
equal in amount, provided that the number of shares available 
to each employee is more than a de minimis amount. In addition, 
rights and privileges with respect to the exercise of a stock 
option are not treated for this purpose as the same as rights 
and privileges with respect to the settlement of an RSU.\763\
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    \760\This requirement continues to apply up to the time an 
inclusion deferral election is made. That is, under the provision, no 
inclusion deferral election may be made with respect to qualified stock 
if any stock of the corporation is readily tradable on an established 
securities market at any time before the election is made.
    \761\In applying the requirement that 80 percent of employees 
receive stock options or RSUs, excluded employees and part-time 
employees are not taken into account. For this purpose, part-time 
employee is defined under section 4980G(d)(4), as an employee who is 
customarily employed for fewer than 30 hours per week. (A technical 
amendment to the provision is needed to reflect the correct statutory 
citation defining part-time employees.)
    \762\Sec. 423(b)(5).
    \763\Under a transition rule, in the case of a calendar year 
beginning before January 1, 2018, the 80-percent requirement is applied 
without regard to whether the rights and privileges with respect to the 
qualified stock are the same.
---------------------------------------------------------------------------
    For purposes of the provision, corporations that are 
members of the same controlled group\764\ are treated as one 
corporation.
---------------------------------------------------------------------------
    \764\As defined in sec. 1563(a).
---------------------------------------------------------------------------

Notice, withholding and reporting requirements

    Under the provision, a corporation that transfers qualified 
stock to a qualified employee must provide a notice to the 
qualified employee at the time (or a reasonable period before) 
the employee's right to the qualified stock is substantially 
vested (and income attributable to the stock would first be 
includible absent an inclusion deferral election). The notice 
must (1) certify to the employee that the stock is qualified 
stock, and (2) notify the employee (a) that the employee may 
(if eligible) elect to defer income inclusion with respect to 
the stock and (b) that, if the employee makes an inclusion 
deferral election, the amount of income required to be included 
at the end of the deferral period will be based on the value of 
the stock at the time the employee's right to the stock first 
becomes substantially vested, notwithstanding whether the value 
of the stock has declined during the deferral period (including 
whether the value of the stock has declined below the 
employee's tax liability with respect to such stock), and the 
amount of income to be included at the end of the deferral 
period will be subject to withholding as provided under the 
provision, as well as of the employee's responsibilities with 
respect to required withholding. Failure to provide the notice 
may result in the imposition of a penalty of $100 for each 
failure, subject to a maximum penalty of $50,000 for all 
failures during any calendar year.
    An inclusion deferral election applies only for income tax 
purposes. The application of FICA and FUTA are not affected. 
The provision includes specific income tax withholding and 
reporting requirements with respect to income subject to an 
inclusion deferral election.
    For the taxable year for which income subject to an 
inclusion deferral election is required to be included in 
income by the employee (as described above), the amount 
required to be included in income is treated as wages with 
respect to which the employer is required to withhold income 
tax at a rate not less than the highest income tax rate 
applicable to individual taxpayers.\765\ The employer must 
report on Form W-2 the amount of income covered by an inclusion 
deferral election (1) for the year of deferral and (2) for the 
year the income is required to be included in income by the 
employee. In addition, for any calendar year, the employer must 
report on Form W-2 the aggregate amount of income covered by 
inclusion deferral elections, determined as of the close of the 
calendar year.
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    \765\That is, the maximum rate of tax in effect for the year under 
section 1. The provision specifies that qualified stock is treated as a 
noncash fringe benefit for income tax withholding purposes.
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                             EFFECTIVE DATE

    The provision generally applies with respect to stock 
attributable to options exercised or RSUs settled after 
December 31, 2017. Under a transition rule, until the Secretary 
(or the Secretary's delegate) issues regulations or other 
guidance implementing the 80-percent and employer notice 
requirements under the provision, a corporation will be treated 
as complying with those requirements (respectively) if it 
complies with a reasonable good faith interpretation of the 
requirements. The penalty for a failure to provide the notice 
required under the provision applies to failures after December 
31, 2017.

        TITLE IV--TAXATION OF FOREIGN INCOME AND FOREIGN PERSONS

                              PRESENT LAW

    The following discussion of present law provides an 
overview of general principles of taxation of cross-border 
activity as well as a detailed explanation of provisions in 
present law that are relevant to the provisions included in 
Title IV of the bill as reported out of Committee.
    Present law combines taxation of all U.S. persons on their 
worldwide income, whether derived in the United States or 
abroad, with limited deferral of taxation of income earned by 
foreign subsidiaries of U.S. companies and source-based 
taxation of the U.S.-source income of nonresident aliens and 
foreign entities. Under this system (sometimes described as the 
U.S. hybrid system), the application of the Code differs 
depending on whether income arises from outbound investment or 
inbound investment. Outbound investment refers to the foreign 
activities of U.S. persons, while inbound investment is 
investment by foreign persons in U.S. assets or activities, 
although certain rules are common to both inbound and outbound 
activities.

         A. Principles Common to Inbound and Outbound Taxation

    Although the U.S. tax rules differ depending on whether the 
activity in question is inbound or outbound, there are certain 
concepts that apply to both inbound and outbound investment. 
Such areas include the transfer pricing rules, entity 
classification, the rules for determination of source, and 
whether a corporation is foreign or domestic.

                              1. Residence

    U.S. persons are subject to tax on their worldwide income. 
The Code defines U.S. person to include all U.S. citizens and 
residents as well as domestic entities such as partnerships, 
corporations, estates and certain trusts.\766\ The term 
``resident'' is defined only with respect to natural persons. 
Noncitizens who are lawfully admitted as permanent residents of 
the United States in accordance with immigration laws 
(colloquially referred to as green card holders) are treated as 
residents for tax purposes. In addition, noncitizens who meet a 
substantial presence test and are not otherwise exempt from 
U.S. taxation are also taxable as U.S. residents.\767\
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    \766\Sec. 7701(a)(30).
    \767\Sec. 7701(b).
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    For legal entities, the Code determines whether an entity 
is subject to U.S. taxation on its worldwide income on the 
basis of its place of organization. For purposes of U.S. tax 
law, a corporation or partnership is treated as domestic if it 
is organized or created under the laws of the United States or 
of any State, unless, in the case of a partnership, the 
Secretary prescribes otherwise by regulation.\768\ Other 
partnerships and corporations (that is, those organized under 
the laws of foreign countries) are generally treated as 
foreign.\769\ In contrast, place of organization is not 
determinative of residence under taxing jurisdictions that use 
factors such as situs, management and control to determine 
residence. As a result, legal entities may have more than one 
tax residence, or, in some case, no residence.\770\ Only 
domestic corporations are subject to U.S. tax on a worldwide 
basis. Foreign corporations are taxed only on income that has a 
sufficient connection with the United States.
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    \768\Sec. 7701(a)(4).
    \769\Secs. 7701(a)(5) and 7701(a)(9). Entities organized in a 
possession or territory of the United States are not considered to have 
been organized under the laws of the United States.
    \770\``The notion of corporate residence is an important touchstone 
of taxation, however, in many foreign income tax systems[,]'' with the 
result that the bilateral treaties are often relied upon to resolve 
conflicting claims of taxing jurisdiction. Joseph Isenbergh, Vol. 1 
U.S. Taxation of Foreign Persons and Foreign Income, Para. 7.1 (Fourth 
Ed. 2016).
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    Tax benefits otherwise available to a domestic corporation 
that migrates its tax home from the United States to foreign 
jurisdiction may be denied to such corporation for ten years 
following such migration.\771\ These sanctions generally apply 
to a transaction in which, pursuant to a plan or a series of 
related transactions: (1) a domestic corporation becomes a 
subsidiary of a foreign-incorporated entity or otherwise 
transfers substantially all of its properties to such an entity 
in a transaction completed after March 4, 2003; (2) the former 
shareholders of the domestic corporation hold (by reason of the 
stock they had held in the domestic corporation) at least 60 
percent but less than 80 percent (by vote or value) of the 
stock of the foreign-incorporated entity after the transaction 
(this stock often being referred to as ``stock held by reason 
of''); and (3) the foreign-incorporated entity, considered 
together with all companies connected to it by a chain of 
greater than 50 percent ownership (that is, the ``expanded 
affiliated group''), does not have substantial business 
activities in the entity's country of incorporation, compared 
to the total worldwide business activities of the expanded 
affiliated group.\772\
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    \771\Sec. 7874.
    \772\Sec. 7874(a). In addition, an excise tax may be imposed on 
certain stock compensation of executives of companies that undertake 
inversion transactions. Sec. 4985.
---------------------------------------------------------------------------
    The Treasury Department and the IRS have promulgated 
detailed guidance, through both regulations and several 
notices, addressing these requirements under section 7874 since 
the section was enacted in 2004,\773\ and have sought to expand 
the reach of the section or reduce the tax benefits of 
inversion transactions. For example, Notice 2014-52 announced 
Treasury's and the IRS's intention to issue regulations and 
took a two-pronged approached. First, it addressed the 
treatment of cross-border combination transactions themselves. 
Second, it addressed post-transaction steps that taxpayers may 
undertake with respect to U.S.-owned foreign subsidiaries 
making it more difficult to access foreign earnings without 
incurring added U.S. tax. On November 19, 2015, Treasury and 
the IRS issued Notice 2015-79, which announced their intent to 
issue further regulations to limit cross-border merger 
transactions, expanding on the guidance issued in Notice 2014-
52. In 2016, Treasury and the IRS issued proposed and temporary 
regulations that incorporate the rules previously announced in 
Notice 2014-52 and Notice 2015-79 and a new multiple domestic 
entity acquisition rule.\774\
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    \773\Notice 2015-79, 2015 I.R.B. LEXIS 583 (Nov. 19, 2015), which 
announced their intent to issue further regulations to limit cross-
border merger transactions, expanding on the guidance issued in Notice 
2014-52. On April 4, 2016, Treasury and the IRS issued proposed and 
temporary regulations (T.D. 9761) that incorporate the rules previously 
announced in Notice 2014-52 and Notice 2015-79 and a new multiple 
domestic entity acquisition rule. On January 13, 2017, Treasury and the 
IRS issued final and temporary regulations under section 7874 (T.D. 
9812), which adopt, with few changes, prior temporary and proposed 
regulations, which identify certain stock of an acquiring foreign 
corporation that is disregarded in calculating the ownership of the 
foreign corporation for purposes of section 7874.
    \774\T.D. 9761, April 4, 2016. But see, Chamber of Commerce v 
Internal Revenue Service, Cause No 1:16-CV-944-LY (W.D. Tex. Sept. 29, 
2017), granting summary judgment to plaintiff in challenge to temporary 
regulations based on lack of compliance with Administrative Procedure 
Requirements.
---------------------------------------------------------------------------
    In early 2017, Treasury issued final and temporary 
regulations\775\ that adopt, with few changes, the prior 
temporary and proposed regulations.
---------------------------------------------------------------------------
    \775\T.D. 9812, January 13, 2017.
---------------------------------------------------------------------------

                        2. Entity classification

    Certain entities are eligible to elect their classification 
for Federal tax purposes under the ``check-the-box'' 
regulations adopted in 1997.\776\ Those regulations simplified 
the entity classification process for both taxpayers and the 
IRS by making the entity classification of unincorporated 
entities explicitly elective in most instances.\777\ The 
eligibility to elect and the breadth of an entity's choices 
depend upon whether it is a ``per se corporation'' and its 
number of beneficial owners. Foreign as well as domestic 
entities may make the election. As a result, it is possible for 
an entity that operates across countries to be treated as a 
hybrid entity. A hybrid entity is one which is treated as a 
flow-through or disregarded entity for U.S. tax purposes but as 
a corporation for foreign tax purposes. For ``reverse hybrid 
entities,'' the opposite is true. The election can affect the 
determination of the source of the income, availability of tax 
credits, and other tax attributes.
---------------------------------------------------------------------------
    \776\Treas. Reg. sec. 301.7701-1, et seq.
    \777\The check-the-box regulations replaced Treas. Reg. sec. 
301.7701-2, as in effect prior to 1997, under which the classification 
of unincorporated entities for Federal tax purposes was determined on 
the basis of a four characteristics indicative of status as a 
corporation: continuity of life, centralization of management, limited 
liability, and free transferability of interests. An entity that 
possessed three or more of these characteristics was treated as a 
corporation; if it possessed two or fewer, then it was treated as a 
partnership. Thus, to achieve characterization as a partnership under 
this system, taxpayers needed to arrange the governing instruments of 
an entity in such a way as to eliminate two of these corporate 
characteristics. The advent and proliferation of limited liability 
companies (``LLCs'') under State laws allowed business owners to create 
customized entities that possessed a critical common feature--limited 
liability for investors--as well as other corporate characteristics the 
owners found desirable. As a consequence, classification was 
effectively elective for well-advised taxpayers.
---------------------------------------------------------------------------

                       3. Source of income rules

    The rules for determining the source of certain types of 
income are specified in the Code and described briefly below. 
Various factors determine the source of income for U.S. tax 
purposes, including the status or nationality of the payor, the 
status or nationality of the recipient, the location of the 
recipient's activities that generate the income, and the 
location of the assets that generate the income. To the extent 
that the source of income is not specified by statute, the 
Treasury Secretary may promulgate regulations that explain the 
appropriate treatment. However, many items of income are not 
explicitly addressed by either the Code or Treasury 
regulations, sometimes resulting in nontaxation of the income. 
On several occasions, courts have determined the source of such 
items by applying the rule for the type of income to which the 
disputed income is most closely analogous, based on all facts 
and circumstances.\778\
---------------------------------------------------------------------------
    \778\See, e.g., Hunt v. Commissioner, 90 T.C. 1289 (1988).
---------------------------------------------------------------------------
            Interest
    Interest is derived from U.S. sources if it is paid by the 
United States or any agency or instrumentality thereof, a State 
or any political subdivision thereof, or the District of 
Columbia. Interest is also from U.S. sources if it is paid by a 
resident or a domestic corporation on a bond, note, or other 
interest-bearing obligation.\779\ Special rules apply to treat 
as foreign-source certain amounts paid on deposits with foreign 
commercial banking branches of U.S. corporations or 
partnerships and certain other amounts paid by foreign branches 
of domestic financial institutions.\780\ Interest paid by the 
U.S. branch of a foreign corporation is also treated as U.S.-
source income.\781\
---------------------------------------------------------------------------
    \779\Sec. 861(a)(1); Treas. Reg. sec. 1.861-2(a)(1).
    \780\Secs. 861(a)(1) and 862(a)(1). For purposes of certain 
reporting and withholding obligations the source rule in section 
861(a)(1)(B) does not apply to interest paid by the foreign branch of a 
domestic financial institution. This results in the payment being 
treated as a withholdable payment. Sec. 1473(1)(C).
    \781\Sec. 884(f)(1).
---------------------------------------------------------------------------
            Dividends
    Dividend income is generally sourced by reference to the 
payor's place of incorporation.\782\ Thus, dividends paid by a 
domestic corporation are generally treated as entirely U.S.-
source income. Similarly, dividends paid by a foreign 
corporation are generally treated as entirely foreign-source 
income. Under a special rule, dividends from certain foreign 
corporations that conduct U.S. businesses are treated in part 
as U.S.-source income.\783\
---------------------------------------------------------------------------
    \782\Secs. 861(a)(2), 862(a)(2).
    \783\Sec. 861(a)(2)(B).
---------------------------------------------------------------------------
            Rents and royalties
    Rental income is sourced by reference to the location or 
place of use of the leased property.\784\ The nationality or 
the country of residence of the lessor or lessee does not 
affect the source of rental income. Rental income from property 
located or used in the United States (or from any interest in 
such property) is U.S.-source income, regardless of whether the 
property is real or personal, intangible or tangible.
---------------------------------------------------------------------------
    \784\Sec. 861(a)(4).
---------------------------------------------------------------------------
    Royalties are sourced in the place of use of (or the place 
of privilege to use) the property for which the royalties are 
paid.\785\ This source rule applies to royalties for the use of 
either tangible or intangible property, including patents, 
copyrights, secret processes, formulas, goodwill, trademarks, 
trade names, and franchises.
---------------------------------------------------------------------------
    \785\Ibid.
---------------------------------------------------------------------------
            Income from sales of personal property
    Subject to significant exceptions, income from the sale of 
personal property is sourced on the basis of the residence of 
the seller.\786\ For this purpose, special definitions of the 
terms ``U.S. resident'' and ``nonresident'' are provided. A 
nonresident is defined as any person who is not a U.S. 
resident,\787\ while the term ``U.S. resident'' comprises any 
juridical entity which is a U.S. person, all U.S. citizens, as 
well as any individual who is a U.S. resident without a tax 
home in a foreign country or a nonresident alien with a tax 
home in the United States.\788\ As a result, nonresident 
includes any foreign corporation.\789\
---------------------------------------------------------------------------
    \786\Sec. 865(a).
    \787\Sec. 865(g)(1)(B).
    \788\Sec. 865(g)(1)(A).
    \789\Sec. 865(g).
---------------------------------------------------------------------------
    Several special rules apply. For example, income from the 
sale of inventory property is generally sourced to the place of 
sale, which is determined by where title to the property 
passes.\790\ However, if the sale is by a nonresident and is 
attributable to an office or other fixed place of business in 
the United States, the sale is treated as income from U.S. 
sources without regard to the place of sale, unless it is sold 
for use, disposition, or consumption outside the United States 
and a foreign office materially participates in the sale.\791\ 
Income from the sale of inventory property that a taxpayer 
produces (in whole or in part) in the United States and sells 
outside the United States, or that a taxpayer produces (in 
whole or in part) outside the United States and sells in the 
United States, is treated as partly U.S.-source and partly 
foreign-source.\792\
---------------------------------------------------------------------------
    \790\Secs. 865(b), 861(a)(6), 862(a)(6); Treas. Reg. sec. 1.861-
7(c).
    \791\Sec. 865(e)(2).
    \792\Sec. 863(b). A taxpayer may elect one of three methods for 
allocating and apportioning income as U.S.-or foreign-source: (1) the 
50-50 method under which 50 percent of the income from the sale of 
inventory property in such a situation is attributable to the 
production activities and 50 percent to the sales activities, with the 
income sourced based on the location of those activities; (2) 
independent factory price (``IFP'') method under which, in certain 
circumstances, an IFP may be established by the taxpayer to determine 
income from production activities; (3) the books and records method 
under which, with advance permission, the taxpayer may use books of 
account to detail the allocation of receipts and expenditures between 
production and sales activities. Treas. Reg. sec. 1.863-3(b), (c). If 
production activity occurs only within the United States, or only 
within foreign countries, then all income is sourced to where the 
production activity occurs; when production activities occur in both 
the United States and one or more foreign countries, the income 
attributable to production activities must be split between U.S. and 
foreign sources. Treas. Reg. sec. 1.863-3(c)(1). The sales activity is 
generally sourced based on where title to the property passes. Treas. 
Reg. secs. 1.863-3(c)(2), 1.861-7(c).
---------------------------------------------------------------------------
    In determining the source of gain or loss from the sale or 
exchange of an interest in a foreign partnership, the IRS has 
taken the position that to the extent that there is unrealized 
gain attributable to partnership assets that are effectively 
connected with the U.S. business, the foreign person's gain or 
loss from the sale or exchange of a partnership interest is 
effectively connected gain or loss to the extent of the 
partner's distributive share of such unrealized gain or loss, 
and not capital gain or loss. Similarly, to the extent that the 
partner's distributive share of unrealized gain is attributable 
to a permanent establishment of the partnership under an 
applicable treaty provision, it may be subject to U.S. tax 
under a treaty.\793\
---------------------------------------------------------------------------
    \793\Rev. Rul. 91-32, 1991-1 C.B. 107. But see, Grecian Magnesite 
Mining, Industrial & Shipping Co. SA v Commissioner, 149 T.C. No. 3 
(2017).
---------------------------------------------------------------------------
    Gain on the sale of depreciable property is divided between 
U.S.-source and foreign-source in the same ratio that the 
depreciation was previously deductible for U.S. tax 
purposes.\794\ Payments received on sales of intangible 
property are sourced in the same manner as royalties to the 
extent the payments are contingent on the productivity, use, or 
disposition of the intangible property.\795\
---------------------------------------------------------------------------
    \794\Sec. 865(c).
    \795\Sec. 865(d).
---------------------------------------------------------------------------
            Personal services income
    Compensation for labor or personal services is generally 
sourced to the place-of-performance. Thus, compensation for 
labor or personal services performed in the United States 
generally is treated as U.S.-source income, subject to an 
exception for amounts that meet certain de minimis 
criteria.\796\ Compensation for services performed both within 
and without the United States is allocated between U.S.- and 
foreign-source.\797\
---------------------------------------------------------------------------
    \796\Sec. 861(a)(3). Gross income of a nonresident alien 
individual, who is present in the United States as a member of the 
regular crew of a foreign vessel, from the performance of personal 
services in connection with the international operation of a ship is 
generally treated as foreign-source income.
    \797\Treas. Reg. sec. 1.861-4(b).
---------------------------------------------------------------------------
            Insurance income
    Underwriting income from issuing insurance or annuity 
contracts generally is treated as U.S.-source income if the 
contract involves property in, liability arising out of an 
activity in, or the lives or health of residents of, the United 
States.\798\
---------------------------------------------------------------------------
    \798\Sec. 861(a)(7).
---------------------------------------------------------------------------
            Transportation income
    Sources rules generally provide that income from furnishing 
transportation that both begins and ends in the United States 
is U.S.-source income,\799\ and 50-percent of income 
attributable to transportation that either begins or ends in 
the United States is treated as U.S.-source income. However, to 
the extent that the operator of a shipping or cruise line is 
foreign, its ownership structure and the maritime law\800\ 
applicable for determining what constitutes international 
shipping, as well as specific income tax provisions, combine to 
create an industry-specific departure from the rules generally 
applicable.\801\
---------------------------------------------------------------------------
    \799\Sec. 863(c).
    \800\U.S. law on navigation is codified in U.S. Code at title 33, 
and is consistent with the body of international maritime law. The 
normative principles of international maritime law for determining the 
maritime zones and territorial sovereignty over seas are embodied in 
the United Nations Convention on the Law of the Sea, first opened for 
signature in 1982. Since 1983, the Executive Branch has agreed that the 
treaty is generally consistent with existing international norms of the 
law of the sea and that the United States would act in conformity to 
the principles of the treaty other than those portions regarding deep 
seabed exploitation, even in the absence of ratification of the treaty.
    \801\Due to the regulatory framework for aviation, an international 
flight must either originate or conclude in the country of residence of 
the airline's owner, where income tax for the international flight is 
assessed. In contrast to international shipping, international aviation 
cannot be carried out using flags-of-convenience. Thus, although tax 
law treats shipping and aviation similarly, the differences between the 
two industries and the applicable regulatory regimes produce different 
tax outcomes. Full territorial sovereignty applies within 12 nautical 
miles of one's coast; the contiguous waters beyond 12 nautical miles 
but up to 24 nautical miles are subject to some regulation. Within 200 
nautical miles, a country may assert an economic zone for exploitation 
of living marine resources and some minerals. Beyond 200 nautical miles 
are the ``high seas'' in which no sovereign state may assert exclusive 
jurisdiction.
---------------------------------------------------------------------------
            Income from space or ocean activities or international 
                    communications
    In the case of a foreign person, generally no income from a 
space or ocean activity or from international communications is 
treated as U.S.-source income.\802\ With respect to the latter, 
an exception is provided if the foreign person maintains an 
office or other fixed place of business in the United States, 
in which case the international communications income 
attributable to such fixed place of business is treated as 
U.S.-source income.\803\ For U.S. persons, all income from 
space or ocean activities and 50 percent of income from 
international communications is treated as U.S.-source income.
---------------------------------------------------------------------------
    \802\Sec. 863(d).
    \803\Sec. 863(e).
---------------------------------------------------------------------------
            Amounts received with respect to guarantees of indebtedness
    Amounts received, directly or indirectly, from a 
noncorporate resident or from a domestic corporation for the 
provision of a guarantee of indebtedness of such person are 
income from U.S. sources.\804\ This includes payments that are 
made indirectly for the provision of a guarantee. For example, 
U.S.-source income under this rule includes a guarantee fee 
paid by a foreign bank to a foreign corporation for the foreign 
corporation's guarantee of indebtedness owed to the bank by the 
foreign corporation's domestic subsidiary, where the cost of 
the guarantee fee is passed on to the domestic subsidiary 
through, for instance, additional interest charged on the 
indebtedness. In this situation, the domestic subsidiary has 
paid the guarantee fee as an economic matter through higher 
interest costs, and the additional interest payments made by 
the subsidiary are treated as indirect payments of the 
guarantee fee and, therefore, as income from U.S. sources.
---------------------------------------------------------------------------
    \804\Sec. 861(a)(9). This provision effects a legislative override 
of the opinion in Container Corp. v. Commissioner, 134 T.C. 122 
(February 17, 2010), aff'd 2011 WL1664358, 107 A.F.T.R.2d 2011-1831 
(5th Cir. May 2, 2011), in which the Tax Court held that fees paid by a 
domestic corporation to its foreign parent with respect to guarantees 
issued by the parent for the debts of the domestic corporation were 
more closely analogous to compensation for services than to interest, 
and determined that the source of the fees should be determined by 
reference to the residence of the foreign parent-guarantor. As a 
result, the income was treated as income from foreign sources.
---------------------------------------------------------------------------
    Such U.S.-source income also includes amounts received from 
a foreign person, whether directly or indirectly, for the 
provision of a guarantee of indebtedness of that foreign person 
if the payments received are connected with income of such 
person that is effectively connected with the conduct of a U.S. 
trade or business. Amounts received from a foreign person, 
whether directly or indirectly, for the provision of a 
guarantee of that person's debt, are treated as foreign-source 
income if they are not from sources within the United States 
under section 861(a)(9).

                       4. Intercompany transfers

            Transfer pricing
    A basic U.S. tax principle applicable in dividing profits 
from transactions between related taxpayers is that the amount 
of profit allocated to each related taxpayer must be measured 
by reference to the amount of profit that a similarly situated 
taxpayer would realize in similar transactions with unrelated 
parties. The transfer pricing rules of section 482 and the 
accompanying Treasury regulations are intended to preserve the 
U.S. tax base by ensuring that taxpayers do not shift income 
properly attributable to the United States to a related foreign 
company through pricing that does not reflect an arm's-length 
result.\805\ Similarly, the domestic laws of most U.S. trading 
partners include rules to limit income shifting through 
transfer pricing. The arm's-length standard is difficult to 
administer in situations in which no unrelated party market 
prices exist for transactions between related parties. When a 
foreign person with U.S. activities has transactions with 
related U.S. taxpayers, the amount of income attributable to 
U.S. activities is determined in part by the same transfer 
pricing rules of section 482 that apply when U.S. persons with 
foreign activities transact with related foreign taxpayers.
---------------------------------------------------------------------------
    \805\For a detailed description of the U.S. transfer pricing rules, 
see Joint Committee on Taxation, Present Law and Background Related to 
Possible Income Shifting and Transfer Pricing (JCX-37-10), July 20, 
2010, pp. 18-50.
---------------------------------------------------------------------------
    Section 482 authorizes the Secretary of the Treasury to 
allocate income, deductions, credits, or allowances among 
related business entities\806\ when necessary to clearly 
reflect income or otherwise prevent tax avoidance, and 
comprehensive Treasury regulations under that section adopt the 
arm's-length standard as the method for determining whether 
allocations are appropriate.\807\ The regulations generally 
attempt to identify the respective amounts of taxable income of 
the related parties that would have resulted if the parties had 
been unrelated parties dealing at arm's length. For income from 
intangible property, section 482 provides ``in the case of any 
transfer (or license) of intangible property (within the 
meaning of section 936(h)(3)(B)), the income with respect to 
such transfer or license shall be commensurate with the income 
attributable to the intangible.'' By requiring inclusion in 
income of amounts commensurate with the income attributable to 
the intangible, Congress was responding to concerns regarding 
the effectiveness of the
arm's-length standard with respect to intangible property--
including, in particular, high-profit-potential 
intangibles.\808\
---------------------------------------------------------------------------
    \806\The term ``related'' as used herein refers to relationships 
described in section 482, which refers to ``two or more organizations, 
trades or businesses (whether or not incorporated, whether or not 
organized in the United States, and whether or not affiliated) owned or 
controlled directly or indirectly by the same interests.''
    \807\Section 1059A buttresses section 482 by limiting the extent to 
which costs used to determine custom valuation can also be used to 
determine basis in property imported from a related party. A taxpayer 
that imports property from a related party may not assign a value to 
the property for cost purposes that exceeds its customs value.
    \808\H.R. Rep. No. 99-426, p. 423.
---------------------------------------------------------------------------
            Gain recognition on outbound transfers
    If a transfer of intangible property to a foreign affiliate 
occurs in connection with certain corporate transactions, 
nonrecognition rules that may otherwise apply are suspended. 
The transferor of intangible property must recognize gain from 
the transfer as though he had sold the intangible (regardless 
of the stage of development of the intangible property) in 
exchange for payments contingent on the use, productivity or 
disposition of the transferred property in amounts that would 
have been received either annually over the useful life of the 
property or upon disposition of the property after the 
transfer.\809\ The appropriate amounts of those imputed 
payments are determined using transfer-pricing principles. 
Final regulations issued in 2016 eliminate an exception under 
temporary regulations that permitted nonrecognition of gain 
from outbound transfers of foreign goodwill and going concern 
value. However, the Secretary announced that reinstatement of 
an exception for active trades or businesses is under 
consideration for cases with little potential for abuse and 
administrative difficulties.\810\
---------------------------------------------------------------------------
    \809\Sec. 367(d).
    \810\See, T.D. 9803, 81 F.R. 91012 (December 17, 2016). Treas. Reg. 
sec. 1.367(d)-1(b) now provides that the rules of section 367(d) apply 
to transfers of intangible property as defined under Treas. Sec. 
1.367(a)-1(d)(5) after September 14, 2015, and to any transfers 
occurring before that date resulting from entity classification 
elections filed on or after September 15, 2015. Noting that commenters 
on the regulations had cited legislative history that contemplated 
active business exceptions, Treasury announced the reconsideration of 
the rule. U.S. Treasury Department, Second Report to the President on 
Identifying and Reducing Tax Regulatory Burdens, Executive Order 13789 
October 2, 2017, TNT Doc 2017-72131. The relevant legislative history 
is found at in H.R. Rep. No. 98-432, 98th Cong., 2d Sess. 1318-1320 
(March 5, 1984) and Conference Report, H.R. Rep. No. 98-861, 98th Cong. 
2d Sess. 951-957 (June 23, 1984).
---------------------------------------------------------------------------

    B. U.S. Tax Rules Applicable to Nonresident Aliens and Foreign 
                         Corporations (Inbound)

    Nonresident aliens and foreign corporations are generally 
subject to U.S. tax only on their U.S.-source income. Thus, the 
source and type of income received by a foreign person 
generally determines whether there is any U.S. income tax 
liability and the mechanism by which it is taxed. The U.S. tax 
rules for U.S. activities of foreign taxpayers apply 
differently to two broad types of income: U.S.-source income 
that is ``fixed or determinable annual or periodical gains, 
profits, and income'' (``FDAP income'') or income that is 
``effectively connected with the conduct of a trade or business 
within the United States'' (``ECI''). FDAP income generally is 
subject to a 30-percent gross-basis tax withheld at its source, 
while ECI is generally subject to the same U.S. tax rules that 
apply to business income derived by U.S. persons. That is, 
deductions are permitted in determining taxable ECI, which is 
then taxed at the same rates applicable to U.S. persons. Much 
FDAP income and similar income is, however, exempt from tax or 
is subject to a reduced rate of tax under the Code\811\ or a 
bilateral income tax treaty.\812\
---------------------------------------------------------------------------
    \811\E.g., the portfolio interest exception in section 871(h) 
(discussed below).
    \812\Because each treaty reflects considerations unique to the 
relationship between the two treaty countries, treaty withholding tax 
rates on each category of income are not uniform across treaties.
---------------------------------------------------------------------------

             1. Gross-basis taxation of U.S.-source income

    Non-business income received by foreign persons from U.S. 
sources is generally subject to tax on a gross basis at a rate 
of 30 percent, which is collected by withholding at the source 
of the payment. As explained below, the categories of income 
subject to the 30-percent tax and the categories for which 
withholding is required are generally coextensive, with the 
result that determining the withholding tax liability 
determines the substantive liability.
    The income of non-resident aliens or foreign corporations 
that is subject to tax at a rate of 30-percent includes FDAP 
income that is not effectively connected with the conduct of a 
U.S. trade or business.\813\ The items enumerated in defining 
FDAP income are illustrative; the common characteristic of 
types of FDAP income is that taxes with respect to the income 
may be readily computed and collected at the source, in 
contrast to the administrative difficulty involved in 
determining the seller's basis and resulting gain from sales of 
property.\814\ The words ``annual or periodical'' are ``merely 
generally descriptive'' of the payments that could be within 
the purview of the statute and do not preclude application of 
the withholding tax to one-time, lump sum payments to 
nonresident aliens.\815\
---------------------------------------------------------------------------
    \813\Secs. 871(a), 881. If the FDAP income is also ECI, it is taxed 
on a net basis, at graduated rates.
    \814\Commissioner v. Wodehouse, 337 U.S. 369, 388-89 (1949). After 
reviewing legislative history of the Revenue Act of 1936, the Supreme 
Court noted that Congress expressly intended to limit taxes on 
nonresident aliens to taxes that could be readily collectible, i.e., 
subject to withholding, in response to ``a theoretical system 
impractical of administration in a great number of cases. H.R. Rep. No. 
2475, 74th Cong., 2d Sess. 9-10 (1936).'' In doing so, the Court 
rejected P.G. Wodehouse's arguments that an advance royalty payment was 
not within the purview of the statutory definition of FDAP income.
    \815\815Commissioner v. Wodehouse, 337 U.S. 369, 393 (1949).
---------------------------------------------------------------------------
    With respect to income from shipping, the gross basis tax 
potentially applicable is four percent,\816\ unless the income 
is effectively connected with a U.S. trade or business, and 
thus subject to the graduated rates, as determined under rules 
specific to U.S.-source gross transportation income rather than 
the more broadly applicable rules defining effectively 
connected income in section 864(c). Even if the income is 
within the purview of those special rules, it may nevertheless 
be exempt if the income is derived from the international 
operation of a ship or aircraft by a foreign entity organized 
in a jurisdiction which provides a reciprocal exemption to U.S. 
entities.\817\
---------------------------------------------------------------------------
    \816\Sec. 887.
    \817\Sec. 883(a)(1). In addition, to the extent provided in 
regulations, income from shipping and aviation is not subject to the 
four-percent gross basis tax if the income is of a type that is not 
subject to the reciprocal exemption for net basis taxation. See sec. 
887(b)(1). Comparable rules under section 872(b)(1) apply to income of 
nonresident alien individuals from shipping operations.
---------------------------------------------------------------------------

Types of FDAP income

    FDAP income encompasses a broad range of types of gross 
income, but has limited application to gains on sales of 
property, including market discount on bonds and option 
premiums.\818\ Capital gains received by nonresident aliens 
present in the United States for fewer than 183 days are 
generally treated as foreign source and are thus not subject to 
U.S. tax, unless the gains are effectively connected with a 
U.S. trade or business; capital gains received by nonresident 
aliens present in the United States for 183 days or more\819\ 
that are treated as income from U.S. sources are subject to 
gross-basis taxation.\820\ In contrast, U.S-source gains from 
the sale or exchange of intangibles are subject to tax and 
withholding if they are contingent upon the productivity of the 
property sold and are not effectively connected with a U.S. 
trade or business.\821\
---------------------------------------------------------------------------
    \818\Although technically insurance premiums paid to a foreign 
insurer or reinsurer are FDAP income, they are exempt from withholding 
under Treas. Reg. sec. 1.1441-2(a)(7) if the insurance contract is 
subject to the excise tax under section 4371. Treas. Reg. secs. 1.1441-
2(b)(1)(i) and 1.1441-2(b)(2).
    \819\For purposes of this rule, whether a person is considered a 
resident in the United States is determined by application of the rules 
under section 7701(b).
    \820\Sec. 871(a)(2). In addition, certain capital gains from sales 
of U.S. real property interests are subject to tax as effectively 
connected income (or in some instances as dividend income) under the 
Foreign Investment in Real Property Tax Act of 1980 (``FIRPTA'').
    \821\Secs. 871(a)(1)(D), 881(a)(4).
---------------------------------------------------------------------------
    Interest on bank deposits may qualify for exemption on two 
grounds, depending on where the underlying principal is held on 
deposit. Interest paid with respect to deposits with domestic 
banks and savings and loan associations, and certain amounts 
held by insurance companies, are U.S.-source income but are not 
subject to the U.S. tax when paid to a foreign person, unless 
the interest is effectively connected with a U.S. trade or 
business of the recipient.\822\ Interest on deposits with 
foreign branches of domestic banks and domestic savings and 
loan associations is not treated as U.S.-source income and is 
thus exempt from U.S. tax (regardless of whether the recipient 
is engaged in a U.S. trade or business).\823\ Similarly, 
interest and original issue discount on certain short-term 
obligations is also exempt from U.S. tax when paid to a foreign 
person.\824\ Additionally, there is generally no information 
reporting required with respect to payments of such 
amounts.\825\
---------------------------------------------------------------------------
    \822\Secs. 871(i)(2)(A), 881(d); Treas. Reg. sec. 1.1441-
1(b)(4)(ii).
    \823\Sec. 861(a)(1)(B); Treas. Reg. sec. 1.1441-1(b)(4)(iii).
    \824\Secs. 871(g)(1)(B), 881(a)(3); Treas. Reg. sec. 1.1441-
1(b)(4)(iv).
    \825\Treas. Reg. sec. 1.1461-1(c)(2)(ii)(A), (B). Regulations 
require a bank to report interest if the recipient is a nonresident 
alien who resides in a country with which the United States has a 
satisfactory exchange of information program under a bilateral 
agreement and the deposit is maintained at an office in the United 
States. Treas. Reg. secs. 1.6049-4(b)(5) and 1.6049-8. The IRS 
publishes lists of the countries whose residents are subject to the 
reporting requirements, and those countries with respect to which the 
reported information will be automatically exchanged. Rev. Proc. 2017-
31, available at https://www.irs.gov/pub/irs-drop/rp-17-31.pdf, 
supplementing Rev. Proc. 2014-64.
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    Although FDAP income includes U.S.-source portfolio 
interest, such interest is specifically exempt from the 30-
percent gross-basis tax. Portfolio interest is any interest 
(including original issue discount) that is paid on an 
obligation that is in registered form and for which the 
beneficial owner has provided to the U.S. withholding agent a 
statement certifying that the beneficial owner is not a U.S. 
person.\826\ For obligations issued before March 19, 2012, 
portfolio interest also includes interest paid on an obligation 
that is not in registered form, provided that the obligation is 
shown to be targeted to foreign investors under the conditions 
sufficient to establish deductibility of the payment of such 
interest.\827\ Portfolio interest, however, does not include 
interest received by a 10-percent shareholder,\828\ certain 
contingent interest,\829\ interest received by a controlled 
foreign corporation from a related person,\830\ or interest 
received by a bank on an extension of credit made pursuant to a 
loan agreement entered into in the ordinary course of its trade 
or business.\831\
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    \826\Sec. 871(h)(2).
    \827\Sec. 163(f)(2)(B). The exception to the registration 
requirements for foreign targeted securities was repealed in 2010, 
effective for obligations issued two years after enactment, thus 
narrowing the portfolio interest exemption for obligations issued after 
March 18, 2012. See Hiring Incentives to Restore Employment Law of 
2010, Pub. L. No. 111-147, sec. 502(b).
    \828\Sec. 871(h)(3).
    \829\Sec. 871(h)(4).
    \830\Sec. 881(c)(3)(C).
    \831\Sec. 881(c)(3)(A).
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Imposition of gross-basis tax and reporting by U.S. withholding agents

    The 30-percent tax on FDAP income is generally collected by 
means of withholding.\832\ Withholding on FDAP payments to 
foreign payees is required unless the withholding agent,\833\ 
i.e., the person making the payment to the foreign person 
receiving the income, can establish that the beneficial owner 
of the amount is eligible for an exemption from withholding or 
a reduced rate of withholding under an income tax treaty.\834\ 
The principal statutory exemptions from the 30-percent tax 
apply to interest on bank deposits, and portfolio interest, 
described above.\835\
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    \832\Secs. 1441, 1442.
    \833\Withholding agent is defined broadly to include any U.S. or 
foreign person that has the control, receipt, custody, disposal, or 
payment of an item of income of a foreign person subject to 
withholding. Treas. Reg. sec. 1.1441-7(a).
    \834\Secs. 871, 881, 1441, 1442; Treas. Reg. sec. 1.1441-1(b).
    \835\A reduced rate of withholding of 14 percent applies to certain 
scholarships and fellowships paid to individuals temporarily present in 
the United States. Sec. 1441(b). In addition to statutory exemptions, 
the 30percent tax with respect to interest, dividends and royalties may 
be reduced or eliminated by a tax treaty between the United States and 
the country in which the recipient of income otherwise subject to tax 
is resident.
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    In many instances, the income subject to withholding is the 
only income of the foreign recipient that is subject to any 
U.S. tax. No U.S. Federal income tax return from the foreign 
recipient is generally required with respect to the income from 
which tax was withheld, if the recipient has no ECI income and 
the withholding is sufficient to satisfy the recipient's 
liability. Accordingly, although the 30-percent gross-basis tax 
is a withholding tax, it is also generally the final tax 
liability of the foreign recipient (unless the foreign 
recipients files for a refund).
    A withholding agent that makes payments of U.S.-source 
amounts to a foreign person is required to report and pay over 
any amounts of U.S. tax withheld. The reports are due to be 
filed with the IRS by March 15 of the calendar year following 
the year in which the payment is made. Two types of reports are 
required: (1) a summary of the total U.S.-source income paid 
and withholding tax withheld on foreign persons for the year 
and (2) a report to both the IRS and the foreign person of that 
person's U.S.-source income that is subject to reporting.\836\ 
The nonresident withholding rules apply broadly to any 
financial institution or other payor, including foreign 
financial institutions.\837\
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    \836\Treas. Reg. sec. 1.1461-1(b), (c).
    \837\See Treas. Reg. sec. 1.1441-7(a) (definition of withholding 
agent includes foreign persons).
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    To the extent that the withholding agent deducts and 
withholds an amount, the withheld tax is credited to the 
recipient of the income.\838\ If the agent withholds more than 
is required, and results in an overpayment of tax, the excess 
may be refunded to the recipient of the income upon filing of a 
timely claim for refund.
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    \838\Sec. 1462.
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Excise tax on foreign reinsurance premiums

    An excise tax applies to premiums paid to foreign insurers 
and reinsurers covering U.S. risks.\839\ The excise tax is 
imposed on a gross basis at the rate of one percent on 
reinsurance and life insurance premiums, and at the rate of 
four percent on property and casualty insurance premiums. The 
excise tax does not apply to premiums that are effectively 
connected with the conduct of a U.S. trade or business or that 
are exempted from the excise tax under an applicable income tax 
treaty. The excise tax paid by one party cannot be credited if, 
for example, the risk is reinsured with a second party in a 
transaction that is also subject to the excise tax.
---------------------------------------------------------------------------
    \839\Secs. 4371-4374.
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    Many U.S. tax treaties provide an exemption from the excise 
tax, including the treaties with Germany, Japan, Switzerland, 
and the United Kingdom.\840\ To prevent persons from 
inappropriately obtaining the benefits of exemption from the 
excise tax, the treaties generally include an anti-conduit 
rule. The most common anti-conduit rule provides that the 
treaty exemption applies to the excise tax only to the extent 
that the risks covered by the premiums are not reinsured with a 
person not entitled to the benefits of the treaty (or any other 
treaty that provides exemption from the excise tax).\841\
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    \840\Generally, when a foreign person qualifies for benefits under 
such a treaty, the United States is not permitted to collect the 
insurance premiums excise tax from that person.
    \841\In Rev. Rul. 2008-15, 2008-1 C.B. 633, the IRS provided 
guidance to the effect that the excise tax is imposed separately on 
each reinsurance policy covering a U.S. risk. Thus, if a U.S. insurer 
or reinsurer reinsures a U.S. risk with a foreign reinsurer, and that 
foreign reinsurer in turn reinsures the risk with a second foreign 
reinsurer, the excise tax applies to both the premium to the first 
foreign reinsurer and the premium to the second foreign reinsurer. In 
addition, if the first foreign reinsurer is resident in a jurisdiction 
with a tax treaty containing an excise tax exemption, the revenue 
ruling provides that the excise tax still applies to both payments to 
the extent that the transaction violates an anti-conduit rule in the 
applicable tax treaty. Even if no violation of an anti-conduit rule 
occurs, under the revenue ruling, the excise tax still applies to the 
premiums paid to the second foreign reinsurer, unless the second 
foreign reinsurer is itself entitled to an excise tax exemption.
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              2. Net-basis taxation of U.S.-source income

