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[Congressional Bills 108th Congress]
[From the U.S. Government Publishing Office]
[H.R. 1939 Introduced in House (IH)]

108th CONGRESS
  1st Session
                                H. R. 1939

To amend the Internal Revenue Code of 1986 to provide a revenue-neutral 
              simplification of the individual income tax.

_______________________________________________________________________

                    IN THE HOUSE OF REPRESENTATIVES

                              May 1, 2003

  Mr. Neal of Massachusetts introduced the following bill; which was 
              referred to the Committee on Ways and Means

_______________________________________________________________________

                                 A BILL

 
To amend the Internal Revenue Code of 1986 to provide a revenue-neutral 
              simplification of the individual income tax.

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

SECTION 1. SHORT TITLE.

    (a) Short Title.--This Act may be cited as the ``Individual Tax 
Simplification Act of 2003''.
    (b) Amendment of 1986 Code.--Except as otherwise expressly 
provided, whenever in this Act an amendment or repeal is expressed in 
terms of an amendment to, or repeal of, a section or other provision, 
the reference shall be considered to be made to a section or other 
provision of the Internal Revenue Code of 1986.
    (c) Table of Contents.--

Sec. 1. Short title.
   TITLE I--SIMPLIFICATION RELATING TO NONREFUNDABLE PERSONAL CREDITS

Sec. 101. Repeal of interaction with alternative minimum tax.
Sec. 102. Uniform phaseout of credits for adoption, children, and 
                            education.
             TITLE II--SIMPLIFICATION OF CAPITAL GAINS TAX

Sec. 201. Simplification of capital gains tax.
TITLE III--REPEAL OF CERTAIN HIDDEN MARGINAL RATE INCREASES; REPEAL OF 
                         INDIVIDUAL MINIMUM TAX

                          Subtitle A--Repeals

Sec. 301. Repeal of overall limitation on itemized deductions.
Sec. 302. Repeal of phaseout of personal exemptions.
Sec. 303. Repeal of alternative minimum tax on individuals.
                      Subtitle B--Revenue Offsets

Sec. 311. Additional income tax.

   TITLE I--SIMPLIFICATION RELATING TO NONREFUNDABLE PERSONAL CREDITS

SEC. 101. REPEAL OF INTERACTION WITH ALTERNATIVE MINIMUM TAX.

    (a) General Rule.--Subsection (a) of section 26 (relating to 
limitation based on amount of tax) 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 tax imposed by this chapter for the taxable year.''.
    (b) Conforming Amendment.--Paragraph (2) of section 26(b) is 
amended by inserting ``subsection (a) and'' before ``paragraph (1)''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2003.

SEC. 102. UNIFORM PHASEOUT OF CREDITS FOR ADOPTION, CHILDREN, AND 
              EDUCATION.

    (a) In General.--Section 26 is amended by redesignating subsections 
(b) and (c) as subsections (c) and (d), respectively, and by inserting 
after subsection (a) the following new subsection:
    ``(b) Uniform Phaseout of Adoption Expense Credit, Child Credit, 
and Hope and Lifetime Learning Credits.--
            ``(1) In general.--The aggregate amount which would (but 
        for subsection (a) and this subsection) be allowed as a credit 
        under sections 23, 24, and 25A shall be reduced (but not below 
        zero) by 10 percent of the amount by which the taxpayer's 
        modified adjusted gross income exceeds the threshold amount. 
        For purposes of the preceding sentence, the term `modified 
        adjusted gross income' means adjusted gross income increased by 
        any amount excluded from gross income under section 911, 931, 
        or 933.
            ``(2) Threshold amount.--For purposes of paragraph (1), the 
        term `threshold amount' means--
                    ``(A) $110,000 in the case of a joint return,
                    ``(B) $75,000 in the case of an individual who is 
                not married, and
                    ``(C) $55,000 in the case of a married individual 
                filing a separate return.
        For purposes of this paragraph, marital status shall be 
        determined under section 7703.''.
    (b) Conforming Amendments.--
            (1) Paragraph (2) of section 23(b) is amended to read as 
        follows:
    ``(2) Limitation based on adjusted gross income.--