    The United States taxes on a net basis the income of 
foreign persons that is ``effectively connected'' with the 
conduct of a trade or business in the United States.\842\ Any 
gross income derived by the foreign person that is not 
effectively connected with the person's U.S. business is not 
taken into account in determining the rates of U.S. tax 
applicable to the person's income from the business.\843\
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    \842\Secs. 871(b), 882.
    \843\Secs. 871(b)(2), 882(a)(2).
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            U.S. trade or business
    A foreign person is subject to U.S. tax on a net basis if 
the person is engaged in a U.S. trade or business. Partners in 
a partnership and beneficiaries of an estate or trust are 
treated as engaged in the conduct of a trade or business within 
the United States if the partnership, estate, or trust is so 
engaged.\844\
---------------------------------------------------------------------------
    \844\Sec. 875.
---------------------------------------------------------------------------
    The question whether a foreign person is engaged in a U.S. 
trade or business is factual and has generated much case law. 
Basic issues include whether the activity constitutes business 
rather than investing, whether sufficient activities in 
connection with the business are conducted in the United 
States, and whether the relationship between the foreign person 
and persons performing functions in the United States in 
respect of the business is sufficient to attribute those 
functions to the foreign person.
    The trade or business rules differ from one activity to 
another. The term ``trade or business within the United 
States'' expressly includes the performance of personal 
services within the United States.\845\ If, however, a 
nonresident alien individual performs personal services for a 
foreign employer, and the individual's total compensation for 
the services and period in the United States are minimal 
($3,000 or less in total compensation and 90 days or fewer of 
physical presence in a year), the individual is not considered 
to be engaged in a U.S. trade or business.\846\ Detailed rules 
govern whether trading in stocks or securities or commodities 
constitutes the conduct of a U.S. trade or business.\847\ A 
foreign person who trades in stock or securities or commodities 
in the United States through an independent agent generally is 
not treated as engaged in a U.S. trade or business if the 
foreign person does not have an office or other fixed place of 
business in the United States through which trades are carried 
out. A foreign person who trades stock or securities or 
commodities for the person's own account also generally is not 
considered to be engaged in a U.S. business so long as the 
foreign person is not a dealer in stock or securities or 
commodities.
---------------------------------------------------------------------------
    \845\Sec. 864(b).
    \846\Sec. 864(b)(1).
    \847\Sec. 864(b)(2).
---------------------------------------------------------------------------
    For eligible foreign persons, U.S. bilateral income tax 
treaties restrict the application of net-basis U.S. taxation. 
Under each treaty, the United States is permitted to tax 
business profits only to the extent those profits are 
attributable to a U.S. permanent establishment of the foreign 
person. The threshold level of activities that constitute a 
permanent establishment is generally higher than the threshold 
level of activities that constitute a U.S. trade or business. 
For example, a permanent establishment typically requires the 
maintenance of a fixed place of business over a significant 
period of time.
            Effectively connected income
    A foreign person that is engaged in the conduct of a trade 
or business within the United States is subject to U.S. net-
basis taxation on the income that is ``effectively connected'' 
with the business. Specific statutory rules govern whether 
income is ECI.\848\
---------------------------------------------------------------------------
    \848\Sec. 864(c).
---------------------------------------------------------------------------
    In the case of U.S.-source capital gain and U.S.-source 
income of a type that would be subject to gross basis U.S. 
taxation, the factors taken into account in determining whether 
the income is ECI include whether the income is derived from 
assets used in or held for use in the conduct of the U.S. trade 
or business and whether the activities of the trade or business 
were a material factor in the realization of the amount (the 
``asset use'' and ``business activities'' tests).\849\ Under 
the asset use and business activities tests, due regard is 
given to whether the income, gain, or asset was accounted for 
through the U.S. trade or business. All other U.S.-source 
income is treated as ECI.\850\
---------------------------------------------------------------------------
    \849\Sec. 864(c)(2).
    \850\Sec. 864(c)(3).
---------------------------------------------------------------------------
    A foreign person who is engaged in a U.S. trade or business 
may have limited categories of foreign-source income that are 
considered to be ECI.\851\ Foreign-source income not included 
in one of these categories (described next) generally is exempt 
from U.S. tax.
---------------------------------------------------------------------------
    \851\This income is subject to net-basis U.S. taxation after 
allowance of a credit for any foreign income tax imposed on the income. 
Sec. 906.
---------------------------------------------------------------------------
    A foreign person's income from foreign sources generally is 
considered to be ECI only if the person has an office or other 
fixed place of business within the United States to which the 
income is attributable and the income is in one of the 
following categories: (1) rents or royalties for the use of 
patents, copyrights, secret processes or formulas, good will, 
trade-marks, trade brands, franchises, or other like intangible 
properties derived in the active conduct of the trade or 
business; (2) interest or dividends derived in the active 
conduct of a banking, financing, or similar business within the 
United States or received by a corporation the principal 
business of which is trading in stocks or securities for its 
own account; or (3) income derived from the sale or exchange 
(outside the United States), through the U.S. office or fixed 
place of business, of inventory or property held by the foreign 
person primarily for sale to customers in the ordinary course 
of the trade or business, unless the sale or exchange is for 
use, consumption, or disposition outside the United States and 
an office or other fixed place of business of the foreign 
person in a foreign country participated materially in the sale 
or exchange.\852\ Foreign-source dividends, interest, and 
royalties are not treated as ECI if the items are paid by a 
foreign corporation more than 50 percent (by vote) of which is 
owned directly, indirectly, or constructively by the recipient 
of the income.\853\
---------------------------------------------------------------------------
    \852\Sec. 864(c)(4)(B).
    \853\Sec. 864(c)(4)(D)(i).
---------------------------------------------------------------------------
    In determining whether a foreign person has a U.S. office 
or other fixed place of business, the office or other fixed 
place of business of an agent generally is disregarded. The 
place of business of an agent other than an independent agent 
acting in the ordinary course of business is not disregarded, 
however, if the agent either has the authority (regularly 
exercised) to negotiate and conclude contracts in the name of 
the foreign person or has a stock of merchandise from which he 
regularly fills orders on behalf of the foreign person.\854\ If 
a foreign person has a U.S. office or fixed place of business, 
income, gain, deduction, or loss is not considered attributable 
to the office unless the office was a material factor in the 
production of the income, gain, deduction, or loss and the 
office regularly carries on activities of the type from which 
the income, gain, deduction, or loss was derived.\855\
---------------------------------------------------------------------------
    \854\Sec. 864(c)(5)(A).
    \855\Sec. 864(c)(5)(B).
---------------------------------------------------------------------------
    Special rules apply in determining the ECI of an insurance 
company. The foreign-source income of a foreign corporation 
that is subject to tax under the insurance company provisions 
of the Code is treated as ECI if the income is attributable to 
its United States business.\856\
---------------------------------------------------------------------------
    \856\Sec. 864(c)(4)(C).
---------------------------------------------------------------------------
    Income, gain, deduction, or loss for a particular year 
generally is not treated as ECI if the foreign person is not 
engaged in a U.S. trade or business in that year.\857\ If, 
however, income or gain taken into account for a taxable year 
is attributable to the sale or exchange of property, the 
performance of services, or any other transaction that occurred 
in a prior taxable year, the determination whether the income 
or gain is taxable on a net basis is made as if the income were 
taken into account in the earlier year and without regard to 
the requirement that the taxpayer be engaged in a trade or 
business within the United States during the later taxable 
year.\858\ If any property ceases to be used or held for use in 
connection with the conduct of a U.S. trade or business and the 
property is disposed of within 10 years after the cessation, 
the determination whether any income or gain attributable to 
the disposition of the property is taxable on a net basis is 
made as if the disposition occurred immediately before the 
property ceased to be used or held for use in connection with 
the conduct of a U.S. trade or business and without regard to 
the requirement that the taxpayer be engaged in a U.S. business 
during the taxable year for which the income or gain is taken 
into account.\859\
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    \857\Sec. 864(c)(1)(B).
    \858\Sec. 864(c)(6).
    \859\Sec. 864(c)(7).
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    Transportation income from U.S. sources is treated as 
effectively connected with a foreign person's conduct of a U.S. 
trade or business only if the foreign person has a fixed place 
of business in the United States that is involved in the 
earning of such income and substantially all of such income of 
the foreign person is attributable to regularly scheduled 
transportation.\860\ If the transportation income is 
effectively connected with conduct of a U.S. trade or business, 
the transportation income, along with transportation income 
that is from U.S. sources because the transportation both 
begins and ends in the United States, may be subject to net-
basis taxation. Income from the international operation of a 
ship or aircraft may be eligible for an exemption under section 
883, provided that the foreign jurisdiction has extended 
reciprocity for U.S. businesses;\861\ whether the party 
claiming an exemption is eligible for the tax relief;\862\ and 
the activities that give rise to the income qualify under 
relevant regulations.
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    \860\Sec. 887(b)(4).
    \861\The most recent compilation of countries that the United 
States recognizes as providing exemptions lists countries in three 
groups: Twenty-seven countries are eligible for exemption on the basis 
of a review of the legislation in the foreign jurisdiction; 39 nations 
exchanged diplomatic notes with the United States that grant exemption 
to some extent; and more than 50 nations are parties with the United 
States to bilateral income tax treaties that include a shipping 
article. Rev. Rul. 2008-17, 2008-1 C.B. 626, modified by Ann. 2008-57, 
2008-C.B. 1192, 2008.
    \862\Sec. 883(c) and regulations thereunder.
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Allowance of deductions

    Taxable ECI is computed by taking into account deductions 
associated with gross ECI. For this purpose, the apportionment 
and allocation of deductions is addressed in detailed 
regulations. The regulations applicable to deductions other 
than interest expense set forth general guidelines for 
allocating deductions among classes of income and apportioning 
deductions between ECI and non-ECI. In some circumstances, 
deductions may be allocated on the basis of units sold, gross 
sales or receipts, costs of goods sold, profits contributed, 
expenses incurred, assets used, salaries paid, space used, time 
spent, or gross income received. More specific guidelines are 
provided for the allocation and apportionment of research and 
experimental expenditures, legal and accounting fees, income 
taxes, losses on dispositions of property, and net operating 
losses. Detailed regulations under section 861 address the 
allocation and apportionment of interest deductions. In 
general, interest is allocated and apportioned based on assets 
rather than income.

                            3. Special rules

FIRPTA

    A foreign person's gain or loss from the disposition of a 
U.S. real property interest (``USRPI'') is treated as ECI and, 
therefore, as taxable at the income tax rates applicable to 
U.S. persons, including the rates for net capital gain. A 
foreign person subject to tax on this income is required to 
file a U.S. tax return under the normal rules relating to 
receipt of ECI.\863\ In the case of a foreign corporation, the 
gain from the disposition of a USRPI may also be subject to the 
branch profits tax at a 30-percent rate (or lower treaty rate).
---------------------------------------------------------------------------
    \863\Sec. 897(a).
---------------------------------------------------------------------------
    The payor of income that FIRPTA treats as ECI (``FIRPTA 
income'') is generally required to withhold U.S. tax from the 
payment.\864\ The foreign person can request a refund with its 
U.S. tax return, if appropriate, based on that person's total 
ECI and deductions (if any) for the taxable year.
---------------------------------------------------------------------------
    \864\Sec. 1445 and Treasury regulations thereunder.
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            Branch profits taxes
    A domestic corporation owned by foreign persons is subject 
to U.S. income tax on its net income. The earnings of the 
domestic corporation are subject to a second tax, this time at 
the shareholder level, when dividends are paid. As described 
previously, when the shareholders are foreign, the second-level 
tax is imposed at a flat rate and collected by withholding. 
Unless the portfolio interest exemption or another exemption 
applies, interest payments made by a domestic corporation to 
foreign creditors are likewise subject to U.S. tax. To 
approximate these second-level withholding taxes imposed on 
payments made by domestic subsidiaries to their foreign parent 
corporations, the United States taxes a foreign corporation 
that is engaged in a U.S. trade or business through a U.S. 
branch on amounts of U.S. earnings and profits that are shifted 
out of, or amounts of interest that are deducted by, the U.S. 
branch of the foreign corporation. These branch taxes may be 
reduced or eliminated under an applicable income tax 
treaty.\865\
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    \865\See Treas. Reg. sec. 1.884-1(g), -5.
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    Under the branch profits tax, the United States imposes a 
tax of 30 percent on a foreign corporation's ``dividend 
equivalent amount.''\866\ The dividend equivalent amount 
generally is the earnings and profits of a U.S. branch of a 
foreign corporation attributable to its ECI.\867\ Limited 
categories of earnings and profits attributable to a foreign 
corporation's ECI are excluded in calculating the dividend 
equivalent amount.\868\
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    \866\Sec. 884(a).
    \867\Sec. 884(b).
    \868\See sec. 884(d)(2) (excluding, for example, earnings and 
profits attributable to gain from the sale of domestic corporation 
stock that constitutes a U.S. real property interest described in 
section 897).
---------------------------------------------------------------------------
    In arriving at the dividend equivalent amount, a branch's 
effectively connected earnings and profits are adjusted to 
reflect changes in a branch's U.S. net equity (that is, the 
excess of the branch's assets over its liabilities, taking into 
account only amounts treated as connected with its U.S. trade 
or business).\869\ The first adjustment reduces the dividend 
equivalent amount to the extent the branch's earnings are 
reinvested in trade or business assets in the United States (or 
reduce U.S. trade or business liabilities). The second 
adjustment increases the dividend equivalent amount to the 
extent prior reinvested earnings are considered remitted to the 
home office of the foreign corporation.
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    \869\Sec. 884(b).
---------------------------------------------------------------------------
    Interest paid by a U.S. trade or business of a foreign 
corporation generally is treated as if paid by a domestic 
corporation and therefore is subject to U.S. 30-percent 
withholding tax (if the interest is paid to a foreign person 
and a Code or treaty exemption or reduction would not be 
available if the interest were actually paid by a domestic 
corporation).\870\ Certain ``excess interest'' of a U.S. trade 
or business of a foreign corporation is treated as if paid by a 
U.S. corporation to a foreign parent and, therefore, is subject 
to U.S. 30-percent withholding tax.\871\ For this purpose, 
excess interest is the excess of the interest expense of the 
foreign corporation apportioned to the U.S. trade or business 
over the amount of interest paid by the trade or business.
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    \870\Sec. 884(f)(1)(A).
    \871\Sec. 884(f)(1)(B).
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            Earnings stripping
    Taxpayers are limited in their ability to reduce the U.S. 
tax on the income derived from their U.S. operations through 
certain earnings stripping transactions involving interest 
payments. If the payor's debt-to-equity ratio exceeds 1.5 to 1 
(a debt-to-equity ratio of 1.5 to 1 or less is considered a 
``safe harbor''), a deduction for disqualified interest paid or 
accrued by the payor in a taxable year is generally disallowed 
to the extent of the payor's excess interest expense.\872\ 
Disqualified interest includes interest paid or accrued to 
related parties when no Federal income tax is imposed with 
respect to such interest;\873\ to unrelated parties in certain 
instances in which a related party guarantees the debt 
(``guaranteed debt''); or to a REIT by a taxable REIT 
subsidiary of that REIT. Excess interest expense is the amount 
by which the payor's net interest expense (that is, the excess 
of interest paid or accrued over interest income) exceeds 50 
percent of its adjusted taxable income (generally taxable 
income computed without regard to deductions for net interest 
expense, net operating losses, domestic production activities 
under section 199, depreciation, amortization, and depletion). 
Interest amounts disallowed under these rules can be carried 
forward indefinitely and are allowed as a deduction to the 
extent of excess limitation in a subsequent tax year. In 
addition, any excess limitation (that is, the excess, if any, 
of 50 percent of the adjusted taxable income of the payor over 
the payor's net interest expense) can be carried forward three 
years.
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    \872\Sec. 163(j).
    \873\If a tax treaty reduces the rate of tax on interest paid or 
accrued by the taxpayer, the interest is treated as interest on which 
no Federal income tax is imposed to the extent of the same proportion 
of such interest as the rate of tax imposed without regard to the 
treaty, reduced by the rate of tax imposed under the treaty, bears to 
the rate of tax imposed without regard to the treaty. Sec. 
163(j)(5)(B).
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  C. U.S. Tax Rules Applicable to Foreign Activities of U.S. Persons 
                               (Outbound)

                             1. In general

    In general, income earned directly by a U.S. person from 
the conduct of a foreign business is taxed on a current 
basis,\874\ but income earned indirectly from a separate legal 
entity operating the foreign business is not. Instead, active 
foreign business income earned by a U.S. person indirectly 
through an interest in a foreign corporation generally is not 
subject to U.S. tax until the income is distributed as a 
dividend to the U.S. person. Certain anti-deferral regimes may 
cause the U.S. owner to be taxed on a current basis in the 
United States on certain categories of passive or highly mobile 
income earned by the foreign corporation regardless of whether 
the income has been distributed as a dividend to the U.S. 
owner. The main anti-deferral regimes that provide such 
exceptions are the controlled foreign corporation (``CFC'') 
rules of subpart F\875\ and the passive foreign investment 
company (``PFIC'') rules.\876\ A foreign tax credit generally 
is available to offset, in whole or in part, the U.S. tax owed 
on foreign-source income, whether the income is earned directly 
by the domestic corporation, repatriated as an actual dividend, 
or included in the domestic parent corporation's income under 
one of the anti-deferral regimes.\877\
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    \874\A U.S. citizen or resident living abroad may be eligible to 
exclude from U.S. taxable income certain foreign earned income and 
foreign housing costs under section 911. For a description of this 
exclusion, see Present Law and Issues in U.S. Taxation of Cross-Border 
Income (JCX-42-11), September 6, 2011, p. 52.
    \875\Secs. 951-964.
    \876\Secs. 1291-1298.
    \877\Secs. 901, 902, 960, 1293(f).
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                        2. Anti-deferral regimes

Subpart F

    Subpart F,\878\ applicable to CFCs and their shareholders, 
is the main anti-deferral regime of relevance to a U.S.-based 
multinational corporate group. A CFC generally is defined as 
any foreign corporation if U.S. persons own (directly, 
indirectly, or constructively) more than 50 percent of the 
corporation's stock (measured by vote or value), taking into 
account only those U.S. persons that are within the meaning of 
the term ``United States shareholder,'' which refers only to 
those U.S. persons who own at least 10 percent of the stock 
(measured by vote only).\879\
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    \878\Secs. 951-964.
    \879\Secs. 951(b), 957, 958. The term ``United States shareholder'' 
is used interchangeably herein with ``U.S. shareholder.''
---------------------------------------------------------------------------
            Subpart F income
    Under the subpart F rules, the United States generally 
taxes the 10-percent U.S. shareholders of a CFC on their pro 
rata shares of certain income of the CFC (referred to as 
``subpart F income''), without regard to whether the income is 
distributed to the shareholders.\880\ In effect, the United 
States treats the 10-percent U.S. shareholders of a CFC as 
having received a current distribution of the corporation's 
subpart F income. With exceptions described below, subpart F 
income generally includes passive income and other income that 
is readily movable from one taxing jurisdiction to another. 
Subpart F income consists of foreign base company income,\881\ 
insurance income,\882\ and certain income relating to 
international boycotts and other violations of public 
policy.\883\
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    \880\Sec. 951(a).
    \881\Sec. 954.
    \882\Sec. 953.
    \883\Sec. 952(a)(3)-(5).
---------------------------------------------------------------------------
    Foreign base company income consists of foreign personal 
holding company income, which includes passive income such as 
dividends, interest, rents, and royalties, and a number of 
categories of income from business operations, including 
foreign base company sales income, foreign base company 
services income, and foreign base company oil-related 
income.\884\
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    \884\Sec. 954.
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    Insurance income subject to current inclusion under the 
subpart F rules includes any income of a CFC attributable to 
the issuing or reinsuring of any insurance or annuity contract 
in connection with risks located in a country other than the 
CFC's country of organization. Subpart F insurance income also 
includes income attributable to an insurance contract in 
connection with risks located within the CFC's country of 
organization as the result of an arrangement under which 
another corporation receives a substantially equal amount of 
consideration for insurance of other country risks. Finally, 
special rules apply under subpart F with respect to related 
person insurance income\885\ in order to address captive 
insurance companies.\886\ Under these rules, the threshold for 
determining control is reduced to 25 percent, and any level of 
stock ownership by a U.S. person in such corporation is 
sufficient for the person to be treated as a U.S. shareholder.
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    \885\Sec. 953(c). Related person insurance income is defined for 
this purpose to mean any insurance income attributable to a policy of 
insurance or reinsurance with respect to which the primary insured is 
either a U.S. shareholder (within the meaning of the provision) in the 
foreign corporation receiving the income or a person related to such a 
shareholder.
    \886\Joint Committee on Taxation, General Explanation of the Tax 
Reform Act of 1986 (JCS-10-87), May 4, 1987, p. 968.
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            Investments in U.S. property
    The 10-percent U.S. shareholders of a CFC also are required 
to include currently in income for U.S. tax purposes their pro 
rata shares of the corporation's untaxed earnings invested in 
certain items of U.S. property.\887\ This U.S. property 
generally includes tangible property located in the United 
States, stock of a U.S. corporation, an obligation of a U.S. 
person, and certain intangible assets, such as patents and 
copyrights, acquired or developed by the CFC for use in the 
United States.\888\ There are specific exceptions to the 
general definition of U.S. property, including for bank 
deposits, certain export property, and certain trade or 
business obligations.\889\ The inclusion rule for investment of 
earnings in U.S. property is intended to prevent taxpayers from 
avoiding U.S. tax on dividend repatriations by repatriating CFC 
earnings through non-dividend payments, such as loans to U.S. 
persons.
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    \887\Secs. 951(a)(1)(B), 956.
    \888\Sec. 956(c)(1).
    \889\Sec. 956(c)(2).
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            Subpart F exceptions
    Several exceptions to the broad definition of subpart F 
income permit continued deferral for income from certain 
transactions, dividends, interest and certain rents and 
royalties received by a CFC from a related corporation 
organized and operating in the same foreign country in which 
the CFC is organized.\890\ The same-country exception is not 
available to the extent that the payments reduce the subpart F 
income of the payor. A second exception from foreign base 
company income and insurance income is available for any item 
of income received by a CFC if the taxpayer establishes that 
the income was subject to an effective foreign income tax rate 
greater than 90 percent of the maximum U.S. corporate income 
tax rate (that is, more than 90 percent of 35 percent, or 31.5 
percent).\891\
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    \890\Sec. 954(c)(3).
    \891\Sec. 954(b)(4).
---------------------------------------------------------------------------
    A provision colloquially referred to as the ``CFC look-
through'' rule excludes from foreign personal holding company 
income dividends, interest, rents, and royalties received or 
accrued by one CFC from a related CFC (with relation based on 
control) to the extent attributable or properly allocable to 
non-subpart-F income of the payor.\892\ The look-through rule 
applies to taxable years of foreign corporations beginning 
before January 1, 2020, and to taxable years of U.S. 
shareholders with or within which such taxable years of foreign 
corporations end.\893\
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    \892\Sec. 954(c)(6).
    \893\See section 144 of the Protecting Americans from Tax Hikes Act 
of 2015 (Division Q of Pub. L. No. 114-113), H.R. 2029 (``the PATH Act 
of 2015''), which extended section 954(c)(6) for five years. Congress 
has previously extended the application of section 954(c)(6) several 
times, most recently in the Tax Increase Prevention Act of 2014, Pub. 
L. No. 113-295; Pub. L. No. 107-147, sec. 614, 2002; Pub. L. No. 106-
170, sec. 503, 1999; Pub. L. No. 105-277, 1998.
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    There is also an exclusion from subpart F income for 
certain income of a CFC that is derived in the active conduct 
of banking or financing business (``active financing income''), 
which applies to all taxable years of the foreign corporation 
beginning after December 31, 2014, and for taxable years of the 
shareholders that end during or within such taxable years of 
the corporation.\894\ With respect to income derived in the 
active conduct of a banking, financing, or similar business, a 
CFC is required to be predominantly engaged in such business 
and to conduct substantial activity with respect to such 
business in order to qualify for the active financing 
exceptions. In addition, certain nexus requirements apply, 
which provide that income derived by a CFC or a qualified 
business unit (``QBU'') of a CFC from transactions with 
customers is eligible for the exceptions if, among other 
things, substantially all of the activities in connection with 
such transactions are conducted directly by the CFC or QBU in 
its home country, and such income is treated as earned by the 
CFC or QBU in its home country for purposes of such country's 
tax laws. Moreover, the exceptions apply to income derived from 
certain cross border transactions, provided that certain 
requirements are met.
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    \894\Sec. 954(h). See section 128 of the PATH Act of 2015, which 
made the active financing exception permanent.
---------------------------------------------------------------------------
    In the case of a securities dealer, an exception from 
foreign personal holding company income applies to any interest 
or dividend (or certain equivalent amounts) from any 
transaction, including a hedging transaction or a transaction 
consisting of a deposit of collateral or margin, entered into 
in the ordinary course of the dealer's trade or business as a 
dealer in securities within the meaning of section 475.\895\ In 
the case of a QBU of the dealer, the income is required to be 
attributable to activities of the QBU in the country of 
incorporation, or to a QBU in the country in which the QBU both 
maintains its principal office and conducts substantial 
business activity. A coordination rule provides that, for 
securities dealers, this exception generally takes precedence 
over the exception for active financing income.
---------------------------------------------------------------------------
    \895\Sec. 954(c)(2)(C).
---------------------------------------------------------------------------
    Income is treated as active financing income only if, among 
other requirements, it is derived by a CFC or by a QBU of that 
CFC. Certain activities conducted by persons related to the CFC 
or its QBU are treated as conducted directly by the CFC or 
QBU.\896\ An activity qualifies under this rule if the activity 
is performed by employees of the related person and if the 
related person is an eligible CFC, the home country of which is 
the same as the home country of the related CFC or QBU; the 
activity is performed in the home country of the related 
person; and the related person receives arm's-length 
compensation that is treated as earned in the home country. 
Income from an activity qualifying under this rule is excluded 
from subpart F income so long as the other active financing 
requirements are satisfied.
---------------------------------------------------------------------------
    \896\Sec. 954(h)(3)(E).
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    Certain income of a qualifying branch of a qualifying 
insurance company with respect to risks located within the home 
country of the branch or within the CFC's country of creation 
or organization are also excepted from foreign personal holding 
company income, provided that certain requirements are met. 
Further, additional exceptions from insurance income and from 
foreign personal holding company income apply for certain 
income of certain CFCs or branches with respect to risks 
located in a country other than the United States, provided 
that the requirements for these exceptions, including reserve 
requirements, are met.\897\
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    \897\Subject to approval by the IRS, a taxpayer may establish that 
the reserve of a life insurance company for life insurance and annuity 
contracts is the amount taken into account in determining the foreign 
statement reserve for the contract (reduced by catastrophe, 
equalization, or deficiency reserve or any similar reserve). IRS 
approval is to be based on whether the method, the interest rate, the 
mortality and morbidity assumptions, and any other factors taken into 
account in determining foreign statement reserves (taken together or 
separately) provide an appropriate means of measuring income for 
Federal income tax purposes.
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            Exclusion of previously taxed earnings and profits
    A 10-percent U.S. shareholder of a CFC may exclude from its 
income actual distributions of earnings and profits from the 
CFC that were previously included in the 10-percent U.S. 
shareholder's income under subpart F.\898\ Any income inclusion 
(under section 956) resulting from investments in U.S. property 
may also be excluded from the 10-percent U.S. shareholder's 
income when such earnings are ultimately distributed.\899\ 
Ordering rules provide that distributions from a CFC are 
treated as coming first out of earnings and profits of the CFC 
that have been previously taxed under subpart F, then out of 
other earnings and profits.\900\
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    \898\Sec. 959(a)(1).
    \899\Sec. 959(a)(2).
    \900\Sec. 959(c).
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            Basis adjustments
    In general, a 10-percent U.S. shareholder of a CFC receives 
a basis increase with respect to its stock in the CFC equal to 
the amount of the CFC's earnings that are included in the 10-
percent U.S. shareholder's income under subpart F.\901\ 
Similarly, a 10-percent U.S. shareholder of a CFC generally 
reduces its basis in the CFC's stock in an amount equal to any 
distributions that the 10-percent U.S. shareholder receives 
from the CFC that are excluded from its income as previously 
taxed under subpart F.\902\
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    \901\Sec. 961(a).
    \902\Sec. 961(b).
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Passive foreign investment companies

    The Tax Reform Act of 1986\903\ established the PFIC anti-
deferral regime. A PFIC is generally defined as any foreign 
corporation if 75 percent or more of its gross income for the 
taxable year consists of passive income, or 50 percent or more 
of its assets consists of assets that produce, or are held for 
the production of, passive income.\904\ Alternative sets of 
income inclusion rules apply to U.S. persons that are 
shareholders in a PFIC, regardless of their percentage 
ownership in the company. One set of rules applies to PFICs 
that are qualified electing funds, under which electing U.S. 
shareholders currently include in gross income their respective 
shares of the company's earnings, with a separate election to 
defer payment of tax, subject to an interest charge, on income 
not currently received.\905\ A second set of rules applies to 
PFICs that are not qualified electing funds, under which U.S. 
shareholders pay tax on certain income or gain realized through 
the company, plus an interest charge that is attributable to 
the value of deferral.\906\ A third set of rules applies to 
PFIC stock that is marketable, under which electing U.S. 
shareholders currently take into account as income (or loss) 
the difference between the fair market value of the stock as of 
the close of the taxable year and their adjusted basis in such 
stock (subject to certain limitations), often referred to as 
``marking to market.''\907\ Under the PFIC regime, passive 
income is any income which is of a kind that would be foreign 
personal holding company income, including dividends, interest, 
royalties, rents, and certain gains on the sale or exchange of 
property, commodities, or foreign currency.
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    \903\Pub. L. No. 99-514.
    \904\Sec. 1297.
    \905\Secs. 1293-1295.
    \906\Sec. 1291.
    \907\Sec. 1296.
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    However, among other exceptions, passive income does not 
include any income derived in the active conduct of an 
insurance business by a corporation that is predominantly 
engaged in an insurance business and that would be subject to 
tax under subchapter L if it were a domestic corporation.\908\ 
In applying the insurance exception, the IRS analyzes whether 
risks assumed under contracts issued by a foreign company 
organized as an insurer are truly insurance risks, whether the 
risks are limited under the terms of the contracts, and the 
status of the company as an insurance company.\909\
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    \908\Sec. 1297(b)(2)(B).
    \909\Notice 2003-34, 2003-C.B. 1 990, June 9, 2003. See also, Prop. 
Treas. Reg. sec. 1.1297-4, 26 CFR Part 1, REG-108214-15, April 24, 
2015.
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Other anti-deferral rules

    The subpart F and PFIC rules are not the only anti-deferral 
regimes. Other rules that impose current U.S. taxation on 
income earned through corporations include the accumulated 
earnings tax rules\910\ and the personal holding company rules.
---------------------------------------------------------------------------
    \910\Secs. 531-537.
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    Rules for coordination among the anti-deferral regimes are 
provided to prevent U.S. persons from being subject to U.S. tax 
on the same item of income under multiple regimes. For example, 
a corporation generally is not treated as a PFIC with respect 
to a particular shareholder if the corporation is also a CFC 
and the shareholder is a 10-percent U.S. shareholder. Thus, 
subpart F is allowed to trump the PFIC rules.

                         3. Foreign tax credit

    Subject to certain limitations, U.S. citizens, resident 
individuals, and domestic corporations are allowed to claim 
credit for foreign income taxes they pay. A domestic 
corporation that owns at least 10 percent of the voting stock 
of a foreign corporation is allowed a ``deemed-paid'' credit 
for foreign income taxes paid by the foreign corporation that 
the domestic corporation is deemed to have paid when the 
related income is distributed as a dividend or is included in 
the domestic corporation's income under the anti-deferral 
rules.\911\
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    \911\Secs. 901, 902, 960, 1291(g).
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    The foreign tax credit generally is limited to a taxpayer's 
U.S. tax liability on its foreign-source taxable income (as 
determined under U.S. tax accounting principles). This limit is 
intended to ensure that the credit serves its purpose of 
mitigating double taxation of foreign-source income without 
offsetting U.S. tax on U.S.-source income.\912\ The limit is 
computed by multiplying a taxpayer's total U.S. tax liability 
for the year by the ratio of the taxpayer's foreign-source 
taxable income for the year to the taxpayer's total taxable 
income for the year. If the total amount of foreign income 
taxes paid and deemed paid for the year exceeds the taxpayer's 
foreign tax credit limitation for the year, the taxpayer may 
carry back the excess foreign taxes to the previous year or 
carry forward the excess taxes to one of the succeeding 10 
years.\913\
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    \912\Secs. 901, 904.
    \913\Sec. 904(c).
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    The computation of the foreign tax credit limitation 
requires a taxpayer to determine the amount of its taxable 
income from foreign sources in each limitation category 
(described below) by allocating and apportioning deductions 
between U.S.-source gross income, on the one hand, and foreign-
source gross income in each limitation category, on the other. 
In general, deductions are allocated and apportioned to the 
gross income to which the deductions factually relate.\914\ 
However, subject to certain exceptions, deductions for interest 
expense and research and experimental expenses are apportioned 
based on taxpayer ratios.\915\ In the case of interest expense, 
this ratio is the ratio of the corporation's foreign or 
domestic (as applicable) assets to its worldwide assets. In the 
case of research and experimental expenses, the apportionment 
ratio is based on either sales or gross income. All members of 
an affiliated group of corporations generally are treated as a 
single corporation for purposes of determining the 
apportionment ratios.\916\
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    \914\Treas. Reg. sec. 1.861-8(b), Temp. Treas. Reg. sec. 1.861-
8T(c).
    \915\Temp. Treas. Reg. sec. 1.861-9T, Treas. Reg. sec. 1.861-17.
    \916\Sec. 864(e)(1), (6); Temp. Treas. Reg. sec. 1.861-14T(e)(2).
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    The term ``affiliated group'' is determined generally by 
reference to the rules for determining whether corporations are 
eligible to file consolidated returns.\917\ These rules exclude 
foreign corporations from an affiliated group.\918\ Interest 
expense allocation rules permitting a U.S. affiliated group to 
apportion the interest expense of the members of the U.S. 
affiliated group on a worldwide-group basis were modified in 
2004, and initially effective for taxable years beginning after 
December 31, 2008.\919\ The effective date of the modified 
rules has been delayed to January 1, 2021.\920\ A result of 
this rule is that interest expense of foreign members of a U.S. 
affiliated group is taken into account in determining whether a 
portion of the interest expense of the domestic members of the 
group must be allocated to foreign-source income. An allocation 
to foreign-source income generally is required only if, in 
broad terms, the domestic members of the group are more highly 
leveraged than is the entire worldwide group. The new rules are 
generally expected to reduce the amount of the U.S. group's 
interest expense that is allocated to foreign-source income.
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    \917\Secs. 864(e)(5), 1504.
    \918\Sec. 1504(b)(3).
    \919\Sec. 864(f); ``American Jobs Creation Act of 2004'' 
(``AJCA''), Pub. L. 108-357, sec. 401(a).
    \920\Hiring Incentives to Restore Employment Act, Pub. L. No. 111-
147, sec. 551(a).
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    The foreign tax credit limitation is applied separately to 
passive category income and to general category income.\921\ 
Passive category income includes passive income, such as 
portfolio interest and dividend income, and certain specified 
types of income. All other income is in the general category. 
Passive income is treated as general category income if it is 
earned by a qualifying financial services entity. Passive 
income is also treated as general category income if it is 
highly taxed (that is, if the foreign tax rate is determined to 
exceed the highest rate of tax specified in Code section 1 or 
11, as applicable). Dividends (and subpart F inclusions), 
interest, rents, and royalties received by a 10-percent U.S. 
shareholder from a CFC are assigned to a separate limitation 
category by reference to the category of income out of which 
the dividends or other payments were made.\922\ Dividends 
received by a 10-percent corporate shareholder of a foreign 
corporation that is not a CFC are also categorized on a look-
through basis.\923\
---------------------------------------------------------------------------
    \921\Sec. 904(d). AJCA generally reduced the number of income 
categories from nine to two, effective for tax years beginning in 2006. 
Before AJCA, the foreign tax credit limitation was applied separately 
to the following categories of income: (1) passive income, (2) high 
withholding tax interest, (3) financial services income, (4) shipping 
income, (5) certain dividends received from noncontrolled section 902 
foreign corporations (also known as ``10/50 companies''), (6) certain 
dividends from a domestic international sales corporation or former 
domestic international sales corporation, (7) taxable income 
attributable to certain foreign trade income, (8) certain distributions 
from a foreign sales corporation or former foreign sales corporation, 
and (9) any other income not described in items (1) through (8) (so-
called ``general basket'' income). A number of other provisions of the 
Code, including several enacted in 2010 as part of Pub. L. No. 111-226, 
create additional separate categories in specific circumstances or 
limit the availability of the foreign tax credit in other ways. See, 
e.g., secs. 865(h), 901(j), 904(d)(6), 904(h)(10).
    \922\Sec. 904(d)(3). The subpart F rules applicable to CFCs and 
their 10-percent U.S. shareholders are described below.
    \923\Sec. 904(d)(4).
---------------------------------------------------------------------------
    Special rules apply to the allocation of income and losses 
from foreign and U.S. sources within each category of 
income.\924\ Foreign losses from one category will first be 
used to offset income from foreign sources of other categories. 
If there remains an overall foreign loss, it will be deducted 
against income from U.S. sources. The same principle applies to 
losses from U.S. sources. In subsequent years, the losses that 
were deducted against another category or source of income will 
be recaptured. That is, an equal amount of income from the same 
category or source that generated a loss in the prior year will 
be recharacterized as income from the other category or source 
against which the loss was deducted. Up to 50 percent of income 
from one source in any subsequent year will be recharacterized 
as income from the other source, whereas foreign-source income 
in a particular category can be fully recharacterized as income 
in another category until the losses from prior years are fully 
recaptured.\925\
---------------------------------------------------------------------------
    \924\Secs. 904(f), (g).
    \925\Secs. 904(f)(1), (g)(1).
---------------------------------------------------------------------------
    In addition to the foreign tax credit limitation just 
described, a taxpayer's ability to claim a foreign tax credit 
may be further limited by a matching rule that prevents the 
separation of creditable foreign taxes from the associated 
foreign income. Under this rule, a foreign tax generally is not 
taken into account for U.S. tax purposes, and thus no foreign 
tax credit is available with respect to that foreign tax, until 
the taxable year in which the related income is taken into 
account for U.S. tax purposes.\926\
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    \926\Sec. 909.
---------------------------------------------------------------------------

                            4. Special rules

            Dual consolidated loss rules
    Under the rules applicable to corporations filing 
consolidated returns, a dual consolidated loss (``DCL'') is any 
net operating loss of a domestic corporation if the corporation 
is subject to an income tax of a foreign country without regard 
to whether such income is from sources in or outside of such 
foreign country, or if the corporation is subject to such a tax 
on a residence basis (a ``dual resident corporation'').\927\ A 
DCL generally cannot be used to reduce the taxable income of 
any member of the corporation's affiliated group. Losses of a 
separate unit of a domestic corporation (a foreign branch or an 
interest in a hybrid entity owned by the corporation) are 
subject to this limitation in the same manner as if the unit 
were a wholly owned subsidiary of such corporation. An 
exemption is available under Treasury regulations in the case 
of DCLs for which a domestic use election (that is, an election 
to use the loss only for domestic, and not foreign, tax 
purposes) has been made.\928\ Recapture is required, however, 
upon the occurrence of certain triggering events, including the 
conversion of a separate unit to a foreign corporation and the 
transfer of 50 percent or more of the assets of a separate unit 
within a twelve-month period.\929\
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    \927\Sec. 1503(d).
    \928\Treas. Reg. sec. 1.1503(d)-6(d).
    \929\ See Treas. Reg. sec. 1.1503(d)-6(e)(1).
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            Temporary dividends-received deduction for repatriated 
                    foreign earnings
    AJCA section 421 added to the Code section 965, a temporary 
provision intended to encourage U.S. multinational companies to 
repatriate foreign earnings. Under section 965, for one taxable 
year certain dividends received by a U.S. corporation from its 
CFCs were eligible for an 85-percent dividends-received 
deduction. At the taxpayer's election, this deduction was 
available for dividends received either during the taxpayer's 
first taxable year beginning on or after October 22, 2004, or 
during the taxpayer's last taxable year beginning before such 
date.
    The temporary deduction was subject to a number of general 
limitations. First, it applied only to cash repatriations 
generally in excess of the taxpayer's average repatriation 
level calculated for a three-year base period preceding the 
year of the deduction. Second, the amount of dividends eligible 
for the deduction was generally limited to the amount of 
earnings shown as permanently invested outside the United 
States on the taxpayer's recent audited financial statements. 
Third, to qualify for the deduction, dividends were required to 
be invested in the United States according to a domestic 
reinvestment plan approved by the taxpayer's senior management 
and board of directors.\930\
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    \930\Section 965(b)(4). The plan was required to provide for the 
reinvestment of the repatriated dividends in the United States, 
including as a source for the funding of worker hiring and training, 
infrastructure, research and development, capital investments, and the 
financial stabilization of the corporation for the purposes of job 
retention or creation.
---------------------------------------------------------------------------
    No foreign tax credit (or deduction) was allowed for 
foreign taxes attributable to the deductible portion of any 
dividend.\931\ For this purpose, the taxpayer was permitted to 
specifically identify which dividends were treated as carrying 
the deduction and which dividends were not. In other words, the 
taxpayer was allowed to choose which of its dividends were 
treated as meeting the base-period repatriation level (and thus 
carry foreign tax credits, to the extent otherwise allowable), 
and which of its dividends were treated as part of the excess 
eligible for the deduction (and thus subject to proportional 
disallowance of any associated foreign tax credits).\932\ 
Deductions were disallowed for expenses that were directly 
allocable to the deductible portion of any dividend.\933\
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    \931\Sec. 965(d)(1).
    \932\Accordingly, taxpayers generally were expected to pay regular 
dividends out of high-taxed CFC earnings (thereby generating deemed-
paid credits available to offset foreign-source income) and section 965 
dividends out of low-taxed CFC earnings (thereby availing themselves of 
the 85-percent deduction).
    \933\Sec. 965(d)(2).
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            Domestic international sales corporations
    A domestic international sales corporations (``DISC'') is a 
domestic corporation that satisfies the following conditions: 
95 percent of its gross receipts must be qualified export 
receipts; 95 percent of the sum of the adjusted bases of all 
its assets must be attributable to the sum of the adjusted 
bases of qualified export assets; the corporation must have no 
more than one class of stock; the par or stated value of the 
outstanding stock must be at least $2,500 on each day of the 
taxable year; and an election must be in effect to be taxed as 
a DISC.\934\ In general, a DISC is not subject to corporate-
level tax and offers limited deferral of tax liability to its 
shareholders.\935\ DISC income attributable to a maximum of $10 
million annually of qualified export receipts is generally 
exempt from income tax at both the corporate and shareholder 
level. Shareholders must pay interest to account for the 
benefit of deferring the tax liability on undistributed DISC 
income related to this $10 million maximum annual amount.\936\ 
Such entities are also referred to as interest charge DISCs, or 
IC-DISCs. Shareholders of a DISC are deemed to receive a 
dividend out of current earnings and profits from qualified 
export receipts in excess of $10 million.\937\ Gain on the sale 
of DISC stock is treated as a dividend to the extent of 
accumulated DISC income.\938\ The shareholders of a corporation 
which is not a DISC, but was a DISC in a previous taxable year, 
and which has previously taxed income or accumulated DISC 
income, are also required to pay interest on the deferral 
benefit, and gain on the sale or exchange of stock in such 
corporation is treated as a dividend.
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    \934\Secs. 992(a) and (b). If a corporation fails to satisfy either 
or both of the 95-percent tests, it is deemed to satisfy such tests if 
it makes a pro rata distribution of its gross receipts which are not 
qualified export receipts and the fair market value of its assets which 
are not qualified export assets. Sec. 992(c).
    \935\Sec. 991. Prior to the 1984 Revenue Act (Pub. L. 98-369), 
DISCs were eligible for more generous tax benefits that were eliminated 
in favor of the since-repealed foreign sales corporation regime 
(``FSC''). An overview of the history of the DISCs and FSCs regimes is 
provided in Joseph Isenbergh, Vol. 3 U.S. Taxation of Foreign Persons 
and Foreign Income, Para. 81. (Fourth Ed. 2016).
    \936\The rate is the average of one-year constant maturity Treasury 
yields. The deferral benefit is the excess of the amount of tax for 
which the shareholder would be liable if deferred DISC income were 
included as ordinary income over the actual tax liability of such 
shareholder. Sec. 995(f).
    \937\The amount of the deemed distribution is the sum of several 
items, including qualified export receipts in excess of $10 million. 
See sec. 955(b).
    \938\Sec. 995(c).
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             TAXATION OF FOREIGN INCOME AND FOREIGN PERSONS

  A. Establishment of Participation Exemption System for Taxation of 
                             Foreign Income

   1. Deduction for foreign-source portion of dividends received by 
     domestic corporations from specified 10-percent owned foreign 
   corporations (sec. 4001 of the bill and new sec. 245A of the Code)

                           REASONS FOR CHANGE

    The Committee believes that the current tax system puts 
American workers and companies at a severe disadvantage to 
foreign workers and companies. This is primarily because the 
United States is one of the few industrialized countries with a 
worldwide system of taxation and has the highest corporate tax 
rate among OECD member countries. The worldwide system of 
taxation with deferral provides perverse incentives to keep 
funds offshore because dividends from foreign subsidiaries are 
not taxed until repatriated to the United States. The Committee 
believes that a territorial system with appropriate anti-base 
erosion safeguards, combined with a lower corporate tax rate, 
will make American workers and companies competitive again, and 
also will remove tax-driven incentives to keep funds offshore.

                        EXPLANATION OF PROVISION

In general

    The provision generally establishes a participation 
exemption system for foreign income. This exemption is provided 
for by means of a 100-percent deduction for the foreign-source 
portion of dividends received from specified 10-percent owned 
foreign corporations by domestic corporations that are United 
States shareholders of those foreign corporations within the 
meaning of section 951(b) (referred to here as ``participation 
DRD'').\939\
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    \939\Under section 951(b), a domestic corporation is a United 
States shareholder of a foreign corporation if it owns, within the 
meaning of section 958(a), or is considered as owning by applying the 
rules of section 958(b), 10 percent or more of the voting stock of the 
foreign corporation.
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    A specified 10-percent owned foreign corporation is any 
foreign corporation with respect to which any domestic 
corporation is a United States shareholder. The phrase does not 
include a passive foreign investment company within the meaning 
of subpart D of part VI of subchapter P.
    The term ``dividend received'' is intended to be 
interpreted broadly, consistently with the meaning of the 
phrases ``amount received as dividends'' and ``dividends 
received'' under sections 243 and 245, respectively.\940\ Under 
proposed section 245A(e), the Secretary of the Treasury may 
prescribe such regulations or other guidance as may be 
necessary or appropriate to carry out the rules of section 
245A, including clarifying the intended broad scope of the term 
``dividend received.''
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    \940\Consequently, for example, gain included in gross income as a 
dividend under section 1248(a) or 964(e) would constitute a dividend 
received for which the deduction under section 245A may be available.
---------------------------------------------------------------------------
    For example, if a domestic corporation indirectly owns 
stock of a foreign corporation through a foreign partnership 
and the domestic corporation would qualify for the 
participation DRD with respect to dividends from the foreign 
corporation if the domestic corporation owned such stock 
directly, the domestic corporation would be allowed a 
participation DRD with respect to its distributive share of the 
partnership's dividend from the foreign corporation.

Foreign-source portion of a dividend

    The participation DRD is available only for the foreign-
source portion of dividends received from specified 10-percent 
owned foreign corporations. The foreign-source portion of any 
dividend is the amount that bears the same ratio to the 
dividend as the specified foreign corporation's post-1986 
undistributed foreign earnings bears to the corporation's total 
post-1986 undistributed earnings. Post-1986 undistributed 
earnings are the amount of the earnings and profits of a 
specified 10-percent owned foreign corporation accumulated in 
taxable years beginning after December 31, 1986, as of the 
close of the taxable year of the foreign corporation in which 
the dividend is distributed and not reduced by dividends\941\ 
distributed during that year. Post-1986 undistributed foreign 
earnings are, in general, the portion of post-1986 
undistributed earnings that is not attributable to post-1986 
undistributed U.S. earnings. Post-1986 undistributed U.S. 
earnings are, in general, undistributed earnings attributable 
to: (a) the corporation's income that is effectively connected 
with the conduct of a trade or business within the United 
States, or (b) any dividend received (directly or through a 
wholly owned foreign corporation) from an 80-percent-owned (by 
vote or value) domestic corporation.
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    \941\Pursuant to section 959(d), a distribution of previously taxed 
income does not constitute a dividend even if it reduces earnings and 
profits.
---------------------------------------------------------------------------
    Rules similar to the rules described above apply when a 
dividend is paid out of earnings and profits of a specified 10-
percent owned foreign corporation accumulated in taxable years 
beginning before January 1, 1987. As a consequence, the 
participation exemption system is available for both post-1986 
and pre-1987 foreign earnings. An ordering rule provides that 
dividends are treated as first being paid out of post-1986 
undistributed earnings to the extent of those earnings.
    An additional rule provides for the treatment of 
distributions of a specified 10-percent owned foreign 
corporation in excess of undistributed earnings. Under section 
316(a)(2), a distribution of earnings and profits of a 
corporation in the taxable year of the distribution is treated 
as a dividend even if the distribution exceeds accumulated 
earnings and profits.\942\ The determination of the foreign-
source portion of such a distribution is calculated in a 
similar manner as for other types of dividends.
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    \942\Called a ``nimble dividend.'' See, Boris I. Bittker and James 
S. Eustice, Federal Income Taxation of Corporations and Shareholders, 
(7th ed. 2016) para. 8-12.
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Foreign tax credit disallowance; foreign tax credit limitation

    No foreign tax credit or deduction is allowed for any taxes 
(including withholding taxes) paid or accrued with respect to a 
dividend that qualifies for the participation DRD.
    For purposes of computing the section 904(a) foreign tax 
credit limitation, a domestic corporation that is a United 
States shareholder of a specified 10-percent owned foreign 
corporation must compute its foreign-source taxable income (and 
entire taxable income) by disregarding the foreign-source 
portion of any dividend received from that foreign corporation 
for which the participation DRD is taken, as well as and any 
deductions properly allocable or apportioned to that foreign-
source portion or the stock with respect to which it is paid.

Six-month holding period requirement

    A domestic corporation is not permitted a participation DRD 
in respect of any dividend on any share of stock that is held 
by the domestic corporation for 180 days or less during the 
361-day period beginning on the date that is 180 days before 
the date on which the share becomes ex-dividend with respect to 
the dividend. For this purpose, a domestic corporation is 
treated as holding a share of stock for any period only if the 
corporation is a specified 10-percent owned foreign corporation 
and the taxpayer is a United States shareholder with respect to 
such corporation during that period.

                             EFFECTIVE DATE

    The provision applies to distributions made (and for 
purposes of determining a taxpayer's foreign tax credit 
limitation under section 904, deductions in taxable years 
beginning) after December 31, 2017.

  2. Application of participation exemption to investments in United 
      States property (sec. 4002 of the bill sec. 956 of the Code)

                           REASONS FOR CHANGE

    The Committee believes that including amounts that a CFC 
invests in United States property in a domestic corporate 
shareholder's gross income would be the wrong result under a 
participation exemption system, when the CFC could otherwise 
pay a dividend or distribute property to the domestic corporate 
shareholder in a manner that would be tax-free. The Committee 
further believes that retention of such a rule would needlessly 
discourage investment in the United States. However, because 
the participation exemption does not extend to individuals, 
section 956 should remain in effect with respect to individuals 
who are United States shareholders of CFCs.

                        EXPLANATION OF PROVISION

    Under the provision, the amount determined under section 
956 (relating to CFC investments in United States property) 
with respect to a domestic corporation is zero. A similar rule 
is intended for domestic corporations that own a CFC through a 
domestic partnership. The provision includes a specific grant 
of authority to the Secretary to issue regulations to effect 
that intent.

                             EFFECTIVE DATE

    The provision applies to taxable years of foreign 
corporations beginning after December 31, 2017.

  3. Limitation on losses with respect to specified 10-percent owned 
foreign corporations (sec. 4003 of the bill secs. 367(a)(3)(C) and 961 
               of the Code, and new sec. 91 of the Code)

                           REASONS FOR CHANGE

    The Committee is concerned that a participation exemption 
system could provide inappropriate double benefits in certain 
circumstances. In particular, a distribution from a foreign 
subsidiary that is eligible for a participation DRD would 
reduce the value of the foreign subsidiary, thereby reducing 
any built-in gain or increasing any built-in loss in the 
shareholder's stock of the subsidiary. Reducing gain in this 
manner is consistent with the application of section 1248(a) 
(or section 964(e)) to recharacterize gain as a dividend for 
which a participation DRD may be permitted. Increasing loss in 
this manner, however, creates an inappropriate and double U.S. 
tax benefit for receiving a tax-free distribution from a 
foreign subsidiary.
    Separately, the Committee is concerned that taxpayers may 
wish to arbitrage the application of the participation 
exemption system to foreign subsidiaries but not foreign 
branches. Specifically, a taxpayer may deduct losses from a 
foreign branch operation against U.S. taxable income and then 
incorporate that branch once it becomes profitable. Present law 
provides an array of loss recapture rules to address such a 
fact pattern,\943\ but those rules generally rely on the 
worldwide system of taxation to recapture losses in excess of 
built-in gains by taxing future earnings when repatriated. 
Instead of only recapturing such losses upon later repatriation 
of earning, the Committee wishes to recapture the U.S. tax 
benefits of these losses immediately upon the incorporation of 
a foreign branch that has generated losses. This is so that the 
repatriation of foreign earnings will not carry negative tax 
consequences thereby discouraging such repatriation, which is 
one of the reasons for moving to a participation exemption 
system of taxation.
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    \943\See, e.g., secs. 367(a)(3)(C), 904(f)(3), 1503(d).
---------------------------------------------------------------------------

                        EXPLANATION OF PROVISION

Reduction in basis of certain foreign stock

    Under the provision, solely for the purpose of determining 
a loss, a domestic corporate shareholder's adjusted basis in 
the stock of a specified 10-percent owned foreign corporation 
(as defined in new section 245A) is reduced by an amount equal 
to the portion of any dividend received with respect to such 
stock from such foreign corporation that was not taxed by 
reason of a dividends received deduction allowable under 
section 245A in any taxable year of such domestic corporation. 
This rule applies in coordination with section 1059, such that 
any reduction in basis required pursuant to this provision will 
be disregarded, to the extent the basis in the 10-percent owned 
foreign corporation's stock has already been reduced pursuant 
to section 1059.

Inclusion of transferred loss amount in certain assets transfers

    Under the provision, if a domestic corporation transfers 
substantially all of the assets of a foreign branch (within the 
meaning of section 367(a)(3)(C)) to a foreign corporation 
which, after such transfer, is a specified 10-percent owned 
foreign corporation with respect to which the domestic 
corporation is a United States shareholder, the domestic 
corporation includes in gross income an amount equal to the 
transferred loss amount, subject to certain limitations.
    The transferred loss amount is the excess of: (1) losses 
incurred by the foreign branch after December 31, 2017 for 
which a deduction was allowed to the domestic corporation, over 
(2) the sum of taxable income earned by the foreign branch and 
gain recognized by reason of an overall foreign loss recapture 
arising out of disposition of assets on account of the 
underlying transfer. For the purposes of (2), only taxable 
income of the foreign branch in taxable years after the loss is 
incurred through the close of the taxable year of the transfer 
is included.
    For transfers not covered by section 367(a)(3)(C), the 
transferred loss amount is reduced by the amount of gain 
recognized by the domestic corporation on the transfer (other 
than gains recognized by reason of overall foreign loss 
recapture). For transfers covered by section 367(a)(3)(C), the 
transferred loss amount is reduced by the amount of gain 
recognized by reason of such subparagraph.
    Amounts included in gross income by reason of the provision 
or by reason of section 367(a)(3)(C) are treated as derived 
from sources within the United States.
    The provision provides authority for the Secretary of the 
Treasury to prescribe regulations or other guidance for proper 
adjustments to the adjusted basis of the specified 10 percent 
owned foreign corporation to which the transfer is made, and to 
the adjusted basis of the property transferred, to reflect 
amounts included in gross income under the provision.

                             EFFECTIVE DATE

    The provision relating to reduction of basis in certain 
foreign stock for the purposes of determining a loss is 
effective for distributions made after December 31, 2017.
    The provision relating to transfer of loss amounts from 
foreign branches to certain foreign corporations is effective 
for transfers after December 31, 2017.

      4. Treatment of deferred foreign income upon transition to 
 participation exemption system of taxation (sec. 4004 of the bill and 
                secs. 78, 904, 907, and 965 of the Code)

                           REASONS FOR CHANGE

    In transitioning to a new participation exemption system, 
the Committee seeks to enhance both the global competitiveness 
of U.S. businesses and to encourage investment in the United 
States. The Committee believes that many domestic companies 
were reluctant to reinvest foreign earnings in the United 
States, when doing so would subject those earnings to high 
rates of corporate income tax rates. Accordingly, the Committee 
is aware that such companies have accumulated significant 
untaxed and undistributed foreign earnings as a result.
    The Committee is also aware that such companies are 
eligible for a 100-percent dividend-received deduction with 
respect to any distributions made under the new participation 
exemption system. To avoid a potential windfall for 
corporations that deferred income, and to ensure that all 
distributions from foreign subsidiaries are treated in the same 
manner under the participation exemption system, the Committee 
believes that it is appropriate to tax such earnings as if they 
had been repatriated under present law, but at a reduced rate.
    The Committee believes the tax on accumulated foreign 
earnings should apply without requiring an actual distribution 
of earnings, and further believes that the tax rate should take 
into account the liquidity of the accumulated earnings. 
Accordingly, the provision establishes a bifurcated rate, i.e., 
14 percent for earnings held in liquid form and 7 percent for 
accumulated foreign earnings that have been reinvested in the 
foreign subsidiary's business. Finally, the Committee has 
provided procedures for payment and collection of the 
transition tax that mitigate the burden on taxpayers.

                        EXPLANATION OF PROVISION

In general

    The provision generally requires that, for the last taxable 
year beginning before January 1, 2018, a U.S. shareholders of 
any CFC or other foreign corporation that is at least 10-
percent U.S.-owned but not controlled (other than a PFIC) must 
include in income its pro rata share of the accumulated post-
1986 deferred foreign income which was not previously taxed. A 
portion of that pro rata share of deferred foreign income is 
deductible; the amount deductible varies depending upon whether 
the deferred foreign income is held in the form of liquid or 
illiquid assets. The deduction results in a reduced rate of tax 
of 14 percent for the included deferred foreign income held in 
liquid form and 7 percent for the remaining deferred foreign 
income. A corresponding portion of the credit for foreign taxes 
is disallowed, thus limiting the credit to the taxable portion 
of the included income. The increased tax liability generally 
may be paid over an eight-year period.

Subpart F inclusion of deferred foreign income

    The mechanism for the mandatory inclusion of pre-effective 
date foreign earnings is subpart F. The provision provides that 
the subpart F income of a specified foreign corporation is 
increased for the last taxable year\944\ that begins before 
January 1, 2018, by its accumulated post-1986 deferred foreign 
income. In contrast to the participation exemption deduction 
available only to domestic corporations that are U.S. 
shareholders under subpart F, the transition ruleplies 
to all U.S. shareholders\945\ of a specified foreign 
corporation. A specified foreign corporation means (1) a CFC or 
(2) any foreign corporation in which a domestic corporation is 
a U.S. shareholder (determined without regard to the special 
attribution rules of section 958(b)(4)), other than a PFIC that 
is not a CFC.\946\ A specified foreign corporation that has 
deferred foreign income is a deferred foreign income 
corporation. Consistent with the general operation of subpart 
F, each U.S. shareholder of a specified foreign corporation 
must include in income its pro rata share of the foreign 
corporation's subpart F income attributable to its accumulated 
deferred foreign income.\947\
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    \944\Foreign corporations no longer in existence and for which 
there is no taxable year beginning or ending in 2017 are not within the 
scope of this provision.
    \545\Sec. 951(b), which defines United States shareholder as any 
U.S. person that owns 10 percent or more of the voting classes of stock 
of a foreign corporation.
    \546\Taxation of income earned by PFICs remains subject to the 
antideferral PFIC regime and dividends received from non-CFC PFICs are 
ineligible for the dividend received deduction under new section 245A.
    \547\For purposes of taking into account its subpart F income under 
this rule, a noncontrolled 10/50 corporation is treated as a CFC.
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            Accumulated post-1986 deferred foreign income
    Accumulated post-1986 deferred foreign income of a 
specified foreign corporation that is the subject to mandatory 
inclusion under this provision is the greater of the 
accumulated post-1986 deferred foreign income determined as of 
November 2, 2017 (the date of introduction of the bill) or as 
of December 31, 2017. The includible portion of the accumulated 
post-1986 deferred foreign income is all post-1986 earnings and 
profits (``E&P'') that are not (1) attributable to income that 
is effectively connected with the conduct of a trade or 
business in the United States and thus subject to current U.S. 
income tax, or (2) when distributed, excludible from the gross 
income of a U.S. shareholder as previously taxed income under 
section 959.
    Post-1986 earnings and profits are those earnings that 
accumulated in taxable years beginning after 1986, computed in 
accordance with sections 964(a) and 986, even if arising from 
periods during which the U.S. shareholder did not own stock of 
the foreign corporation. Post-1986 earnings are not reduced by 
dividends during the taxable year in which measurement occurs. 
Such earnings are increased by the amount of qualified 
deficits\948\ that arose in a taxable year beginning before 
January 1, 2018, if such deficit is also treated as a qualified 
deficit for purposes of taxable years beginning after December 
31, 2017. Finally, the post-1986 earnings and profits are 
determined by reference to the foreign corporation's total 
earnings and profits, irrespective of the foreign tax credit 
separate category limitations.\949\
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    \948\Sec. 952(c)(1)(B)(ii).
    \949\For example, assume that a foreign corporation organized after 
December 31, 1986 has $100 of accumulated earnings and profits as of 
November 1, 2017, and December 31, 2017 (determined without diminution 
by reason of dividends distributed during the taxable year and after 
any increase for qualified deficits), which consist of $120 general 
limitation earnings and profits and a $20 passive limitation deficit, 
the foreign corporation's post-1986 earnings and profits would be $100, 
even if the $20 passive limitation deficit was a hovering deficit 
described in Treas. Reg. sec. 1.367(b)-17(d)(2). Foreign income taxes 
related to the hovering deficit, however, would not be deemed paid by 
the U.S. shareholder recognizing an incremental income inclusion. The 
same would be true of a hovering deficit in the general limitation 
category.
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    The Secretary may prescribe regulations or other guidance 
regarding the treatment of accumulated post-1986 foreign 
deferred income of specified foreign corporations that have 
shareholders who are not U.S. shareholders. Such rules may also 
include rules that are appropriate to implement the intent of 
the revised section 965 and the use of the date of introduction 
as one of the measurement dates in order to establish a floor 
for determining the post-1986 deferred foreign earnings and 
profits. For example, guidance may address the extent to which 
retroactive effective dates selected in entity classification 
elections filed after introduction of the bill will be 
permitted.\950\
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    \950\See Treas, Reg, 301.7701-3(c), under which an election may 
specify an effective date up to 75 days prior to the date on which the 
election is filed.
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            Reductions of amounts included in income of U.S. 
                    shareholder of foreign corporations with deficits 
                    in E&P
    The income inclusion required of a U.S. shareholder under 
this transition rule is reduced by the portion of aggregate 
foreign earnings and profits deficit allocated to that person 
by reason of that person's interest in one or more E&P deficit 
foreign corporations. An E&P deficit foreign corporation is 
defined as any specified foreign corporation owned by the U.S. 
shareholder as of the date on which accumulated earnings and 
profits are measure for that corporation (November 2, 2017 or 
December 31, 2017, as the case may be) and which also has a 
deficit in post-1986 earnings and profits as of that date. 
Accordingly, the deficits of a foreign subsidiary that 
accumulated prior to its acquisition by the U.S. shareholder 
may be taken into account in determining the aggregate foreign 
earnings and profits deficit of a U.S. shareholder.
    The U.S. shareholder aggregates its pro rata share in the 
foreign E&P deficits of each such company and allocates such 
aggregate amount among the deferred foreign income corporations 
in which the shareholder is a U.S. shareholder. The aggregate 
foreign E&P deficit is allocable to a specified foreign 
corporation in the same ratio as the U.S. shareholder's pro 
rata share of post-1986 deferred income in that corporation 
bears to the U.S. shareholder's pro rata share of accumulated 
post-1986 deferred foreign income from all deferred income 
companies of such shareholder.
    To illustrate the ratio, assume that Z, a domestic 
corporation, is a U.S. shareholder with respect to each of four 
specified foreign corporations, two of which are E&P deficit 
foreign corporations. Assume further the foreign companies have 
the following accumulated post-1986 deferred foreign income or 
foreign E&P deficits as of November 2, 2017 and December 31, 
2017:

Example

--------------------------------------------------------------------------------------------------------------------------------------------------------
                    Specified Foreign Corp.                           Percentage Owned        Post-1986 profit/deficit USD         Pro Rata Share
--------------------------------------------------------------------------------------------------------------------------------------------------------
A.............................................................                           60%                      ($1,000)                        ($600)
B.............................................................                           10%                        ($200)                         ($20)
C.............................................................                        $2,000                        $1,400                           70%
D.............................................................                          100%                        $1,000                        $1,000
--------------------------------------------------------------------------------------------------------------------------------------------------------

    The aggregate foreign E&P deficit of the U.S. shareholder 
is ($620), and the aggregate share of accumulated post-1986 
deferred foreign income is $2,400. Thus, the portion of the 
aggregate foreign E&P deficit allocable to Corporation C is 
($362), that is, ($620)  1400/2400. The remainder of 
the aggregate foreign E&P deficit is allocable to Corporation 
D. The U.S. shareholder has a net surplus of E&P in the amount 
of $1,780.
    The provision also permits intragroup netting among U.S. 
shareholders in an affiliated group in which there is at least 
one U.S. shareholder with a net E&P surplus and another with a 
net E&P deficit. The net E&P surplus shareholder may reduce its 
net surplus by the shareholder's applicable share of aggregate 
unused E&P deficit, based on the group's ownership percentage 
of the members. For example, assume that a U.S. corporation has 
two domestic subsidiaries, X and Y, each of which it owns 100 
percent and 80 percent, respectively. If X has a $1,000 net E&P 
surplus, and Y has $1,000 net E&P deficit, X is an E&P net 
surplus shareholder, and Y is an E&P net deficit shareholder. 
The net E&P surplus of X is reduced by the net E&P deficit of Y 
to the extent of the group's ownership percentage in Y, which 
is 80-percent. The remaining net E&P deficit of Y is unused. If 
the U.S. shareholder Z is also a wholly owned subsidiary of the 
same U.S. parent as X and Y, the group ownership percentage of 
Y is unchanged, and the surpluses of X and Z are reduced 
ratably by 800 of the net E&P deficit of Y.
            Participation exemption applied to accumulated post-1986 
                    deferred foreign income
    A U.S. shareholder of a specified foreign corporation is 
allowed a deduction of a portion of the increased subpart F 
income attributable to the inclusion of pre-effective date 
deferred foreign income. The amount of the deduction is the sum 
of the 14-percent rate equivalent percentage of the inclusion 
amount that is the shareholder's aggregate cash position and 
the 7 percent rate equivalent percentage of the portion of the 
inclusion that exceeds the aggregate cash position. By stating 
the permitted deduction in the form of a tax rate equivalent 
percentage, the provision ensures that all pre-effective date 
accumulated post-1986 deferred foreign income is subject to 
either a 7-percent or 14-percent rate of tax, depending on the 
underlying assets as of the measurement date, without regard to 
the corporate tax rate that may be in effect at the time of the 
inclusion. For example, corporate taxpayers that use a fiscal 
year as the taxable year may report the increased subpart F 
income in a taxable year for which a reduced corporate tax rate 
would otherwise apply (on a pro-rated basis under section 15), 
but the allowable deduction would be reduced such that the rate 
of U.S. tax on the income inclusion would be 7 or 14 percent.
            Aggregate cash position
    The aggregate cash position of a U.S. shareholder is the 
average of the shareholder's pro rata share of the cash 
position of each specified foreign corporation with respect to 
which that shareholder is a U.S. shareholder on each of three 
dates: date of introduction (November 2, 2017) and the last day 
of the two most recent taxable years ending before the date of 
introduction. Appropriate adjustments are made if a specified 
foreign corporation is not in existence on one or more of those 
dates. By using a three-year average as the aggregate cash 
position for a U.S. shareholders, the effect of unusual or 
anomalous transactions is muted.
    For purposes of this computation, the cash position of 
certain non-corporate entities that would be treated as 
specified foreign corporations if they were foreign 
corporations is also included. The cash position of an entity 
consists of all cash, net accounts receivables, and the fair 
market value of similarly liquid assets, specifically including 
personal property that is actively traded on an established 
financial market, government securities, certificates of 
deposit, commercial paper, foreign currency, and short-term 
obligations. In addition, the Secretary may identify other 
assets that are economically equivalent to the enumerated 
assets that are treated as cash.
    Certain reductions from the aggregate cash position are 
specified in the provision. First, rules are provided to avoid 
the double counting of cash positions of specified foreign 
corporations in an affiliated group, while ensuring that all of 
the cash position is taken into account. Second, regardless of 
the form in which a specified foreign corporation holds 
earnings, to the extent the earnings constitute blocked income 
that could not be distributed by the corporation due to local 
jurisdiction restrictions,\951\ such earnings are not included 
in the cash position of that specified foreign corporation. The 
blocked income remains within the scope of the accumulated 
post-1986 deferred foreign income that is subject to inclusion 
under this provision.
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    \951\ 1ASec. 964(b) and regulations thereunder.
---------------------------------------------------------------------------
    In addition to the authority to identify other assets that 
are subject to the cash position determination by regulation, 
the provision also authorizes the Secretary to disregard 
transactions that are determined to have the principal purpose 
of reducing the aggregate foreign cash position.

Foreign tax credits reduced

    A portion of foreign income taxes deemed paid or accrued 
with respect to the increased subpart F income attributable to 
the inclusion of pre-effective date deferred foreign income is 
not creditable against the Federal income tax attributable to 
the inclusion, nor are they deductible. The disallowed portion 
of foreign tax credits is 60 percent of foreign taxes paid 
attributable to the portion of the inclusion attributable to 
the aggregate cash position plus 80 percent of foreign taxes 
paid attributable to the remaining portion of the section 965 
inclusion.\952\
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    \952\Other foreign tax credits used by a taxpayer against tax 
liability resulting from the deemed inclusion apply in full.
---------------------------------------------------------------------------
    The provision coordinates the disallowance of foreign tax 
credits described above with the requirement\953\ that a 
domestic corporate shareholder is deemed to receive a dividend 
in an amount equal to foreign taxes it is deemed to have paid 
and for which it claimed a credit. Under the coordination rule, 
the foreign taxes treated as paid or accrued by a domestic 
corporation as a result of the inclusion are limited to those 
taxes in proportion to the taxable portion of the section 965 
inclusion. The gross-up amount equals the total foreign income 
taxes multiplied by a fraction, the numerator of which is 
taxable portion of the increased subpart F income under this 
provision and the denominator of which is the total increase in 
subpart F income under this provision.
---------------------------------------------------------------------------
    \953\ 1ASec. 78.
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    The amount of deferred foreign income required to be 
included in subpart F income under this provision is 
disregarded for purposes of determining the amount of income 
from foreign sources and the combined foreign oil and gas 
income that a U.S. shareholder has for purposes of the 
recapture rules applicable to overall foreign losses, separate 
limitation losses, and foreign oil and gas losses under 
sections 904(f)(1) and 907(c)(4).
    The foreign income taxes deemed paid with respect to the 
inclusion required by the provision and for which no credit is 
allowed in the year of inclusion by reason of section 904 
limitations (e.g., because part or all of the inclusion 
required by the provision is offset by a net operating loss 
deduction) are eligible for a special 20 year carry-forward 
period, rather than the otherwise applicable 10 year carry-
forward period.

Installment payments

    A U.S. shareholder may elect to pay the net tax liability 
resulting from the mandatory inclusion of pre-effective-date 
undistributed CFC earnings in eight equal installments. The net 
tax liability that may be paid in installments is the excess of 
the U.S. shareholder's net income tax for the taxable year in 
which the pre-effective-date undistributed CFC earnings are 
included in income over the taxpayer's net income tax for that 
year determined without regard to the inclusion. Net income tax 
means net income tax as defined for purposes of the general 
business credit, but reduced by the amount of that credit.
    An election to pay tax in installments must be made by the 
due date for the tax return for the taxable year in which the 
pre-effective-date undistributed CFC earnings are included in 
income. The Treasury Secretary has authority to prescribe the 
manner of making the election. The first installment must be 
paid on the due date (determined without regard to extensions) 
for the tax return for the taxable year of the income 
inclusion. Succeeding installments must be paid annually no 
later than the due dates (without extensions) for the income 
tax return of each succeeding year. If a deficiency is later 
determined with respect to the net tax liability, the 
additional tax due may be prorated among all installment 
payments in most circumstances. The portions of the deficiency 
prorated to an installment that was due before the deficiency 
was assessed must be paid upon notice and demand. The portion 
prorated to any remaining installment is payable with the 
timely payment of that installment payment, unless the 
deficiency is attributable to negligence, intentional disregard 
of rules or regulations, or fraud with intent to evade tax, in 
which case the entire deficiency is payable upon notice and 
demand.
    The timely payment of an installment does not incur 
interest. If a deficiency is determined that is attributable to 
an understatement of the net tax liability due under this 
provision, the deficiency is payable with underpayment interest 
for the period beginning on the date on which the net tax 
liability would have been due, without regard to an election to 
pay in installments, and ending with the payment of the 
deficiency. Furthermore, any amount of deficiency prorated to a 
remaining installment also bears interest on the deficiency, 
but not on the original installment amount.
    The provision also includes an acceleration rule. If (1) 
there is a failure to pay timely any required installment, (2) 
there is a liquidation or sale of substantially all of the U.S. 
shareholder's assets (including in a bankruptcy case), (3) the 
U.S. shareholder ceases business, or (4) another similar 
circumstance arises, the unpaid portion of all remaining 
installments is due on the date of the event (or, in a title 11 
or similar case, the day before the petition is filed).

Special rule for S corporations

    A special rule permits deferral of the transition net tax 
liability for shareholders of a U.S. shareholder that is a 
flow-through entity known as an S corporation.\954\ The S 
corporation is required to report on its income tax return the 
amount includible in gross income by reason of this provision, 
as well as the amount of deduction that would be allowable, and 
provide a copy of such information to its shareholders. Any 
shareholder of the S corporation may elect to defer his portion 
of the net tax liability at transition to the participation 
exemption system until the shareholder's taxable year in which 
a triggering event occurs. The election to defer the tax is due 
not later than the due date for the return of the S corporation 
for its last taxable year that begins before January 1, 2018.
---------------------------------------------------------------------------
    \954\Section 1361 defines an S corporation as a domestic small 
business corporation that has an election in effect for status as an S 
corporation, with fewer than 100 shareholders, none of whom are 
nonresident aliens, and all of whom are individuals, estates, trusts or 
certain exempt organizations.
---------------------------------------------------------------------------
    Three types of events may trigger an end to deferral of the 
net tax liability. The first type of triggering event is a 
change in the status of the corporation as an S corporation. 
The second category includes liquidation, sale of substantially 
all corporate assets, termination of the company or end of 
business, or similar event, including reorganization in 
bankruptcy. The third type of triggering event is a transfer of 
shares of stock in the S corporation by the electing taxpayer, 
whether by sale, death or otherwise, unless the transferee of 
the stock agrees with the Secretary to be liable for net tax 
liability in the same manner as the transferor. Partial 
transfers trigger the end of deferral only with respect to the 
portion of tax properly allocable to the portion of stock sold.
    If a shareholder of an S corporation has elected deferral 
under the special rule for S corporation shareholders and a 
triggering event occurs, the S corporation and the electing 
shareholder are jointly and severally liable for any net tax 
liability and related interest or penalties. The period within 
which the IRS may collect such liability does not begin before 
the date of an event that triggers the end of the deferral. If 
an election to defer payment of the net tax liability is in 
effect for a shareholder, that shareholder must report the 
amount of the deferred net tax liability on each income tax 
return due during the period that the election is in effect. 
Failure to include that information with each income tax return 
will result in a penalty equal to five-percent of the amount 
that should have been reported.
    After a triggering event occurs, a shareholder is the S 
corporation may elect to pay the net tax liability in eight 
equal installments, subject to rules similar to those generally 
applicable absent deferral. Whether a shareholder may elect to 
pay in installments depends upon the type of event that 
triggered the end of deferral. If the triggering event is a 
liquidation, sale of substantially all corporate assets, 
termination of the company or end of business, or similar 
event, the installment payment election is not available. 
Instead, the entire net tax liability is due upon notice and 
demand. The installment election is due with the timely return 
for the year in which the triggering event occurs. The first 
installment payment is required by the due date of the same 
return, determined without regard to extensions of time to 
file.

Future considerations

    The Committee is aware that certain aspects of this section 
require additional attention. For example, the Committee 
recognizes that the definition of post-1986 earnings and 
profits could operate to count the same earnings twice where a 
specified foreign corporation makes a distribution to another 
specified foreign corporation on or after November 2, 2017, but 
prior to the end of the taxable year to which section 965 
applies. The Committee intends to correct this inappropriate 
result. Additionally, the Committee is aware that the 
definition of post-1986 earnings and profits in this section 
includes a provision that increases post-1986 earnings and 
profits by the amount of any qualified deficit, within the 
meaning of section 952 of the Code. The Committee intends to 
revise this provision to allow qualified deficits to reduce 
post-1986 earnings and profits for purposes of section 965 and 
to ensure that qualified deficits taken into account under 
section 965 cannot be used to reduce future subpart F income. 
The Committee also understands that the existing net operating 
loss (NOL), overall domestic loss (ODL), and foreign tax credit 
carry-forward rules may interact with income inclusions arising 
from section 965 in ways that may not be appropriate and that 
require additional consideration.

                             EFFECTIVE DATE

    The provision is effective for the last taxable year of a 
foreign corporation that begins before January 1, 2018, and 
with respect to U.S. shareholders, for the taxable years in 
which or with which such taxable years of the foreign 
corporations end, and subsequent years.

         B. Modifications Related to Foreign Tax Credit System

1. Repeal of section 902 indirect foreign tax credits; determination of 
  section 960 credit on current year basis (sec. 4101 of the bill and 
                   secs. 78, 902 and 960 of the Code)

                           REASONS FOR CHANGE

    The Committee believes that a section 902 credit is not 
appropriate in a participation exemption system under which 100 
percent of dividends received by certain domestic corporate 
shareholders of specified foreign corporations are exempt from 
U.S. taxation. To continue to offer section 902 credits for 
taxes deemed paid would result in a double benefit to the U.S. 
shareholder, by first allowing a dividend to be recognized in 
income with no U.S. tax liability associated therewith, and by 
further reducing existing U.S. tax liability with a credit for 
taxes paid on foreign source income. Rather, offering deemed 
paid foreign tax credits on a current year basis solely under 
section 960 reflects what the Committee believes to be a 
simpler and more appropriate application of the foreign tax 
credit regime in a 100 percent participation exemption system.

                        EXPLANATION OF PROVISION

    The provision repeals the deemed-paid credit with respect 
to dividends received by a domestic corporation that owns 10 
percent or more of the voting stock of a foreign corporation.
    A deemed-paid credit is provided with respect to any income 
inclusion under subpart F. The deemed-paid credit is limited to 
the amount of foreign income taxes properly attributable to the 
subpart F inclusion. Foreign income taxes under the provision 
include income, war profits, or excess profits taxes paid or 
accrued by the CFC to any foreign country or possession of the 
United States. The provision eliminates the need for computing 
and tracking cumulative tax pools.
    Additionally, the provision provides rules applicable to 
foreign taxes attributable to distributions from previously 
taxed earnings and profits, including distributions made 
through tiered-CFCs.
    The Secretary is granted authority under the provision to 
provide regulations and other guidance as may be necessary and 
appropriate to carry out the purposes of this provision. It is 
anticipated that the Secretary would provide regulations with 
rules for allocating taxes similar to rules in place for 
purposes of determining the allocation of taxes to specific 
foreign tax credit baskets.\955\ Under such rules, taxes are 
not attributable to an item of subpart F income if the base 
upon which the tax was imposed does not include the item of 
subpart F income. For example, if foreign law exempts a certain 
type of income from its tax base, no deemed-paid credit results 
from the inclusion of such income as subpart F. Tax imposed on 
income that is not included in subpart F income, is not 
considered attributable to subpart F income.
---------------------------------------------------------------------------
    \955\See Treas. Reg. sec. 1.904-6(a).
---------------------------------------------------------------------------
    In addition to the rules described in this section, the 
provision makes several conforming amendments to various other 
sections of the Code reflecting the repeal of section 902 and 
the modification of section 960. These conforming amendments 
include amending the section 78 gross-up provision to apply 
solely to taxes deemed paid under the amended section 960.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2017.

2. Source of income from sales of inventory determined solely on basis 
  of production activities (sec. 4102 of the bill and sec. 863 of the 
                                 Code)

                           REASONS FOR CHANGE

    The Committee acknowledges that current administrative 
guidance, which sources sales income, in part, based on the 
place of destination rather than the place of production, may 
be appropriate in the context of our current tax system. 
However, the Committee believes this approach is not 
appropriate under a participation exemption system with lower 
tax rates. Rather than providing targeted relief to particular 
kinds of income, the Committee is instead reducing tax rates 
for all taxpayers, while also modernizing the U.S. system for 
taxing cross-border income. Therefore, the Committee believes 
changing present law in this area will more accurately measure 
foreign-source taxable income as part of providing a flatter, 
fairer, and simpler tax system.

                        EXPLANATION OF PROVISION

    Under this provision, gains, profits, and income from the 
sale or exchange of inventory property produced partly in, and 
partly outside, the United States is allocated and apportioned 
on the basis of the location of production with respect to the 
property. For example, income derived from the sale of 
inventory property to a foreign jurisdiction is sourced wholly 
within the United States if the property was produced entirely 
in the United States, even if title passage occurred elsewhere. 
Likewise, income derived from inventory property sold in the 
United States, but produced entirely in another country, is 
sourced in that country even if title passage occurs in the 
United States. If the inventory property is produced partly in, 
and partly outside, the United States, however, the income 
derived from its sale is sourced partly in the United States.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2017.

                C. Modifications of Subpart F Provisions

   1. Repeal of inclusion based on withdrawal of previously excluded 
 subpart F income from qualified investment (sec. 4201 of the bill and 
                         sec. 955 of the Code)

                           REASONS FOR CHANGE

    In the transition to a participation exemption system, 
foreign earned income that is not subject to immediate 
inclusion in the U.S. shareholder's gross income under the 
subpart F regime will generally be exempt from U.S. taxation 
upon repatriation through a dividend paid from a specified 
foreign corporation to its U.S. shareholder. Foreign base 
company shipping income was repealed as a type of foreign base 
company income (and therefore, subpart F income) in 2004.\956\ 
The Committee believes that since a CFC's foreign base shipping 
company income is no longer subject to immediate inclusion in 
its U.S. shareholder's gross income, a corresponding decrease 
in the CFC's investment in that otherwise exempt income should 
not trigger an immediate income inclusion to its U.S. 
shareholder.
---------------------------------------------------------------------------
    \956\American Jobs Creation Act, Pub. L 108-357, 118 Stat. 1511 
(Oct. 22, 2004).
---------------------------------------------------------------------------

                        EXPLANATION OF PROVISION

    The provision repeals section 955. As a result, a U.S. 
shareholder in a CFC that invested its previously excluded 
subpart F income in qualified foreign base company shipping 
operations is no longer required to include in income a pro 
rata share of the previously excluded subpart F income when the 
CFC decreases such investments.

                             EFFECTIVE DATE

    The provision is effective for taxable years of foreign 
corporations beginning after December 31, 2017, and to taxable 
years of U.S. shareholders within which or with which such 
taxable years of foreign corporations end.

 2. Repeal of treatment of foreign base company oil related income as 
  subpart F income (sec. 4202 of the bill and sec. 954(a) of the Code)

                           REASONS FOR CHANGE

    The move to a participation exemption system and the repeal 
of section 902 are expected to result in the loss of a 
significant amount of foreign tax credits that are attributable 
to foreign oil and gas operations and that are available to 
offset U.S. tax liability imposed on current inclusions of 
foreign base company oil related income. Consequently, the 
Committee is concerned that moving to a participation exemption 
system could undermine the intended application of those rules 
and put U.S. oil and gas companies at a competitive 
disadvantage relative to their foreign peers. Furthermore, the 
Committee believes the introduction of additional anti-base 
erosion rules under the bill obviates the need for separate 
anti-base erosion rules with respect to foreign oil and gas 
operations. Therefore, the Committee believes the foreign base 
company oil related income rules are not necessary in the 
context of the international tax reforms made in the bill.

                        EXPLANATION OF PROVISION

    The provision eliminates foreign base company oil related 
income as a category of foreign base company income.

                             EFFECTIVE DATE

    The provision is effective for taxable years of foreign 
corporations beginning after December 31, 2017, and for taxable 
years of U.S. shareholders in which or with which such taxable 
years of foreign corporations end.

   3. Inflation adjustment of de minimis exception for foreign base 
 company income (sec. 4203 of the bill and sec. 954(b)(3) of the Code)

                           REASON FOR CHANGE

    The de minimis exception contained in current section 
954(b)(3)(A) has not been adjusted for inflation since its 
enactment in 1986. The Committee believes that indexing the de 
minimis amount to inflation is warranted so that it serves as a 
more accurate reflection of the changing economic environment.

                        EXPLANATION OF PROVISION

    The provision amends the de minimis exception of present 
law, which permits a CFC to exclude its foreign base company 
income if the sum of its total foreign base company income and 
gross insurance income is the lesser of 5 percent of its gross 
income or $1,000,000. In the case of any taxable year beginning 
after 2017, the provision indexes for inflation the $1,000,000 
de minimis amount for foreign base company income, with all 
increases rounded to the nearest multiple of $50,000.

                             EFFECTIVE DATE

    The provision is effective for taxable years of foreign 
corporations beginning after December 31, 2017, and for taxable 
years of U.S. shareholders in which or with which such taxable 
years of foreign corporations end.

  4. Look-thru rule for related controlled foreign corporations made 
    permanent (sec. 4204 of the bill and sec. 954(c)(6) of the Code)

                           REASONS FOR CHANGE

    As was the case when section 954(c)(6) was originally 
enacted, today most countries allow their companies to redeploy 
active foreign earnings with no additional tax burden. The 
Committee believes that this provision will make U.S. companies 
and U.S. workers more competitive with respect to such 
countries. By allowing U.S. companies to reinvest their active 
foreign earnings where they are most needed without incurring 
additional tax that companies based in many other countries 
never incur, the Committee believes that the provision will 
continue to enable U.S. companies to make more sales overseas 
and thus produce more goods in the United States. These 
benefits should be enhanced by making this provision permanent, 
thereby eliminating uncertainty as to its future application.

                        EXPLANATION OF PROVISION

    The provision makes the exclusion from foreign personal 
holding company income for certain dividends, interest 
(including factoring income that is treated as equivalent to 
interest under section 954(c)(1)(E)), rents, and royalties 
received or accrued by one CFC from a related CFC permanent.

                             EFFECTIVE DATE

    The provision is effective for taxable years of foreign 
corporations beginning after December 31, 2019, and for taxable 
years of U.S. shareholders in which or with which such taxable 
years of foreign corporations end.

5. Modification of stock attribution rules for determining status as a 
 controlled foreign corporation (sec. 4205 of the bill secs. 318, 958 
                         and 6038 of the Code).

                           REASONS FOR CHANGE

    The Committee is aware of certain transactions used to 
avoid subpart F provisions. One such transaction involves 
effectuating ``de-control'' of a foreign subsidiary, by taking 
advantage of the section 958(b)(4) rule that effectively turns 
off the constructive stock ownership rules of 318(a)(3) when to 
do otherwise would result in a U.S. person being treated as 
owning stock owned by a foreign person. Accordingly, such a 
transaction converts former CFCs to non-CFCs, despite 
continuous ownership by U.S. shareholders. The Committee 
believes this provision is necessary to render de-controlling 
transactions ineffective as a means of avoiding the subpart F 
provisions.

                        EXPLANATION OF PROVISION

    The provision amends the ownership attribution rules of 
section 958(b) so that certain stock of a foreign corporation 
owned by a foreign person is attributed to a related U.S. 
person for purposes of determining whether the related U.S. 
person is a U.S. shareholder of the foreign corporation and, 
therefore, whether the foreign corporation is a CFC. In other 
words, the provision provides ``downward attribution'' from a 
foreign person to a related U.S. person in circumstances in 
which present law does not so provide. The pro rata share of a 
CFC's subpart F income that a U.S. shareholder is required to 
include in gross income, however, continues to be determined 
based on direct or indirect ownership of the CFC, without 
application of the new downward attribution rule. The Secretary 
is granted authority to alleviate any unnecessary reporting 
burdens that may be triggered by the provision.

                             EFFECTIVE DATE

    The provision is effective for taxable years of foreign 
corporations beginning after December 31, 2017, and for taxable 
years of U.S. shareholders in which or with which such taxable 
years of foreign corporations end.

 6. Elimination of requirement that corporation must be controlled for 
 30 days before subpart F inclusions apply (sec. 4206 of the bill and 
                         951(a)(1) of the Code)

                           REASONS FOR CHANGE

    The Committee believes the original purpose for the 30-day 
rule to facilitate tax administration--is no longer necessary 
in light of the availability of technology to track owner and 
corporate attributes on a daily basis. At the same time, the 
Committee believes the 30-day rule under present law provides 
inappropriate opportunities for taxpayers to structure 
transactions to avoid U.S. tax.

                        EXPLANATION OF PROVISION

    The provision eliminates the requirement that a corporation 
must be controlled for an uninterrupted period of 30 days 
before subpart F inclusions apply.

                             EFFECTIVE DATE

    The provision is effective for taxable years of foreign 
corporations beginning after December 31, 2017, and for taxable 
years of U.S. shareholders with or within which such taxable 
years of foreign corporations end.

                     D. Prevention of Base Erosion

 1. Current year inclusion by United States shareholders with foreign 
 high returns (sec. 4301 of the bill and secs. 78 and 960 and new sec. 
                           951A of the Code)

                           REASONS FOR CHANGE

    Under present law, multinational enterprises have 
flexibility to attribute profits to low-tax jurisdictions 
because each enterprise can structure transactions between 
affiliates in a manner that minimizes overall tax liability. 
The arm's length standard, which the Committee believes 
continues to be the best standard for determining the 
appropriate pricing of a transaction between affiliates, 
provides that profits are attributable based on the functions 
performed, the assets employed, and the risks assumed by the 
relevant parties.\957\ To the extent that these functions, 
assets, and risks are mobile, taxpayers may seek to situate 
them in, or relocate them to, low-tax jurisdictions.
---------------------------------------------------------------------------
    \957\See generally Treas. Reg. sec. 1.482-1 et seq.
---------------------------------------------------------------------------
    Changing the U.S. international tax system from a worldwide 
system of taxation to a participation exemption system of 
taxation exacerbates the incentive under present law to shift 
profits abroad. Specifically, under present law, most foreign 
profits earned through a subsidiary are not subject to current 
taxation but will eventually be subject to U.S. taxation upon 
repatriation. Under the participation exemption system provided 
for in the bill, however, foreign profits earned through a 
subsidiary generally will never be subject to U.S. taxation. 
Accordingly, new measures to protect against the erosion of the 
U.S. tax base are warranted.
    One common form of erosion is the concentration of a 
multinational enterprise's high-value functions, assets, and 
risks abroad in low-tax jurisdictions in order to generate 
profits offshore. The internal supply chain giving rise to 
these profits may or may not involve U.S. activities, although 
the existence of a U.S. shareholder may indicate some U.S. 
connection (e.g., U.S. research and development, U.S.-sourced 
capital, etc.). The concentration of these functions, assets, 
and risks may occur through the relocation of employees, the 
acquisition or development of intellectual property offshore, 
or the contractual allocation of risk within the enterprise. 
Although present law addresses transfers of property from a 
U.S. shareholder to its foreign subsidiary\958\ and subjects 
certain forms of passive or highly mobile income to current 
U.S. taxation,\959\ present law does not adequately address the 
actions described in the preceding sentence.\960\
---------------------------------------------------------------------------
    \958\See, e.g., secs. 367(d) and 482.
    \959\See secs. 951-964; see also sec. 367(a)(3)(B).
    \960\For example, the Tax Court has concluded a foreign 
subsidiary's use of its U.S. parent's business opportunities or 
employees does not necessarily constitute a compensable transfer of 
property. See Hospital Corp. v. Commissioner, 81 T.C. 520 (1983), 
nonacq. 1987-2 C.B. 1; Veritas Software Corp. v. Commissioner, 133 T.C. 
297 (2009), nonacq. AOD-2010-05. Additionally, the Tax Court has 
concluded that a foreign subsidiary's use of its own resources, even if 
originating from or connected with its U.S. parent's resources, does 
not necessarily result in taxable income of the U.S. parent. See, e.g., 
Amazon.com, Inc. v. Commissioner, 148 T.C. No. 8 (2017); Eaton Corp. v. 
Commissioner, T.C. Memo. 2017-147; Medtronic Inc. v. Commissioner, T.C. 
Memo. 2016-112. The Committee does not believe the U.S. tax base would 
be adequately protected from erosion under a participation exemption 
system if these opportunities for concentrating high returns abroad 
remained available to taxpayers.
---------------------------------------------------------------------------
    The Committee recognizes that multinational companies 
concentrate valuable functions, assets, and risks for reasons 
other than tax savings. For example, centralizing decision-
making, quality control, and brand management into regional 
centers of excellence can provide significant value to an 
enterprise. This may result in the concentration of complex 
functions, valuable intellectual property, and entrepreneurial 
risk in a particular principal affiliate in a particular 
country, entirely independent of tax considerations. This also 
results, however, in significant profits being attributable to 
a single entity, which may result in significant tax savings if 
that entity is subject to a low effective tax rate. The 
Committee believes that the ability to obtain this result 
provides significant financial incentive for companies to 
structure in this manner in order to concentrate profits in 
low-tax jurisdictions, ultimately leading to the migration of 
valuable jobs and property from the United States.
    Therefore, the Committee has studied various mechanisms for 
taxing high returns concentrated in U.S. shareholders' foreign 
subsidiaries. Other proposals, including those released by the 
Committee, have considered approaches based on specific 
transfers of intellectual property, foreign earnings 
attributable to all foreign activities, and foreign earnings 
attributable only to intellectual property.\961\ These 
proposals have fallen short conceptually and administratively, 
leading the Committee to focus on foreign high returns.\962\ 
Specifically, the Committee believes that foreign high returns 
attributable to mobile functions, assets, and risks are best 
measured as the excess of foreign earnings over a normal 
equity-holder's return on assets with limited mobility--i.e., 
depreciable tangible property.\963\ In making this measurement, 
the Committee recognizes the integrated nature of modern supply 
chains and believes it is more appropriate to look at a 
multinational enterprise's foreign operations on an aggregate 
basis, rather than by entity or by country.
---------------------------------------------------------------------------
    \961\See, e.g., Ways and Means Discussion Draft, 112th Cong, 1st 
Sess. (October 26, 2011), available at https://waysandmeans.house.gov/
UploadedFiles/Discussion_Draft.pdf.
    \962\See the Tax Reform Act of 2014, H.R. 1 (113th Cong., 2nd 
Sess., February 26, 2014). The Committee has also considered and 
continues to consider moving to a destination-based system of taxation, 
although the bill does not do so.
    \963\The Committee also believes that looking to a normal equity-
holder's return--i.e., by excluding creditors' returns paid through 
interest--will prevent distortions that would otherwise arise if 
taxpayers could obtain a tax advantage by acquiring depreciable 
tangible property with debt that is not expected to produce a return in 
excess of the financing costs.
---------------------------------------------------------------------------
    Notwithstanding these considerations, certain kinds of 
income are not appropriately subject to scrutiny under 
additional anti-base erosion rules. Subpart F income and ECI 
are already subject to full U.S. taxation and need not be 
subject to this provision's anti-base erosion rules. Income 
from the redeployment of active foreign earnings should not be 
subject to additional U.S. tax for the same reasons that 
section 954(c)(6) is made permanent under section 4204 of the 
bill--i.e., to make U.S. companies and U.S. workers more 
competitive globally. Income subject to the active financing 
exception rules of sections 954(c)(2)(C), (h), and (i) have 
already passed scrutiny under existing anti-base erosion rules 
based on local presence and are unlikely to be the mobile 
income with which the Committee is concerned. And profits from 
the disposition of market-priced commodities generally do not 
relate to functions, assets, or risks easily relocated within a 
multinational group. Accordingly, these categories of income 
generally can be excluded in computing foreign high returns.
    As previously mentioned, the Committee does not believe the 
concentration of high returns abroad by itself is a sufficient 
indicium of erosion of the U.S. tax base. Where those returns 
are subject to a low effective tax rate that achieves 
significant tax savings, however, the Committee believes base 
erosion may have been a consideration and that U.S. taxation is 
appropriate.
    Conditioning the application of an anti-base erosion rule 
on low effective tax rates can be accomplished through a low-
tax test or a reduced U.S. tax rate with a credit. Under the 
former approach, foreign earnings would be subject to U.S. tax 
only if the effective foreign tax rate is below a certain 
threshold, leading to a cliff effect and the potential for 
significant double taxation if credits are not allowed. Under 
the latter approach, U.S. tax is imposed at a reduced rate with 
a credit allowed for foreign taxes paid, which is more complex 
and encourages foreign jurisdictions to raise taxes to ``soak 
up'' the credit, but which also applies more smoothly to 
companies near the effective tax rate threshold. The Committee 
believes the latter approach is more favorable both to the 
competitiveness of U.S. workers and companies and the U.S. 
fisc. Furthermore, the Committee believes that relying on the 
framework of existing law can mitigate complexity and that 
partially disallowing foreign tax credits, combined with 
measuring foreign high return income and foreign taxes on such 
income on a global basis, will protect against foreign soak-up 
taxes. Determining the appropriate threshold for a low 
effective tax rate requires a balance between protecting the 
U.S. tax base and promoting the global competitiveness of U.S. 
workers and companies.