                                ``For limitation based on adjusted 
gross income, see section 26(b).''.
            (2) Subsection (c) of section 23 is amended--
                    (A) by inserting ``(as reduced under section 
                26(b))'' before ``exceeds'', and
                    (B) by adding at the end the following new 
                sentence: ``For purposes of this subsection, the 
                reduction under section 26(b) shall first be applied to 
                the credits under sections 24 and 25A and then to the 
                credit under this section.''.
            (3) Subsection (b) of section 24 is amended to read as 
        follows:
    ``(b) Limitation Based on Adjusted Gross.--

                                ``For limitation based on adjusted 
gross income, see section 26(b).''.
            (4) Subsection (d) of section 25A is amended to read as 
        follows:
    ``(d) Limitation Based on Adjusted Gross.--

                                ``For limitation based on adjusted 
gross income, see section 26(b).''.
            (5) Subsection (h) of section 25A is amended to read as 
        follows:
    ``(h) Inflation Adjustments.--
            ``(1) In general.--In the case of a taxable year beginning 
        after 2004, each of the $1,000 amounts under subsection (b)(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(f)(3) for the calendar year in which 
                the taxable year begins, determined by substituting 
                `calendar year 2003' for `calendar year 1992' in 
                subparagraph (B) thereof.
            ``(2) Rounding.--If any amount as adjusted under paragraph 
        (1) is not a multiple of $100, such amount shall be rounded to 
        the next lowest multiple of $100.''.
            (6) The section heading for section 26 is amended by 
        inserting before the period ``; phaseout of certain credits 
        based on income; definitions''.
            (7) The item relating to section 26 in the table of 
        sections for subpart A of part IV of subchapter A of chapter 1 
        is amended by inserting before the period ``; phaseout of 
        certain credits based on income; definitions''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2003.

             TITLE II--SIMPLIFICATION OF CAPITAL GAINS TAX

SEC. 201. SIMPLIFICATION OF CAPITAL GAINS TAX.

    (a) In General.--Part I of subchapter P of chapter 1 (relating to 
treatment of capital gains) is amended by adding at the end the 
following new section:

``SEC. 1203. CAPITAL GAINS DEDUCTION.