                        EXPLANATION OF PROVISION

In general

    Under the provision, a U.S. shareholder of any CFC must 
include in gross income for a taxable year an amount equal to 
50 percent of its foreign high return amount (``FHRA'') in a 
manner generally similar to inclusions of subpart F income. 
FHRA means, with respect to any U.S. shareholder for the 
shareholder's taxable year, the shareholder's net CFC tested 
income less an amount equal to the excess (if any) of (1) the 
applicable percentage of the aggregate of the shareholder's pro 
rata share of the qualified business asset investment 
(``QBAI'') of each CFC with respect to which it is a U.S. 
shareholder over (2) the amount of interest expense taken into 
account in determining the shareholder's net CFC tested income. 
The applicable percentage is the Federal short-term rate 
(determined under section 1274(d) for the month in which such 
shareholder's taxable year ends) plus seven percentage points.
    The formula for FHRA, which is calculated at the U.S. 
shareholder level, is generally:\964\
---------------------------------------------------------------------------
    \964\If the amount of interest expense exceeds [(7% + AFR) x QBAI], 
then the quantity in brackets in the formula equals zero in the 
determination of FHRA.

          FHRA = Net CFC Tested Income - [(7% + AFR) x QBAI - 
---------------------------------------------------------------------------
        Interest Expense]

    where AFR is the short-term Federal rate.

Net CFC tested income

    Net CFC tested income means, with respect to any U.S. 
shareholder, the excess of the aggregate of its pro rata share 
of the tested income of each CFC with respect to which it is a 
U.S. shareholder over the aggregate of its pro rata share of 
the tested loss of each CFC with respect to which it is a U.S. 
shareholder. Pro rata shares are determined under the rules of 
section 951(a)(2).
    The formula for net CFC tested income, which is calculated 
at the U.S. shareholder level, is:

          Net CFC Tested Income = Sum of CFC Tested Income - 
        Sum of CFC Tested Loss

    The tested income of a CFC means the excess (if any) of the 
gross income of the corporation determined without regard to 
amounts excluded from tested income, over deductions (including 
taxes) properly allocable to such gross income. The amounts 
excluded from test income are: (1) the corporation's ECI if the 
income is subject to tax;\965\ (2) any gross income taken into 
account in determining the corporation's subpart F income; (3) 
any amount, except as otherwise provided by the Secretary, that 
qualifies for CFC look-through treatment, but only to the 
extent that any deduction allowable for the payment or accrual 
of such amount does not result in a reduction of the FHRA of 
any U.S. shareholder (determined without regard to such 
amount); (4) any gross income excluded as foreign personal 
holding company income by reason of the exceptions for active 
financing income and active insurance income, as well as the 
exception for dealers under section 954(c)(2)(C); (5) any gross 
income excluded from foreign base company income or insurance 
income by reason of the high-tax exception under section 
954(b)(4); (6) any dividend received from a related person (as 
defined in section 954(d)(3)); and (7) any commodities gross 
income.
---------------------------------------------------------------------------
    \965\ECI includes income that is treated as ECI under a section 
882(g) election. As a result, income that a CFC derives from certain 
sales to the U.S. market is excluded from the FHRA calculation and is 
subject to new section 4491, to the extent that the sales are made to a 
related party.
---------------------------------------------------------------------------
    Commodities gross income means (1) gross income of a 
corporation (or of a partnership in which the corporation is a 
partner) from the disposition of commodities that it has 
produced or extracted and that are commodities described in 
sections 475(e)(2)(A) and 475(e)(2)(D), and (2) the gross 
income of the corporation from the disposition of property that 
gives rise to income described in (1). Commodities income is 
intended to include any foreign oil and gas extraction 
income\966\ and any foreign oil related income.\967\
---------------------------------------------------------------------------
    \966\ Sec. 907(c)(1).
    \967\ Sec. 907(c)(2).
---------------------------------------------------------------------------
    The tested loss of a CFC means the excess (if any) of the 
deductions (including taxes) properly allocable to the 
corporation's gross income determined without regard to the 
tested income exceptions over the amount of such gross income.

Qualified business asset investment

    QBAI means, with respect to any CFC for a taxable year, the 
aggregate of its adjusted bases (determined as of the close of 
the taxable year and after any adjustments with respect to such 
taxable year) in specified tangible property used in its trade 
or business and with respect to which a deduction is allowable 
under section 168. Specified tangible property means any 
tangible property to the extent such property is used in the 
production of tested income or tested loss. The adjusted basis 
in any property is determined without regard to any provision 
of law that is enacted after the date of enactment of this 
provision, unless such law specifically and directly amends 
this provision's definition.
    If a CFC holds an interest in a partnership as of the close 
of the corporation's taxable year, the corporation takes into 
account its distributive share of the aggregate of the 
partnership's adjusted bases (determined as of such date in the 
hands of the partnership) in tangible property held by the 
partnership to the extent that such property is used in the 
trade or business of the partnership, is of a type with respect 
to which a deduction is allowable under section 168, and is 
used in the production of tested income or tested loss 
(determined with respect to the corporation's distributive 
share of income or loss with respect to such property). The 
corporation's distributive share of the adjusted basis of any 
property is the corporation's distributive share of income and 
loss with respect to such property.
    For purposes of determining QBAI, the Secretary is 
authorized to issue anti-avoidance regulations or other 
guidance as the Secretary determines appropriate, including 
regulations or other guidance that provide for the treatment of 
property if the property is transferred or held temporarily, or 
if avoidance was a factor in the transfer or holding of the 
property.

Foreign tax credits and coordination with subpart F

            Deemed-paid credit for taxes properly attributable to 
                    tested income
    For any FHRA included in the gross income of a domestic 
corporation, the corporation is deemed to have paid foreign 
income taxes equal to 80 percent of its foreign high return 
percentage multiplied by the aggregate tested foreign income 
taxes paid or accrued by each CFC with respect to which the 
corporation is a U.S. shareholder. The foreign high return 
percentage is the corporation's FHRA divided by the aggregate 
amount of its pro rata share of the tested income of each CFC 
with respect to which it is a U.S. shareholder. Tested foreign 
income taxes are the foreign income taxes paid or accrued by a 
CFC that are properly attributable to gross income taken into 
account in determining tested income or tested loss.
    The provision creates a separate foreign tax credit basket 
for the FHRA inclusion, with no carryforward or carryback 
available for excess credits. For purpose of determining the 
foreign tax credit limitation, any FHRA is not general category 
income, and income that can be classified as both a FHRA and 
passive category income is considered passive category income. 
The taxes deemed to have been paid are treated as an increase 
in the FHRA for purposes of section 78, determined by taking 
into account 100 percent of its foreign high return percentage 
multiplied by the the aggregate tested foreign income taxes.
            Coordination with subpart F
    Although FHRA inclusions do not constitute subpart F 
income, FHRA inclusions are generally treated similarly to 
subpart F inclusions. Thus, with respect to any CFC any pro 
rata amount from which is taken into account in determining the 
FHRA included in gross income of a U.S. shareholder, such 
amount, except as otherwise provided by the Secretary, is 
treated in the same manner as an amount included under section 
951(a)(1)(A) for purposes of applying sections 168(h)(2)(B), 
535(b)(10), 851(b), 904(h)(1), 959, 961, 962, 993(a)(1)(E), 
996(f)(1), 1248(b)(1), 1248(d)(1), 6501(e)(1)(C), 
6654(d)(2)(D), and 6655(e)(4).
    The provision requires that the amount of FHRA included by 
a U.S. corporation be allocated across each CFC with respect to 
which it is a U.S. shareholder. The portion of the FHRA treated 
as being with respect to a CFC equals zero for a foreign 
corporation with tested loss and, for a foreign corporation 
with tested income, the portion of the FHRA which bears the 
same ratio to the total FHRA as the shareholder's pro rata 
amount of the tested income of the foreign corporation bears to 
the aggregate amount of the shareholder's pro rata share of the 
tested income of each CFC with respect to which it is a U.S. 
shareholder.
    Tested losses taken into account in determining a U.S. 
shareholder's FHRA cannot also reduce the shareholder's 
inclusions in gross income under section 951(a)(1)(A) by reason 
of the earnings and profits limitation in section 952(c). 
Accordingly, a U.S. shareholder's amount included in gross 
income under section 951(a)(1)(A) with respect to a CFC is 
determined by increasing the earnings and profits of such 
corporation (solely for purposes of determining such amount) by 
an amount that bears the same ratio (not greater than 1) to the 
shareholder's pro rata share of the tested loss of such CFC as 
(1) the aggregate amount of the shareholder's pro rata share of 
the tested income of each CFC with respect to which it is a 
U.S. shareholder bears to (2) the aggregate amount of the 
shareholder's tested loss of each CFC with respect to which it 
is a U.S. shareholder. If this increase in earnings and profits 
results in an incremental inclusion under section 951(a)(1)(A), 
the CFC will increases its earnings and profits described in 
section 959(c)(2) by that amount and decrease its earnings and 
profits in section 959(c)(3) by that amount (even if that 
results in, or increases, a deficit).
            Taxable years for which persons are treated as U.S. 
                    shareholders of a CFC
    For purposes of the FHRA inclusion, a U.S. shareholder of a 
CFC is treated as a U.S. shareholder of the corporation for any 
taxable year of the shareholder if a taxable year of the 
corporation ends in or with the taxable year of such person and 
the person owns (within the meaning of section 958(a)) stock in 
the corporation on the last day in the taxable year of the 
corporation on which the corporation is a CFC. A corporation is 
generally treated as a CFC for any taxable year if the 
corporation is a CFC at any time during the taxable year.

Examples

    The following examples illustrate how FHRA is calculated. 
The examples are highly stylized and are not meant to represent 
actual taxpayer scenarios.
            Example 1: Two Wholly Owned CFCs, Each with Tested Income
    Assume a domestic corporation, US1, wholly owns two CFCs, 
CFC1 and CFC2. These are the only CFCs with respect to which 
US1 is a U.S. shareholder. Assume that the applicable 
percentage to be applied to QBAI is 10 percent. The following 
table includes more information about CFC1 and CFC2. Assume 
that their foreign sales income are items of gross income 
included in the computation of tested income, and that all 
expenses are allocable to their foreign sales income. Also 
assume a U.S. corporate tax rate of 20 percent, and that the 
foreign tax rates faced by CFC1 and CFC2 are applied evenly 
across each of its sources of income.

                           FACTS FOR EXAMPLE 1
------------------------------------------------------------------------
                                           CFC1               CFC2
------------------------------------------------------------------------
                              GROSS INCOME
 
Foreign Sales Income..............               $300             $2,000
Subpart F Income..................               $100                 $0
Commodities Income................               $600                 $0
 
                                EXPENSES
 
Operating Expenses................               $200               $300
 
                               NET INCOME        $800             $1,700
 
Foreign Tax Rate..................         20 percent          5 percent
QBAI..............................               $500                 $0
------------------------------------------------------------------------

            CFC-level calculations of tested income and QBAI
    CFC1 has foreign sales income of $300 (assumed to be 
included in the tested income calculation) and expenses of $220 
(including $20 of taxes, computed below) allocable to its 
foreign sales income. Therefore, it has tested income of $80 (= 
$300-$220) and tested foreign income tax of $20 (= 20% 
 $100). CFC1 has QBAI of $500.
    CFC2 has foreign sales income of $2,000 (assumed to be 
included in the tested income calculation) and expenses of $385 
(including $85 of taxes, computed below) allocable to its 
foreign sales income. Therefore, it has tested income of $1,615 
(= $2,000-$385) and tested foreign income tax of $85 (= 5% 
 $1,700). CFC2 has QBAI of $0.
    U.S.-shareholder-level calculation of FHRA and tax 
liability US1 has net CFC tested income of $1,695, which is the 
sum of CFC1's tested income of $80 and CFC2's tested income of 
$1,615. Its pro rata share of QBAI is $500 (= [100%  
$500] + [100%  $0]). No interest expense is taken into 
account in determining US1's net CFC tested income. Therefore, 
US1's FHRA = $1,695-([10%  $500]-$0) = $1,645.
    US1 receives a deemed-paid credit equal to 80 percent of 
its foreign high return percentage multiplied by the aggregate 
tested foreign income taxes paid or accrued by CFC1 and CFC2. 
Its foreign high return percentage is 97.1 percent (= FHRA/
Aggregate Tested Income = $1,645/$1,695). The aggregate tested 
foreign income taxes paid or accrued by CFC1 and CFC2 is $105 
(= $20 + $85). Therefore, US1's deemed-paid credit is 80 
percent  97.1 percent  $105 = $81.52.
    US1 includes 50 percent of its FHRA and 50 percent of its 
section 78 gross-up in gross income, or $873.45 (= 50% 
 [$1,645  $101.90]).\968\ The tentative U.S. 
tax owed on this income is the U.S. corporate tax rate of 20 
percent applied to the total inclusion of $873.45, or $174.69.
---------------------------------------------------------------------------
    \968\The section 78 gross-up amount = 100 percent  97.1 
percent  $105 = 101.90
---------------------------------------------------------------------------
    The residual U.S. tax paid by US1 on its FHRA is its 
tentative U.S. tax of $174.69 less its deemed-paid credit of 
$81.52, or $93.17, for an effective U.S. tax rate (after 
foreign tax credits) of 5.7 percent on its FHRA of $1,645.
            Example 2: Variant of Example 1, With Tested Loss
    Example 2 generally has the same facts as example 1, except 
that CFC2 has foreign sales of $360. This means that CFC2 has 
tested income (before taking into account taxes) of $60. 
Assume, for simplicity, that it still pays foreign taxes of $85 
with respect to the $360 of foreign sales, so that its tested 
loss is $25 (= $60-$85) and its tested foreign income tax is 
$85.
    Like in Example 1, CFC1 has tested income of $80 and tested 
foreign income tax of $20.
            U.S.-shareholder-level calculation of FHRA and tax 
                    liability
    US1 has net CFC tested income of $55, which is CFC1's 
tested income of $80 less CFC2's tested loss of $25. Its pro 
rata share of QBAI is $500 (= [100%  $500] + [100% 
 $0]). No interest expense is taken into account in 
determining US1's net CFC tested income. Therefore, US1's FHRA 
= $55-(10%  $500)-$0 = $5.
    US1 receives a deemed-paid credit equal to 80 percent of 
its foreign high return percentage multiplied by the aggregate 
tested foreign income taxes paid or accrued by CFC1 and CFC2. 
Its foreign high return percentage is 5 percent (= FHRA/
Aggregate Tested Income = $5/$100). The aggregate tested 
foreign income taxes paid or accrued by CFC1 and CFC2 is $105 
(= $20 + $85). Therefore, US1's deemed-paid credit is 80 
percent  5 percent  $105 = $4.20.
    US1 includes 50 percent of its FHRA in gross income and 50 
percent of its section 78 gross-up in gross income, or $5.13 (= 
50%  [$5 + $5.25]).\969\ The tentative U.S. tax owed 
on this income is the U.S. corporate tax rate of 20 percent 
applied to the total inclusion of $5.13, or $1.03.
---------------------------------------------------------------------------
    \969\The section 78 gross-up amount = 100 percent  5 
percent  $105 = $5.25
---------------------------------------------------------------------------
    The residual U.S. tax paid by US1 on its FHRA is its 
tentative U.S. tax of $1.03 less its deemed-paid credit of 
$5.25, or $0, for an effective U.S. tax rate of 0% on its FHRA 
of $5. The amount of US1's deemed-paid credit that is unused, 
$4.22, may not be carried back or carried forward.
            Example 3: CFC Look-Through Payment
    Example 3 illustrates how the FHRA calculation is applied 
when there are payments that qualify for CFC look-through 
treatment. Example 3 is limited to the calculation of the FHRA 
and does not provide calculations of the amount of U.S. or 
foreign income tax related to the FHRA.
    USCo, a domestic corporation, wholly owns US1 and US2, each 
a domestic corporation. US1 wholly owns CFC1, and US2 wholly 
owns CFC2. These are the only CFCs with respect to which either 
US1 or US2 is a U.S. shareholder. Assume the applicable 
percentage for QBAI is 10 percent.
    CFC1 has total gross income of $100, none of which 
qualifies for a tested income exception, and has interest 
expense of $30, which it pays to CFC2. CFC1 has no other 
deductions and has QBAI of $200. As a result, CFC1 has tested 
income of $70 (= $100 of gross income less $30 of interest 
expense). US1's net CFC tested income is $70 and the applicable 
percentage of its pro rata share of QBAI is $20 (= 10% 
 $200). As CFC1's interest expense of $30 was taken 
into account in determining its tested income of $70, the 
excess of US1's applicable percentage of QBAI over this amount 
of interest expense is $0. As a result, US1's FHRA is $70 (= 
$70-$0).
    CFC2 has $30 of interest income, all of which qualifies for 
CFC look-through treatment because CFC1 has no subpart F 
income. Assume CFC2 has no other gross income, no deductions, 
and no QBAI. CFC2's interest income is not includible in its 
tested income, but only to the extent a deduction for its 
payment or accrual does not reduce the FHRA of any U.S. 
shareholder. Absent the $30 interest expense deduction used in 
determining its net CFC tested income, US1's net CFC tested 
income would have been $100, and US1's FHRA would have been $80 
(= $100-$20). With the $30 deduction, US1's net CFC's tested 
income is $70. Therefore, the deduction allowable for the 
payment or accrual of the interest reduced the FHRA of US1 by 
$10, so only $20 of CFC2's interest income is excluded from 
tested income. As a result, CFC2 has tested income of $10 (= 
$30-$20), and US2 has net CFC tested income of $10 (= $10-$0).

                             EFFECTIVE DATE

    The provision is effective for taxable years of foreign 
corporations beginning after December 31, 2017, and for taxable 
years of U.S. shareholders in which or with which such taxable 
years of foreign corporations end.

 2. Limitation on deduction of interest by domestic corporations which 
are members of an international financial reporting group (sec. 4302 of 
                   the bill and sec. 163 of the Code)

                           REASONS FOR CHANGE

    The Committee believes that it is important to provide 
measures to discourage excessive leverage directly in 
conjunction with the adoption of a participation exemption 
system. The Committee further believes that the provision would 
prevent multinational companies from generating excessive 
interest deductions in the United States on debt that is issued 
to foreign affiliates or that is incurred to produce exempt 
foreign income in a dividend exemption system in a manner that 
applies equally to foreign and U.S. companies in order to 
provide a level playing field while recognizing standard non-
tax business practices that involve parent corporations 
incurring debt to finance the acquisition or establishment of 
subsidiaries. The fungibility of money and the ease with which 
multinational enterprises may generally redeploy capital among 
affiliates within the group provides multinational enterprises 
with significant flexibility in locating interest expense 
within the group. Under present law, this enables multinational 
enterprises to locate significant interest expense in high-tax 
jurisdictions such as the United States in order to maximize 
the tax benefits of interest deductions, irrespective of the 
location of the operations funded by the debt proceeds. 
Furthermore, U.S. subsidiaries of foreign-parented 
multinationals have an incentive to issue related-party debt to 
increase the interest deductions allowed against U.S. taxable 
income. Present law provides a limited set of rules to combat 
these concerns.\970\
---------------------------------------------------------------------------
    \970\With respect to the former concern, interest expense 
allocation rules generally limit the availability of foreign tax 
credits to the extent a U.S. shareholder deducts interest to fund the 
operations of its foreign subsidiaries. See Treas. Reg. secs. 1.861-8 
through -13T. With respect to the latter concern, sections 163(j), 
267(a)(3), and 482 limit the deductibility of related-party interest 
payments in certain circumstances, and the subpart F rules limit the 
U.S. tax benefits of issuing debt to a foreign subsidiary. 
Additionally, recent regulations issued under section 385 limit the 
deductibility of related-party interest payments in certain cases by 
recharacterizing intercompany debt instruments as equity.
---------------------------------------------------------------------------
    Therefore, the Committee believes it is necessary to 
restrict the deductibility of interest by a U.S. taxpayer to 
the extent to which the interest expense gives rise to U.S. 
taxable income. Similarly, the Committee does not believe 
interest expense should be deductible to the extent it gives 
rise to foreign earnings, whether of a foreign subsidiary or of 
a non-subsidiary foreign affiliate, that will never be subject 
to U.S. tax.
    In applying such a limitation, the Committee is cognizant 
of the imperative to provide U.S. and foreign companies with a 
level playing field. Accordingly, the Committee's approach 
applies equally to U.S.- and foreign-parented multinationals. 
In order for such an approach to be administrable, it is 
appropriate to look at information readily available to U.S. 
and foreign companies alike, as well as the IRS, such as 
financial accounting information, so as to minimize the need 
for burdensome calculations and record-keeping specific to U.S. 
tax considerations.

                        EXPLANATION OF PROVISION

    The provision limits the amount of U.S. interest expense 
that a domestic corporation which is a member of an 
international financial reporting group can deduct to the sum 
of the member's interest income plus the allowable percentage 
of 110 percent of net interest expense. An international 
financial reporting group is a group that: (1) includes at 
least one foreign corporation engaged in a U.S. trade or 
business or at least one domestic corporation and one foreign 
corporation at any time during the group's reporting year, (2) 
prepares consolidated financial statements in accordance with 
U.S. Generally Accepted Accounting Principles (``GAAP''), 
International Financial Reporting Standards (``IFRS''), or any 
other comparable method identified by the Secretary,\971\ and 
(3) reports in such statements average annual gross receipts in 
excess of $100,000,000 (determined in the aggregate with 
respect to all entities which are part of such group) for the 
three-reporting-year period ending with such reporting year.
---------------------------------------------------------------------------
    \971\The International Financial Reporting Standards are a set of 
accounting standards commonly used for the preparation of financial 
statements of public companies listed in countries outside the United 
States.
---------------------------------------------------------------------------
    The allowable percentage is the ratio of a corporation's 
allocable share of the international financial reporting 
group's net interest expense over such corporation's reported 
net interest expense. A corporation's allocable share of an 
international financial reporting group's net interest expense 
is determined based on the corporation's share of the group's 
earnings (computed by adding back net interest expense, taxes, 
depreciation, and amortization) as reflected in the group's 
consolidated financial statements. A corporation's reported net 
interest expense is its net interest expense reported in the 
books and records used to prepare the group's consolidated 
financial statements. For international financial reporting 
groups that do not prepare consolidated financial statements 
under U.S. GAAP, IFRS, or any other comparable method 
identified by the Secretary and which are filed with the United 
States Securities and Exchange Commission, the provision 
provides a hierarchy of other audited consolidated financial 
statements that may be relied upon by such group.
    The provision applies to partnerships at the partnership 
level under rules similar to the rules of section 3301 of the 
bill. The provision also applies to foreign corporations 
engaged in a U.S. trade or business. A U.S. consolidated group 
is considered a single corporation under this provision.
    The amount of any interest not allowed as a deduction for 
any taxable year by reason of this provision or section 3301 of 
the bill (depending on whichever imposes the lower limitation 
for the amount allowed as an interest deduction with respect to 
such taxable year) can be carried forward as interest (and as 
business interest for purposes of section 3301 of the bill) for 
up to five years.
    The following example illustrates the coordination of this 
provision with section 3301 of the bill in a context involving 
a partnership.
            Example
          FP, a foreign corporation, wholly owns USS, a 
        domestic corporation. FP and USS each own 50 percent of 
        PS, a partnership. FP, USS, and PS prepare audited 
        consolidated financial statements in accordance with 
        U.S. GAAP that are used for internal management 
        purposes and under which average annual gross receipts 
        for the 3-reporting-year period ending with the current 
        reporting year in excess of $100 million are reported. 
        During the current reporting year, the FP-USS-PS group 
        has consolidated EBITDA of 300 and consolidated 
        interest expense of 50. During that period, USS has 
        EBITDA of 50 (determined without regard to 
        distributions from PS), reported interest expense of 
        25, business interest of 30, and adjusted taxable 
        income (determined without regard to USS's distributive 
        share of PS's non-separately stated taxable income or 
        loss) of 40. Also during that period, PS has EBITDA of 
        150, reported interest expense of 15, business interest 
        of 20, and adjusted taxable income of 120.
          PS's business interest is deductible only to the 
        extent it does not exceed the limitations in each of 
        section 163(j) (as provided in section 3301 of the 
        bill) and section 163(n) (as provided in section 4302 
        of the bill). PS's limitation under section 163(j) is 
        36, which equals 30 percent of its adjusted taxable 
        income of 120 (i.e., 30%  120 = 36). PS's 
        limitation under section 163(n) is 22, which equals the 
        allowable percentage (i.e., 160% = 50  150/
        300/15, not greater than 100%) of 110 percent of PS's 
        business interest (i.e., 22 = 110%  20). 
        Therefore, all 20 of PS's business interest is 
        deductible. PS's excess amount under section 163(j) 
        (i.e., 36-20 = 16) and excess EBITDA under section 
        163(n) (i.e., 150-300  15/50 = 60) flow 
        through to its partners.
          Similarly, USS's business interest is deductible only 
        to the extent it does not exceed the limitations in 
        each of section 163(j) and section 163(n). USS's 
        limitation under section 163(j) is 20, which equals 30 
        percent of the sum of its adjustable taxable income of 
        40 (determined without regard to USS's distributive 
        share of PS's non-separately stated taxable income or 
        loss) or 12 (i.e., 30%  40 = 12) plus USS's 
        distributive share of PS's excess amount under section 
        163(j)(3)(B) (i.e., 50%  16 = 8). USS's 
        limitation under section 163(n) is 17.60, which equals 
        the allowable percentage (i.e., 53% = 50  (50 
        + 30)/300/25) of 110 percent of USS's business interest 
        (i.e., 33 = 110%  30) after taking into 
        account USS's distributive share of PS's excess EBITDA 
        under section 163(n) (i.e., 50%  60 = 30). 
        Therefore, USS may deduct 17.60 of its 30 of business 
        interest in the current year.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2017.

3. Excise tax on certain payments from domestic corporations to related 
 foreign corporations; election to treat such payments as effectively 
connected income (sec. 4303 of the bill and secs. 882, 4491, 6038C, and 
                           6038E of the Code)

                           REASONS FOR CHANGE

    The Committee recognizes that, under the current system, 
companies have been able to base erode by making outbound, 
related-party deductible payments. This is true for both 
foreign-and U.S.-parented multinationals, the former of which 
often make outbound royalty or interest payments, and the 
latter of which make outbound payments to remunerate foreign 
affiliates for tangible goods or intercompany services. There 
is no reason to believe such behavior would not continue in the 
future. The Committee is not persuaded by arguments that once 
the United States has a competitive corporate tax rate, 
multinationals will have no incentive to base erode. Indeed, in 
a participation exemption system, the need for anti-base 
erosion measures remains critical as long as there are foreign 
jurisdictions in which corporations can achieve effective tax 
rates lower than that which they can achieve in the United 
States. That is to say, until the United States has a corporate 
tax rate of zero, there will be a need for anti-base erosion 
measures. The Committee believes it is of paramount importance 
that anti-base erosion measures designed to address this 
problem apply equally to U.S. and foreign multinationals.
    In the context of this provision, it is critical to note 
that the Committee views base erosion in the truest, most 
fundamental sense of the term--U.S. taxpayers reducing their 
base of U.S. taxable income by making certain payments to 
foreign affiliates. The Committee recognizes the importance and 
vitality of transfer pricing generally, and of section 482, its 
regulations, and the vast body of case law and administrative 
guidance issued to date specifically. The Committee affirms its 
belief that the arm's length standard continues to be the 
foundational principle underpinning the pricing of intercompany 
transactions. However, the role transfer pricing plays in the 
larger base erosion problem cannot be ignored.
    The basic tenets of transfer pricing rules--in the United 
States and worldwide--operate on the premise that related 
entities are to be remunerated for their activities on the 
basis of the functions performed, assets owned, and risks 
undertaken. Within these parameters, multinationals have the 
unique ability to determine which entities will be endowed with 
the high value assets, complex functions and risk-bearing 
activities within the supply chain, and thereby justify the 
higher profits these entities are rightfully deemed to earn 
under even the most accurate application of section 482 
principles. The Committee is concerned that these entities are 
often, and increasingly, overseas. Thus, the base erosion 
problem remains and is exacerbated; whether the price is arm's 
length or not, multinationals are permitted to send payments to 
foreign affiliates to compensate them for their activities. In 
the course of so doing, the U.S. affiliate enjoys a deduction 
(or another tax benefit to reduce its U.S. taxable income), 
while the foreign affiliate generates foreign source income 
that will never be subject to U.S. tax. Accordingly, rather 
than implementing a provision to combat perceived transfer 
pricing abuses, the Committee instead seeks to address the 
mismatch created by the reduction to U.S. taxable income via 
outbound, related-party payments and the recognition of foreign 
income that is attributable to those payments and never subject 
to U.S. tax.
    The Committee recognizes that instances of double taxation 
are possible when the corresponding foreign jurisdiction also 
taxes the foreign-earned income. Relief is provided through the 
allowance of a partial foreign tax credit.

                        EXPLANATION OF PROVISION

In general

    This provision imposes an excise tax on certain amounts 
paid by U.S. payors to certain related foreign recipients to 
the extent the amounts are deductible by the U.S. payor. 
However, the excise tax does not apply if the foreign recipient 
elects to be subject to U.S. income tax on the amounts 
received. In calculating the U.S. income tax liability imposed 
under such an election, deemed expenses are allowed as a 
deduction. A foreign tax credit of 80% of applicable foreign 
credits are allowed against the U.S. tax liability imposed by 
this provision if an election is made.

Excise tax

    The provision provides for an excise tax on specified 
amounts paid or incurred by a domestic corporation to a foreign 
corporation if both the foreign and domestic corporations are 
members of the same international financial reporting group. 
The amount of the tax is equal to 20 percent of the specified 
amounts paid or incurred. The excise tax is not imposed with 
respect to amounts that are or are deemed to be effectively 
connected with a U.S. trade or business of the foreign 
corporation. The excise tax imposed is neither deductible nor 
creditable.
    A specified amount is any amount which is allowable by the 
payor as a deduction or includible in costs of goods sold, or 
inventory, or in the basis of an amortizable or depreciable 
asset. A specified amount does not include: (i) interest, (ii) 
an amount paid or incurred for the acquisition of a security 
defined in section 475(c)(2) (without regard to the last 
sentence thereof) or a commodity defined in sections 475(e)(2), 
that is, a commodity actively traded within the meaning of 
section 1092(d)(1) or an identified hedge of such commodity, 
or, (iii) for a payor which has elected to use a services cost 
method under section 482, an amount paid or incurred for 
services if such amount is the total services cost with no 
markup.
    An international financial reporting group is any group of 
entities that prepares consolidated financial statements\972\ 
if the average annual aggregate payment amount for the group 
for the three-year period ending in the reporting year exceeds 
$100,000,000. The annual aggregate payment amount means the 
aggregate of the specified amounts made by U.S. members of the 
group to foreign members of the group during the reporting 
year.
---------------------------------------------------------------------------
    \972\This term is defined in new section 163(n)(4) as a financial 
statement certified as being prepared in accordance with generally 
accepted accounting principles, international financial reporting 
standards, or any other comparable method of accounting identified by 
the Secretary of the Treasury and which is: (i) a 10-K (or successor 
form), or annual statement to shareholders required to be filed with 
the United States Securities and Exchange Commission, or, if this is 
not available, (ii) an audited financial statement used for (1) credit 
purposes, (2) reporting to shareholders, partners or other proprietors, 
or to beneficiaries, or (3) any other substantial nontax purpose, or, 
if (i) and (ii) are not available, (iii) filed with any other Federal 
or State agency for nontax purposes, or, if (i), (ii), or (iii) are not 
available, a financial statement used for a purpose described in 
(ii)(1), (2) and (3), or filed with any regulatory or governmental 
body, within or outside the United States, specified by the Secretary 
of the Treasury.
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Partnerships and branches

    For purposes of this provision, a partnership is treated as 
an aggregate of its partners. Accordingly, a payment made to a 
partnership is treated as a payment to the partners, and a 
payment from a partnership is treated as a payment from the 
partners, in an amount equal to the partner's distributive 
share of the relevant item of income, gain, deduction, or loss.
    For purposes of this provision, U.S. branches are treated 
as separate entities for purposes of determining the treatment 
of payments between a branch and entities other than its owner 
and for purposes of deemed payments between a branch and its 
owner.

Election to treat payments as effectively connected income

    If a specified amount is paid or incurred by a domestic 
corporation with respect to a foreign corporation and both the 
foreign and domestic corporations are members of the same 
international financial reporting group, the foreign 
corporation may elect to take into account all such specified 
amounts as if the foreign corporation were engaged in a U.S. 
trade or business and had a permanent establishment and as if 
the payment were effectively connected with that U.S. trade or 
business and were attributable to the permanent establishment, 
irrespective of any otherwise applicable treaty. If the foreign 
corporation makes such election, the excise tax is not imposed 
and tax is imposed on a net basis on such specified amounts 
less deemed expenses. The election applies for the taxable year 
for which the election is made and all subsequent taxable years 
unless revoked with consent of the Secretary of the Treasury.
    In general, the amount treated as effectively connected 
income under this provision is treated as such for all purposes 
of the Code. For example, it is subject to the branch profit 
tax (unless otherwise reduced, such as by an applicable treaty) 
and is not subject to the excise tax under section 4371. 
However, for purposes of section 245 and new section 245A, 
these amounts are not treated as effectively connected income. 
Therefore, a distribution of earnings attributable to the 
amounts described in this provision is eligible for the 
participation DRD under new section 245A.
    The deemed expenses with respect to any specified amount 
received by a foreign corporation during any reporting year is 
the amount of expenses such that the net income ratio of the 
foreign corporation with respect to the specified amount 
(taking into account only such specified amounts and such 
deemed expenses) is equal to the net income ratio of the 
international financial reporting group determined for the 
reporting year with respect to the product line to which the 
specified amount relates. The net income ratio is the ratio of 
net income determined without regard to income taxes, interest 
income, and interest expense, divided by revenue. The net 
income ratio is calculated in accordance with the books and 
records used in preparing the group's consolidated financial 
statements. The net income ratio is determined by taking into 
account only revenues and expenses of the foreign members of 
the international financial reporting group (other than the 
members of the group that are or are treated as domestic 
corporations for purposes of the provision) derived from, or 
incurred with respect to, persons that are not members of the 
group or members of the group that are or are treated as 
domestic corporations for purposes of the provision.
    The following example illustrates the determination of a 
foreign affiliate's deemed expenses under the provision:
    According to the books and records (after taking into 
account intercompany transactions otherwise eliminated in 
consolidation) of an international financial reporting group 
consisting of US, FS1, and FS2, a domestic corporation, US has 
third-party revenues of $1000, incurs third-party expenses of 
$500, and makes a $300 payment for intercompany services to its 
foreign affiliate, FS1. FS1 has revenues of $500 ($200 of which 
are third-party) and incurs third-party expenses of $250. US's 
other foreign affiliate, FS2, has $300 of revenues, incurs $150 
of third-party expenses, and makes a $100 intercompany payment 
to US. US's entire payment to FS1 is deductible for Federal 
income tax purposes, and FS1 elects to treat the $300 amount as 
subject to section 882(g)(1). On a consolidated basis, the US-
FS1-FS2 group has revenues of $1500 and incurs third-party 
expenses of $900.
    To determine the foreign affiliate's deemed expenses, its 
foreign profit margin will be determined by reference to ratio 
of the foreign earnings before interest and taxes (``EBIT'') 
against the foreign revenues, with adjustments for related 
party inbound and outbound payments. In other words, the 
foreign affiliate's profit margin can be determined as follows:

          (GEBIT - USEBIT + RPOP - RPIP)  (GREV - USREV - 
        USREV + RPOP)

    GEBIT is global EBIT (determined on a consolidated basis), 
USEBIT is the domestic corporation's EBIT (without regard to 
related party transactions), RPOP is the group's related party 
outbound payments made from domestic corporations to foreign 
affiliates, and RPIP is the group's related party inbound 
payments made from foreign affiliates to domestic corporations.
    In the denominator, GREV is global revenues (determined on 
a consolidated basis) and USREV is the domestic corporation's 
revenues (without regard to related party transactions).
    Under the aforementioned facts, the foreign affiliate's 
profit margin would be 37.5%, or

          (600 - 500 + 300 - 100)  (1500 - 1000 + 300)

    Accordingly, of the $300 payment from U.S. to FS1, $112.50 
would be deemed to be income effectively connected to a U.S. 
trade or business, and subject to corporate tax. The remaining 
$187.50 of the payment would be deemed expenses for which FSI 
would be allowed a deduction.

Coordination with FDAP

    Amounts treated as effectively connected income under this 
provision are not excluded from the definition of fixed or 
determinable annual or periodical (``FDAP'') income. Payments 
subject to tax under section 881 do not constitute specified 
payments under this provision except to the extent that the 
rate of tax imposed under section 881 is reduced by a bilateral 
income tax treaty.

Joint and several liability

    If there is an underpayment with respect to any taxable 
year of an electing foreign corporation which is a member of an 
international financial accounting group, each domestic 
corporation in the group is jointly and severally liable for as 
much of the underpayment as does not exceed the excess of such 
underpayment over the amount of such underpayment determined 
without regard to this rule and any penalty, addition to tax, 
or additional amount attributable to the above amount.

Foreign tax credit

    The foreign tax credit allowed under section 906(a) with 
respect to amounts taken into account as effectively connected 
income is limited to 80 percent of the amount of taxes paid or 
accrued (and determined without regard to section 906(b)(1)). 
These foreign tax credits are effectively separately basketed 
and may not be carried backwards or forwards.

Reporting

    An electing foreign corporation that receives a specified 
amount is required to report, with respect to each member of 
the international financial reporting group from which any such 
amount is received: (i) the name and taxpayer identification 
number of each member, (ii) the aggregate amounts received from 
each member, (iii) the product lines to which such amounts 
relate, the aggregate amounts relating to each product line, 
and the net income ratio for each product line, and (iv) a 
summary of changes in financial accounting methods that affect 
the computation of any net income ratio described above.
    A domestic corporation that pays or accrues a specified 
amount with respect to which a foreign corporation has made the 
election is required to make a return according to the forms 
and regulations prescribed by the Secretary of the Treasury 
containing certain information and to maintain sufficient 
records to determine the tax liability imposed by this 
provision. The information required to be provided is as 
follows: (1) the name and taxpayer identification number of the 
common parent of the international financial reporting group of 
which the domestic corporation is a member, and (2) with 
respect to a specified amount: (A) the name and taxpayer 
identification number of the recipient of the amount, (B) the 
aggregate amounts received by the recipient, (C) the product 
lines to which the amounts relate and the aggregate amounts for 
each product line, and the net income ratio for each product 
line, and (D) a summary of any changes in financial accounting 
methods that affect the computation of any net income ratio 
described in (C).
    Treasury may prescribe regulations or other guidance that 
address reporting requirements of foreign affiliates under this 
provision, such as allowing reporting or elections on a group 
basis.

                             EFFECTIVE DATE

    The provisions of this section apply to amounts paid or 
incurred after December 31, 2018.

       E. Provisions Related to Possessions of the United States

1. Extension of deduction allowable with respect to income attributable 
to domestic production activities in Puerto Rico (sec. 4401 of the bill 
                       and sec. 199 of the Code)

                              PRESENT LAW

In general

    Present law generally provides a deduction from taxable 
income (or, in the case of an individual, adjusted gross 
income) that is equal to nine percent of the lesser of the 
taxpayer's qualified production activities income or taxable 
income for the taxable year. For taxpayers subject to the 35-
percent corporate income tax rate, the nine-percent deduction 
effectively reduces the corporate income tax rate to slightly 
less than 32 percent on qualified production activities income.
    In general, qualified production activities income is equal 
to domestic production gross receipts reduced by the sum of: 
(1) the costs of goods sold that are allocable to those 
receipts; and (2) other expenses, losses, or deductions which 
are properly allocable to those receipts.
    Domestic production gross receipts generally are gross 
receipts of a taxpayer that are derived from: (1) any sale, 
exchange, or other disposition, or any lease, rental, or 
license, of qualifying production property\973\ that was 
manufactured, produced, grown or extracted by the taxpayer in 
whole or in significant part within the United States; (2) any 
sale, exchange, or other disposition, or any lease, rental, or 
license, of qualified film\974\ produced by the taxpayer; (3) 
any lease, rental, license, sale, exchange, or other 
disposition of electricity, natural gas, or potable water 
produced by the taxpayer in the United States; (4) construction 
of real property performed in the United States by a taxpayer 
in the ordinary course of a construction trade or business; or 
(5) engineering or architectural services performed in the 
United States for the construction of real property located in 
the United States.
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    \973\Qualifying production property generally includes any tangible 
personal property, computer software, and sound recordings.
    \974\Qualified film includes any motion picture film or videotape 
(including live or delayed television programming, but not including 
certain sexually explicit productions) if 50 percent or more of the 
total compensation relating to the production of the film (including 
compensation in the form of residuals and participations) constitutes 
compensation for services performed in the United States by actors, 
production personnel, directors, and producers.
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    The amount of the deduction for a taxable year is limited 
to 50 percent of the wages paid by the taxpayer, and properly 
allocable to domestic production gross receipts, during the 
calendar year that ends in such taxable year.\975\ Wages paid 
to bona fide residents of Puerto Rico generally are not 
included in the definition of wages for purposes of computing 
the wage limitation amount.\976\
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    \975\For purposes of the provision, ``wages'' include the sum of 
the amounts of wages as defined in section 3401(a) and elective 
deferrals that the taxpayer properly reports to the Social Security 
Administration with respect to the employment of employees of the 
taxpayer during the calendar year ending during the taxpayer's taxable 
year.
    \976\Section 3401(a)(8)(C) excludes wages paid to United States 
citizens who are bona fide residents of Puerto Rico from the term wages 
for purposes of income tax withholding.
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Rules for Puerto Rico

    When used in the Code in a geographical sense, the term 
``United States'' generally includes only the States and the 
District of Columbia.\977\ A special rule for determining 
domestic production gross receipts, however, provides that in 
the case of any taxpayer with gross receipts from sources 
within the Commonwealth of Puerto Rico, the term ``United 
States'' includes the Commonwealth of Puerto Rico, but only if 
all of the taxpayer's Puerto Rico-sourced gross receipts are 
taxable under the Federal income tax for individuals or 
corporations.\978\ In computing the 50-percent wage limitation, 
the taxpayer is permitted to take into account wages paid to 
bona fide residents of Puerto Rico for services performed in 
Puerto Rico.\979\
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    \977\Sec. 7701(a)(9).
    \978\Sec. 199(d)(8)(A).
    \979\Sec. 199(d)(8)(B).
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    The special rules for Puerto Rico apply only with respect 
to the first 11 taxable years of a taxpayer beginning after 
December 31, 2005, and before January 1, 2017.

                           REASONS FOR CHANGE

    The Committee recognizes the importance of supporting 
manufacturing activities in Puerto Rico, as such activities 
promote employment and investment.

                        EXPLANATION OF PROVISION

    The provision extends the special domestic production 
activities rules for Puerto Rico to apply for the first 12 
taxable years of a taxpayer beginning after December 31, 2005 
and before January 1, 2018.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2016.

2. Extension of temporary increase in limit on cover over of rum excise 
taxes to Puerto Rico and the Virgin Islands (sec. 4402 of the bill and 
                        sec. 119(d) of the Code)

                              PRESENT LAW

    A $13.50 per proof gallon\980\ excise tax is imposed on 
distilled spirits produced in or imported into the United 
States.\981\ The excise tax does not apply to distilled spirits 
that are exported from the United States, including exports to 
U.S. possessions (e.g., Puerto Rico and the Virgin 
Islands).\982\
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    \980\A proof gallon is a liquid gallon consisting of 50 percent 
alcohol. See secs. 5002(a)(10) and (11).
    \981\Sec. 5001(a)(1).
    \982\Secs. 5214(a)(1)(A), 5002(a)(15), 7653(b) and (c).
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    The Code provides for cover over (payment) to Puerto Rico 
and the Virgin Islands of the excise tax imposed on rum 
imported (or brought) into the United States, without regard to 
the country of origin.\983\ The amount of the cover over is 
limited under Code section 7652(f) to $10.50 per proof gallon 
($13.25 per proof gallon before January 1, 2017).
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    \983\Secs. 7652(a)(3), (b)(3), and (e)(1). One percent of the 
amount of excise tax collected from imports into the United States of 
articles produced in the Virgin Islands is retained by the United 
States under section 7652(b)(3).
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    Tax amounts attributable to shipments to the United States 
of rum produced in Puerto Rico are covered over to Puerto Rico. 
Tax amounts attributable to shipments to the United States of 
rum produced in the Virgin Islands are covered over to the 
Virgin Islands. Tax amounts attributable to shipments to the 
United States of rum produced in neither Puerto Rico nor the 
Virgin Islands are divided and covered over to the two 
possessions under a formula.\984\ Amounts covered over to 
Puerto Rico and the Virgin Islands are deposited into the 
treasuries of the two possessions for use as those possessions 
determine.\985\ All of the amounts covered over are subject to 
the limitation.
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    \984\Sec. 7652(e)(2).
    \985\Secs. 7652(a)(3), (b)(3), and (e)(1).
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                           REASONS FOR CHANGE

    The Committee recognizes the importance of providing 
dedicated revenue sources to Puerto Rico and the Virgin Islands 
in order to fund their economic development and infrastructure.

                        EXPLANATION OF PROVISION

    The provision suspends for six years the $10.50 per proof 
gallon limitation on the amount of excise taxes on rum covered 
over to Puerto Rico and the Virgin Islands. Under the 
provision, the cover-over limitation of $13.25 per proof gallon 
is extended for rum brought into the United States after 
December 31, 2016, and before January 1, 2023. After December 
31, 2022, the cover over amount reverts to $10.50 per proof 
gallon.

                             EFFECTIVE DATE

    The provision applies to distilled spirits brought into the 
United States after December 31, 2016.

 3. Extension of American Samoa economic development credit (sec. 4403 
            of the bill and sec. 119 of Pub. L. No. 109-432)

                              PRESENT LAW

    A domestic corporation that was an existing credit claimant 
with respect to American Samoa and that elected the application 
of section 936 for its last taxable year beginning before 
January 1, 2006 is allowed a credit based on the corporation's 
economic activity-based limitation with respect to American 
Samoa. The credit is not part of the Code but is computed based 
on the rules of sections 30A and 936. The credit is allowed for 
the first eleven taxable years of a corporation that begin 
after December 31, 2005, and before January 1, 2017.
    A corporation was an existing credit claimant with respect 
to a American Samoa if (1) the corporation was engaged in the 
active conduct of a trade or business within American Samoa on 
October 13, 1995, and (2) the corporation elected the benefits 
of the possession tax credit\986\ in an election in effect for 
its taxable year that included October 13, 1995.\987\ A 
corporation that added a substantial new line of business 
(other than in a qualifying acquisition of all the assets of a 
trade or business of an existing credit claimant) ceased to be 
an existing credit claimant as of the close of the taxable year 
ending before the date on which that new line of business was 
added.
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    \986\For taxable years beginning before January 1, 2006, certain 
domestic corporations with business operations in the U.S. possessions 
were eligible for the possession tax credit. Secs. 27(b) and 936. This 
credit offset the U.S. tax imposed on certain income related to 
operations in the U.S. possessions. Subject to certain limitations, the 
amount of the possession tax credit allowed to any domestic corporation 
equaled the portion of that corporation's U.S. tax that was 
attributable to the corporation's non-U.S. source taxable income from 
(1) the active conduct of a trade or business within a U.S. possession, 
(2) the sale or exchange of substantially all of the assets that were 
used in such a trade or business, or (3) certain possessions 
investment. No deduction or foreign tax credit was allowed for any 
possessions or foreign tax paid or accrued with respect to taxable 
income that was taken into account in computing the credit under 
section 936. Under the economic activity-based limit, the amount of the 
credit could not exceed an amount equal to the sum of (1) 60 percent of 
the taxpayer's qualified possession wages and allocable employee fringe 
benefit expenses, (2) 15 percent of depreciation allowances with 
respect to short-life qualified tangible property, plus 40 percent of 
depreciation allowances with respect to medium-life qualified tangible 
property, plus 65 percent of depreciation allowances with respect to 
long-life qualified tangible property, and (3) in certain cases, a 
portion of the taxpayer's possession income taxes. A taxpayer could 
elect, instead of the economic activity-based limit, a limit equal to 
the applicable percentage of the credit that otherwise would have been 
allowable with respect to possession business income, beginning in 
1998, the applicable percentage was 40 percent.
    To qualify for the possession tax credit for a taxable year, a 
domestic corporation was required to satisfy two conditions. First, the 
corporation was required to derive at least 80 percent of its gross 
income for the three-year period immediately preceding the close of the 
taxable year from sources within a possession. Second, the corporation 
was required to derive at least 75 percent of its gross income for that 
same period from the active conduct of a possession business. Sec. 
936(a)(2). The section 936 credit generally expired for taxable years 
beginning after December 31, 2005.
    \987\A corporation will qualify as an existing credit claimant if 
it acquired all the assets of a trade or business of a corporation that 
(1) actively conducted that trade or business in a possession on 
October 13, 1995, and (2) had elected the benefits of the possession 
tax credit in an election in effect for the taxable year that included 
October 13, 1995.
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    The amount of the credit allowed to a qualifying domestic 
corporation under the provision is equal to the sum of the 
amounts used in computing the corporation's economic activity-
based limitation with respect to American Samoa, except that no 
credit is allowed for the amount of any American Samoa income 
taxes. Thus, for any qualifying corporation the amount of the 
credit equals the sum of (1) 60 percent of the corporation's 
qualified American Samoa wages and allocable employee fringe 
benefit expenses and (2) 15 percent of the corporation's 
depreciation allowances with respect to short-life qualified 
American Samoa tangible property, plus 40 percent of the 
corporation's depreciation allowances with respect to medium-
life qualified American Samoa tangible property, plus 65 
percent of the corporation's depreciation allowances with 
respect to long-life qualified American Samoa tangible 
property.
    The section 936(c) rule denying a credit or deduction for 
any possessions or foreign tax paid with respect to taxable 
income taken into account in computing the credit under section 
936 does not apply with respect to the credit allowed by the 
provision.
    For taxable years beginning after December 31, 2016, the 
credit rules are modified in two ways. First, domestic 
corporations with operations in American Samoa are allowed the 
credit even if those corporations are not existing credit 
claimants. Second, the credit is available to a domestic 
corporation (either an existing credit claimant or a new credit 
claimant) only if, in addition to satisfying all the present 
law requirements for claiming the credit, the corporation also 
has qualified production activities income (as defined in 
section 199(c) by substituting ``American Samoa'' for ``the 
United States'' in each place that latter term appears).
    In the case of a corporation that is an existing credit 
claimant with respect to American Samoa and that elected the 
application of section 936 for its last taxable year beginning 
before January 1, 2006, the credit applies to the first nine 
taxable years of the corporation which begin after December 31, 
2005, and before January 1, 2017. For any other corporation, 
the credit applies to the first three taxable years of that 
corporation which begin after December 31, 2011 and before 
January 1, 2017.

                           REASON FOR CHANGE

    The Committee recognizes the importance of providing 
incentives to stimulate economic development, create jobs, and 
fund infrastructure in American Samoa.

                        EXPLANATION OF PROVISION

    The provision extends the credit for five years to apply 
(a) in the case of a corporation that is an existing credit 
claimant with respect to American Samoa and that elected the 
application of section 936 for its last taxable year beginning 
before January 1, 2006, to the first 17 taxable years of the 
corporation which begin after December 31, 2005, and before 
January 1, 2023, and (b) in the case of any other corporation, 
to the first 11 taxable years of the corporation which begin 
after December 31, 2011, and before January 1, 2023.
    For purposes of this provision, section 119(e) of division 
A of the Tax Relief and Health Care Act of 2006\988\ is amended 
to indicate that any reference to section 199 of the Code is to 
be treated as a reference to section 199 as in effect before 
its repeal by this bill.
---------------------------------------------------------------------------
    \988\Tax Relief and Health Care Act of 2006, Pub. L. No. 109-432, 
sec. 119.
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2016.

                     F. Other International Reforms

 1. Restriction on insurance business exception to the passive foreign 
 investment company rules (sec. 4501 of the bill and sec. 1297 of the 
                               Code)\989\

---------------------------------------------------------------------------
    \989\For a description of present law, see the description in part 
C.2 above relating to passive foreign investment companies.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee is concerned about a lack of clarity and 
precision in the exception to the passive foreign investment 
company rules for income derived in the active conduct of an 
insurance business by a corporation that is predominantly 
engaged in an insurance business. This lack of clarity and 
precision makes the scope of the exception difficult to 
ascertain and to enforce. In particular, the Committee is 
concerned about the lack of precision regarding how much 
insurance or reinsurance business the company must do to 
qualify under the exception. The Committee has been informed of 
offshore arrangements applying the present-law exception that 
reinsure risks and that invest in U.S. hedge funds, and that 
have been structured in a manner that raises concerns about the 
potential for base erosion.\990\ The Committee believes that a 
more mechanical, formulaic rule that is more straightforward to 
enforce and to apply is appropriate while still preserving the 
opportunity for a corporation to present facts and 
circumstances showing it is predominantly engaged in the 
insurance business, provided the corporation's applicable 
insurance liabilities are at least 10 percent of its total 
assets. The Committee also believes that it is important to 
separately treat different categories of reserves to more 
accurately determine whether a company meets the insurance 
exception.
---------------------------------------------------------------------------
    \990\The hedge fund reinsurance arrangement is said to provide 
indefinite deferral of U.S. taxation of the hedge fund's investment 
earnings, such as interest and dividends. At the time the taxpayer 
liquidates the investment, ordinary investment earnings are said to be 
converted to capital gains, which are subject to a lower rate of tax. 
Press reports have discussed the arrangements. See, e.g., Hal Lux, 
``The Great Hedge Fund Reinsurance Tax Game,'' Institutional Investor, 
April 2001, pages 52-58, http://www.institutionalinvestor.com/Article/
1027978/The-Great-hedge-fund-reinsurance-tax-ame.html; Steven Davidoff 
Solomon, ``With Lax Regulation, a Risky Industry Flourishes Offshore,'' 
Deal Book, New York Times, September 4 2012, http://
dealbook.nytimes.com/2012/09/04/with-lax-regulation-a-risky-
industryflourishes-offshore/?_php=true&_type=blogs&_r=0.
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                        EXPLANATION OF PROVISION

    The provision modifies the requirements for a corporation 
the income of which is not included in passive income for 
purposes of the PFIC rules. The provision replaces the test 
based on whether a corporation is predominantly engaged in an 
insurance business with a test based on the corporation's 
insurance liabilities.\991\ The requirement that the foreign 
corporation would be subject to tax under subchapter L if it 
were a domestic corporation is retained.
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    \991\Treasury regulations proposed in 2015 have taken a different 
approach that is based on the current statutory rule. Prop. Treas. Reg. 
sec. 1.1297-4, 26 CFR Part 1, REG-108214-15, April 24, 2015. The 
proposed regulations provide that ``the term insurance business means 
the business of issuing insurance and annuity contracts and the 
reinsuring of risks underwritten by insurance companies, together with 
those investment activities and administrative services that are 
required to support or are substantially related to insurance and 
annuity contracts issued or reinsured by the foreign corporation.'' The 
proposed regulations provide that an investment activity is an activity 
producing foreign personal holding company income, and that is 
``required to support or [is] substantially related to insurance and 
annuity contracts issued or reinsured by the foreign corporation to the 
extent that income from the activities is earned from assets held by 
the foreign corporation to meet obligations under the contracts.'' The 
preamble to the proposed regulations specifically requests comments on 
the proposed regulations ``with regard to how to determine the portion 
of a foreign insurance company's assets that are held to meet 
obligations under insurance contracts issued or reinsured by the 
company,'' for example, if the assets ``do not exceed a specified 
percentage of the corporation's total insurance liabilities for the 
year.'' Ibid.
---------------------------------------------------------------------------
    Under the provision, passive income for purposes of the 
PFIC rules does not include income derived in the active 
conduct of an insurance business by a corporation (1) that 
would be subject to tax under subchapter L if it were a 
domestic corporation; and (2) the applicable insurance 
liabilities of which constitute more than 25 percent of its 
total assets as reported on the company's applicable financial 
statement for the last year ending with or within the taxable 
year.
    For the purpose of the provision's exception from passive 
income, applicable insurance liabilities means, with respect to 
any property and casualty or life insurance business (1) loss 
and loss adjustment expenses, (2) reserves (other than 
deficiency, contingency, or unearned premium reserves) for life 
and health insurance risks and life and health insurance claims 
with respect to contracts providing coverage for mortality or 
morbidity risks. This includes loss reserves for property and 
casualty, life, and health insurance contracts and annuity 
contracts. Unearned premium reserves with respect to any type 
of risk are not treated as applicable insurance liabilities for 
purposes of the provision. For purposes of the provision, the 
amount of any applicable insurance liability may not exceed the 
lesser of such amount (1) as reported to the applicable 
insurance regulatory body in the applicable financial statement 
(or, if less, the amount required by applicable law or 
regulation), or (2) as determined under regulations prescribed 
by the Secretary.
    An applicable financial statement is a statement for 
financial reporting purposes that (1) is made on the basis of 
generally accepted accounting principles, (2) is made on the 
basis of international financial reporting standards, but only 
if there is no statement made on the basis of generally 
accepted accounting principles, or (3) except as otherwise 
provided by the Secretary in regulations, is the annual 
statement required to be filed with the applicable insurance 
regulatory body, but only if there is no statement made on 
either of the foregoing bases. Unless otherwise provided in 
regulations, it is intended that generally accepted accounting 
principles means U.S. GAAP.
    The applicable insurance regulatory body means, with 
respect to any insurance business, the entity established by 
law to license, authorize, or regulate such insurance business 
and to which the applicable financial statement is provided. 
For example, in the United States, the applicable insurance 
regulatory body is the State insurance regulator to which the 
corporation provides its annual statement.
    If a corporation fails to qualify solely because its 
applicable insurance liabilities constitute 25 percent or less 
of its total assets, a United States person who owns stock of 
the corporation may elect in such manner as the Secretary 
prescribes to treat the stock as stock of a qualifying 
insurance corporation if (1) the corporation's applicable 
insurance liabilities constitute at least 10 percent of its 
total assets, and (2) based on the applicable facts and 
circumstances, the corporation is predominantly engaged in an 
insurance business, and its failure to qualify under the 25 
percent threshold is due solely to runoff-related or rating-
related circumstances involving such insurance business.
    Facts and circumstances that tend to show the firm may not 
be predominantly engaged in an insurance business include a 
small number of insured risks with low likelihood but large 
potential costs; workers focused to a greater degree on 
investment activities than underwriting activities; and low 
loss exposure. Additional relevant facts for determining 
whether the firm is predominantly engaged in an insurance 
business include: claims payment patterns for the current and 
prior years; the firm's loss exposure as calculated for a 
regulator such as the SEC or for a rating agency, or if those 
are not calculated, for internal pricing purposes; the 
percentage of gross receipts constituting premiums for the 
current and prior years; and the number and size of insurance 
contracts issued or taken on through reinsurance by the firm. 
The fact that a firm has been holding itself out as an insurer 
for a long period is not determinative either way.
    Runoff-related or rating-related circumstances include, for 
example, the fact that the company is in runoff, that is, it is 
not taking on new insurance business (and consequently has 
little or no premium income), and is using its remaining assets 
to pay off claims with respect to pre-existing insurance risks 
on its books. Such circumstances also include, for example, the 
application to the company of specific requirements with 
respect to capital and surplus relating to insurance 
liabilities imposed by a rating agency as a condition of 
obtaining a rating necessary to write new insurance business 
for the current year.

                             EFFECTIVE DATE

    The provision applies to taxable years beginning after 
December 31, 2017.

                     TITLE V--EXEMPT ORGANIZATIONS

                    A. Unrelated Business Income Tax

1. Clarification of unrelated business income tax treatment of entities 
 exempt from tax under section 501(a) (sec. 5001 of the bill and sec. 
                            511 of the Code)

                              PRESENT LAW

Tax exemption for certain organizations

    Section 501(a) exempts certain organizations from Federal 
income tax. Such organizations include: (1) tax-exempt 
organizations described in section 501(c) (including among 
others section 501(c)(3) charitable organizations and section 
501(c)(4) social welfare organizations); (2) religious and 
apostolic organizations described in section 501(d); and (3) 
trusts forming part of a pension, profit-sharing, or stock 
bonus plan of an employer described in section 401(a).
    Section 115 excludes from gross income certain income of 
entities that perform an essential government function. The 
exemption applies to: (1) income derived from any public 
utility or the exercise of any essential governmental function 
and accruing to a State or any political subdivision thereof, 
or the District of Columbia; or (2) income accruing to the 
government of any possession of the United States, or any 
political subdivision thereof.

Unrelated business income tax, in general

    An exempt organization generally may have revenue from four 
sources: contributions, gifts, and grants; trade or business 
income that is related to exempt activities (e.g., program 
service revenue); investment income; and trade or business 
income that is not related to exempt activities. The Federal 
income tax exemption generally extends to the first three 
categories, and does not extend to an organization's unrelated 
trade or business income. In some cases, however, the 
investment income of an organization is taxed as if it were 
unrelated trade or business income.\992\
---------------------------------------------------------------------------
    \992\This is the case for social clubs (sec. 501(c)(7)), voluntary 
employees' beneficiary associations (sec. 501(c)(9)), and organizations 
and trusts described in sections 501(c)(17) and 501(c)(20). Sec. 
512(a)(3).
---------------------------------------------------------------------------
    The unrelated business income tax (``UBIT'') generally 
applies to income derived from a trade or business regularly 
carried on by the organization that is not substantially 
related to the performance of the organization's tax-exempt 
functions.\993\ An organization that is subject to UBIT and 
that has $1,000 or more of gross unrelated business taxable 
income must report that income on Form 990-T (Exempt 
Organization Business Income Tax Return).
---------------------------------------------------------------------------
    \993\Secs. 511-514.
---------------------------------------------------------------------------
    Most exempt organizations may operate an unrelated trade or 
business so long as the organization remains primarily engaged 
in activities that further its exempt purposes. Therefore, an 
organization may engage in a substantial amount of unrelated 
business activity without jeopardizing exempt status. A section 
501(c)(3) (charitable) organization, however, may not operate 
an unrelated trade or business as a substantial part of its 
activities.\994\ Therefore, the unrelated trade or business 
activity of a section 501(c)(3) organization must be 
insubstantial.
---------------------------------------------------------------------------
    \994\Treas. Reg. sec. 1.501(c)(3)-1(e).
---------------------------------------------------------------------------

Organizations subject to tax on unrelated business income

    Most exempt organizations are subject to the tax on 
unrelated business income. Specifically, organizations subject 
to the unrelated business income tax generally include: (1) 
organizations exempt from tax under section 501(a), including 
organizations described in section 501(c) (except for U.S. 
instrumentalities and certain charitable trusts);\995\ (2) 
qualified pension, profit-sharing, and stock bonus plans 
described in section 401(a);\996\ and (3) certain State 
colleges and universities.\997\
---------------------------------------------------------------------------
    \995\Sec. 511(a)(2)(A).
    \996\Sec. 511(a)(2)(A).
    \997\Sec. 511(a)(2)(B).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes it is necessary and desirable to 
clarify the applicability of the UBIT rules to certain tax-
exempt organizations. The UBIT rules, by their express terms, 
apply to most organizations described in section 401(a) and 
501(c) and do not exclude section 115 organizations that are 
also described in section 401(a) or 501(c). The Committee 
understands, however, that certain organizations (such as State 
pension funds) that are described in section 401(a) or 501(c) 
of the Code take the position that they are not subject to UBIT 
because their income is derived from the exercise of an 
essential government function as described in section 115 of 
the Code. This provision clarifies that organizations with 
income described in section 115 are not exempt from application 
of the UBIT rules.

                        EXPLANATION OF PROVISION

    The provision clarifies that an organization does not fail 
to be subject to tax on its unrelated business income as an 
organization exempt from tax under section 501(a) solely 
because the organization also is exempt, or excludes amounts 
from gross income, by reason of another provision of the Code. 
For example, if an organization is described in section 401(a) 
(and thus is exempt from tax under section 501(a)) and its 
income also is described in section 115 (relating to the 
exclusion from gross income of certain income derived from the 
exercise of an essential governmental function), its status 
under section 115 does not cause it to be exempt from tax on 
its unrelated business income.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2017.

2. Exclusion of research income from unrelated business taxable income 
limited to publicly available research (sec. 5002 of the bill and sec. 
                         512(b)(9) of the Code)

                              PRESENT LAW

Tax exemption for certain organizations

    Section 501(a) exempts certain organizations from Federal 
income tax. Such organizations include: (1) tax-exempt 
organizations described in section 501(c) (including among 
others section 501(c)(3) charitable organizations and section 
501(c)(4) social welfare organizations); (2) religious and 
apostolic organizations described in section 501(d); and (3) 
trusts forming part of a pension, profit-sharing, or stock 
bonus plan of an employer described in section 401(a).

Unrelated business income tax, in general

    The unrelated business income tax (``UBIT'') generally 
applies to income derived from a trade or business regularly 
carried on by the organization that is not substantially 
related to the performance of the organization's tax-exempt 
functions.\998\ An organization that is subject to UBIT and 
that has $1,000 or more of gross unrelated business taxable 
income must report that income on Form 990-T (Exempt 
Organization Business Income Tax Return).
---------------------------------------------------------------------------
    \998\Secs. 511-514.
---------------------------------------------------------------------------
    Most exempt organizations may operate an unrelated trade or 
business so long as the organization remains primarily engaged 
in activities that further its exempt purposes. Therefore, an 
organization may engage in a substantial amount of unrelated 
business activity without jeopardizing exempt status. A section 
501(c)(3) (charitable) organization, however, may not operate 
an unrelated trade or business as a substantial part of its 
activities.\999\ Therefore, the unrelated trade or business 
activity of a section 501(c)(3) organization must be 
insubstantial.
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    \999\Treas. Reg. sec. 1.501(c)(3)-1(e).
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Organizations subject to tax on unrelated business income

    Most exempt organizations are subject to the tax on 
unrelated business income. Specifically, organizations subject 
to the unrelated business income tax generally include: (1) 
organizations exempt from tax under section 501(a), including 
organizations described in section 501(c) (except for U.S. 
instrumentalities and certain charitable trusts);\1000\ (2) 
qualified pension, profit-sharing, and stock bonus plans 
described in section 401(a);\1001\ and (3) certain State 
colleges and universities.\1002\
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    \1000\Sec. 511(a)(2)(A).
    \1001\Sec. 511(a)(2)(A).
    \1002\Sec. 511(a)(2)(B).
---------------------------------------------------------------------------

Exclusions from unrelated business taxable income

            In general
    Certain types of income are specifically exempt from 
unrelated business taxable income, such as dividends, interest, 
royalties, and certain rents,\1003\ unless derived from debt-
financed property or from certain 50-percent controlled 
subsidiaries.\1004\ Other exemptions from UBIT are provided for 
activities in which substantially all the work is performed by 
volunteers, for income from the sale of donated goods, and for 
certain activities carried on for the convenience of members, 
students, patients, officers, or employees of a charitable 
organization. In addition, special UBIT provisions exempt from 
tax activities of trade shows and State fairs, income from 
bingo games, and income from the distribution of low-cost items 
incidental to the solicitation of charitable contributions. 
Organizations liable for tax on unrelated business taxable 
income may be liable for alternative minimum tax determined 
after taking into account adjustments and tax preference items.
---------------------------------------------------------------------------
    \1003\Secs. 511-514.
    \1004\Sec. 512(b)(13).
---------------------------------------------------------------------------
            Research income
    Certain income derived from research activities of exempt 
organizations is excluded from unrelated business taxable 
income. For example, income derived from research performed for 
the United States, a State, and certain agencies and 
subdivisions is excluded.\1005\ Income from research performed 
by a college, university, or hospital for any person also is 
excluded.\1006\ Finally, if an organization is operated 
primarily for purposes of carrying on fundamental research the 
results of which are freely available to the general public, 
all income derived by research performed by such organization 
for any person, not just income derived from research available 
to the general public, is excluded.\1007\
---------------------------------------------------------------------------
    \1005\Sec. 512(b)(7).
    \1006\Sec. 512(b)(8).
    \1007\Sec. 512(b)(9).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes it is desirable to carefully tailor 
the exclusions from the UBIT rules to better encourage tax-
exempt organizations to engage in fundamental research the 
results of which are made available to the general public.

                        EXPLANATION OF PROVISION

    The provision modifies the exclusion of income from 
research performed by an organization operated primarily for 
purposes of carrying on fundamental research the results of 
which are freely available to the general public (section 
512(b)(9)). Under the provision, the organization may exclude 
from unrelated business taxable income under section 512(b)(9) 
only income from such fundamental research the results of which 
are freely available to the general public.

                             EFFECTIVE DATE

    The proposal is effective for taxable years beginning after 
December 31, 2017.

                            B. Excise Taxes

1. Simplification of excise tax on private foundation investment income 
           (sec. 5101 of the bill and sec. 4940 of the Code)

                              PRESENT LAW

Excise tax on the net investment income of private foundations

    Under section 4940(a), private foundations that are 
recognized as exempt from Federal income tax under section 
501(a) (other than exempt operating foundations\1008\) are 
subject to a two-percent excise tax on their net investment 
income. Net investment income generally includes interest, 
dividends, rents, royalties (and income from similar sources), 
and capital gain net income, and is reduced by expenses 
incurred to earn this income. The two-percent rate of tax is 
reduced to one-percent in any year in which a foundation 
exceeds the average historical level of its charitable 
distributions. Specifically, the excise tax rate is reduced if 
the foundation's qualifying distributions (generally, amounts 
paid to accomplish exempt purposes)\1009\ equal or exceed the 
sum of (1) the amount of the foundation's assets for the 
taxable year multiplied by the average percentage of the 
foundation's qualifying distributions over the five taxable 
years immediately preceding the taxable year in question, and 
(2) one percent of the net investment income of the foundation 
for the taxable year.\1010\ In addition, the foundation cannot 
have been subject to tax in any of the five preceding years for 
failure to meet minimum qualifying distribution requirements in 
section 4942.
---------------------------------------------------------------------------
    \1008\Sec. 4940(d)(1). Exempt operating foundations generally 
include organizations such as museums or libraries that devote their 
assets to operating charitable programs but have difficulty meeting the 
``public support'' tests necessary not to be classified as a private 
foundation. To be an exempt operating foundation, an organization must: 
(1) be an operating foundation (as defined in section 4942(j)(3)); (2) 
be publicly supported for at least 10 taxable years; (3) have a 
governing body no more than 25 percent of whom are disqualified persons 
and that is broadly representative of the general public; and (4) have 
no officers who are disqualified persons. Sec. 4940(d)(2).
    \1009\Sec. 4942(g).
    \1010\Sec. 4940(e).
---------------------------------------------------------------------------
    Private foundations that are not exempt from tax under 
section 501(a), such as certain charitable trusts, are subject 
to an excise tax under section 4940(b). The tax is equal to the 
excess of the sum of the excise tax that would have been 
imposed under section 4940(a) if the foundation were tax exempt 
and the amount of the tax on unrelated business income that 
would have been imposed if the foundation were tax exempt, over 
the income tax imposed on the foundation under subtitle A of 
the Code.
    Private foundations are required to make a minimum amount 
of qualifying distributions each year to avoid tax under 
section 4942. The minimum amount of qualifying distributions a 
foundation has to make to avoid tax under section 4942 is 
reduced by the amount of section 4940 excise taxes paid.\1011\
---------------------------------------------------------------------------
    \1011\Sec. 4942(d)(2).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    Under the present-law, two-tier private foundation excise 
tax rate structure, a foundation must carefully manage the 
timing and amount of its grant making to minimize its excise 
tax burden. Compliance can be costly and consume resources that 
otherwise would have been used for grant making or other 
charitable activity.
    In addition, to qualify for the lower tax rate in a year, a 
foundation must ensure that its distributions for the year 
exceed a historical, average level of distributions. This 
structure creates an incentive for foundations to limit 
distributions in any one year, because a significant increase 
in distributions will raise the foundation's average level of 
distributions, making it more difficult to qualify for the 
reduced rate in future years. As a result, a foundation that 
might have been inclined to distribute a larger amount in a 
time of public need, such as during the response to a natural 
disaster, has a disincentive to do so.
    For these reasons, the Committee believes it is appropriate 
to replace the present-law, two-tier private foundation excise 
tax rate structure with a simplified structure that uses a 
single tax rate of 1.4 percent.

                        EXPLANATION OF PROVISION

    The provision replaces the two rates of excise tax on tax-
exempt private foundations with a single rate of tax of 1.4 
percent. Thus, under the provision, a tax-exempt private 
foundation generally is subject to an excise tax of 1.4 percent 
on its net investment income. A taxable private foundation is 
subject to an excise tax equal to the excess (if any) of the 
sum of the 1.4 percent net investment income excise tax and the 
amount of the tax on unrelated business income (both calculated 
as if the foundation were tax-exempt), over the income tax 
imposed on the foundation. The provision repeals the special 
reduced excise tax rate for private foundations that exceed 
their historical level of qualifying distributions.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2017.

 2. Private operating foundation requirements relating to operation of 
   an art museum (sec. 5102 of the bill and sec. 4942(j) of the Code)

                              PRESENT LAW

Public charities and private foundations

    An organization qualifying for tax-exempt status under 
section 501(c)(3) is further classified as either a public 
charity or a private foundation. An organization may qualify as 
a public charity in several ways.\1012\ Certain organizations 
are classified as public charities per se, regardless of their 
sources of support. These include churches, certain schools, 
hospitals and other medical organizations, certain 
organizations providing assistance to colleges and 
universities, and governmental units.\1013\ Other organizations 
qualify as public charities because they are broadly publicly 
supported. First, a charity may qualify as publicly supported 
if at least one-third of its total support is from gifts, 
grants, or other contributions from governmental units or the 
general public.\1014\ Alternatively, it may qualify as publicly 
supported if it receives more than one-third of its total 
support from a combination of gifts, grants, and contributions 
from governmental units and the public plus revenue arising 
from activities related to its exempt purposes (e.g., fee for 
service income). In addition, this category of public charity 
must not rely excessively on endowment income as a source of 
support.\1015\ A supporting organization, i.e., an organization 
that provides support to another section 501(c)(3) entity that 
is not a private foundation and meets certain other 
requirements of the Code, also is classified as a public 
charity.\1016\
---------------------------------------------------------------------------
    \1012\The Code does not expressly define the term ``public 
charity,'' but rather provides exceptions to those entities that are 
treated as private foundations.
    \1013\Sec. 509(a)(1) (referring to sections 170(b)(1)(A)(i) through 
(iv) for a description of these organizations).
    \1014\Treas. Reg. sec. 1.170A-9(f)(2). Failing this mechanical 
test, the organization may qualify as a public charity if it passes a 
``facts and circumstances'' test. Treas. Reg. sec. 1.170A-9(f)(3).
    \1015\To meet this requirement, the organization must normally 
receive more than one-third of its support from a combination of (1) 
gifts, grants, contributions, or membership fees and (2) certain gross 
receipts from admissions, sales of merchandise, performance of 
services, and furnishing of facilities in connection with activities 
that are related to the organization's exempt purposes. Sec. 
509(a)(2)(A). In addition, the organization must not normally receive 
more than one-third of its public support in each taxable year from the 
sum of (1) gross investment income and (2) the excess of unrelated 
business taxable income as determined under section 512 over the amount 
of unrelated business income tax imposed by section 511. Sec. 
509(a)(2)(B).
    \1016\Sec. 509(a)(3). Supporting organizations are further 
classified as Type I, II, or III depending on the relationship they 
have with the organizations they support. Supporting organizations must 
support public charities listed in one of the other categories (i.e., 
per se public charities, broadly supported public charities, or revenue 
generating public charities), and they are not permitted to support 
other supporting organizations or testing for public safety 
organizations.
    Organizations organized and operated exclusively for testing for 
public safety also are classified as public charities. Sec. 509(a)(4). 
Such organizations, however, are not eligible to receive deductible 
charitable contributions under section 170.
---------------------------------------------------------------------------
    A section 501(c)(3) organization that does not fit within 
any of the above categories is a private foundation. In 
general, private foundations receive funding from a limited 
number of sources (e.g., an individual, a family, or a 
corporation).
    The deduction for charitable contributions to private 
foundations is in some instances less generous than the 
deduction for charitable contributions to public charities. In 
addition, private foundations are subject to a number of 
operational rules and restrictions that do not apply to public 
charities.\1017\
---------------------------------------------------------------------------
    \1017\Unlike public charities, private foundations are subject to 
tax on their net investment income at a rate of two percent (one 
percent in some cases). Sec. 4940. Private foundations also are subject 
to more restrictions on their activities than are public charities. For 
example, private foundations are prohibited from engaging in self-
dealing transactions (sec. 4941), are required to make a minimum amount 
of charitable distributions each year, (sec. 4942), are limited in the 
extent to which they may control a business (sec. 4943), may not make 
speculative investments (sec. 4944), and may not make certain 
expenditures (sec. 4945). Violations of these rules result in excise 
taxes on the foundation and, in some cases, may result in excise taxes 
on the managers of the foundation.
---------------------------------------------------------------------------

Tax on failure to distribute income by private nonoperating foundations

    Private nonoperating foundations are required to pay out a 
minimum amount each year as qualifying distributions.\1018\ In 
general, a qualifying distribution is an amount paid to 
accomplish one or more of the organization's exempt purposes, 
including reasonable and necessary administrative 
expenses.\1019\ Failure to pay out the minimum required amount 
results in an initial excise tax on the foundation of 30 
percent of the undistributed amount. An additional tax of 100 
percent of the undistributed amount applies if an initial tax 
is imposed and the required distributions have not been made by 
the end of the applicable taxable period.\1020\ A foundation 
may include as a qualifying distribution the salaries, 
occupancy expenses, travel costs, and other reasonable and 
necessary administrative expenses that the foundation incurs in 
operating a grant program. A qualifying distribution also 
includes any amount paid to acquire an asset used (or held for 
use) directly in carrying out one or more of the organization's 
exempt purposes and certain amounts set aside for exempt 
purposes.\1021\
---------------------------------------------------------------------------
    \1018\Sec. 4942.
    \1019\Sec. 4942(g)(1)(A).
    \1020\Sec. 4942(a) and (b). Taxes imposed may be abated if certain 
conditions are met. Secs. 4961 and 4962.
    \1021\Sec. 4942(g)(1)(B) and 4942(g)(2). In general, an 
organization is permitted to adjust the distributable amount in those 
cases where distributions during the five preceding years have exceeded 
the payout requirements. Sec. 4942(i).
---------------------------------------------------------------------------

Private operating foundations

    The tax on failure to distribute income does not apply to 
the undistributed income of a private foundation for any 
taxable year for which it is an operating foundation.\1022\ 
Private operating foundations generally operate their own 
charitable programs directly, rather than serving primarily as 
a grantmaking entity.
---------------------------------------------------------------------------
    \1022\Sec. 4942(a)(1).
---------------------------------------------------------------------------
    Private operating foundations must satisfy several tests 
designed to distinguish them from nonoperating (grantmaking) 
foundations. First, an operating foundation generally must make 
qualifying distributions for the direct conduct of activities 
that are related to its exempt purpose (as opposed to making 
such distributions in the form of grants to other charities) 
equal to 85 percent of the lesser of its adjusted net income or 
its minimum investment return, each as defined under section 
4942.\1023\ In addition, an operating foundation must satisfy 
one of the following three alternative tests: (1) an asset 
test, under which substantially more than half of the 
organization's assets (generally, 65 percent) are devoted to 
the direct conduct of exempt activities or to functionally 
related businesses; (2) an endowment test, under which the 
organization normally makes qualifying distributions for the 
direct conduct of activities related to its exempt purpose in 
an amount not less than two-thirds of its minimum investment 
return; or (3) a support test, under which the organization 
must meet certain measures to show that it receives public 
support.\1024\
---------------------------------------------------------------------------
    \1023\Sec. 4942(j)(3)(A); Treas. Reg. sec. 53.4942(b)-1(c).
    \1024\Sec. 4942(j)(3)(B).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    Because private operating foundations run their own 
charitable programs (rather than serving primarily as grant 
makers to operating charities), private operating foundations 
are given preferential treatment under Code. It has come to the 
attention of the Committee, however, that certain private 
operating foundations that operate art museums severely 
restrict public access to their collections, raising the 
question whether the museums are operated for a public or a 
private purpose. For this reason, the Committee believes that 
an organization that operates an art museum as a substantial 
activity should not qualify for private operating foundation 
status unless it offers meaningful access to the public during 
normal business hours.

                        EXPLANATION OF PROVISION

    Under the provision, an organization that operates an art 
museum as a substantial activity does not qualify as a private 
operating foundation unless the museum is open during normal 
business hours to the public for at least 1,000 hours during 
the taxable year.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2017.

   3. Excise tax based on investment income of private colleges and 
   universities (sec. 5103 of the bill and new sec. 4969 of the Code)

                              PRESENT LAW

Public charities and private foundations

    An organization qualifying for tax-exempt status under 
section 501(c)(3) is further classified as either a public 
charity or a private foundation. An organization may qualify as 
a public charity in several ways.\1025\ Certain organizations 
are classified as public charities per se, regardless of their 
sources of support. These include churches, certain schools, 
hospitals and other medical organizations, certain 
organizations providing assistance to colleges and 
universities, and governmental units.\1026\ Other organizations 
qualify as public charities because they are broadly publicly 
supported. First, a charity may qualify as publicly supported 
if at least one-third of its total support is from gifts, 
grants, or other contributions from governmental units or the 
general public.\1027\ Alternatively, it may qualify as publicly 
supported if it receives more than one-third of its total 
support from a combination of gifts, grants, and contributions 
from governmental units and the public plus revenue arising 
from activities related to its exempt purposes (e.g., fee for 
service income). In addition, this category of public charity 
must not rely excessively on endowment income as a source of 
support.\1028\ A supporting organization, i.e., an organization 
that provides support to another section 501(c)(3) entity that 
is not a private foundation and meets the requirements of the 
Code, also is classified as a public charity.\1029\
---------------------------------------------------------------------------
    \1025\The Code does not expressly define the term ``public 
charity,'' but rather provides exceptions to those entities that are 
treated as private foundations.
    \1026\Sec. 509(a)(1) (referring to sections 170(b)(1)(A)(i) through 
(iv) for a description of these organizations).
    \1027\Treas. Reg. sec. 1.170A-9(f)(2). Failing this mechanical 
test, the organization may qualify as a public charity if it passes a 
``facts and circumstances'' test. Treas. Reg. sec. 1.170A-9(f)(3).
    \1028\To meet this requirement, the organization must normally 
receive more than one-third of its support from a combination of (1) 
gifts, grants, contributions, or membership fees and (2) certain gross 
receipts from admissions, sales of merchandise, performance of 
services, and furnishing of facilities in connection with activities 
that are related to the organization's exempt purposes. Sec. 
509(a)(2)(A). In addition, the organization must not normally receive 
more than one-third of its public support in each taxable year from the 
sum of (1) gross investment income and (2) the excess of unrelated 
business taxable income as determined under section 512 over the amount 
of unrelated business income tax imposed by section 511. Sec. 
509(a)(2)(B).
    \1029\Sec. 509(a)(3). Supporting organizations are further 
classified as Type I, II, or III depending on the relationship they 
have with the organizations they support. Supporting organizations must 
support public charities listed in one of the other categories (i.e., 
per se public charities, broadly supported public charities, or revenue 
generating public charities), and they are not permitted to support 
other supporting organizations or testing for public safety 
organizations.
    Organizations organized and operated exclusively for testing for 
public safety also are classified as public charities. Sec. 509(a)(4). 
Such organizations, however, are not eligible to receive deductible 
charitable contributions under section 170.
---------------------------------------------------------------------------
    A section 501(c)(3) organization that does not fit within 
any of the above categories is a private foundation. In 
general, private foundations receive funding from a limited 
number of sources (e.g., an individual, a family, or a 
corporation).
    The deduction for charitable contributions to private 
foundations is in some instances less generous than the 
deduction for charitable contributions to public charities. In 
addition, private foundations are subject to a number of 
operational rules and restrictions that do not apply to public 
charities.\1030\
---------------------------------------------------------------------------
    \1030\Unlike public charities, private foundations are subject to 
tax on their net investment income at a rate of two percent (one 
percent in some cases). Sec. 4940. Private foundations also are subject 
to more restrictions on their activities than are public charities. For 
example, private foundations are prohibited from engaging in self-
dealing transactions (sec. 4941), are required to make a minimum amount 
of charitable distributions each year, (sec. 4942), are limited in the 
extent to which they may control a business (sec. 4943), may not make 
speculative investments (sec. 4944), and may not make certain 
expenditures (sec. 4945). Violations of these rules result in excise 
taxes on the foundation and, in some cases, may result in excise taxes 
on the managers of the foundation.
---------------------------------------------------------------------------

Excise tax on investment income of private foundations

    Under section 4940(a), private foundations that are 
recognized as exempt from Federal income tax under section 
501(a) (other than exempt operating foundations)\1031\ are 
subject to a two-percent excise tax on their net investment 
income. Net investment income generally includes interest, 
dividends, rents, royalties (and income from similar sources), 
and capital gain net income, and is reduced by expenses 
incurred to earn this income. The two-percent rate of tax is 
reduced to one-percent in any year in which a foundation 
exceeds the average historical level of its charitable 
distributions. Specifically, the excise tax rate is reduced if 
the foundation's qualifying distributions (generally, amounts 
paid to accomplish exempt purposes)\1032\ equal or exceed the 
sum of (1) the amount of the foundation's assets for the 
taxable year multiplied by the average percentage of the 
foundation's qualifying distributions over the five taxable 
years immediately preceding the taxable year in question, and 
(2) one percent of the net investment income of the foundation 
for the taxable year.\1033\ In addition, the foundation cannot 
have been subject to tax in any of the five preceding years for 
failure to meet minimum qualifying distribution requirements in 
section 4942.\1034\
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    \1031\Exempt operating foundations are exempt from the section 4940 
tax. Sec. 4940(d)(1). Exempt operating foundations generally include 
organizations such as museums or libraries that devote their assets to 
operating charitable programs but have difficulty meeting the ``public 
support'' tests necessary not to be classified as a private foundation. 
To be an exempt operating foundation, an organization must: (1) be an 
operating foundation (as defined in section 4942(j)(3)); (2) be 
publicly supported for at least 10 taxable years; (3) have a governing 
body no more than 25 percent of whom are disqualified persons and that 
is broadly representative of the general public; and (4) have no 
officers who are disqualified persons. Sec. 4940(d)(2).
    \1032\Sec. 4942(g).
    \1033\Sec. 4940(e).
    \1034\Under a separate provision, the private foundation excise tax 
would be simplified by replacing the two-tier rate structure with a 
single-rate tax set at 1.4 percent.
---------------------------------------------------------------------------
    Private foundations that are not exempt from tax under 
section 501(a), such as certain charitable trusts, are subject 
to an excise tax under section 4940(b). The tax is equal to the 
excess of the sum of the excise tax that would have been 
imposed under section 4940(a) if the foundation were tax exempt 
and the amount of the tax on unrelated business income that 
would have been imposed if the foundation were tax exempt, over 
the income tax imposed on the foundation under subtitle A of 
the Code.
    Private foundations are required to make a minimum amount 
of qualifying distributions each year to avoid tax under 
section 4942. The minimum amount of qualifying distributions a 
foundation has to make to avoid tax under section 4942 is 
reduced by the amount of section 4940 excise taxes paid.\1035\
---------------------------------------------------------------------------
    \1035\Sec. 4942(d)(2).
---------------------------------------------------------------------------

Private colleges and universities

    Private colleges and universities generally are treated as 
public charities rather than private foundations\1036\ and thus 
are not subject to the private foundation excise tax on net 
investment income.
---------------------------------------------------------------------------
    \1036\Secs. 509(a)(1) and 170(b)(1)(A)(ii).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    In recent years, the endowment balances at many private 
colleges and universities have increased dramatically. At the 
same time, college tuition has risen at rates in excess of the 
rate of inflation. Where the endowment of a private college or 
university has grown so large that it is not commensurate with 
the scope of the institution's activities in educating 
students, the Committee believes it is appropriate to impose a 
modest excise tax on the investment income derived from the 
endowment.

                        EXPLANATION OF PROVISION

    The provision imposes an excise tax on an applicable 
educational institution for each taxable year equal to 1.4 
percent of the net investment income of the institution for the 
taxable year. Net investment income is determined using rules 
similar to the rules of section 4940(c) (relating to the net 
investment income of a private foundation).
    For purposes of the provision, an applicable educational 
institution is an institution: (1) that has at least 500 
students during the preceding taxable year; (2) that is an 
eligible education institution as described in section 25A of 
the Code;\1037\ (3) that is not described in the first section 
of section 511(a)(2)(B) of the Code (generally describing State 
colleges and universities); and (4) the aggregate fair market 
value of the assets of which at the end of the preceding 
taxable year (other than those assets that are used directly in 
carrying out the institution's exempt purpose)\1038\ is at 
least $250,000 per student. For these purposes, the number of 
students of an institution is based on the daily average number 
of full-time students attending the institution, with part-time 
students being taken into account on a full-time student 
equivalent basis.
---------------------------------------------------------------------------
    \1037\Section 25A defines an eligible educational institution as an 
institution (1) which is described in section 481 of the Higher 
Education Act of 1965 (20 U.S.C. sec. 1088), as in effect on August 5, 
1977, and (2) which is eligible to participate in a program under title 
IV of such Act.
    \1038\Assets used directly in carrying out the institution's exempt 
purpose include, for example, classroom buildings and physical 
facilities used for educational activities and office equipment or 
other administrative assets used by employees of the institution in 
carrying out exempt activities, among other assets. 1039 Secs. 
509(f)(3). 1040 Secs. 509(a)(3).
---------------------------------------------------------------------------
    For purposes of determining whether an institution meets 
the asset-per-student threshold and determining net investment 
income, assets and net investment income include amounts with 
respect to an organization that is related to the institution. 
An organization is treated as related to the institution for 
this purpose if the organization: (1) controls, or is 
controlled by, the institution; (2) is controlled by one or 
more persons that control the institution; or (3) is a 
supported organization\1039\ or a supporting organization\1040\ 
during the taxable year with respect to the institution.
---------------------------------------------------------------------------
    \1039\Secs. 509(f)(3).
    \1040\Secs. 509(a)(3).
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2017.

   4. Provide an exception to the private foundation excess business 
 holdings rules for philanthropic business holdings (sec. 5104 of the 
                    bill and sec. 4943 of the Code)

                              PRESENT LAW

Public charities and private foundations

    An organization qualifying for tax-exempt status under 
section 501(c)(3) is further classified as either a public 
charity or a private foundation. An organization may qualify as 
a public charity in several ways.\1041\ Certain organizations 
are classified as public charities per se, regardless of their 
sources of support. These include churches, certain schools, 
hospitals and other medical organizations (including medical 
research organizations), certain organizations providing 
assistance to colleges and universities, and governmental 
units.\1042\ Other organizations qualify as public charities 
because they are broadly publicly supported. First, a charity 
may qualify as publicly supported if at least one-third of its 
total support is from gifts, grants, or other contributions 
from governmental units or the general public.\1043\ 
Alternatively, it may qualify as publicly supported if it 
receives more than one-third of its total support from a 
combination of gifts, grants, and contributions from 
governmental units and the public plus revenue arising from 
activities related to its exempt purposes (e.g., fee for 
service income). In addition, this category of public charity 
must not rely excessively on endowment income as a source of 
support.\1044\ A supporting organization, i.e., an organization 
that provides support to another section 501(c)(3) entity that 
is not a private foundation and meets certain other 
requirements of the Code, also is classified as a public 
charity.\1045\
---------------------------------------------------------------------------
    \1041\The Code does not expressly define the term ``public 
charity,'' but rather provides exceptions to those entities that are 
treated as private foundations.
    \1042\Sec. 509(a)(1) (referring to sections 170(b)(1)(A)(i) through 
(iv) for a description of these organizations).
    \1043\Treas. Reg. sec. 1.170A-9(f)(2). Failing this mechanical 
test, the organization may qualify as a public charity if it passes a 
``facts and circumstances'' test. Treas. Reg. sec. 1.170A-9(f)(3).
    \1044\To meet this requirement, the organization must normally 
receive more than one-third of its support from a combination of (1) 
gifts, grants, contributions, or membership fees and (2) certain gross 
receipts from admissions, sales of merchandise, performance of 
services, and furnishing of facilities in connection with activities 
that are related to the organization's exempt purposes. Sec. 
509(a)(2)(A). In addition, the organization must not normally receive 
more than one-third of its public support in each taxable year from the 
sum of (1) gross investment income and (2) the excess of unrelated 
business taxable income as determined under section 512 over the amount 
of unrelated business income tax imposed by section 511. Sec. 
509(a)(2)(B).
    \1045\Sec. 509(a)(3). Organizations organized and operated 
exclusively for testing for public safety also are classified as public 
charities. Sec. 509(a)(4). Such organizations, however, are not 
eligible to receive deductible charitable contributions under section 
170.
---------------------------------------------------------------------------
    A section 501(c)(3) organization that does not fit within 
any of the above categories is a private foundation. In 
general, private foundations receive funding from a limited 
number of sources (e.g., an individual, a family, or a 
corporation).
    The deduction for charitable contributions to private 
foundations is in some instances less generous than the 
deduction for charitable contributions to public charities. In 
addition, private foundations are subject to a number of 
operational rules and restrictions that do not apply to public 
charities, as well as a tax on their net investment 
income.\1046\
---------------------------------------------------------------------------
    \1046\Unlike public charities, private foundations are subject to 
tax on their net investment income at a rate of two percent (one 
percent in some cases). Sec. 4940. Private foundations also are subject 
to more restrictions on their activities than are public charities. For 
example, private foundations are prohibited from engaging in self-
dealing transactions (sec. 4941), are required to make a minimum amount 
of charitable distributions each year (sec. 4942), are limited in the 
extent to which they may control a business (sec. 4943), may not make 
speculative investments (sec. 4944), and may not make certain 
expenditures (sec. 4945). Violations of these rules result in excise 
taxes on the foundation and, in some cases, may result in excise taxes 
on the managers of the foundation.
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Excess business holdings of private foundations

    Private foundations are subject to tax on excess business 
holdings.\1047\ In general, a private foundation is permitted 
to hold 20 percent of the voting stock in a corporation, 
reduced by the amount of voting stock held by all disqualified 
persons (as defined in section 4946). If it is established that 
no disqualified person has effective control of the 
corporation, a private foundation and disqualified persons 
together may own up to 35 percent of the voting stock of a 
corporation. A private foundation shall not be treated as 
having excess business holdings in any corporation if it owns 
(together with certain other related private foundations) not 
more than two percent of the voting stock and not more than two 
percent in value of all outstanding shares of all classes of 
stock in that corporation. Similar rules apply with respect to 
holdings in a partnership (substituting ``profits interest'' 
for ``voting stock'' and ``capital interest'' for ``nonvoting 
stock'') and to other unincorporated enterprises (by 
substituting ``beneficial interest'' for ``voting stock''). 
Private foundations are not permitted to have holdings in a 
proprietorship. Foundations generally have a five-year period 
to dispose of excess business holdings (acquired other than by 
purchase) without being subject to tax.\1048\ This five-year 
period may be extended an additional five years in limited 
circumstances.\1049\ The excess business holdings rules do not 
apply to holdings in a functionally related business or to 
holdings in a trade or business at least 95 percent of the 
gross income of which is derived from passive sources.\1050\
---------------------------------------------------------------------------
    \1047\Sec. 4943. Taxes imposed may be abated if certain conditions 
are met. Secs. 4961 and 4962.
    \1048\Sec. 4943(c)(6).
    \1049\Sec. 4943(c)(7).
    \1050\Sec. 4943(d)(3).
---------------------------------------------------------------------------
    The initial tax is equal to five percent of the value of 
the excess business holdings held during the foundation's 
applicable taxable year. An additional tax is imposed if an 
initial tax is imposed and at the close of the applicable 
taxable period, the foundation continues to hold excess 
business holdings. The amount of the additional tax is equal to 
200 percent of such holdings.

                           REASONS FOR CHANGE

    In recent years, a new type of philanthropy has combined 
private sector entrepreneurship with charitable giving, such as 
through the donation of a private company's after-tax profits 
to charity. The Committee believes it is appropriate to 
encourage this form of philanthropy by eliminating certain 
legal impediments to its use, while also ensuring that private 
individuals cannot improperly benefit from amounts intended for 
a charitable purpose or inappropriately manage a taxable 
business. The Committee therefore believes it is appropriate to 
create an exception to the present-law private foundation 
excess business holdings rules for certain philanthropic 
business holdings. By so doing, the law will permit private 
philanthropists to bequeath an entire business to a private 
foundation, provided that the after-tax profits of the business 
will be paid to the foundation and certain other requirements 
are satisfied, while also ensuring that the donor's heirs 
cannot improperly benefit from the arrangement.

                        EXPLANATION OF PROVISION

    The provision creates an exception to the excess business 
holdings rules for certain philanthropic business holdings. 
Specifically, the tax on excess business holdings does not 
apply with respect to the holdings of a private foundation in 
any business enterprise that, for the taxable year, satisfies 
the following requirements: (1) the ownership requirements; (2) 
the ``all profits to charity'' distribution requirement; and 
(3) the independent operation requirements.
    The ownership requirements are satisfied if: (1) all 
ownership interests in the business enterprise are held by the 
private foundation at all times during the taxable year; and 
(2) all the private foundation's ownership interests in the 
business enterprise were acquired not by purchase.
    The ``all profits to charity'' distribution requirement is 
satisfied if the business enterprise, not later than 120 days 
after the close of the taxable year, distributes an amount 
equal to its net operating income for such taxable year to the 
private foundation. For this purpose, the net operating income 
of any business enterprise for any taxable year is an amount 
equal to the gross income of the business enterprise for the 
taxable year, reduced by the sum of: (1) the deductions allowed 
by chapter 1 of the Code for the taxable year that are directly 
connected with the production of the income; (2) the tax 
imposed by chapter 1 on the business enterprise for the taxable 
year; and (3) an amount for a reasonable reserve for working 
capital and other business needs of the business enterprise.
    The independent operation requirements are met if, at all 
times during the taxable year, the following three requirements 
are satisfied. First, no substantial contributor to the private 
foundation, or family member of such a contributor, is a 
director, officer, trustee, manager, employee, or contractor of 
the business enterprise (or an individual having powers or 
responsibilities similar to any of the foregoing). Second, at 
least a majority of the board of directors of the private 
foundation are not also directors or officers of the business 
enterprise or members of the family of a substantial 
contributor to the private foundation. Third, there is no loan 
outstanding from the business enterprise to a substantial 
contributor to the private foundation or a family member of 
such contributor. For purposes of the independent operation 
requirements, ``substantial contributor'' has the meaning given 
to the term under section 4958(c)(3)(C), and family members are 
determined under section 4958(f)(4).
    The provision does not apply to the following 
organizations: (1) donor advised funds or supporting 
organizations that are subject to the excess business holdings 
rules by reason of section 4943(e) or (f); (2) any trust 
described in section 4947(a)(1) (relating to charitable 
trusts); or (3) any trust described in section 4947(a)(2) 
(relating to split-interest trusts).

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2017.

           C. Requirements for Organizations Exempt From Tax

    1. Section 501(c)(3) organizations permitted to make statements 
  relating to political campaign in ordinary course of activities in 
carrying out exempt purpose (sec. 5201 of the bill and sec. 501 of the 
                                 Code)

                              PRESENT LAW

Section 501(c)(3) organizations

    Charitable organizations, i.e., organizations described in 
section 501(c)(3), generally are exempt from Federal income tax 
and are eligible to receive tax deductible contributions. A 
charitable organization must operate primarily in pursuance of 
one or more tax-exempt purposes constituting the basis of its 
tax exemption.\1051\ The Code specifies such purposes as 
religious, charitable, scientific, testing for public safety, 
literary, or educational purposes, or to foster international 
amateur sports competition, or for the prevention of cruelty to 
children or animals.\1052\ In general, an organization is 
organized and operated for charitable purposes if it provides 
relief for the poor and distressed or the underprivileged. In 
order to qualify as operating primarily for a purpose described 
in section 501(c)(3), an organization must satisfy the 
following operational requirements: (1) its net earnings may 
not inure to the benefit of any person in a position to 
influence the activities of the organization; (2) it must 
operate to provide a public benefit, not a private 
benefit;\1053\ (3) it may not be operated primarily to conduct 
an unrelated trade or business;\1054\ (4) it may not engage in 
substantial legislative lobbying; and (5) it may not 
participate or intervene in any political campaign.
---------------------------------------------------------------------------
    \1051\Treas. Reg. sec. 1.501(c)(3)-1(c)(1).
    \1052\Treas. Reg. sec. 1.501(c)(3)-1(d)(2).
    \1053\Treas. Reg. sec. 1.501(c)(3)-1(d)(1)(ii).
    \1054\Treas. Reg. sec. 1.501(c)(3)-1(e)(1). Conducting a certain 
level of unrelated trade or business activity will not jeopardize tax-
exempt status.
---------------------------------------------------------------------------
    Section 501(c)(3) organizations are classified either as 
``public charities'' or ``private foundations.''\1055\ Private 
foundations generally are defined under section 509(a) as all 
organizations described in section 501(c)(3) other than an 
organization granted public charity status by reason of: (1) 
being a specified type of organization (i.e., churches, 
educational institutions, hospitals and certain other medical 
organizations, certain organizations providing assistance to 
colleges and universities, or a governmental unit); (2) 
receiving a substantial part of its support from governmental 
units or direct or indirect contributions from the general 
public; or (3) providing support to another section 501(c)(3) 
entity that is not a private foundation. In contrast to public 
charities, private foundations generally are funded from a 
limited number of sources (e.g., an individual, family, or 
corporation). Donors to private foundations and persons related 
to such donors together often control the operations of private 
foundations.
---------------------------------------------------------------------------
    \1055\Sec. 509(a).
---------------------------------------------------------------------------
    Because private foundations receive support from, and 
typically are controlled by, a small number of supporters, 
private foundations are subject to a number of anti-abuse rules 
and excise taxes not applicable to public charities.\1056\ 
Public charities also have certain advantages over private 
foundations regarding the deductibility of contributions.
---------------------------------------------------------------------------
    \1056\Secs. 4940-4945.
---------------------------------------------------------------------------

Political campaign activities

    Charitable organizations may not participate in, or 
intervene in (including the publishing or distributing of 
statements), any political campaign on behalf of (or in 
opposition to) any candidate for public office.\1057\ The 
prohibition on such political campaign activity is absolute 
and, in general, includes activities such as making 
contributions to a candidate's political campaign, endorsements 
of a candidate, lending employees to work in a political 
campaign, or providing facilities for use by a candidate. The 
absolute prohibition on campaign activities was added in 1954 
by the so called ``Johnson amendment.''\1058\ Many other 
activities may constitute political campaign activity, 
depending on the facts and circumstances. The sanction for a 
violation of the prohibition is loss of the organization's tax-
exempt status.
---------------------------------------------------------------------------
    \1057\Sec. 501(c)(3).
    \1058\Internal Revenue Code of 1954, sec. 501(c)(3), Pub. L. No. 
591 (August 16, 1954).
---------------------------------------------------------------------------
    For organizations that engage in prohibited political 
campaign activity, the Code provides three penalties that may 
be applied either as alternatives to revocation of tax 
exemption or in addition to loss of tax-exempt status: an 
excise tax on political expenditures,\1059\ termination 
assessment of all taxes due,\1060\ and an injunction against 
further political expenditures.\1061\
---------------------------------------------------------------------------
    \1059\Sec. 4955.
    \1060\Sec. 6852(a)(1).
    \1061\Sec. 7409.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that the Johnson amendment's 
prohibition on the making of candidate-related statements 
creates an undue chilling effect on free speech by curtailing 
charity employees'--including ministers' and other religious 
leaders'--expression of their political opinions. The Committee 
therefore believes that the restriction should be modified to 
permit charities to engage in certain candidate-related speech 
in the course of their exempt activities in a manner that would 
not fundamentally change the nature of what makes them 
charities under the Code.

                        EXPLANATION OF PROVISION

    The provision modifies the present-law rules relating to 
political campaign activity by section 501(c)(3) organizations 
for the following purposes: (1) section 501(c)(3) tax-exempt 
status; (2) qualifying as an eligible recipient of tax-
deductible contributions for income,\1062\ gift,\1063\ and 
estate tax\1064\ purposes; and (3) application of the excise 
tax on political expenditures by section 501(c)(3) 
organizations.\1065\
---------------------------------------------------------------------------
    \1062\Sec. 170(c)(2).
    \1063\Sec. 2522.
    \1064\Secs. 2055 and 2106.
    \1065\Sec. 4955.
---------------------------------------------------------------------------
    For such purposes, an organization shall not fail to be 
treated as organized and operated exclusively for a purpose 
described in section 501(c)(3), nor shall it be deemed to have 
participated in, or intervened in any political campaign on 
behalf of (or in opposition to) any candidate for public 
office, solely because of the content of any statement that: 
(A) is made in the ordinary course of the organization's 
regular and customary activities in carrying out its exempt 
purpose; and (B) results in the organization incurring not more 
than de minimis incremental expenses.
    The provision does not apply to taxable years beginning 
after December 31, 2023.

                             EFFECTIVE DATE

    The provision is effective for taxable years beginning 
after December 31, 2018.

2. Additional reporting requirements for donor advised fund sponsoring 
    organizations (sec. 5202 of the bill and sec. 6033 of the Code)

                              PRESENT LAW

Overview

    Some charitable organizations (including community 
foundations) establish accounts to which donors may contribute 
and thereafter provide nonbinding advice or recommendations 
with regard to distributions from the fund or the investment of 
assets in the fund. Such accounts are commonly referred to as 
``donor advised funds.'' Donors who make contributions to 
charities for maintenance in a donor advised fund generally 
claim a charitable contribution deduction at the time of the 
contribution.\1066\ Although sponsoring charities frequently 
permit donors (or other persons appointed by donors) to provide 
nonbinding recommendations concerning the distribution or 
investment of assets in a donor advised fund, sponsoring 
charities generally must have legal ownership and control of 
such assets following the contribution. If the sponsoring 
charity does not have such control (or permits a donor to 
exercise control over amounts contributed), the donor's 
contributions may not qualify for a charitable deduction, and, 
in the case of a community foundation, the contribution may be 
treated as being subject to a material restriction or condition 
by the donor.
---------------------------------------------------------------------------
    \1066\Contributions to a sponsoring organization for maintenance in 
a donor advised fund are not eligible for a charitable deduction for 
income tax purposes if the sponsoring organization is a veterans' 
organization described in section 170(c)(3), a fraternal society 
described in section 170(c)(4), or a cemetery company described in 
section 170(c)(5); for gift tax purposes if the sponsoring organization 
is a fraternal society described in section 2522(a)(3) or a veterans' 
organization described in section 2522(a)(4); or for estate tax 
purposes if the sponsoring organization is a fraternal society 
described in section 2055(a)(3) or a veterans' organization described 
in section 2055(a)(4). In addition, contributions to a sponsoring 
organization for maintenance in a donor advised fund are not eligible 
for a charitable deduction for income, gift, or estate tax purposes if 
the sponsoring organization is a Type III supporting organization 
(other than a functionally integrated Type III supporting 
organization). In addition to satisfying generally applicable 
substantiation requirements under section 170(f), a donor must obtain, 
with respect to each charitable contribution to a sponsoring 
organization to be maintained in a donor advised fund, a 
contemporaneous written acknowledgment from the sponsoring organization 
providing that the sponsoring organization has exclusive legal control 
over the assets contributed.
---------------------------------------------------------------------------

Statutory definition of a donor advised fund

    The Code defines a ``donor advised fund'' as a fund or 
account that is: (1) separately identified by reference to 
contributions of a donor or donors; (2) owned and controlled by 
a sponsoring organization; and (3) with respect to which a 
donor (or any person appointed or designated by such donor (a 
``donor advisor'')) has, or reasonably expects to have, 
advisory privileges with respect to the distribution or 
investment of amounts held in the separately identified fund or 
account by reason of the donor's status as a donor. All three 
prongs of the definition must be met in order for a fund or 
account to be treated as a donor advised fund.\1067\
---------------------------------------------------------------------------
    \1067\See sec. 4966(d)(2)(A). A donor advised fund does not include 
a fund or account that makes distributions only to a single identified 
organization or governmental entity. A donor advised fund also does not 
include certain funds or accounts with respect to which a donor or 
donor advisor provides advice as to which individuals receive grants 
for travel, study, or other similar purposes. In addition, the 
Secretary may exempt a fund or account from treatment as a donor 
advised fund if such fund or account is advised by a committee not 
directly or indirectly controlled by a donor, donor advisor, or persons 
related to a donor or donor advisor. The Secretary also may exempt a 
fund or account from treatment as a donor advised fund if such fund or 
account benefits a single identified charitable purpose. Secs. 
4966(d)(2)(B) and (C).
---------------------------------------------------------------------------
    A ``sponsoring organization'' is an organization that: (1) 
is described in section 170(c)\1068\ (other than a governmental 
entity described in section 170(c)(1), and without regard to 
any requirement that the organization be organized in the 
United States\1069\); (2) is not a private foundation (as 
defined in section 509(a)); and (3) maintains one or more donor 
advised funds.\1070\
---------------------------------------------------------------------------
    \1068\Section 170(c) describes organizations to which charitable 
contributions that are deductible for income tax purposes can be made.
    \1069\See sec. 170(c)(2)(A).
    \1070\Sec. 4966(d)(1).
---------------------------------------------------------------------------

Reporting and disclosure

    Each sponsoring organization must disclose on its 
information return: (1) the total number of donor advised funds 
it owns; (2) the aggregate value of assets held in those funds 
at the end of the organization's taxable year; and (3) the 
aggregate contributions to and grants made from those funds 
during the year.\1071\ In addition, when seeking recognition of 
its tax-exempt status, a sponsoring organization must disclose 
whether it intends to maintain donor advised funds.\1072\
---------------------------------------------------------------------------
    \1071\Sec. 6033(k).
    \1072\Sec. 508(f).
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    Organizations that sponsor donor advised funds are now 
among the largest charities in the United States. To better 
understand the operations of donor advised funds and to enhance 
public oversight of the tax-exempt sector, the Committee 
believes it is in the interest of the public and policymakers 
to require sponsoring organizations to report on their annual 
information returns additional information regarding levels of 
grant making from donor advised funds and policies implemented 
by the sponsoring organization relating to distributions from 
donor advised funds.

                        EXPLANATION OF PROVISION

    The provision requires a sponsoring organization to report 
additional information on its annual information return (Form 
990). Sponsoring organizations must indicate: (1) the average 
amount of grants made from donor advised funds during the 
taxable year (expressed as a percentage of the value of assets 
held in such funds at the beginning of the taxable year), and 
(2) whether the organization has a policy with respect to donor 
advised funds relating to the frequency and minimum level of 
distributions from donor advised funds. The sponsoring 
organization must include with its return a copy of any such 
policy.

                             EFFECTIVE DATE

    The provision is effective for returns filed for taxable 
years beginning after December 31, 2017.

                      III. VOTES OF THE COMMITTEE

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November 
6, 2017.
    The vote on Mr. Doggett's motion to postpone consideration 
of H.R. 1 was not agreed to by a roll call vote of 16 yeas to 
24 nays (with a quorum being present). The vote was as follows:

----------------------------------------------------------------------------------------------------------------
          Representative             Yea      Nay     Present      Representative      Yea      Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................  .......       X   .........  Mr. Neal...........       X   .......  .........
Mr. Johnson......................  .......       X   .........  Mr. Levin..........       X   .......  .........
Mr. Nunes........................  .......       X   .........  Mr. Lewis..........       X   .......  .........
Mr. Tiberi.......................  .......       X   .........  Mr. Doggett........       X   .......  .........
Mr. Reichert.....................  .......       X   .........  Mr. Thompson.......       X   .......  .........
Mr. Roskam.......................  .......       X   .........  Mr. Larson.........       X   .......  .........
Mr. Buchanan.....................  .......       X   .........  Mr. Blumenauer.....       X   .......  .........
Mr. Smith (NE)...................  .......       X   .........  Mr. Kind...........       X   .......  .........
Ms. Jenkins......................  .......       X   .........  Mr. Pascrell.......       X   .......  .........
Mr. Paulsen......................  .......       X   .........  Mr. Crowley........       X   .......  .........
Mr. Marchant.....................  .......       X   .........  Mr. Davis..........       X   .......  .........
Ms. Black........................  .......       X   .........  Ms. Sanchez........       X   .......  .........
Mr. Reed.........................  .......       X   .........  Mr. Higgins........       X   .......  .........
Mr. Kelly........................  .......       X   .........  Ms. Sewell.........       X   .......  .........
Mr. Renacci......................  .......       X   .........  Ms. DelBene........       X   .......  .........
Mr. Meehan.......................  .......       X   .........  Ms. Chu............       X   .......  .........
Ms. Noem.........................  .......       X   .........
Mr. Holding......................  .......       X   .........
Mr. Smith (MO)...................  .......       X   .........
Mr. Rice.........................  .......       X   .........
Mr. Schweikert...................  .......       X   .........
Ms. Walorski.....................  .......       X   .........
Mr. Curbelo......................  .......       X   .........
Mr. Bishop.......................  .......       X   .........
----------------------------------------------------------------------------------------------------------------

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November 
6, 2017.
    The vote on the amendment offered by Mr. Brady to the 
amendment in the nature of a substitute to H.R. 1, which would 
make modifications to several tax provisions including 
administration of the earned income tax credit program, the 
exclusion from gross income for dependent care assistance, the 
tax on investment income on endowments, the tax treatment of 
musical compositions, stock option compensation, carried 
interest, and the rules on international base erosion, was 
agreed to by a roll call vote of 24 yeas to 16 nays (with a 
quorum being present). The vote was as follows:

----------------------------------------------------------------------------------------------------------------
          Representative             Yea      Nay     Present      Representative      Yea      Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................       X   .......  .........  Mr. Neal...........  .......       X   .........
Mr. Johnson......................       X   .......  .........  Mr. Levin..........  .......       X   .........
Mr. Nunes........................       X   .......  .........  Mr. Lewis..........  .......       X   .........
Mr. Tiberi.......................       X   .......  .........  Mr. Doggett........  .......       X   .........
Mr. Reichert.....................       X   .......  .........  Mr. Thompson.......  .......       X   .........
Mr. Roskam.......................       X   .......  .........  Mr. Larson.........  .......       X   .........
Mr. Buchanan.....................       X   .......  .........  Mr. Blumenauer.....  .......       X   .........
Mr. Smith (NE)...................       X   .......  .........  Mr. Kind...........  .......       X   .........
Ms. Jenkins......................       X   .......  .........  Mr. Pascrell.......  .......       X   .........
Mr. Paulsen......................       X   .......  .........  Mr. Crowley........  .......       X   .........
Mr. Marchant.....................       X   .......  .........  Mr. Davis..........  .......       X   .........
Ms. Black........................       X   .......  .........  Ms. Sanchez........  .......       X   .........
Mr. Reed.........................       X   .......  .........  Mr. Higgins........  .......       X   .........
Mr. Kelly........................       X   .......  .........  Ms. Sewell.........  .......       X   .........
Mr. Renacci......................       X   .......  .........  Ms. DelBene........  .......       X   .........
Mr. Meehan.......................       X   .......  .........  Ms. Chu............  .......       X   .........
Ms. Noem.........................       X   .......
Mr. Holding......................       X   .......  .........
Mr. Smith (MO)...................       X   .......  .........
Mr. Rice.........................       X   .......  .........
Mr. Schweikert...................       X   .......  .........
Ms. Walorski.....................       X   .......  .........
Mr. Curbelo......................       X   .......  .........
Mr. Bishop.......................       X   .......  .........
----------------------------------------------------------------------------------------------------------------

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November 
7, 2017.
    The vote on the amendment offered by Mr. Blumenauer to the 
amendment in the nature of a substitute to H.R. 1, which would 
sunset H.R. 1 in the event the deficit increases, was not 
agreed to by a roll call vote of 16 yeas to 23 nays (with a 
quorum being present). The vote was as follows:

----------------------------------------------------------------------------------------------------------------
          Representative             Yea      Nay     Present      Representative      Yea      Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................  .......       X   .........  Mr. Neal...........       X   .......  .........
Mr. Johnson......................  .......       X   .........  Mr. Levin..........       X   .......  .........
Mr. Nunes........................  .......       X   .........  Mr. Lewis..........       X   .......  .........
Mr. Tiberi.......................  .......       X   .........  Mr. Doggett........       X   .......  .........
Mr. Reichert.....................  .......       X   .........  Mr. Thompson.......       X   .......  .........
Mr. Roskam.......................  .......       X   .........  Mr. Larson.........       X   .......  .........
Mr. Buchanan.....................  .......       X   .........  Mr. Blumenauer.....       X   .......  .........
Mr. Smith (NE)...................  .......       X   .........  Mr. Kind...........       X   .......  .........
Ms. Jenkins......................  .......       X   .........  Mr. Pascrell.......       X   .......  .........
Mr. Paulsen......................  .......       X   .........  Mr. Crowley........       X   .......  .........
Mr. Marchant.....................  .......       X   .........  Mr. Davis..........       X   .......  .........
Ms. Black........................  .......       X   .........  Ms. Sanchez........       X   .......  .........
Mr. Reed.........................  .......       X   .........  Mr. Higgins........       X   .......  .........
Mr. Kelly........................  .......       X   .........  Ms. Sewell.........       X   .......  .........
Mr. Renacci......................  .......       X   .........  Ms. DelBene........       X   .......  .........
Mr. Meehan.......................  .......       X   .........  Ms. Chu............       X   .......  .........
Ms. Noem.........................  .......       X   .........
Mr. Holding......................  .......       X   .........
Mr. Smith (MO)...................  .......       X   .........
Mr. Rice.........................  .......  .......  .........
Mr. Schweikert...................  .......       X   .........
Ms. Walorski.....................  .......       X   .........
Mr. Curbelo......................  .......       X   .........
Mr. Bishop.......................  .......       X   .........
----------------------------------------------------------------------------------------------------------------

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November 
7, 2017.
    The vote on the amendment offered by Mr. Pascrell to the 
amendment in the nature of a substitute to H.R. 1, which would 
strike the changes to the state and local deduction, was not 
agreed to by a roll call vote of 16 yeas to 23 nays (with a 
quorum being present). The vote was as follows:

----------------------------------------------------------------------------------------------------------------
          Representative             Yea      Nay     Present      Representative      Yea      Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................  .......       X   .........  Mr. Neal...........       X   .......  .........
Mr. Johnson......................  .......       X   .........  Mr. Levin..........       X   .......  .........
Mr. Nunes........................  .......       X   .........  Mr. Lewis..........       X   .......  .........
Mr. Tiberi.......................  .......       X   .........  Mr. Doggett........       X   .......  .........
Mr. Reichert.....................  .......       X   .........  Mr. Thompson.......       X   .......  .........
Mr. Roskam.......................  .......       X   .........  Mr. Larson.........       X   .......  .........
Mr. Buchanan.....................  .......       X   .........  Mr. Blumenauer.....       X   .......  .........
Mr. Smith (NE)...................  .......       X   .........  Mr. Kind...........       X   .......  .........
Ms. Jenkins......................  .......       X   .........  Mr. Pascrell.......       X   .......  .........
Mr. Paulsen......................  .......       X   .........  Mr. Crowley........       X   .......  .........
Mr. Marchant.....................  .......       X   .........  Mr. Davis..........       X   .......  .........
Ms. Black........................  .......  .......  .........  Ms. Sanchez........       X   .......  .........
Mr. Reed.........................  .......       X   .........  Mr. Higgins........       X   .......  .........
Mr. Kelly........................  .......       X   .........  Ms. Sewell.........       X   .......  .........
Mr. Renacci......................  .......       X   .........  Ms. DelBene........       X   .......  .........
Mr. Meehan.......................  .......       X   .........  Ms. Chu............       X   .......  .........
Ms. Noem.........................  .......       X   .........
Mr. Holding......................  .......       X   .........
Mr. Smith (MO)...................  .......       X   .........
Mr. Rice.........................  .......       X   .........
Mr. Schweikert...................  .......       X   .........
Ms. Walorski.....................  .......       X   .........
Mr. Curbelo......................  .......       X   .........
Mr. Bishop.......................  .......       X   .........
----------------------------------------------------------------------------------------------------------------

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November 
7, 2017.
    The vote on the amendment offered by Mr. Kind to the 
amendment in the nature of a substitute to H.R. 1, which would 
repeal the state and local tax deduction for all business 
organizations, was not agreed to by a roll call vote of 15 yeas 
to 23 nays (with a quorum being present). The vote was as 
follows:

----------------------------------------------------------------------------------------------------------------
          Representative             Yea      Nay     Present      Representative      Yea      Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................  .......       X   .........  Mr. Neal...........       X   .......  .........
Mr. Johnson......................  .......       X   .........  Mr. Levin..........       X   .......  .........
Mr. Nunes........................  .......       X   .........  Mr. Lewis..........       X   .......  .........
Mr. Tiberi.......................  .......       X   .........  Mr. Doggett........       X   .......  .........
Mr. Reichert.....................  .......       X   .........  Mr. Thompson.......       X   .......  .........
Mr. Roskam.......................  .......       X   .........  Mr. Larson.........       X   .......  .........
Mr. Buchanan.....................  .......       X   .........  Mr. Blumenauer.....       X   .......  .........
Mr. Smith (NE)...................  .......       X   .........  Mr. Kind...........       X   .......  .........
Ms. Jenkins......................  .......       X   .........  Mr. Pascrell.......       X   .......  .........
Mr. Paulsen......................  .......       X   .........  Mr. Crowley........       X   .......  .........
Mr. Marchant.....................  .......       X   .........  Mr. Davis..........       X   .......  .........
Ms. Black........................  .......  .......  .........  Ms. Sanchez........       X   .......  .........
Mr. Reed.........................  .......       X   .........  Mr. Higgins........  .......  .......  .........
Mr. Kelly........................  .......       X   .........  Ms. Sewell.........       X   .......  .........
Mr. Renacci......................  .......       X   .........  Ms. DelBene........       X   .......  .........
Mr. Meehan.......................  .......       X   .........  Ms. Chu............       X   .......  .........
Ms. Noem.........................  .......       X   .........
Mr. Holding......................  .......       X   .........
Mr. Smith (MO)...................  .......       X   .........
Mr. Rice.........................  .......       X   .........
Mr. Schweikert...................  .......       X   .........
Ms. Walorski.....................  .......       X   .........
Mr. Curbelo......................  .......       X   .........
Mr. Bishop.......................  .......       X   .........
----------------------------------------------------------------------------------------------------------------

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November 
7, 2017.
    The vote on the amendment offered by Mr. Kind to the 
amendment in the nature of a substitute to H.R. 1, which would 
restore the Work Opportunity Tax Credit, was not agreed to by a 
roll call vote of 16 yeas to 23 nays (with a quorum being 
present). The vote was as follows:

----------------------------------------------------------------------------------------------------------------
          Representative             Yea      Nay     Present      Representative      Yea      Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................  .......       X   .........  Mr. Neal...........       X   .......  .........
Mr. Johnson......................  .......       X   .........  Mr. Levin..........       X   .......  .........
Mr. Nunes........................  .......       X   .........  Mr. Lewis..........       X   .......  .........
Mr. Tiberi.......................  .......       X   .........  Mr. Doggett........       X   .......  .........
Mr. Reichert.....................  .......       X   .........  Mr. Thompson.......       X   .......  .........
Mr. Roskam.......................  .......       X   .........  Mr. Larson.........       X   .......  .........
Mr. Buchanan.....................  .......       X   .........  Mr. Blumenauer.....       X   .......  .........
Mr. Smith (NE)...................  .......       X   .........  Mr. Kind...........       X   .......  .........
Ms. Jenkins......................  .......       X   .........  Mr. Pascrell.......       X   .......  .........
Mr. Paulsen......................  .......       X   .........  Mr. Crowley........       X   .......  .........
Mr. Marchant.....................  .......       X   .........  Mr. Davis..........       X   .......  .........
Ms. Black........................  .......  .......  .........  Ms. Sanchez........       X   .......  .........
Mr. Reed.........................  .......       X   .........  Mr. Higgins........       X   .......  .........
Mr. Kelly........................  .......       X   .........  Ms. Sewell.........       X   .......  .........
Mr. Renacci......................  .......       X   .........  Ms. DelBene........       X   .......  .........
Mr. Meehan.......................  .......       X   .........  Ms. Chu............       X   .......  .........
Ms. Noem.........................  .......       X   .........
Mr. Holding......................  .......       X   .........
Mr. Smith (MO)...................  .......       X   .........
Mr. Rice.........................  .......       X   .........
Mr. Schweikert...................  .......       X   .........
Ms. Walorski.....................  .......       X   .........
Mr. Curbelo......................  .......       X   .........
Mr. Bishop.......................  .......       X   .........
----------------------------------------------------------------------------------------------------------------

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November 
7, 2017.
    The vote on the amendment offered by Ms. Sanchez to the 
amendment in the nature of a substitute to H.R. 1, which would 
expand the Child Tax Credit and make permanent the $300 
``family flexibility'' credit, was not agreed to by a roll call 
vote of 16 yeas to 23 nays (with a quorum being present). The 
vote was as follows:

----------------------------------------------------------------------------------------------------------------
          Representative             Yea      Nay     Present      Representative      Yea      Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................  .......       X   .........  Mr. Neal...........       X   .......  .........
Mr. Johnson......................  .......       X   .........  Mr. Levin..........       X   .......  .........
Mr. Nunes........................  .......       X   .........  Mr. Lewis..........       X   .......  .........
Mr. Tiberi.......................  .......       X   .........  Mr. Doggett........       X   .......  .........
Mr. Reichert.....................  .......       X   .........  Mr. Thompson.......       X   .......  .........
Mr. Roskam.......................  .......       X   .........  Mr. Larson.........       X   .......  .........
Mr. Buchanan.....................  .......       X   .........  Mr. Blumenauer.....       X   .......  .........
Mr. Smith (NE)...................  .......       X   .........  Mr. Kind...........       X   .......  .........
Ms. Jenkins......................  .......       X   .........  Mr. Pascrell.......       X   .......  .........
Mr. Paulsen......................  .......       X   .........  Mr. Crowley........       X   .......  .........
Mr. Marchant.....................  .......       X   .........  Mr. Davis..........       X   .......  .........
Ms. Black........................  .......  .......  .........  Ms. Sanchez........       X   .......  .........
Mr. Reed.........................  .......       X   .........  Mr. Higgins........       X   .......  .........
Mr. Kelly........................  .......       X   .........  Ms. Sewell.........       X   .......  .........
Mr. Renacci......................  .......       X   .........  Ms. DelBene........       X   .......  .........
Mr. Meehan.......................  .......       X   .........  Ms. Chu............       X   .......  .........
Ms. Noem.........................  .......       X   .........
Mr. Holding......................  .......       X   .........
Mr. Smith (MO)...................  .......       X   .........
Mr. Rice.........................  .......       X   .........
Mr. Schweikert...................  .......       X   .........
Ms. Walorski.....................  .......       X   .........
Mr. Curbelo......................  .......       X   .........
Mr. Bishop.......................  .......       X   .........
----------------------------------------------------------------------------------------------------------------

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November 
7, 2017.
    The vote on the amendment offered by Mr. Davis to the 
amendment in the nature of a substitute to H.R. 1, which would 
reinstate the Adoption Tax Credit, the exclusion for employer-
related dependent care, and the exclusion for employer-related 
adoption assistance and expand the Child and Dependent Care Tax 
Credit, was not agreed to by a roll call vote of 16 yeas to 23 
nays (with a quorum being present). The vote was as follows:

----------------------------------------------------------------------------------------------------------------
          Representative             Yea      Nay     Present      Representative      Yea      Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................  .......       X   .........  Mr. Neal...........       X   .......  .........
Mr. Johnson......................  .......       X   .........  Mr. Levin..........       X   .......  .........
Mr. Nunes........................  .......       X   .........  Mr. Lewis..........       X   .......  .........
Mr. Tiberi.......................  .......       X   .........  Mr. Doggett........       X   .......  .........
Mr. Reichert.....................  .......       X   .........  Mr. Thompson.......       X   .......  .........
Mr. Roskam.......................  .......       X   .........  Mr. Larson.........       X   .......  .........
Mr. Buchanan.....................  .......       X   .........  Mr. Blumenauer.....       X   .......  .........
Mr. Smith (NE)...................  .......       X   .........  Mr. Kind...........       X   .......  .........
Ms. Jenkins......................  .......       X   .........  Mr. Pascrell.......       X   .......  .........
Mr. Paulsen......................  .......       X   .........  Mr. Crowley........       X   .......  .........
Mr. Marchant.....................  .......       X   .........  Mr. Davis..........       X   .......  .........
Ms. Black........................  .......  .......  .........  Ms. Sanchez........       X   .......  .........
Mr. Reed.........................  .......       X   .........  Mr. Higgins........       X   .......  .........
Mr. Kelly........................  .......       X   .........  Ms. Sewell.........       X   .......  .........
Mr. Renacci......................  .......       X   .........  Ms. DelBene........       X   .......  .........
Mr. Meehan.......................  .......       X   .........  Ms. Chu............       X   .......  .........
Ms. Noem.........................  .......       X   .........
Mr. Holding......................  .......       X   .........
Mr. Smith (MO)...................  .......       X   .........
Mr. Rice.........................  .......       X   .........
Mr. Schweikert...................  .......       X   .........
Ms. Walorski.....................  .......       X   .........
Mr. Curbelo......................  .......       X   .........
Mr. Bishop.......................  .......       X   .........
----------------------------------------------------------------------------------------------------------------

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November 
7, 2017.
    The vote on the amendment offered by Mr. Doggett to the 
amendment in the nature of a substitute to H.R. 1, which would 
include in gross income the net controlled foreign corporation 
income of United States shareholders in controlled foreign 
corporations, was not agreed to by a roll call vote of 16 yeas 
to 23 nays (with a quorum being present). The vote was as 
follows:

----------------------------------------------------------------------------------------------------------------
          Representative             Yea      Nay     Present      Representative      Yea      Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................  .......       X   .........  Mr. Neal...........       X   .......  .........
Mr. Johnson......................  .......       X   .........  Mr. Levin..........       X   .......  .........
Mr. Nunes........................  .......       X   .........  Mr. Lewis..........       X   .......  .........
Mr. Tiberi.......................  .......       X   .........  Mr. Doggett........       X   .......  .........
Mr. Reichert.....................  .......       X   .........  Mr. Thompson.......       X   .......  .........
Mr. Roskam.......................  .......       X   .........  Mr. Larson.........       X   .......  .........
Mr. Buchanan.....................  .......       X   .........  Mr. Blumenauer.....       X   .......  .........
Mr. Smith (NE)...................  .......       X   .........  Mr. Kind...........       X   .......  .........
Ms. Jenkins......................  .......       X   .........  Mr. Pascrell.......       X   .......  .........
Mr. Paulsen......................  .......       X   .........  Mr. Crowley........       X   .......  .........
Mr. Marchant.....................  .......       X   .........  Mr. Davis..........       X   .......  .........
Ms. Black........................  .......  .......  .........  Ms. Sanchez........       X   .......  .........
Mr. Reed.........................  .......       X   .........  Mr. Higgins........       X   .......  .........
Mr. Kelly........................  .......       X   .........  Ms. Sewell.........       X   .......  .........
Mr. Renacci......................  .......       X   .........  Ms. DelBene........       X   .......  .........
Mr. Meehan.......................  .......       X   .........  Ms. Chu............       X   .......  .........
Ms. Noem.........................  .......       X   .........
Mr. Holding......................  .......       X   .........
Mr. Smith (MO)...................  .......       X   .........
Mr. Rice.........................  .......       X   .........
Mr. Schweikert...................  .......       X   .........
Ms. Walorski.....................  .......       X   .........
Mr. Curbelo......................  .......       X   .........
Mr. Bishop.......................  .......       X   .........
----------------------------------------------------------------------------------------------------------------

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November 
7, 2017.
    The vote on the amendment offered by Ms. Sewell to the 
amendment in the nature of a substitute to H.R. 1, which would 
provide a tax credit to qualified apprenticeship programs, was 
not agreed to by a roll call vote of 16 yeas to 23 nays (with a 
quorum being present). The vote was as follows:

----------------------------------------------------------------------------------------------------------------
          Representative             Yea      Nay     Present      Representative      Yea      Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................  .......       X   .........  Mr. Neal...........       X   .......  .........
Mr. Johnson......................  .......       X   .........  Mr. Levin..........       X   .......  .........
Mr. Nunes........................  .......       X   .........  Mr. Lewis..........       X   .......  .........
Mr. Tiberi.......................  .......       X   .........  Mr. Doggett........       X   .......  .........
Mr. Reichert.....................  .......       X   .........  Mr. Thompson.......       X   .......  .........
Mr. Roskam.......................  .......       X   .........  Mr. Larson.........       X   .......  .........
Mr. Buchanan.....................  .......       X   .........  Mr. Blumenauer.....       X   .......  .........
Mr. Smith (NE)...................  .......       X   .........  Mr. Kind...........       X   .......  .........
Ms. Jenkins......................  .......       X   .........  Mr. Pascrell.......       X   .......  .........
Mr. Paulsen......................  .......       X   .........  Mr. Crowley........       X   .......  .........
Mr. Marchant.....................  .......       X   .........  Mr. Davis..........       X   .......  .........
Ms. Black........................  .......  .......  .........  Ms. Sanchez........       X   .......  .........
Mr. Reed.........................  .......       X   .........  Mr. Higgins........       X   .......  .........
Mr. Kelly........................  .......       X   .........  Ms. Sewell.........       X   .......  .........
Mr. Renacci......................  .......       X   .........  Ms. DelBene........       X   .......  .........
Mr. Meehan.......................  .......       X   .........  Ms. Chu............       X   .......  .........
Ms. Noem.........................  .......       X   .........
Mr. Holding......................  .......       X   .........
Mr. Smith (MO)...................  .......       X   .........
Mr. Rice.........................  .......       X   .........
Mr. Schweikert...................  .......       X   .........
Ms. Walorski.....................  .......       X   .........
Mr. Curbelo......................  .......       X   .........
Mr. Bishop.......................  .......       X   .........
----------------------------------------------------------------------------------------------------------------

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November 
8, 2017.
    The vote on the amendment offered by Mr. Larson to the 
amendment in the nature of a substitute to H.R. 1, which would 
strike section 1308 and raise the corporate rate, was not 
agreed to by a roll call vote of 16 yeas to 24 nays (with a 
quorum being present). The vote was as follows:

----------------------------------------------------------------------------------------------------------------
          Representative             Yea      Nay     Present      Representative      Yea      Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................  .......       X   .........  Mr. Neal...........       X   .......  .........
Mr. Johnson......................  .......       X   .........  Mr. Levin..........       X   .......  .........
Mr. Nunes........................  .......       X   .........  Mr. Lewis..........       X   .......  .........
Mr. Tiberi.......................  .......       X   .........  Mr. Doggett........       X   .......  .........
Mr. Reichert.....................  .......       X   .........  Mr. Thompson.......       X   .......  .........
Mr. Roskam.......................  .......       X   .........  Mr. Larson.........       X   .......  .........
Mr. Buchanan.....................  .......       X   .........  Mr. Blumenauer.....       X   .......  .........
Mr. Smith (NE)...................  .......       X   .........  Mr. Kind...........       X   .......  .........
Ms. Jenkins......................  .......       X   .........  Mr. Pascrell.......       X   .......  .........
Mr. Paulsen......................  .......       X   .........  Mr. Crowley........       X   .......  .........
Mr. Marchant.....................  .......       X   .........  Mr. Davis..........       X   .......  .........
Ms. Black........................  .......       X   .........  Ms. Sanchez........       X   .......  .........
Mr. Reed.........................  .......       X   .........  Mr. Higgins........       X   .......  .........
Mr. Kelly........................  .......       X   .........  Ms. Sewell.........       X   .......  .........
Mr. Renacci......................  .......       X   .........  Ms. DelBene........       X   .......  .........
Mr. Meehan.......................  .......       X   .........  Ms. Chu............       X   .......  .........
Ms. Noem.........................  .......       X   .........
Mr. Holding......................  .......       X   .........
Mr. Smith (MO)...................  .......       X   .........
Mr. Rice.........................  .......       X   .........
Mr. Schweikert...................  .......       X   .........
Ms. Walorski.....................  .......       X   .........
Mr. Curbelo......................  .......       X   .........
Mr. Bishop.......................  .......       X   .........
----------------------------------------------------------------------------------------------------------------

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November 
8, 2017.
    The vote on the amendment offered by Mr. Lewis to the 
amendment in the nature of a substitute to H.R. 1, which would 
strike section 5201, was not agreed to by a roll call vote of 
16 yeas to 23 nays (with a quorum being present). The vote was 
as follows:

----------------------------------------------------------------------------------------------------------------
          Representative             Yea      Nay     Present      Representative      Yea      Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................  .......       X   .........  Mr. Neal...........       X   .......  .........
Mr. Johnson......................  .......       X   .........  Mr. Levin..........       X   .......  .........
Mr. Nunes........................  .......       X   .........  Mr. Lewis..........       X   .......  .........
Mr. Tiberi.......................  .......       X   .........  Mr. Doggett........       X   .......  .........
Mr. Reichert.....................  .......       X   .........  Mr. Thompson.......       X   .......  .........
Mr. Roskam.......................  .......       X   .........  Mr. Larson.........       X   .......  .........
Mr. Buchanan.....................  .......       X   .........  Mr. Blumenauer.....       X   .......  .........
Mr. Smith (NE)...................  .......       X   .........  Mr. Kind...........       X   .......  .........
Ms. Jenkins......................  .......       X   .........  Mr. Pascrell.......       X   .......  .........
Mr. Paulsen......................  .......       X   .........  Mr. Crowley........       X   .......  .........
Mr. Marchant.....................  .......       X   .........  Mr. Davis..........       X   .......  .........
Ms. Black........................  .......       X   .........  Ms. Sanchez........       X   .......  .........
Mr. Reed.........................  .......       X   .........  Mr. Higgins........       X   .......  .........
Mr. Kelly........................  .......       X   .........  Ms. Sewell.........       X   .......  .........
Mr. Renacci......................  .......  .......  .........  Ms. DelBene........       X   .......  .........
Mr. Meehan.......................  .......       X   .........  Ms. Chu............       X   .......  .........
Ms. Noem.........................  .......       X   .........
Mr. Holding......................  .......       X   .........
Mr. Smith (MO)...................  .......       X   .........
Mr. Rice.........................  .......       X   .........
Mr. Schweikert...................  .......       X   .........
Ms. Walorski.....................  .......       X   .........
Mr. Curbelo......................  .......       X   .........
Mr. Bishop.......................  .......       X   .........
----------------------------------------------------------------------------------------------------------------

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November 
8, 2017.
    The vote on the amendment offered by Mr. Doggett to the 
amendment in the nature of a substitute to H.R. 1, which would 
restore the above-and-line deductions for interest payments on 
qualified education loans and tuition and related expenses, the 
exclusions for interest on United States savings bonds used to 
pay for tuition, qualified tuition reductions, and employer-
provided education assistance, and reinstate the above-the-
line-deduction for out-of-pocket teacher expenses, and expand 
the American Opportunity Tax Credit, was not agreed to by a 
roll call vote of 16 yeas to 24 nays (with a quorum being 
present). The vote was as follows:

----------------------------------------------------------------------------------------------------------------
          Representative             Yea      Nay     Present      Representative      Yea      Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................  .......       X   .........  Mr. Neal...........       X   .......  .........
Mr. Johnson......................  .......       X   .........  Mr. Levin..........       X   .......  .........
Mr. Nunes........................  .......       X   .........  Mr. Lewis..........       X   .......  .........
Mr. Tiberi.......................  .......       X   .........  Mr. Doggett........       X   .......  .........
Mr. Reichert.....................  .......       X   .........  Mr. Thompson.......       X   .......  .........
Mr. Roskam.......................  .......       X   .........  Mr. Larson.........       X   .......  .........
Mr. Buchanan.....................  .......       X   .........  Mr. Blumenauer.....       X   .......  .........
Mr. Smith (NE)...................  .......       X   .........  Mr. Kind...........       X   .......  .........
Ms. Jenkins......................  .......       X   .........  Mr. Pascrell.......       X   .......  .........
Mr. Paulsen......................  .......       X   .........  Mr. Crowley........       X   .......  .........
Mr. Marchant.....................  .......       X   .........  Mr. Davis..........       X   .......  .........
Ms. Black........................  .......       X   .........  Ms. Sanchez........       X   .......  .........
Mr. Reed.........................  .......       X   .........  Mr. Higgins........       X   .......  .........
Mr. Kelly........................  .......       X   .........  Ms. Sewell.........       X   .......  .........
Mr. Renacci......................  .......       X   .........  Ms. DelBene........       X   .......  .........
Mr. Meehan.......................  .......       X   .........  Ms. Chu............       X   .......  .........
Ms. Noem.........................  .......       X   .........
Mr. Holding......................  .......       X   .........
Mr. Smith (MO)...................  .......       X   .........
Mr. Rice.........................  .......       X   .........
Mr. Schweikert...................  .......       X   .........
Ms. Walorski.....................  .......       X   .........
Mr. Curbelo......................  .......       X   .........
Mr. Bishop.......................  .......       X   .........
----------------------------------------------------------------------------------------------------------------

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November 
8, 2017.
    The vote on the amendment offered by Mr. Thompson to the 
amendment in the nature of a substitute to H.R. 1, which would 
retroactively extend and make permanent the exclusion from 
income on mortgage debt forgiveness, and repeal the limitations 
on the exclusion from capital gain on the sale of a taxpayer's 
principal residence, with an offset, was not agreed to by a 
roll call vote of 16 yeas to 24 nays (with a quorum being 
present). The vote was as follows:

----------------------------------------------------------------------------------------------------------------
          Representative             Yea      Nay     Present      Representative      Yea      Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................  .......       X   .........  Mr. Neal...........       X   .......  .........
Mr. Johnson......................  .......       X   .........  Mr. Levin..........       X   .......  .........
Mr. Nunes........................  .......       X   .........  Mr. Lewis..........       X   .......  .........
Mr. Tiberi.......................  .......       X   .........  Mr. Doggett........       X   .......  .........
Mr. Reichert.....................  .......       X   .........  Mr. Thompson.......       X   .......  .........
Mr. Roskam.......................  .......       X   .........  Mr. Larson.........       X   .......  .........
Mr. Buchanan.....................  .......       X   .........  Mr. Blumenauer.....       X   .......  .........
Mr. Smith (NE)...................  .......       X   .........  Mr. Kind...........       X   .......  .........
Ms. Jenkins......................  .......       X   .........  Mr. Pascrell.......       X   .......  .........
Mr. Paulsen......................  .......       X   .........  Mr. Crowley........       X   .......  .........
Mr. Marchant.....................  .......       X   .........  Mr. Davis..........       X   .......  .........
Ms. Black........................  .......       X   .........  Ms. Sanchez........       X   .......  .........
Mr. Reed.........................  .......       X   .........  Mr. Higgins........       X   .......  .........
Mr. Kelly........................  .......       X   .........  Ms. Sewell.........       X   .......  .........
Mr. Renacci......................  .......       X   .........  Ms. DelBene........       X   .......  .........
Mr. Meehan.......................  .......       X   .........  Ms. Chu............       X   .......  .........
Ms. Noem.........................  .......       X   .........
Mr. Holding......................  .......       X   .........
Mr. Smith (MO)...................  .......       X   .........
Mr. Rice.........................  .......       X   .........
Mr. Schweikert...................  .......       X   .........
Ms. Walorski.....................  .......       X   .........
Mr. Curbelo......................  .......       X   .........
Mr. Bishop.......................  .......       X   .........
----------------------------------------------------------------------------------------------------------------

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November 
8, 2017.
    The vote on the amendment offered by Ms. Chu to the 
amendment in the nature of a substitute to H.R. 1, which would 
expand the Earned Income Tax Credit, and provide for an offset, 
was not agreed to by a roll call vote of 16 yeas to 24 nays 
(with a quorum being present). The vote was as follows:

----------------------------------------------------------------------------------------------------------------
          Representative             Yea      Nay     Present      Representative      Yea      Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................  .......       X   .........  Mr. Neal...........       X   .......  .........
Mr. Johnson......................  .......       X   .........  Mr. Levin..........       X   .......  .........
Mr. Nunes........................  .......       X   .........  Mr. Lewis..........       X   .......  .........
Mr. Tiberi.......................  .......       X   .........  Mr. Doggett........       X   .......  .........
Mr. Reichert.....................  .......       X   .........  Mr. Thompson.......       X   .......  .........
Mr. Roskam.......................  .......       X   .........  Mr. Larson.........       X   .......  .........
Mr. Buchanan.....................  .......       X   .........  Mr. Blumenauer.....       X   .......  .........
Mr. Smith (NE)...................  .......       X   .........  Mr. Kind...........       X   .......  .........
Ms. Jenkins......................  .......       X   .........  Mr. Pascrell.......       X   .......  .........
Mr. Paulsen......................  .......       X   .........  Mr. Crowley........       X   .......  .........
Mr. Marchant.....................  .......       X   .........  Mr. Davis..........       X   .......  .........
Ms. Black........................  .......       X   .........  Ms. Sanchez........       X   .......  .........
Mr. Reed.........................  .......       X   .........  Mr. Higgins........       X   .......  .........
Mr. Kelly........................  .......       X   .........  Ms. Sewell.........       X   .......  .........
Mr. Renacci......................  .......       X   .........  Ms. DelBene........       X   .......  .........
Mr. Meehan.......................  .......       X   .........  Ms. Chu............       X   .......  .........
Ms. Noem.........................  .......       X   .........
Mr. Holding......................  .......       X   .........
Mr. Smith (MO)...................  .......       X   .........
Mr. Rice.........................  .......       X   .........
Mr. Schweikert...................  .......       X   .........
Ms. Walorski.....................  .......       X   .........
Mr. Curbelo......................  .......       X   .........
Mr. Bishop.......................  .......       X   .........
----------------------------------------------------------------------------------------------------------------

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November 
8, 2017.
    The vote on the amendment offered by Ms. DelBene to the 
amendment in the nature of a substitute to H.R. 1, which would 
strike section 3601, and expand low income housing tax credits, 
was not agreed to by a roll call vote of 16 yeas to 24 nays 
(with a quorum being present). The vote was as follows:

----------------------------------------------------------------------------------------------------------------
          Representative             Yea      Nay     Present      Representative      Yea      Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................  .......       X   .........  Mr. Neal...........       X   .......  .........
Mr. Johnson......................  .......       X   .........  Mr. Levin..........       X   .......  .........
Mr. Nunes........................  .......       X   .........  Mr. Lewis..........       X   .......  .........
Mr. Tiberi.......................  .......       X   .........  Mr. Doggett........       X   .......  .........
Mr. Reichert.....................  .......       X   .........  Mr. Thompson.......       X   .......  .........
Mr. Roskam.......................  .......       X   .........  Mr. Larson.........       X   .......  .........
Mr. Buchanan.....................  .......       X   .........  Mr. Blumenauer.....       X   .......  .........
Mr. Smith (NE)...................  .......       X   .........  Mr. Kind...........       X   .......  .........
Ms. Jenkins......................  .......       X   .........  Mr. Pascrell.......       X   .......  .........
Mr. Paulsen......................  .......       X   .........  Mr. Crowley........       X   .......  .........
Mr. Marchant.....................  .......       X   .........  Mr. Davis..........       X   .......  .........
Ms. Black........................  .......       X   .........  Ms. Sanchez........       X   .......  .........
Mr. Reed.........................  .......       X   .........  Mr. Higgins........       X   .......  .........
Mr. Kelly........................  .......       X   .........  Ms. Sewell.........       X   .......  .........
Mr. Renacci......................  .......       X   .........  Ms. DelBene........       X   .......  .........
Mr. Meehan.......................  .......       X   .........  Ms. Chu............       X   .......  .........
Ms. Noem.........................  .......       X   .........
Mr. Holding......................  .......       X   .........
Mr. Smith (MO)...................  .......       X   .........
Mr. Rice.........................  .......       X   .........
Mr. Schweikert...................  .......       X   .........
Ms. Walorski.....................  .......       X   .........
Mr. Curbelo......................  .......       X   .........
Mr. Bishop.......................  .......       X   .........
----------------------------------------------------------------------------------------------------------------

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November 
8, 2017.
    The vote on Mr. Nunes' motion to table Mr. Pascrell's 
appeal of the ruling of the Chair was agreed to by a roll call 
vote of 23 yeas to 16 nays (with a quorum being present). The 
vote was as follows:

----------------------------------------------------------------------------------------------------------------
          Representative             Yea      Nay     Present      Representative      Yea      Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................       X   .......  .........  Mr. Neal...........  .......       X   .........
Mr. Johnson......................       X   .......  .........  Mr. Levin..........  .......       X   .........
Mr. Nunes........................       X   .......  .........  Mr. Lewis..........  .......       X   .........
Mr. Tiberi.......................       X   .......  .........  Mr. Doggett........  .......       X   .........
Mr. Reichert.....................       X   .......  .........  Mr. Thompson.......  .......       X   .........
Mr. Roskam.......................       X   .......  .........  Mr. Larson.........  .......       X   .........
Mr. Buchanan.....................       X   .......  .........  Mr. Blumenauer.....  .......       X   .........
Mr. Smith (NE)...................       X   .......  .........  Mr. Kind...........  .......       X   .........
Ms. Jenkins......................       X   .......  .........  Mr. Pascrell.......  .......       X   .........
Mr. Paulsen......................       X   .......  .........  Mr. Crowley........  .......       X   .........
Mr. Marchant.....................       X   .......  .........  Mr. Davis..........  .......       X   .........
Ms. Black........................       X   .......  .........  Ms. Sanchez........  .......       X   .........
Mr. Reed.........................       X   .......  .........  Mr. Higgins........  .......       X   .........
Mr. Kelly........................       X   .......  .........  Ms. Sewell.........  .......       X   .........
Mr. Renacci......................       X   .......  .........  Ms. DelBene........  .......       X   .........
Mr. Meehan.......................       X   .......  .........  Ms. Chu............  .......       X   .........
Ms. Noem.........................       X   .......  .........
Mr. Holding......................       X   .......  .........
Mr. Smith (MO)...................  .......  .......  .........
Mr. Rice.........................       X   .......  .........
Mr. Schweikert...................       X   .......  .........
Ms. Walorski.....................       X   .......  .........
Mr. Curbelo......................       X   .......  .........
Mr. Bishop.......................       X   .......  .........
----------------------------------------------------------------------------------------------------------------

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November 
8, 2017.
    The vote on the amendment offered by Ms. Sewell to the 
amendment in the nature of a substitute to H.R. 1, which would 
strike section 3602, was not agreed to by a roll call vote of 
16 yeas to 24 nays (with a quorum being present). The vote was 
as follows:

----------------------------------------------------------------------------------------------------------------
          Representative             Yea      Nay     Present      Representative      Yea      Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................  .......       X   .........  Mr. Neal...........       X   .......  .........
Mr. Johnson......................  .......       X   .........  Mr. Levin..........       X   .......  .........
Mr. Nunes........................  .......       X   .........  Mr. Lewis..........       X   .......  .........
Mr. Tiberi.......................  .......       X   .........  Mr. Doggett........       X   .......  .........
Mr. Reichert.....................  .......       X   .........  Mr. Thompson.......       X   .......  .........
Mr. Roskam.......................  .......       X   .........  Mr. Larson.........       X   .......  .........
Mr. Buchanan.....................  .......       X   .........  Mr. Blumenauer.....       X   .......  .........
Mr. Smith (NE)...................  .......       X   .........  Mr. Kind...........       X   .......  .........
Ms. Jenkins......................  .......       X   .........  Mr. Pascrell.......       X   .......  .........
Mr. Paulsen......................  .......       X   .........  Mr. Crowley........       X   .......  .........
Mr. Marchant.....................  .......       X   .........  Mr. Davis..........       X   .......  .........
Ms. Black........................  .......       X   .........  Ms. Sanchez........       X   .......  .........
Mr. Reed.........................  .......       X   .........  Mr. Higgins........       X   .......  .........
Mr. Kelly........................  .......       X   .........  Ms. Sewell.........       X   .......  .........
Mr. Renacci......................  .......       X   .........  Ms. DelBene........       X   .......  .........
Mr. Meehan.......................  .......       X   .........  Ms. Chu............       X   .......  .........
Ms. Noem.........................  .......       X   .........
Mr. Holding......................  .......       X   .........
Mr. Smith (MO)...................  .......       X   .........
Mr. Rice.........................  .......       X   .........
Mr. Schweikert...................  .......       X   .........
Ms. Walorski.....................  .......       X   .........
Mr. Curbelo......................  .......       X   .........
Mr. Bishop.......................  .......       X   .........
----------------------------------------------------------------------------------------------------------------

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November 
8, 2017.
    The vote on the amendment offered by Mr. Crowley to the 
amendment in the nature of a substitute to H.R. 1, which would 
restore the expired credit in section 36, add a new credit for 
renters purchasing their first home, and provide a credit for 
taxpayers who rent their homes and for whom their rent exceeds 
30 percent of their income, was not agreed to by a roll call 
vote of 16 yeas to 24 nays (with a quorum being present). The 
vote was as follows:

----------------------------------------------------------------------------------------------------------------
          Representative             Yea      Nay     Present      Representative      Yea      Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................  .......       X   .........  Mr. Neal...........       X   .......  .........
Mr. Johnson......................  .......       X   .........  Mr. Levin..........       X   .......  .........
Mr. Nunes........................  .......       X   .........  Mr. Lewis..........       X   .......  .........
Mr. Tiberi.......................  .......       X   .........  Mr. Doggett........       X   .......  .........
Mr. Reichert.....................  .......       X   .........  Mr. Thompson.......       X   .......  .........
Mr. Roskam.......................  .......       X   .........  Mr. Larson.........       X   .......  .........
Mr. Buchanan.....................  .......       X   .........  Mr. Blumenauer.....       X   .......  .........
Mr. Smith (NE)...................  .......       X   .........  Mr. Kind...........       X   .......  .........
Ms. Jenkins......................  .......       X   .........  Mr. Pascrell.......       X   .......  .........
Mr. Paulsen......................  .......       X   .........  Mr. Crowley........       X   .......  .........
Mr. Marchant.....................  .......       X   .........  Mr. Davis..........       X   .......  .........
Ms. Black........................  .......       X   .........  Ms. Sanchez........       X   .......  .........
Mr. Reed.........................  .......       X   .........  Mr. Higgins........       X   .......  .........
Mr. Kelly........................  .......       X   .........  Ms. Sewell.........       X   .......  .........
Mr. Renacci......................  .......       X   .........  Ms. DelBene........       X   .......  .........
Mr. Meehan.......................  .......       X   .........  Ms. Chu............       X   .......  .........
Ms. Noem.........................  .......       X   .........
Mr. Holding......................  .......       X   .........
Mr. Smith (MO)...................  .......       X   .........
Mr. Rice.........................  .......       X   .........
Mr. Schweikert...................  .......       X   .........
Ms. Walorski.....................  .......       X   .........
Mr. Curbelo......................  .......       X   .........
Mr. Bishop.......................  .......       X   .........
----------------------------------------------------------------------------------------------------------------

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November 
8, 2017.
    The vote on the amendment offered by Mr. Pascrell to the 
amendment in the nature of a substitute to H.R. 1, which would 
add a new title relating to disaster tax relief, was not agreed 
to by a roll call vote of 15 yeas to 24 nays (with a quorum 
being present). The vote was as follows:

----------------------------------------------------------------------------------------------------------------
          Representative             Yea      Nay     Present      Representative      Yea      Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady........................  .......       X   .........  Mr. Neal...........       X   .......  .........
Mr. Johnson......................  .......       X   .........  Mr. Levin..........       X   .......  .........
Mr. Nunes........................  .......       X   .........  Mr. Lewis..........       X   .......  .........
Mr. Tiberi.......................  .......       X   .........  Mr. Doggett........       X   .......  .........
Mr. Reichert.....................  .......       X   .........  Mr. Thompson.......       X   .......  .........
Mr. Roskam.......................  .......       X   .........  Mr. Larson.........  .......  .......  .........
Mr. Buchanan.....................  .......       X   .........  Mr. Blumenauer.....       X   .......  .........
Mr. Smith (NE)...................  .......       X   .........  Mr. Kind...........       X   .......  .........
Ms. Jenkins......................  .......       X   .........  Mr. Pascrell.......       X   .......  .........
Mr. Paulsen......................  .......       X   .........  Mr. Crowley........       X   .......  .........
Mr. Marchant.....................  .......       X   .........  Mr. Davis..........       X   .......  .........
Ms. Black........................  .......       X   .........  Ms. Sanchez........       X   .......  .........
Mr. Reed.........................  .......       X   .........  Mr. Higgins........       X   .......  .........
Mr. Kelly........................  .......       X   .........  Ms. Sewell.........       X   .......  .........
Mr. Renacci......................  .......       X   .........  Ms. DelBene........       X   .......  .........
Mr. Meehan.......................  .......       X   .........  Ms. Chu............       X   .......  .........
Ms. Noem.........................  .......       X   .........
Mr. Holding......................  .......       X   .........
Mr. Smith (MO)...................  .......       X   .........
Mr. Rice.........................  .......       X   .........
Mr. Schweikert...................  .......       X   .........
Ms. Walorski.....................  .......       X   .........
Mr. Curbelo......................  .......       X   .........
Mr. Bishop.......................  .......       X   .........
----------------------------------------------------------------------------------------------------------------

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November 
8, 2017.
    The vote on the amendment offered by Ms. DelBene to the 
amendment in the nature of a substitute to H.R. 1, which would 
prevent the High Cost Plan Excise Tax from going into effect as 
scheduled, was not agreed to by a roll call vote of 16 yeas to 
24 nays (with a quorum being present). The vote was as follows:

----------------------------------------------------------------------------------------------------------------
         Representative             Yea       Nay     Present     Representative      Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady......................  ........        X   .........  Mr. Neal.........        X   ........  .........
Mr. Johnson....................  ........        X   .........  Mr. Levin........        X   ........  .........
Mr. Nunes......................  ........        X   .........  Mr. Lewis........        X   ........  .........
Mr. Tiberi.....................  ........        X   .........  Mr. Doggett......        X   ........  .........
Mr. Reichert...................  ........        X   .........  Mr. Thompson.....        X   ........  .........
Mr. Roskam.....................  ........        X   .........  Mr. Larson.......        X   ........  .........
Mr. Buchanan...................  ........        X   .........  Mr. Blumenauer...        X   ........  .........
Mr. Smith (NE).................  ........        X   .........  Mr. Kind.........        X   ........  .........
Ms. Jenkins....................  ........        X   .........  Mr. Pascrell.....        X   ........  .........
Mr. Paulsen....................  ........        X   .........  Mr. Crowley......        X   ........  .........
Mr. Marchant...................  ........        X   .........  Mr. Davis........        X   ........  .........
Ms. Black......................  ........        X   .........  Ms. Sanchez......        X   ........  .........
Mr. Reed.......................  ........        X   .........  Mr. Higgins......        X   ........  .........
Mr. Kelly......................  ........        X   .........  Ms. Sewell.......        X   ........  .........
Mr. Renacci....................  ........        X   .........  Ms. DelBene......        X   ........  .........
Mr. Meehan.....................  ........        X   .........  Ms. Chu..........        X   ........  .........
Ms. Noem.......................  ........        X   .........
Mr. Holding....................  ........        X   .........
Mr. Smith (MO).................  ........        X   .........
Mr. Rice.......................  ........        X   .........
Mr. Schweikert.................  ........        X   .........
Ms. Walorski...................  ........        X   .........
Mr. Curbelo....................  ........        X   .........
Mr. Bishop.....................  ........        X   .........
----------------------------------------------------------------------------------------------------------------

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November 
8, 2017.
    The vote on Mr. Reichert's motion to table Mr. Higgins' 
appeal of the ruling of the Chair was agreed to by a roll call 
vote of 22 yeas to 16 nays (with a quorum being present). The 
vote was as follows:

----------------------------------------------------------------------------------------------------------------
         Representative             Yea       Nay     Present     Representative      Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady......................        X   ........  .........  Mr. Neal.........  ........        X   .........
Mr. Johnson....................        X   ........  .........  Mr. Levin........  ........        X   .........
Mr. Nunes......................        X   ........  .........  Mr. Lewis........  ........        X   .........
Mr. Tiberi.....................        X   ........  .........  Mr. Doggett......  ........        X   .........
Mr. Reichert...................        X   ........  .........  Mr. Thompson.....  ........        X   .........
Mr. Roskam.....................        X   ........  .........  Mr. Larson.......  ........        X   .........
Mr. Buchanan...................  ........  ........  .........  Mr. Blumenauer...  ........        X   .........
Mr. Smith (NE).................        X   ........  .........  Mr. Kind.........  ........        X   .........
Ms. Jenkins....................        X   ........  .........  Mr. Pascrell.....  ........        X   .........
Mr. Paulsen....................        X   ........  .........  Mr. Crowley......  ........        X   .........
Mr. Marchant...................        X   ........  .........  Mr. Davis........  ........        X   .........
Ms. Black......................        X   ........  .........  Ms. Sanchez......  ........        X   .........
Mr. Reed.......................        X   ........  .........  Mr. Higgins......  ........        X   .........
Mr. Kelly......................        X   ........  .........  Ms. Sewell.......  ........        X   .........
Mr. Renacci....................        X   ........  .........  Ms. DelBene......  ........        X   .........
Mr. Meehan.....................        X   ........  .........  Ms. Chu..........  ........        X   .........
Ms. Noem.......................        X   ........  .........
Mr. Holding....................        X   ........  .........
Mr. Smith (MO).................        X   ........  .........
Mr. Rice.......................  ........  ........  .........
Mr. Schweikert.................        X   ........  .........
Ms. Walorski...................        X   ........  .........
Mr. Curbelo....................        X   ........  .........
Mr. Bishop.....................        X   ........  .........
----------------------------------------------------------------------------------------------------------------

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November 
8, 2017.
    The vote on the amendment offered by Mr. Doggett to the 
amendment in the nature of a substitute to H.R. 1, which would 
strike the repeal of the Alternative Minimum Tax, was not 
agreed to by a roll call vote of 16 yeas to 24 nays (with a 
quorum being present). The vote was as follows:

----------------------------------------------------------------------------------------------------------------
         Representative             Yea       Nay     Present     Representative      Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady......................  ........        X   .........  Mr. Neal.........        X   ........  .........
Mr. Johnson....................  ........        X   .........  Mr. Levin........        X   ........  .........
Mr. Nunes......................  ........        X   .........  Mr. Lewis........        X   ........  .........
Mr. Tiberi.....................  ........        X   .........  Mr. Doggett......        X   ........  .........
Mr. Reichert...................  ........        X   .........  Mr. Thompson.....        X   ........  .........
Mr. Roskam.....................  ........        X   .........  Mr. Larson.......        X   ........  .........
Mr. Buchanan...................  ........        X   .........  Mr. Blumenauer...        X   ........  .........
Mr. Smith (NE).................  ........        X   .........  Mr. Kind.........        X   ........  .........
Ms. Jenkins....................  ........        X   .........  Mr. Pascrell.....        X   ........  .........
Mr. Paulsen....................  ........        X   .........  Mr. Crowley......        X   ........  .........
Mr. Marchant...................  ........        X   .........  Mr. Davis........        X   ........  .........
Ms. Black......................  ........        X   .........  Ms. Sanchez......        X   ........  .........
Mr. Reed.......................  ........        X   .........  Mr. Higgins......        X   ........  .........
Mr. Kelly......................  ........        X   .........  Ms. Sewell.......        X   ........  .........
Mr. Renacci....................  ........        X   .........  Ms. DelBene......        X   ........  .........
Mr. Meehan.....................  ........        X   .........  Ms. Chu..........        X   ........  .........
Ms. Noem.......................  ........        X   .........
Mr. Holding....................  ........        X   .........
Mr. Smith (MO).................  ........        X   .........
Mr. Rice.......................  ........        X   .........
Mr. Schweikert.................  ........        X   .........
Ms. Walorski...................  ........        X   .........
Mr. Curbelo....................  ........        X   .........
Mr. Bishop.....................  ........        X   .........
----------------------------------------------------------------------------------------------------------------

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November 
8, 2017.
    The vote on the amendment offered by Mr. Levin to the 
amendment in the nature of a substitute to H.R. 1, which would 
provide a different method of taxing carried interest 
compensation as ordinary income, was not agreed to by a roll 
call vote of 16 yeas to 24 nays (with a quorum being present). 
The vote was as follows:

----------------------------------------------------------------------------------------------------------------
         Representative             Yea       Nay     Present     Representative      Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady......................  ........        X   .........  Mr. Neal.........        X   ........  .........
Mr. Johnson....................  ........        X   .........  Mr. Levin........        X   ........  .........
Mr. Nunes......................  ........        X   .........  Mr. Lewis........        X   ........  .........
Mr. Tiberi.....................  ........        X   .........  Mr. Doggett......        X   ........  .........
Mr. Reichert...................  ........        X   .........  Mr. Thompson.....        X   ........  .........
Mr. Roskam.....................  ........        X   .........  Mr. Larson.......        X   ........  .........
Mr. Buchanan...................  ........        X   .........  Mr. Blumenauer...        X   ........  .........
Mr. Smith (NE).................  ........        X   .........  Mr. Kind.........        X   ........  .........
Ms. Jenkins....................  ........        X   .........  Mr. Pascrell.....        X   ........  .........
Mr. Paulsen....................  ........        X   .........  Mr. Crowley......        X   ........  .........
Mr. Marchant...................  ........        X   .........  Mr. Davis........        X   ........  .........
Ms. Black......................  ........        X   .........  Ms. Sanchez......        X   ........  .........
Mr. Reed.......................  ........        X   .........  Mr. Higgins......        X   ........  .........
Mr. Kelly......................  ........        X   .........  Ms. Sewell.......        X   ........  .........
Mr. Renacci....................  ........        X   .........  Ms. DelBene......        X   ........  .........
Mr. Meehan.....................  ........        X   .........  Ms. Chu..........        X   ........  .........
Ms. Noem.......................  ........        X   .........
Mr. Holding....................  ........        X   .........
Mr. Smith (MO).................  ........        X   .........
Mr. Rice.......................  ........        X   .........
Mr. Schweikert.................  ........        X   .........
Ms. Walorski...................  ........        X   .........
Mr. Curbelo....................  ........        X   .........
Mr. Bishop.....................  ........        X   .........
----------------------------------------------------------------------------------------------------------------

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November 
8, 2017.
    The vote on the amendment offered by Mr. Lewis to the 
amendment in the nature of a substitute to H.R. 1, which would 
delay the effective date of all revenue-reducing provisions 
until the United States withdraws from current wars in 
Afghanistan, Iraq, and Syria, and the deficit is zero, was not 
agreed to by a roll call vote of 16 yeas to 24 nays (with a 
quorum being present). The vote was as follows:

----------------------------------------------------------------------------------------------------------------
         Representative             Yea       Nay     Present     Representative      Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady......................  ........        X   .........  Mr. Neal.........        X   ........  .........
Mr. Johnson....................  ........        X   .........  Mr. Levin........        X   ........  .........
Mr. Nunes......................  ........        X   .........  Mr. Lewis........        X   ........  .........
Mr. Tiberi.....................  ........        X   .........  Mr. Doggett......        X   ........  .........
Mr. Reichert...................  ........        X   .........  Mr. Thompson.....        X   ........  .........
Mr. Roskam.....................  ........        X   .........  Mr. Larson.......        X   ........  .........
Mr. Buchanan...................  ........        X   .........  Mr. Blumenauer...        X   ........  .........
Mr. Smith (NE).................  ........        X   .........  Mr. Kind.........        X   ........  .........
Ms. Jenkins....................  ........        X   .........  Mr. Pascrell.....        X   ........  .........
Mr. Paulsen....................  ........        X   .........  Mr. Crowley......        X   ........  .........
Mr. Marchant...................  ........        X   .........  Mr. Davis........        X   ........  .........
Ms. Black......................  ........        X   .........  Ms. Sanchez......        X   ........  .........
Mr. Reed.......................  ........        X   .........  Mr. Higgins......        X   ........  .........
Mr. Kelly......................  ........        X   .........  Ms. Sewell.......        X   ........  .........
Mr. Renacci....................  ........        X   .........  Ms. DelBene......        X   ........  .........
Mr. Meehan.....................  ........        X   .........  Ms. Chu..........        X   ........  .........
Ms. Noem.......................  ........        X   .........
Mr. Holding....................  ........        X   .........
Mr. Smith (MO).................  ........        X   .........
Mr. Rice.......................  ........        X   .........
Mr. Schweikert.................  ........        X   .........
Ms. Walorski...................  ........        X   .........
Mr. Curbelo....................  ........        X   .........
Mr. Bishop.....................  ........        X   .........
----------------------------------------------------------------------------------------------------------------

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November 
9, 2017.
    The vote on the amendment offered by Mr. Blumenauer to the 
amendment in the nature of a substitute to H.R. 1, which would 
maintain the wind energy production tax credit as under current 
law, was not agreed to by a roll call vote of 15 yeas to 22 
nays (with a quorum being present). The vote was as follows:

----------------------------------------------------------------------------------------------------------------
         Representative             Yea       Nay     Present     Representative      Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady......................  ........        X   .........  Mr. Neal.........        X   ........  .........
Mr. Johnson....................  ........        X   .........  Mr. Levin........        X   ........  .........
Mr. Nunes......................  ........  ........  .........  Mr. Lewis........        X   ........  .........
Mr. Tiberi.....................  ........        X   .........  Mr. Doggett......        X   ........  .........
Mr. Reichert...................  ........        X   .........  Mr. Thompson.....        X   ........  .........
Mr. Roskam.....................  ........        X   .........  Mr. Larson.......        X   ........  .........
Mr. Buchanan...................  ........        X   .........  Mr. Blumenauer...        X   ........  .........
Mr. Smith (NE).................  ........        X   .........  Mr. Kind.........        X   ........  .........
Ms. Jenkins....................  ........        X   .........  Mr. Pascrell.....        X   ........  .........
Mr. Paulsen....................  ........        X   .........  Mr. Crowley......  ........  ........  .........
Mr. Marchant...................  ........  ........  .........  Mr. Davis........        X   ........  .........
Ms. Black......................  ........        X   .........  Ms. Sanchez......        X   ........  .........
Mr. Reed.......................  ........        X   .........  Mr. Higgins......        X   ........  .........
Mr. Kelly......................  ........        X   .........  Ms. Sewell.......        X   ........  .........
Mr. Renacci....................  ........        X   .........  Ms. DelBene......        X   ........  .........
Mr. Meehan.....................  ........        X   .........  Ms. Chu..........        X   ........  .........
Ms. Noem.......................  ........        X   .........
Mr. Holding....................  ........        X   .........
Mr. Smith (MO).................  ........        X   .........
Mr. Rice.......................  ........        X   .........
Mr. Schweikert.................  ........        X   .........
Ms. Walorski...................  ........        X   .........
Mr. Curbelo....................  ........        X   .........
Mr. Bishop.....................  ........        X   .........
----------------------------------------------------------------------------------------------------------------

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November 
9, 2017.
    The vote on the amendment offered by Ms. Chu to the 
amendment in the nature of a substitute to H.R. 1, which would 
strike Subtitle G of Title I related to Estate, Gift, and 
Generation-skipping Transfer Taxes, was not agreed to by a roll 
call vote of 14 yeas to 24 nays (with a quorum being present). 
The vote was as follows:

----------------------------------------------------------------------------------------------------------------
         Representative             Yea       Nay     Present     Representative      Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady......................  ........        X   .........  Mr. Neal.........        X   ........  .........
Mr. Johnson....................  ........        X   .........  Mr. Levin........        X   ........  .........
Mr. Nunes......................  ........        X   .........  Mr. Lewis........        X   ........  .........
Mr. Tiberi.....................  ........        X   .........  Mr. Doggett......        X   ........  .........
Mr. Reichert...................  ........        X   .........  Mr. Thompson.....        X   ........  .........
Mr. Roskam.....................  ........        X   .........  Mr. Larson.......        X   ........  .........
Mr. Buchanan...................  ........        X   .........  Mr. Blumenauer...        X   ........  .........
Mr. Smith (NE).................  ........        X   .........  Mr. Kind.........        X   ........  .........
Ms. Jenkins....................  ........        X   .........  Mr. Pascrell.....  ........  ........  .........
Mr. Paulsen....................  ........        X   .........  Mr. Crowley......  ........  ........  .........
Mr. Marchant...................  ........        X   .........  Mr. Davis........        X   ........  .........
Ms. Black......................  ........        X   .........  Ms. Sanchez......        X   ........  .........
Mr. Reed.......................  ........        X   .........  Mr. Higgins......        X   ........  .........
Mr. Kelly......................  ........        X   .........  Ms. Sewell.......        X   ........  .........
Mr. Renacci....................  ........        X   .........  Ms. DelBene......        X   ........  .........
Mr. Meehan.....................  ........        X   .........  Ms. Chu..........        X   ........  .........
Ms. Noem.......................  ........        X   .........
Mr. Holding....................  ........        X   .........
Mr. Smith (MO).................  ........        X   .........
Mr. Rice.......................  ........        X   .........
Mr. Schweikert.................  ........        X   .........
Ms. Walorski...................  ........        X   .........
Mr. Curbelo....................  ........        X   .........
Mr. Bishop.....................  ........        X   .........
----------------------------------------------------------------------------------------------------------------

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November 
9, 2017.
    The vote on the amendment offered by Mr. Kind to the 
amendment in the nature of a substitute to H.R. 1, which would 
create a tax deduction for domestic production in excess of 
current Section 199, was not agreed to by a roll call vote of 
16 yeas to 24 nays (with a quorum being present). The vote was 
as follows:

----------------------------------------------------------------------------------------------------------------
         Representative             Yea       Nay     Present     Representative      Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady......................  ........        X   .........  Mr. Neal.........        X   ........  .........
Mr. Johnson....................  ........        X   .........  Mr. Levin........        X   ........  .........
Mr. Nunes......................  ........        X   .........  Mr. Lewis........        X   ........  .........
Mr. Tiberi.....................  ........        X   .........  Mr. Doggett......        X   ........  .........
Mr. Reichert...................  ........        X   .........  Mr. Thompson.....        X   ........  .........
Mr. Roskam.....................  ........        X   .........  Mr. Larson.......        X   ........  .........
Mr. Buchanan...................  ........        X   .........  Mr. Blumenauer...        X   ........  .........
Mr. Smith (NE).................  ........        X   .........  Mr. Kind.........        X   ........  .........
Ms. Jenkins....................  ........        X   .........  Mr. Pascrell.....        X   ........  .........
Mr. Paulsen....................  ........        X   .........  Mr. Crowley......        X   ........  .........
Mr. Marchant...................  ........        X   .........  Mr. Davis........        X   ........  .........
Ms. Black......................  ........        X   .........  Ms. Sanchez......        X   ........  .........
Mr. Reed.......................  ........        X   .........  Mr. Higgins......        X   ........  .........
Mr. Kelly......................  ........        X   .........  Ms. Sewell.......        X   ........  .........
Mr. Renacci....................  ........        X   .........  Ms. DelBene......        X   ........  .........
Mr. Meehan.....................  ........        X   .........  Ms. Chu..........        X   ........  .........
Ms. Noem.......................  ........        X   .........
Mr. Holding....................  ........        X   .........
Mr. Smith (MO).................  ........        X   .........
Mr. Rice.......................  ........        X   .........
Mr. Schweikert.................  ........        X   .........
Ms. Walorski...................  ........        X   .........
Mr. Curbelo....................  ........        X   .........
Mr. Bishop.....................  ........        X   .........
----------------------------------------------------------------------------------------------------------------

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November 
9, 2017.
    The vote on the amendment offered by Mr. Pascrell to the 
amendment in the nature of a substitute to H.R. 1, which would 
require the disclosure to the Ways and Means Committee of the 
income tax returns of the President, was not agreed to by a 
roll call vote of 16 yeas to 24 nays (with a quorum being 
present). The vote was as follows:

----------------------------------------------------------------------------------------------------------------
         Representative             Yea       Nay     Present     Representative      Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady......................  ........        X   .........  Mr. Neal.........        X   ........  .........
Mr. Johnson....................  ........        X   .........  Mr. Levin........        X   ........  .........
Mr. Nunes......................  ........        X   .........  Mr. Lewis........        X   ........  .........
Mr. Tiberi.....................  ........        X   .........  Mr. Doggett......        X   ........  .........
Mr. Reichert...................  ........        X   .........  Mr. Thompson.....        X   ........  .........
Mr. Roskam.....................  ........        X   .........  Mr. Larson.......        X   ........  .........
Mr. Buchanan...................  ........        X   .........  Mr. Blumenauer...        X   ........  .........
Mr. Smith (NE).................  ........        X   .........  Mr. Kind.........        X   ........  .........
Ms. Jenkins....................  ........        X   .........  Mr. Pascrell.....        X   ........  .........
Mr. Paulsen....................  ........        X   .........  Mr. Crowley......        X   ........  .........
Mr. Marchant...................  ........        X   .........  Mr. Davis........        X   ........  .........
Ms. Black......................  ........        X   .........  Ms. Sanchez......        X   ........  .........
Mr. Reed.......................  ........        X   .........  Mr. Higgins......        X   ........  .........
Mr. Kelly......................  ........        X   .........  Ms. Sewell.......        X   ........  .........
Mr. Renacci....................  ........        X   .........  Ms. DelBene......        X   ........  .........
Mr. Meehan.....................  ........        X   .........  Ms. Chu..........        X   ........  .........
Ms. Noem.......................  ........        X   .........
Mr. Holding....................  ........        X   .........
Mr. Smith (MO).................  ........        X   .........
Mr. Rice.......................  ........        X   .........
Mr. Schweikert.................  ........        X   .........
Ms. Walorski...................  ........        X   .........
Mr. Curbelo....................  ........        X   .........
Mr. Bishop.....................  ........        X   .........
----------------------------------------------------------------------------------------------------------------

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November 
9, 2017.
    The vote on the amendment offered by Mr. Brady to the 
amendment in the nature of a substitute to H.R. 1, which would 
make improvements relating to the maximum rate on business 
income of individuals, preserve the adoption tax credit, 
improve the program integrity of the Child Tax Credit, improve 
the consolidation of education savings rules, preserve the 
above-the-line deduction for moving expenses of a member of the 
Armed Forces on active duty, preserve the current law effective 
tax rates on C corporation dividends subject to the dividends 
received deduction, improve interest expense rules with respect 
to accrued interest on floor plan financing indebtedness, 
modify the treatment of S corporation conversions into C 
corporations, modify the tax treatment of research and 
experimentation expenditures, modify the treatment of expenses 
in contingent fee cases, modify the transition rules on the 
treatment of deferred foreign income, improve the excise tax on 
investment income of private colleges and universities, and 
modify rules with respect to political statements made by 
certain tax-exempt entities, was agreed to by a roll call vote 
of 24 yeas to 16 nays (with a quorum being present). The vote 
was as follows:

----------------------------------------------------------------------------------------------------------------
         Representative             Yea       Nay     Present     Representative      Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady......................        X   ........  .........  Mr. Neal.........  ........        X   .........
Mr. Johnson....................        X   ........  .........  Mr. Levin........  ........        X   .........
Mr. Nunes......................        X   ........  .........  Mr. Lewis........  ........        X   .........
Mr. Tiberi.....................        X   ........  .........  Mr. Doggett......  ........        X   .........
Mr. Reichert...................        X   ........  .........  Mr. Thompson.....  ........        X   .........
Mr. Roskam.....................        X   ........  .........  Mr. Larson.......  ........        X   .........
Mr. Buchanan...................        X   ........  .........  Mr. Blumenauer...  ........        X   .........
Mr. Smith (NE).................        X   ........  .........  Mr. Kind.........  ........        X   .........
Ms. Jenkins....................        X   ........  .........  Mr. Pascrell.....  ........        X   .........
Mr. Paulsen....................        X   ........  .........  Mr. Crowley......  ........        X   .........
Mr. Marchant...................        X   ........  .........  Mr. Davis........  ........        X   .........
Ms. Black......................        X   ........  .........  Ms. Sanchez......  ........        X   .........
Mr. Reed.......................        X   ........  .........  Mr. Higgins......  ........        X   .........
Mr. Kelly......................        X   ........  .........  Ms. Sewell.......  ........        X   .........
Mr. Renacci....................        X   ........  .........  Ms. DelBene......  ........        X   .........
Mr. Meehan.....................        X   ........  .........  Ms. Chu..........  ........        X   .........
Ms. Noem.......................        X   ........  .........
Mr. Holding....................        X   ........  .........
Mr. Smith (MO).................        X   ........  .........
Mr. Rice.......................        X   ........  .........
Mr. Schweikert.................        X   ........  .........
Ms. Walorski...................        X   ........  .........
Mr. Curbelo....................        X   ........  .........
Mr. Bishop.....................        X   ........  .........
----------------------------------------------------------------------------------------------------------------

    In compliance with the Rules of the House of 
Representatives, the following statement is made concerning the 
vote of the Committee on Ways and Means during the markup 
consideration of H.R. 1, ``Tax Cuts and Jobs Act,'' on November 
9, 2017.
    H.R. 1 was ordered favorably reported to the House of 
Representatives as amended by a roll call vote of 24 yeas to 16 
nays (with a quorum being present). The vote was as follows:

----------------------------------------------------------------------------------------------------------------
         Representative             Yea       Nay     Present     Representative      Yea       Nay     Present
----------------------------------------------------------------------------------------------------------------
Mr. Brady......................        X   ........  .........  Mr. Neal.........  ........        X   .........
Mr. Johnson....................        X   ........  .........  Mr. Levin........  ........        X   .........
Mr. Nunes......................        X   ........  .........  Mr. Lewis........  ........        X   .........
Mr. Tiberi.....................        X   ........  .........  Mr. Doggett......  ........        X   .........
Mr. Reichert...................        X   ........  .........  Mr. Thompson.....  ........        X   .........
Mr. Roskam.....................        X   ........  .........  Mr. Larson.......  ........        X   .........
Mr. Buchanan...................        X   ........  .........  Mr. Blumenauer...  ........        X   .........
Mr. Smith (NE).................        X   ........  .........  Mr. Kind.........  ........        X   .........
Ms. Jenkins....................        X   ........  .........  Mr. Pascrell.....  ........        X   .........
Mr. Paulsen....................        X   ........  .........  Mr. Crowley......  ........        X   .........
Mr. Marchant...................        X   ........  .........  Mr. Davis........  ........        X   .........
Ms. Black......................        X   ........  .........  Ms. Sanchez......  ........        X   .........
Mr. Reed.......................        X   ........  .........  Mr. Higgins......  ........        X   .........
Mr. Kelly......................        X   ........  .........  Ms. Sewell.......  ........        X   .........
Mr. Renacci....................        X   ........  .........  Ms. DelBene......  ........        X   .........
Mr. Meehan.....................        X   ........  .........  Ms. Chu..........  ........        X   .........
Ms. Noem.......................        X   ........  .........
Mr. Holding....................        X   ........  .........
Mr. Smith (MO).................        X   ........  .........
Mr. Rice.......................        X   ........  .........
Mr. Schweikert.................        X   ........  .........
Ms. Walorski...................        X   ........  .........
Mr. Curbelo....................        X   ........  .........
Mr. Bishop.....................        X   ........  .........
----------------------------------------------------------------------------------------------------------------

                     IV. BUDGET EFFECTS OF THE BILL

               A. Committee Estimate of Budgetary Effects

    In compliance with clause 3(d) of rule XIII of the Rules of 
the House of Representatives, the following statement is made 
concerning the effects on the budget of the bill, H.R. 1, as 
reported.
    The bill, as reported, is estimated to have the following 
effect on Federal fiscal year budget receipts for the period 
2018-2027:

    Clause 8 of rule XIII of the Rules of the House of 
Representatives requires that an estimate provided by the Joint 
Committee on Taxation to the Director of the Congressional 
Budget Office under section 201(f) of the Congressional Budget 
Act of 1974 for any major legislation shall, to the extent 
practicable, incorporate the budgetary effects of changes in 
economic output, employment, capital stock, and other 
macroeconomic variables resulting from such legislation. Major 
legislation is defined as legislation having a gross budgetary 
effect (before incorporating macroeconomic effects) that is 
greater in any fiscal year than 0.25 percent of the current 
projected gross domestic product of the United States for that 
fiscal year. The bill meets this definition of major 
legislation.
    The staff of the Joint Committee on Taxation is currently 
analyzing changes in economic output, employment, capital 
stock, and other macroeconomic variables resulting from the 
bill for purposes of determining these budgetary effects. 
However, it was not practicable to complete this analysis, 
which requires accounting for the effects of each provision in 
this bill, along with interactions between these provisions, by 
the filing of this report.

B. Statement Regarding New Budget Authority and Tax Expenditures Budget 
                               Authority

    In compliance with clause 3(c)(2) of rule XIII of the Rules 
of the House of Representatives, the Committee states that the 
bill involves no new or increased budget authority. The 
Committee further states that the revenue-reducing provisions 
of the bill include increased tax expenditures.

      C. Cost Estimate Prepared by the Congressional Budget Office

    In compliance with clause 3(c)(3) of rule XIII of the Rules 
of the House of Representatives, requiring a cost estimate 
prepared by the CBO, the following statement by CBO is 
provided.

                                     U.S. Congress,
                               Congressional Budget Office,
                                 Washington, DC, November 13, 2017.
Hon. Kevin Brady,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 1, a bill to 
provide for reconciliation pursuant to titles II and V of the 
Concurrent Resolution on the Budget for Fiscal Year 2018. It 
contains the revenue estimates prepared by the staff of the 
Joint Committee on Taxation.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Cecilia 
Pastrone.
            Sincerely,
                                                Keith Hall,
                                                          Director.
    Enclosure.

H.R. 1--A bill to provide for reconciliation pursuant to titles II and 
        V of the Concurrent Resolution on the Budget for Fiscal Year 
        2018

    Summary: H.R. 1, the Tax Cuts and Jobs Act, would amend 
numerous provisions of U.S. tax law. The bill would modify the 
individual income tax brackets and tax rates in effect under 
current law. The bill also would increase the standard 
deduction and the child tax credit. Deductions for personal 
exemptions and certain itemized deductions would be repealed, 
along with the individual and corporate alternative minimum tax 
(AMT) and, starting in 2025, the estate tax. H.R. 1 would 
replace the structure of corporate income tax rates, which has 
a top rate of 35 percent under current law, with a single 20 
percent rate, and would establish a maximum tax rate of 25 
percent for qualified business income of an individual from 
certain pass-through entities. Among other changes, the bill 
would also substantially alter the current system under which 
U.S. corporations are subject to taxation on their worldwide 
income.
    The staff of the Joint Committee on Taxation (JCT) 
estimates that enacting the bill would reduce revenues by about 
$1,438 billion over the 2018-2027 period, and decrease outlays 
by $2 billion over the same period, leading to an increase in 
the deficit of $1,437 billion over the next 10 years. A portion 
of the changes in revenues would be from Social Security 
payroll taxes, which are off-budget. Excluding the estimated 
$19 billion increase in off-budget revenues over the next 10 
years, JCT estimates that H.R. 1 would increase on-budget 
deficits by about $1,456 billion over the period from 2018 to 
2027. Pay-as-you-go procedures apply because enacting the 
legislation would affect direct spending and revenues.
    JCT estimates that enacting the legislation would not 
increase net direct spending by more than $2.5 billion in any 
of the four consecutive 10-year periods beginning in 2028.
    Because of the magnitude of the estimated budgetary 
effects, this bill is considered to be ``major legislation,'' 
as defined in section 5107 of H. Con. Res. 71, the Concurrent 
Resolution on the Budget for Fiscal Year 2018. Hence, it 
triggers the requirement that the cost estimate, to the extent 
practicable, include the budgetary impact of its macroeconomic 
effects. The staff of the Joint Committee on Taxation is 
currently analyzing changes in economic output, employment, 
capital stock, and other macroeconomic variables resulting from 
the bill for purposes of determining these budgetary effects. 
However, JCT indicates it is not practicable for a 
macroeconomic analysis to incorporate the full effects of all 
of the provisions in the bill, including interactions between 
these provisions, within the very short time available between 
completion of the bill and the filing of the committee report.
    JCT has determined that the tax provisions of the bill 
contain no intergovernmental or private sector mandates as 
defined in the Unfunded Mandates Reform Act (UMRA).
    Estimated cost to the Federal Government: The estimated 
budgetary effect of H.R. 1 is shown in the following table.

                           BASIS OF ESTIMATE

Revenues and direct spending

    The Congressional Budget Act of 1974, as amended, 
stipulates that revenue estimates provided by the staff of the 
Joint Committee on Taxation will be the official estimates for 
all tax legislation considered by the Congress. As such, CBO 
incorporates those estimates into its cost estimates of the 
effects of legislation. Virtually all of the estimates for the 
provisions of H.R. 1 were provided by JCT. The date of 
enactment is generally assumed to be December 1, 2017.
    JCT estimates that, together, the provisions contained in 
H.R. 1 would decrease federal revenues on net by about $118 
billion in 2018, by $937 billion over the period from 2018 to 
2022, and by $1,438 billion over the period from 2018 to 2027. 
Net outlays would decrease by $9 billion in 2018, increase by 
$13 billion from 2018 to 2022, and decrease by $2 billion over 
the period from 2018 to 2027. On net, deficits would increase 
by $108 billion in 2018, by $950 billion from 2018 to 2022, and 
by $1,437 billion from 2018 to 2027. A portion of those effects 
reflect changes to revenues from Social Security taxes, which 
are off-budget. Over the 2018 to 2027 period, the bill would 
increase on-budget deficits by $1,456 billion and reduce off-
budget deficits by $19 billion, as estimated by JCT.

------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                         By fiscal year, in billions of dollars--
                                                        ----------------------------------------------------------------------------------------------------------------------------------------
                                                            2018       2019       2020       2021       2022       2023       2024       2025       2026       2027    2018-2022     2018-2027
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                       CHANGES IN REVENUES
 
Tax Reform for Individuals.............................      -64.2     -134.3     -124.5     -123.8     -123.3      -88.9      -69.1      -70.4      -88.8      -88.4     -569.6          -975.9
Business Tax Reform....................................     -124.3     -129.3     -116.3     -101.6      -89.0      -24.8        2.4      -27.0      -55.0      -80.4     -560.4          -744.5
Taxation of Foreign Income and Foreign Persons.........       70.7       42.2       24.4       27.2       27.6       28.6       28.3       28.1       10.4       -7.2      191.9           279.3
Exempt Organizations...................................        0.3        0.4          *        0.1        0.2        0.2        0.5        0.5        0.5        0.5        1.1             2.7
                                                        ----------------------------------------------------------------------------------------------------------------------------------------
    Total Estimated Changes in Revenues................     -117.6     -221.0     -216.5     -198.2     -184.5      -84.9      -37.9      -68.8     -132.9     -175.4     -937.1        -1,438.4
        On-Budget......................................     -116.7     -220.6     -216.3     -198.2     -185.0      -88.8      -43.0      -73.0     -136.6     -178.7     -936.0        -1,457.7
        Off-Budgeta....................................       -0.9       -0.4       -0.2          *        0.5        3.9        5.1        4.2        3.7        3.3       -1.1            19.3
 
                                                                                   CHANGES IN DIRECT SPENDING
 
Tax Reform for Individuals:
    Estimated Budget Authority.........................      -11.7        3.6        3.4        3.1        2.5        3.5       -3.4       -4.3       -4.8       -4.2        1.6           -12.2
    Estimated Outlays..................................      -11.7        3.6        3.4        3.1        2.5        3.5       -3.4       -4.3       -4.8       -4.2        1.6           -12.2
Business Tax Reform:
    Estimated Budget Authority.........................        2.2        2.3        1.7        1.9        1.8       -0.1       -0.1       -0.1       -0.1       -0.1       10.1             9.7
    Estimated Outlays..................................        2.2        2.3        1.7        1.9        1.8       -0.1       -0.1       -0.1       -0.1       -0.1       10.1             9.7
Taxation of Foreign Income and Foreign Persons:
    Estimated Budget Authority.........................        0.3        0.1        0.1        0.1        0.1          *          0          0          0          0        0.8             0.9
    Estimated Outlays..................................        0.3        0.1        0.1        0.1        0.1          *          0          0          0          0        0.8             0.9
    Total Changes in Direct Spending
        Estimated Budget Authority.....................       -9.2        6.0        5.2        5.1        4.4        3.4       -3.5       -4.4       -4.9       -4.3       12.5            -1.6
        Estimated Outlays..............................       -9.2        6.0        5.2        5.1        4.4        3.4       -3.5       -4.4       -4.9       -4.3       12.5            -1.6
 
                                                    NET INCREASE OR DECREASE (-) IN THE DEFICIT FROM CHANGES IN DIRECT SPENDING AND REVENUES
 
Impact on Deficit......................................      108.4      227.0      221.7      203.3      188.9       88.3       34.4       64.4      128.0      171.1      949.6         1,436.8
        On-Budget Deficit..............................      107.5      226.6      221.5      203.3      189.4       92.2       39.5       68.6      131.7      174.4      948.5         1,456.1
        Off-Budget Deficit.............................        0.9        0.4        0.2          *       -0.5       -3.9       -5.1       -4.2       -3.7       -3.3        1.1           -19.3
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Staff of the Joint Committee on Taxation.
Note: Components may not add to totals due to rounding; * = between -$50 million and $50 million.
a. Off-budget revenues result from changes in Social Security payroll tax receipts.

    Tax Reform for Individuals. H.R. 1 would make numerous 
changes to tax law pertaining to individuals. Provisions in 
this section include all of those in Title I of the bill and 
the part of Title II pertaining to the individual alternative 
minimum tax. Such provisions estimated to reduce revenues over 
the 2018 to 2027 period include the following changes, which 
would take effect in 2018 unless otherwise noted:
           Establish four brackets instead of the seven 
        in place under current law, with tax rates of 12 
        percent, 25 percent, 35 percent, and 39.6 percent, plus 
        a phase out of the 12 percent tax bracket for taxpayers 
        with taxable income above $1 million ($1.2 million for 
        joint filers);
           Increase the standard deduction;
           Repeal the alternative minimum tax on 
        individuals;
           Establish a maximum tax rate of 25 percent 
        for qualified business income of an individual from 
        certain pass-through entities, namely partnerships, S 
        corporations, and sole proprietorships;
           Increase the child tax credit, which would 
        be consolidated into a new family tax credit that would 
        also include a temporary $300 credit for each taxpayer 
        (including both spouses for joint filers) and nonchild 
        dependents; and
           Double the exemption amount allowed under 
        estate and gift taxes, and, starting in 2025, repeal 
        the estate tax and the generation-skipping transfer 
        tax.
    Provisions estimated to increase revenues over the 2018 to 
2027 period include the following changes:
           Repeal deductions for personal exemptions;
           Repeal and limit certain itemized 
        deductions, including repealing the deductions for 
        state and local income and sales taxes, limiting the 
        deduction for real property taxes, and limiting the 
        deductions for mortgage interest; and
           Index tax parameters by the chained consumer 
        price index instead of the traditional consumer price 
        index.
    JCT estimates that the individual tax provisions would, on 
net, reduce revenues by $976 billion from 2018 to 2027. In 
addition, the provisions would affect outlays for refundable 
tax credits, decreasing them by an estimated $12 billion over 
the 2018 to 2027 period. Some of the provisions in this section 
would affect off-budget revenues, increasing them by $15 
billion over the period from 2018 to 2027, JCT estimates. On-
budget revenues would decrease by an estimated $991 billion.
    The largest revenue reductions would result from the 
provision to establish a new income tax rate and bracket 
structure, which JCT estimates would reduce revenues by $1,104 
billion over the period from 2018 to 2027 and reduce outlays 
for refundable tax credits by $15 billion over the same period. 
In addition, the increase in the standard deduction would 
reduce revenues by $819 billion over the period from 2018 to 
2027 and increase outlays for refundable tax credits by $103 
billion over the same period, according to JCT's estimates. The 
repeal of the alternative minimum tax on individuals would 
reduce revenues by $696 billion from 2018 to 2027.
    JCT also estimates that the provisions providing a maximum 
tax rate for pass-through entities would reduce revenues by 
$597 billion over the period from 2018 to 2027, and that 
modifications to the child tax credit and the new family tax 
credit would, over the same 10-year period, reduce revenues by 
$504 billion and increase outlays for refundable tax credits by 
$136 billion. JCT estimates that additional revenue reductions, 
totaling $151 billion from 2018 to 2027, would result from the 
modifications to estate and gift taxes.
    The largest revenue increases would result from the 
provision to repeal deductions for personal exemptions, which 
JCT estimates would increase revenues by $1,383 billion and 
reduce outlays for refundable credits by $179 billion over the 
2018 to 2027 period. In addition, JCT estimates that the repeal 
and limitation of certain itemized deductions would increase 
revenues by $1,258 billion and reduce outlays for refundable 
credits by $4 billion from 2018 to 2027. The change in the 
inflation measure used to index tax parameters would increase 
revenues by $109 billion and reduce outlays for refundable 
credits by $19 billion over the 2018 to 2027 period, according 
to JCT estimates.
    Business Tax Reform. The bill would make many changes to 
business taxes. Provisions in this section include all of Title 
III and the part of Title II pertaining to the corporate 
alternative minimum tax. The ones with the largest effects on 
revenues, as estimated by JCT, are the following:
           Replace with a single 20 percent rate the 
        graduated structure of income tax rates for 
        corporations under current law that has a top rate of 
        35 percent;
           Limit the amount of deductions for net 
        interest expenses to the sum of business interest 
        income and 30 percent of an adjusted measure of taxable 
        income; and
           Limit the deduction for past net operating 
        losses to 90 percent of current taxable income and 
        generally repeal the two-year period over which losses 
        may be carried back to previous tax years.
    JCT estimates that the business tax provisions would, on 
net, reduce revenues by $745 billion from 2018 to 2027. In 
addition, the provisions would increase outlays for refundable 
tax credits by an estimated $10 billion over the 2018 to 2027 
period.
    JCT estimates that the modifications to the corporate tax 
rate structure, including reducing the top tax rate from 35 
percent that is assessed on most taxable income to a 20 percent 
rate that would apply to all amounts of taxable income, would 
reduce revenues by $1,456 billion over the 2018-2027 period. 
JCT further estimates that limiting the deductions for interest 
expenses would increase revenues by $172 billion over the same 
10-year period. In addition, limiting the use of net operating 
losses would raise revenues by $156 billion over the period 
from 2018 to 2027.
    Other changes to business taxes, including the following 
ones, would increase revenues, on net, according to JCT:
           Requiring that certain research or 
        experimental expenditures be amortized over a five-year 
        period or longer, starting in 2023, would increase 
        revenues by $109 billion over the period from 2023 to 
        2027.
           Repealing the deduction for income 
        attributable to domestic production activities would 
        increase revenues by $95 billion over the 2018 to 2027 
        period;
           Repealing the tax credit for clinical 
        testing expenses for certain drugs for rare diseases or 
        conditions would increase revenues by $54 billion over 
        the same period; and
           Terminating private activity bonds would 
        increase revenues by $39 billion over the next 10 
        years.
    Those increases in revenues would be partially offset by 
the repeal of the alternative minimum tax on corporations, 
which JCT estimates would reduce revenues by $30 billion from 
2018 to 2027 and increase outlays for refundable credits by $10 
billion over the same period.
    Taxation of Foreign Income and Foreign Persons. Changes to 
taxes pertaining to foreign income and foreign persons are 
contained in Title IV of H.R. 1. The bill would substantially 
modify the current system under which U.S. corporations are 
subject to taxation on their worldwide income, generally 
including foreign earnings in taxable income when paid to them 
as dividends by their foreign subsidiaries and with an 
allowance for tax credits for certain foreign taxes paid. The 
system under H.R. 1 would provide an exemption for dividends 
paid by a foreign corporation to its U.S. parent, with no 
foreign tax credits allowed for taxes paid on the amount of 
such dividends. A number of other changes would also be 
implemented by Title IV.
    The provisions in Title IV with the largest estimated 
effects on revenues are the following:
           Require that certain untaxed foreign income 
        of U.S. corporations be deemed to be immediately paid 
        to them as dividends and included in taxable income, 
        subject to taxation at a 14 percent rate (or 7 percent 
        for certain illiquid assets), and with an option to 
        spread the resulting tax amounts equally over an eight-
        year period;
           Provide a deduction for the foreign-source 
        portion of dividends received by domestic corporations 
        from certain foreign corporations;
           Impose an excise tax of 20 percent on 
        certain payments to related foreign corporations; and
           Require that U.S. corporations include in 
        taxable income a portion of a specified high income 
        amount earned by their foreign subsidiaries.
    JCT estimates that the provisions related to foreign 
taxation would, on net, increase revenues by $279 billion from 
2018 to 2027. The provisions would also increase outlays by $1 
billion over the 2018 to 2027 period, resulting from an 
extension of certain payments to Puerto Rico and the Virgin 
Islands of rum excise taxes, as estimated by CBO.
    JCT estimates that the deduction for dividends received 
from foreign corporations would reduce revenues by $205 billion 
over the 2018-2027 period. Other provisions would result in 
revenue increases from 2018 to 2027 as estimated by JCT: 
requiring a deemed repatriation of untaxed foreign income ($293 
billion); imposing an excise tax on certain payments ($95 
billion); and requiring the inclusion in taxable income of 
certain foreign earned high returns ($68 billion). The 
additional revenue from the provision regarding deemed 
repatriations would be concentrated earlier in the ten-year 
period: it would increase revenues by an estimated $79 billion 
in 2018, $54 billion in 2019, between $26 billion and $27 
billion per year from 2020 through 2025, and $9 billion in 
2026, before resulting in a reduction in revenue of $8 billion 
in 2027.
    Exempt Organizations. Title V of H.R. 1 would make several 
changes to the tax treatment of tax-exempt organizations. Those 
changes include the following: imposing an excise tax based on 
the investment income of private colleges and universities; 
revising the unrelated business income tax; and modifying 
restrictions on political campaign activity for certain tax-
exempt organizations. JCT estimates that the changes from Title 
V would, on net, increase revenues by $0.5 billion or less in 
each year of the 2018 to 2027 period, for a total increase of 
$3 billion over the 10-year period. No single provision would 
have an effect of greater than $0.5 billion in any year, 
according to JCT estimates.
    Pay-As-You-Go considerations: The Statutory Pay-As-You-Go 
Act of 2010 establishes budget-reporting and enforcement 
procedures for legislation affecting direct spending or 
revenues. The net changes in outlays and revenues that are 
subject to those pay-as-you-go procedures are shown in the 
following table. Only on-budget changes to outlays or revenues 
are subject to pay-as-you-go procedures.

                               CBO ESTIMATE OF PAY-AS-YOU-GO EFFECTS FOR H.R. 1, AS ORDERED REPORTED BY THE HOUSE COMMITTEE ON WAYS AND MEANS ON NOVEMBER 9, 2017
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                              By fiscal year, in billions of dollars--
                                                                   -----------------------------------------------------------------------------------------------------------------------------
                                                                      2018      2019      2020      2021      2022      2023      2024      2025      2026      2027     2018-2022    2018-2027
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                      NET INCREASE OR DECREASE (-) IN THE ON-BUDGET DEFICIT
 
Statutory Pay-As-You-Go Effects...................................     107.5     226.6     221.5     203.3     189.4      92.2      39.5      68.6     131.7     174.4        948.5      1,456.1
Memorandum:a
    Change in Outlays.............................................      -9.2       6.0       5.2       5.1       4.4       3.4      -3.5      -4.4      -4.9      -4.3         12.5         -1.6
    Change in On-Budget Revenues..................................     116.7    -220.6    -216.3    -198.2    -185.0     -88.8     -43.0     -73.0    -136.6    -178.7       -936.0     -1,457.7
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Staff of the Joint Committee on Taxation.
aA positive sign for outlays indicates an increase in outlays. A negative sign for revenues indicates a reduction in revenues.
Note: Components do not add to totals due to rounding.

    Increase in long term direct spending: JCT estimates that 
enacting the legislation would not increase net direct spending 
by more than $2.5 billion in any of the four consecutive 10-
year periods beginning in 2028.
    Mandates: JCT has determined that H.R. 1 contains no 
private-sector or intergovernmental mandates as defined by 
UMRA.
    Estimate prepared by: Staff of the Joint Committee on 
Taxation and Cecilia Pastrone from the Congressional Budget 
Office.
    Estimate approved by: John McClelland, Assistant Director 
for Tax Analysis.

     V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE

          A. Committee Oversight Findings and Recommendations

    With respect to clause 3(c)(1) of rule XIII of the Rules of 
the House of Representatives, the Committee made findings and 
recommendations that are reflected in this report.

        B. Statement of General Performance Goals and Objectives

    With respect to clause 3(c)(4) of rule XIII of the Rules of 
the House of Representatives, the Committee advises that the 
bill contains no measure that authorizes funding, so no 
statement of general performance goals and objectives for which 
any measure authorizes funding is required.

              C. Information Relating to Unfunded Mandates

    This information is provided in accordance with section 423 
of the Unfunded Mandates Reform Act of 1995 (Pub. L. No. 104-
4).
    The Committee has determined that the bill does not contain 
Federal mandates on the private sector. The Committee has 
determined that the bill does not impose a Federal 
intergovernmental mandate on State, local, or tribal 
governments.

                       D. Tax Complexity Analysis

    Section 4022(b) of the Internal Revenue Service 
Restructuring and Reform Act of 1998 (``IRS Reform Act'') 
requires the staff of the Joint Committee on Taxation (in 
consultation with the Internal Revenue Service and the Treasury 
Department) to provide a tax complexity analysis. The 
complexity analysis is required for all legislation reported by 
the Senate Committee on Finance, the House Committee on Ways 
and Means, or any committee of conference if the legislation 
includes a provision that directly or indirectly amends the 
Internal Revenue Code of 1986 and has widespread applicability 
to individuals or small businesses.
    Pursuant to clause 3(h)(1) of rule XIII of the Rules of the 
House of Representatives, for each such provision identified by 
the staff of the Joint Committee on Taxation, a summary 
description of the provision is provided below along with an 
estimate of the number and type of affected taxpayers, and a 
discussion regarding the relevant complexity and administrative 
issues.
    Following the analysis of the staff of the Joint Committee 
on Taxation are the comments of the IRS and Treasury regarding 
each provision included in the complexity analysis.

  1. Simplification of rates, standard deduction, personal exemption 
             (secs. 1001, 1002, 1003 and 1004 of the bill)

            Summary description of the provisions
    The bill changes the structure of the individual income tax 
by modifying the rate structure such that there are only four 
tax brackets (12-percent, 25-percent, 35-percent and 39.6-
percent), significantly increasing the size of the standard 
deduction (for 2018 the standard deduction is $24,400 for joint 
filers, $18,300 for heads of household and $12,200 for other 
filers), and eliminating personal exemptions.
            Number of affected taxpayers
    It is estimated that the provision will affect 
approximately 120 million tax returns.
            Discussion
    It is not anticipated that individuals will need to keep 
additional records due to these provisions. It should not 
result in an increase in disputes with the IRS, nor will 
regulatory guidance be necessary to implement this provision.
    The IRS will need to adjust its wage withholding tables to 
reflect the repeal of personal exemptions. Because revised wage 
withholding will occur within the first month of 2018, this 
would require employers to switch to new withholding tables 
somewhat quickly, which can be expected to result in a one-time 
additional burden for employers (or potential additional costs 
for employers that rely on a bookkeeping or payroll service).
    Some taxpayers who currently itemize deductions may respond 
to the provision by claiming the increased standard deduction 
in lieu of itemizing. According to estimates by the staff of 
the Joint Committee on Taxation, approximately 94 percent of 
taxpayers will claim the standard deduction under the bill, up 
from approximately 70 percent under present law. These 
taxpayers will no longer have to file Schedule A to Form 1040, 
a significant number of which will no longer need to engage in 
the record keeping inherent in itemizing below-the-line 
deductions. Moreover, by claiming the standard deduction, such 
taxpayers may qualify to use simpler versions of the Form 1040 
(i.e., Form 1040EZ or Form 1040A) that are not available to 
individuals who itemize their deductions. These forms simplify 
the return preparation process by eliminating from the Form 
1040 those items that do not apply to particular taxpayers.
    This reduction in complexity and record keeping also may 
result in a decline in the number of individuals using a tax 
preparation service, or tax preparation software, or a decline 
in the cost of such service or software. The provision also 
should reduce the number of disputes between taxpayers and the 
IRS regarding the substantiation of itemized deductions.

  2. Reduced rate for small businesses with net active business income

    Under the bill, a special rule provides a reduced tax rate 
of 11, 10, or nine percent in the case of an individual's 
qualified active business income below an indexed threshold of 
$75,000 (in the case of a joint return or a surviving spouse). 
The indexed $75,000 threshold is three quarters of that amount 
for individuals filing as head of household and half that 
amount for other individuals. The reduced rate is not available 
to estates and trusts.
    The reduced rate is phased in. The reduced rate is 11 
percent (that is, one percentage point below the 12 percent 
rate) for taxable years beginning in 2018 and 2019, and is 10 
percent (that is, two percentage points below the 12 percent 
rate) in 2020 and 2021. For taxable years beginning in 2022 and 
thereafter the reduced rate is nine percent.
    The reduced tax rate applies to the least of three amounts, 
the taxpayer's: (1) qualified active business income, (2) 
taxable income reduced by net capital gain, or (3) 9-percent 
bracket threshold amount (described above). Qualified active 
business income means the excess of the taxpayer's net business 
income from any active business activity over his or her net 
business loss from any active business activity. Qualified 
active business income includes income from any trade or 
business activity, including service businesses. No capital 
percentage limitation applies in determining qualified active 
business income.
    A phase-out applies to the amount subject to the 11-, 10-, 
or nine-percent rate. The amount taxed at one of these rates is 
reduced by the excess of taxable income over an indexed 
applicable threshold amount, $150,000 in the case of married 
individuals filing jointly. The applicable threshold amount is 
three quarters of that amount for individuals filing as head of 
household and half that amount for other individuals.
    An active business activity is an activity that involves 
the conduct of any trade or business and that is not a passive 
activity for purposes of the passive loss rules of section 469 
(that is, generally, the taxpayer materially participates in 
the trade or business activity).
            Number of affected taxpayers
    It is estimated that the provision will affect over ten 
percent of small business tax returns.
            Discussion
    It is not anticipated that individuals will need to keep 
additional records due to this provision. It should not result 
in an increase in disputes with the IRS, nor will regulatory 
guidance be necessary to implement this provision. It may, 
however, increase the number of questions that taxpayers ask 
the IRS, such as how to calculate qualified active business 
income. This increased volume of questions could have an 
adverse impact on other elements of IRS' operation, such as the 
levels of taxpayer service. The provision should not increase 
the tax preparation costs for most individuals.
    The IRS will need to add to the individual income tax forms 
package a new worksheet so that taxpayers can calculate their 
qualified active business income. This worksheet will require a 
series of calculations.

   3. Increase in child tax credit and addition of new family credit 
                   exemption (sec. 1101 of the bill)

            Summary description of the provisions
    The bill increases the value of the child tax credit to 
$1,600, providing that no more than $1,000 per child shall be 
refundable. This $1,000 limitation is indexed and rounded up, 
such that in 2018 it is $1,100. In order to qualify for the 
child tax credit, a Social Security number must be provided for 
the qualifying child. The bill also provides a $300 
nonrefundable tax credit for the taxpayer, the taxpayer's 
spouse, and any dependent other than a qualifying child. This 
credit expires for taxable years beginning after December 31, 
2022.
            Number of affected taxpayers
    It is estimated that the provision will affect 
approximately 90 million tax returns.
            Discussion
    It is not anticipated that individuals will need to keep 
additional records due to these provisions. It should not 
result in an increase in disputes with the IRS, nor will 
regulatory guidance be necessary to implement this provision. 
The provision may, however, increase the number of questions 
that taxpayers ask the IRS, such as whether they may claim the 
new family credit for certain members of their household, or 
whether and to what extent the combined tax credit is 
refundable.
    The IRS will need to modify its forms and publications to 
reflect this change.

4. Repeal of the deduction for State and local income taxes (sec. 1303 
                              of the bill)

            Summary description of the provisions
    Under the provision, in the case of an individual, as a 
general matter, State, local and foreign property taxes and 
State and local sales taxes are allowed as a deduction only 
when paid or accrued in carrying on a trade or business or an 
activity described in section 212 (relating to expenses for the 
production of income). Thus, the provision allows only those 
deductions for State, local and foreign property taxes, and 
sales taxes, that are presently deductible in computing income 
on an individual's Schedule C, Schedule E, or Schedule F on 
such individual's tax return.
    The provision contains an exception to the above-stated 
rule in the case of real property taxes. Under this exception, 
an individual may claim an itemized deduction of up to $10,000 
($5,000 for married taxpayer filing a separate return) for 
property taxes paid or accrued in the taxable year, in addition 
to any property taxes deducted in carrying on a trade or 
business or an activity described in section 212. Foreign real 
property taxes may not be deducted under this exception.
    Under the provision, in the case of an individual, State 
and local income, war profits, and excess profits taxes are not 
allowable as a deduction.
            Number of affected taxpayers
    It is estimated that the provision will affect 
approximately 44 million tax returns.
            Discussion
    It is not anticipated that individuals will need to keep 
additional records due to this provision. Because the deduction 
for State and local taxes has been longstanding in the Code, 
its repeal may require regulatory guidance, so as to provide 
guidance for taxpayers regarding which taxes remain properly 
deductible on an individual's Schedule C, Schedule E or 
Schedule F. This may also result in an increase in disputes 
with the IRS.
    Additionally, if a technical correction is made to remove 
the reporting requirement regarding State and local refunds of 
income tax, this would relieve those jurisdictions with a 
reporting obligation of the cost of complying with this 
obligation, as well as reduce the need for taxpayers to retain 
such reports for their books and records.
    The IRS will need to modify its forms and publications to 
reflect this change

                         5. Increased expensing

    The bill extends and modifies the additional first-year 
depreciation deduction through 2022 (through 2023 for longer 
production period property and certain aircraft). The 50-
percent allowance is increased to 100 percent for property 
acquired and placed in service after September 27, 2017, and 
before January 1, 2023 (January 1, 2024, for longer production 
period property and certain aircraft), as well as for specified 
plants planted or grafted after September 27, 2017, and before 
January 1, 2023. The $8,000 increase amount in the limitation 
on the depreciation deductions allowed with respect to certain 
passenger automobiles is increased to $16,000 for passenger 
automobiles acquired and placed in service after September 27, 
2017, and before January 1, 2023.
    The bill maintains the present law phase-down of bonus 
depreciation and the section 280F increase amount for property 
acquired before September 28, 2017, and placed in service after 
September 27, 2017.
    The bill extends the special rule under the percentage-of-
completion method for the allocation of bonus depreciation to a 
long-term contract for property placed in service before 
January 1, 2023 (January 1, 2024, in the case of longer 
production period property).
    The bill removes the requirement that the original use of 
qualified property must commence with the taxpayer. Thus, the 
additional first-year depreciation deduction applies to 
purchases of used as well as new items.
    The bill excludes from the definition of qualified property 
any property used (i) in a real property trade or business, 
(ii) in the trade or business of certain regulated public 
utilities, and (iii) in a trade or business that has had floor 
plan financing indebtedness unless the taxpayer with such trade 
or business is not a tax shelter precluded from using the cash 
method and is exempt from the interest limitation rules in 
section 3301 of the bill by satisfying the $25 million gross 
receipts test of section 448(c).
    As a conforming amendment to the repeal of AMT, the bill 
repeals the election to accelerate AMT credits in lieu of bonus 
depreciation.
            Number of affected taxpayers
    It is estimated that the provision will affect over ten 
percent of small business tax returns.
            Discussion
    The reporting requirements are unchanged by this provision. 
Capital assets purchased during the tax year will still need to 
be reported on Form 4562, Depreciation and Amortization 
(Including Information on Listed Property); however, the 
current year tax deduction associated with such assets will 
increase.

                 6. Expansion of section 179 expensing

    The bill increases the maximum amount a taxpayer may 
expense under section 179 to $5 million and increases the 
phase-out threshold amount to $20 million for five taxable 
years (i.e., for taxable years beginning in 2018, 2019, 2020, 
2021, and 2022). The $5,000,000 and $20,000,000 amounts are 
indexed for inflation for taxable years beginning after 2018.
    The bill expands the definition of qualified real property 
under section 179 to include qualified energy efficient heating 
and air-conditioning property acquired and placed in service by 
the taxpayer after November 2, 2017.
            Number of affected taxpayers
    It is estimated that the provision will affect over ten 
percent of small business tax returns.
            Discussion
    While taxpayers purchasing section 179 property will still 
be required to complete and file Form 4562, Depreciation and 
Amortization (Including Information on Listed Property), 
significantly less detail is required to be included on such 
form. Accordingly, the compliance burden of many taxpayers will 
be reduced.

  E. Congressional Earmarks, Limited Tax Benefits, and Limited Tariff 
                                Benefits

    With respect to clause 9 of rule XXI of the Rules of the 
House of Representatives, the Committee has carefully reviewed 
the provisions of the bill and states that the provisions of 
the bill do not contain any congressional earmarks, limited tax 
benefits, or limited tariff benefits within the meaning of the 
rule.

                   F. Duplication of Federal Programs

    In compliance with clause 3(c)(5) of Rule XIII of the Rules 
of the House of Representatives, the Committee states that no 
provision of the bill establishes or reauthorizes: (1) a 
program of the Federal Government known to be duplicative of 
another Federal program; (2) a program included in any report 
from the Government Accountability Office to Congress pursuant 
to section 21 of Public Law 111-139; or (3) a program related 
to a program identified in the most recent Catalog of Federal 
Domestic Assistance, published pursuant to the Federal Program 
Information Act (Pub. L. No. 95-220, as amended by Pub. L. No. 
98-169).

                 G. Disclosure of Directed Rule Makings

    In compliance with Sec. 3(i) of H. Res. 5 (115th Congress), 
the bill contains the following directed rulemakings:
    Section 1311 directs the Secretary of the Treasury to issue 
regulations related to the termination of deduction and 
exclusions for contributions to medical savings accounts.
    Section 1503 directs the Secretary of the Treasury to 
modify Treasury Regulation section 1.401(k)-1(d)(3)(iv)(E).
    Section 3307 directs the Secretary of the Treasury to issue 
regulations relating to entertainment and fringe-benefit 
expenses.
    Section 3314 directs the Secretary of the Treasury to issue 
regulations to the recharacterization of certain gains in the 
case of partnership profits interests held in connection with 
performance of investment services.
    Section 3802, addressing an excise tax on excess tax-exempt 
organization executive compensation, directs the Secretary of 
the Treasury to issue regulations as necessary to prevent 
avoidance of the purposes of this section through the 
performances of services other than as an employee.
    Section 4301, addressing current year inclusion by United 
States shareholders with foreign high returns, directs the 
Secretary of the Treasury to issue regulations as the Secretary 
determines appropriate to prevent the avoidance of the purposes 
of this section.

       VI. CHANGES IN EXISTING LAW MADE BY THE BILL, AS REPORTED

    With respect to clause 3(e) of rule XIII of the Rules of 
the House of Representatives, the Committee advises that 
compliance prior to consideration was not possible.

                         VII. DISSENTING VIEWS

    The Tax Cuts and Jobs Act, H.R. 1, is a bad deal for 
millions of Americans, particularly the middle class. The 
legislation puts the wealthy and well-connected first, while 
forcing millions of American families to watch as their taxes 
go up at every stage of their lives--from childhood to 
retirement. That's simply not what the American people asked us 
to do, and it is not something that the Democrats on this 
Committee can support.
    Committee Democrats unanimously opposed H.R. 1 at the 
markup, because the legislation disproportionately benefits the 
wealthy and big corporations over hardworking taxpayers who are 
struggling with the rising costs of education, housing, and 
other expenses, not to mention the challenges of saving for 
retirement. Under H.R. 1, nearly one-half of all middle-class 
families would pay more taxes in 2026 than they would under 
current law, and about one-third would pay more in 2018. As the 
Wall Street Journal said this week, this is ``a middle class 
tax cut that is really a hike.''
The Tax Cuts and Jobs Act would hurt middle-class families with 
        children
    Rather than provide meaningful assistance to families with 
children through a much-needed expansion to the Child Tax 
Credit (CTC), the Republican bill prioritizes tax cuts to 
wealthy individuals. In fact, the Center on Budget and Policy 
Priorities estimated that the expanded CTC contained in H.R. 1 
would leave out 10 million children in low-wage working 
families and another roughly 13 million children in low- and 
modest-income working families would receive something less 
than the full $600 per-child credit increase. By making the CTC 
increase nonrefundable, many families would simply not benefit.
The Tax Cuts and Jobs Act would hurt students and teachers
    Our schools are woefully underfunded and students suffer 
because of it. When their supplies budgets run out (often well 
before securing essential items like books and paper), many 
teachers buy supplies for their classrooms with money out of 
their own pockets. H.R. 1 removes the tax credit these teachers 
receive for buying these classroom supplies. A survey conducted 
during the 2015-16 school year found that teachers spend an 
average of $600 on classroom supplies and materials every year. 
The current law above-the-line deduction gives them some of 
that money back. While corporations can deduct the costs of 
paper and pencils as necessary business expenses, H.R. 1 would 
take away that ability from teachers across America.
    H.R. 1 also harms students. It would repeal two tax credits 
for students: the Lifetime Learning Credit and Hope Scholarship 
Credit. The loss of these tax credits alone would cost low- and 
middle-income students $17 billion over the next decade. While 
the bill does put into place a one-year extension of the 
American Opportunity Tax Credit (AOTC), it is less generous 
than the two tax credits lost plus the extension is only 
temporary. Under H.R. 1, the AOTC is cut in one-half after four 
years, which would make the maximum credit $1,250 for the fifth 
year of education.
    Once out of school, H.R. 1 also removes the student loan 
interest deduction. Currently, student loan borrowers can 
deduct up to $2,500 of interest paid on student loans. In 2015, 
more than 12 million people claimed the student loan interest 
deduction.
    For students who work, the bill eliminates the tax-free 
status of employer tuition reimbursements. A 2013 employer 
survey found that 61 percent of companies make available some 
type of tuition-assistance program. While H.R. 1 provides big 
corporations with extensive tax breaks, the Republicans chose 
to tax middle-class workers when they benefit from tuition 
reimbursement programs.
The Tax Cuts and Jobs Act would hurt middle-class Americans and 
        threaten state and local government services
    H.R. 1 harms middle-class Americans by repealing the state 
and local tax (SALT) deduction for individuals, except for a 
property tax deduction capped at $10,000. The SALT deduction 
prevents taxpayers from owing federal taxes on the income they 
pay in taxes to state and local governments. State and local 
tax payments are not disposable income, and it is unfair to 
treat them as such. The SALT deduction is so common-sense that 
it has been in force since the first federal income tax, 
adopted more than a century ago, when the whole federal income 
tax law was three pages long.
    Ironically, H.R. 1 would allow corporations to continue 
deducting state and local taxes, while eliminating much of the 
benefit for individuals and families.
    Currently, more than 100 million Americans in 44 million 
households claim the SALT deduction. Almost 40 percent of 
taxpayers earning between $50,000 and $75,000 claim SALT, and 
over 70 percent of taxpayers making $100,000 to $200,000 use 
it. Over one-half the value of the deduction went to households 
with incomes below $200,000. People living in every 
congressional district in every state in the country use this 
deduction, and it benefits taxpayers of all income levels, 
directly or indirectly.
    Two-thirds of state and local government spending comes 
from its income and sales taxes. These revenues support 
essential public services investments, like schools, local law 
enforcement, fire fighters, road construction and maintenance, 
and health care. Nearly everyone who itemizes claims the SALT 
deduction; therefore, repealing SALT would raise the cost of 
state and local services on a wide swath of taxpayers. This 
would pressure state and local governments to reduce revenues 
and cut crucial public investments.
The Tax Cuts and Jobs Act would hurt homeowners and home values
    H.R. 1 would hurt homeowners. The American Dream has long 
included the idea of home ownership but H.R. 1 scales back the 
tax benefit of buying a new home. It also eliminates private 
activity bonds, which are key for financing affordable housing. 
That's why groups like the National Association of Home 
Builders (NAHB) oppose this bill. H.R. 1 depresses home 
ownership and home values. The bill cuts the amount people can 
claim as mortgage interest deductions so that only those people 
who can afford large down payments can afford to buy homes--
especially in coastal cities where home prices are very high. 
Also, because the bill discourages itemized deductions, many 
who can now deduct modest mortgage interest will see no tax 
benefit from that deduction. For many potential homeowners, 
buying a home will be no better than renting, and they will 
leave the market. Current home owners will have a smaller pool 
of buyers to sell to and their home values--the primary source 
of wealth for middle-class Americans--will decline. According 
to NAHB President Granger MacDonald, ``The House Republican tax 
reform plan abandons middle-class taxpayers in favor of high-
income Americans and wealthy corporations. The bill eviscerates 
existing housing tax benefits by drastically reducing the 
number of home owners who can take advantage of mortgage 
interest and property tax incentives.'' National Association of 
Realtors President William E. Brown agreed, ``The nation's 1.3 
million Realtors cannot support a bill that takes homeownership 
off the table for millions of middle-class families.''
The Tax Cuts and Jobs Act would hurt older Americans
    H.R. 1 repeals the medical expense deduction, effectively 
creating a new Health Tax on older and sick Americans. This 
Health Tax would result in a tax increase for millions of 
Americans with high medical costs, especially older Americans. 
The end result is a massive tax increase for older Americans 
and individuals living with expensive illnesses--like cancer, 
Alzheimer's, or a rare disease--to pay for corporate tax cuts.
    The medical expense deduction is particularly important for 
older Americans. Over 73 percent of those claiming the tax 
credit are over 50 years old, and 55 percent are over 65 years 
old. One-half of those claiming the tax credit have incomes 
below $50,000.
    The Affordable Care Act helped lower the number of 
Americans facing medical debt by giving millions health 
insurance coverage for the first time. However, a severe 
illness or even medical bills from a car accident, can still 
mount to thousands of dollars. For the family caring for a 
premature child, the couple trying to conceive, or the husband 
caring for a wife diagnosed with Alzheimer's, this deduction is 
one way to help prevent medical bills from crushing families in 
debt.
For all of these reasons and more, we oppose The Tax Cuts and Jobs Act
    The middle class in this country are struggling. In passing 
tax reform, we must take those Americans who feel forgotten and 
left behind into consideration and build a tax code founded on 
fairness. This bill simply does not.
    Instead, H.R. 1 lets the American people down at every step 
of their life--from birth through retirement. It fails to 
provide the needed improvements to the tax code that could 
assist the hopeful young family trying to keep their head above 
water; the student trying to do the right thing by getting an 
education; and the factory worker at the end of a long career 
just hoping to have enough left over to retire with dignity. 
Democrats believe that instead of pulling down the ladder of 
opportunity for those in the middle class, and the millions who 
aspire to it, we should expand it to make sure that everyone 
has a fair shot.
    The secret, closed door negotiations produced a deeply 
flawed bill that will hurt the teacher that spends her own 
money to buy school supplies for their students; students 
trying to responsibly pay back their student loans; the wife 
trying to afford her husband's Alzheimer's care; and the 
janitor who wants to retire with dignity so he can spoil his 
grandchildren.
    American families should not be forced watch as the rich 
get richer, and they fall further and further behind. H.R. 1 
would do just that.
                                           Richard E. Neal,
                                                    Ranking Member.

                            ADDITIONAL VIEWS

    In addition to the facts outlined by the Ranking Member, 
the record must be clear: H.R. 1 is not long-awaited, once-in-
a-generation, bipartisan tax reform. This bill ignores long-
standing inequities in tax law and fails to simplify the tax 
code. Instead, this legislation meticulously selects winners 
and losers. Simply said, H.R. 1 robs poor Peter to pay 
billionaire Paul.
    H.R. 1 features deficit-creating tax cuts and irresponsible 
policy changes. Some proposals are straightforward. For 
example, the assault on the elderly, disabled, teachers, 
caretakers, and immigrant families is a flagrant and heartless 
attempt to find revenue to pay for corporate tax cuts. Workers 
would lose employer-supported training and education benefits. 
Changes to the mortgage interest deduction and the 
deductibility of state and local taxes would cause unnecessary 
harm to both taxpayers and local governments.
    Unfortunately, the impact of other amendments in this bill 
are much more difficult to decipher. H.R. 1 shifts tax 
provisions and timelines in a manner that will force 
individuals and communities to spend hours, days, weeks, 
months, and resources calculating their real losses and gains. 
Sadly, this bill neglects Congress' core constitutional 
responsibility to develop sound fiscal policy, which serve all 
American taxpayers, not just a select few. There are serious 
challenges facing our country like affordable housing, 
veterans' services, transportation financing, and student debt, 
which should be core components of any legislation intended to 
serve as a compass for a generation of policy makers.
    An example of how H.R. 1 further complicates the tax code 
is the bill's impact on those seeking to improve their lives 
through the pursuit of higher education. As students of all 
ages struggle to compete in a 21st Century workforce and face 
increased burden of debt, the education tax provisions of this 
bill create an additional and perhaps insurmountable hurdle; it 
exacerbates an already dire situation. As graduate students in 
Metro Atlanta and across the country began to review H.R. 1, 
they learned the tax changes would only exacerbate their 
financial woes. This is a grave and serious issue for my 
Congressional District, which has many outstanding colleges and 
universities. One student calculated her individual net loss to 
be at least $550 per month. Many others fear that if Congress 
passes this legislation, a graduate degree would no longer be 
within their reach. This is unconscionable and unacceptable.
    It is also important to examine the holistic impact of this 
legislation on aging cities and counties that are struggling to 
revitalize their communities. Notably, the effect of 
eliminating the new markets tax credit and the historic 
rehabilitation tax credit--combined with changes to private 
activity bonds and limitations on the ability of State and 
local governments to offer incentives to recruit new 
businesses--would devastate major community development, 
housing, transportation, water and sewer, and health 
initiatives. Make no mistake--H.R. 1 will cripple policy makers 
at every level of government.
    Finally, this bill is a disservice to the role of Congress 
and the legacy of our predecessors who put the good of our 
nation ahead of a select few. In 1913, the United States 
ratified the Sixteenth Amendment to the U.S. Constitution; this 
amendment allowed Congress to develop legislation to tax 
income. Congress developed subsequent revenue bills--the 
Revenue Act of 1913 and the War Revenue Act of 1917--that 
featured core standards. These included encouraging the best of 
humanity through charitable and philanthropic endeavors and 
ensuring that future generations did not bear the burden of the 
financial costs of war. H.R. 1 undermines both of these 
principles.
    Since the Republican Majority developed and rushed this 
bill through committee without congressional review or 
bipartisan input, certain provisions are untested and could 
cause irreparable damage. Upon examining H.R. 1, the non-
partisan Joint Committee on Taxation reported the bill would 
result in $94.8 billion less in charitable contribution 
deductions. This legislation pays tribute to the 100th 
anniversary of the charitable contribution deduction by 
proposing policies that will result in a 40 percent decline of 
its usage. This bill turns the clock back on a century of 
progress.
    Some of the most blatant examples of dangerous, 
undemocratic policy include this bill's impact on charitable 
and faith-based institutions. Alarmingly, section 5201 of H.R. 
1 would repeal the ``Johnson Amendment,'' a 53-year standard 
that prohibits religious and philanthropic organizations from 
engaging in political activities. The Joint Committee on 
Taxation estimates this policy change would increase the 
deficit by $2.1 billion. The bill would create a loophole in 
campaign finance laws and increase tax-exempt political 
contributions. Not only did the Majority reject efforts to 
strip this costly provision, but the Chair also expanded 
section 5201 to include all 501(c)3 (e.g. religious, nonprofit, 
and charitable) organizations at the end of the Committee 
markup. Faith-based, philanthropic, charitable, and 
transparency groups in every State of our country 
overwhelmingly oppose this dangerous policy change.
    H.R. 1 ignores the grave reality that the United States is 
engaged in the longest wars in history, for which sadly there 
is no end in sight. Last week, Brown University's Cost of War 
Project reported that the current wars in Afghanistan, Iraq, 
Syria, and Pakistan cost at least $5.6 trillion or $23,386 per 
taxpayer. Never before has Congress directly and repeatedly 
shirked its responsibility to finance U.S. participation in 
war. For 16 years, brave service members put their lives on the 
line and their families on hold to protect and serve our 
nation, as Congress fails to do our part. Instead, H.R. 1 
continues to pay for these wars on a credit card. Not only does 
H.R. 1 neglect to address this grave matter, but it will also 
finance these irresponsible corporate tax cuts through massive 
reductions to safety net programs and non-defense discretionary 
programs upon which all Americans--including veterans and 
military families--rely.
    The record must be clear; H.R. 1 is not tax reform. This 
legislation does not simplify the tax code. It does not give 
hope and opportunity to those who strive to realize the 
American dream. It does not rectify long-standing injustices 
within U.S. tax law. Instead, this unprecedented and negligent 
legislation puts the gains of a select few ahead of the best 
interests of our children, grandchildren, and generations yet 
unborn.

                                                        John Lewis.
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