    ``If for any taxable year a taxpayer other than a corporation has a 
net capital gain, 38 percent of such gain shall be a deduction from 
gross income.''.
    (b) Deduction Allowable Whether or Not Taxpayer Itemizes Other 
Deductions.--
            (1) Subsection (b) of section 63 is amended by striking 
        ``and'' at the end of paragraph (1), by striking the period at 
        the end of paragraph (2) and inserting ``, and'', and by adding 
        at the end the following new paragraph:
            ``(3) the deduction allowed by section 1203.''.
            (2) Subsection (d) of section 63 is amended by striking 
        ``and'' at the end of paragraph (1), by striking the period at 
        the end of paragraph (2) and inserting ``, and'', and by adding 
        at the end the following new paragraph:
            ``(3) the deduction allowed by section 1203.''.
    (c) Treatment of Collectibles.--
            (1) In general.--Section 1222 is amended by inserting after 
        paragraph (11) the following new paragraph:
            ``(12) Special rule for collectibles.--
                    ``(A) In general.--Any gain or loss from the sale 
                or exchange of a collectible shall be treated as a 
                short-term capital gain or loss (as the case may be), 
                without regard to the period such asset was held. The 
                preceding sentence shall apply only to the extent the 
                gain or loss is taken into account in computing taxable 
                income.
                    ``(B) Treatment of certain sales of interests in 
                partnerships, etc.--For purposes of subparagraph (A), 
                any gain from the sale or exchange of an interest in a 
                partnership, S corporation, or trust which is 
                attributable to unrealized appreciation in the value of 
                collectibles held by such entity shall be treated as 
                gain from the sale or exchange of a collectible. Rules 
                similar to the rules of section 751(f) shall apply for 
                purposes of the preceding sentence.
                    ``(C) Collectible.--For purposes of this paragraph, 
                the term `collectible' means any capital asset which is 
                a collectible (as defined in section 408(m) without 
                regard to paragraph (3) thereof).''.
            (2) Charitable deduction not affected.--
                    (A) Paragraph (1) of section 170(e) is amended by 
                adding at the end thereof the following new sentence: 
                ``For purposes of this paragraph, section 1222 shall be 
                applied without regard to paragraph (12) thereof 
                (relating to special rule for collectibles).''.
                    (B) Clause (iv) of section 170(b)(1)(C) is amended 
                by inserting before the period at the end thereof the 
                following: ``and section 1222 shall be applied without 
                regard to paragraph (12) thereof (relating to special 
                rule for collectibles)''.
    (d) Technical and Conforming Changes.--
            (1) Section 1 is amended by striking subsection (h).
            (2) Subparagraph (E) of section 163(d)(4) is amended to 
        read as follows:
                    ``(E) Coordination with capital gains deduction.--
                The net capital gain taken into account under section 
                1203 for any taxable year shall be reduced (but not 
                below zero) by the amount which the taxpayer takes into 
                account as investment income under subparagraph 
                (B)(iii) for such year.''.
            (3) Paragraph (1) of section 170(e) is amended by striking 
        ``the amount of gain'' in the material following subparagraph 
        (B)(ii) and inserting ``62 percent (100 percent in the case of 
        a corporation) of the amount of gain''.
            (4) Subparagraph (B) of section 172(d)(2) is amended to 
        read as follows:
                    ``(B) the exclusion under section 1202 and the 
                deduction under section 1203 shall not be allowed.''.
            (5) The last sentence of section 453A(c)(3) is amended by 
        striking all that follows ``long-term capital gain,'' and 
        inserting ``the maximum rate on net capital gain under section 
        1201 or the deduction under section 1203 (whichever is 
        appropriate) shall be taken into account.''.
            (6)(A) Section 641(c)(2)(A) is amended by striking ``Except 
        as provided in section 1(h), the'' and inserting ``The''.
            (B) Section 641(c)(2)(C) is amended by inserting after 
        clause (iii) the following new clause:
                            ``(iv) The deduction under section 1203.''.
            (7) Paragraph (4) of section 642(c) is amended to read as 
        follows:
            ``(4) Adjustments.--To the extent that the amount otherwise 
        allowable as a deduction under this subsection consists of gain 
        from the sale or exchange of capital assets held for more than 
        1 year, proper adjustment shall be made for any exclusion 
        allowable under section 1202 and any deduction allowable under 
        section 1203 to the estate or trust. In the case of a trust, 
        the deduction allowed by this subsection shall be subject to 
        section 681 (relating to unrelated business income).''.
            (8) Section 642 is amended by adding at the end the 
        following new subsection:
    ``(j) Capital Gains Deduction.--The deduction under section 1203 to 
an estate or trust shall be computed by excluding the portion (if any) 
of the gains for the taxable year which is includible by the income 
beneficiaries under sections 652 and 662 (relating to inclusions of 
amounts in gross income of beneficiaries of trusts) as gain derived 
from the sale or exchange of capital assets.''.
            (9) The last sentence of section 643(a)(3) is amended to 
        read as follows: ``The exclusion under section 1202 and the 
        deduction under section 1203 shall not be taken into 
        account.''.
            (10) Subparagraph (C) of section 643(a)(6) is amended by 
        inserting ``(i)'' before ``there shall'' and by inserting 
        before the period ``, and (ii) the deduction under section 1203 
        (relating to capital gains deduction) shall not be taken into 
        account''.
            (11) Paragraph (4) of section 691(c) is amended by striking 
        ``1(h),'' and by inserting ``1203,'' after ``1202,''.
            (12) The second sentence of paragraph (2) of section 871(a) 
        is amended by striking ``section 1202'' and inserting 
        ``sections 1202 and 1203''.
            (13)(A) Paragraph (2) of section 904(b) is amended by 
        striking subparagraphs (A) and (C), by redesignating 
        subparagraph (B) as subparagraph (A), and by inserting after 
        subparagraph (A) (as so redesignated) the following new 
        subparagraph:
                    ``(B) Other taxpayers.--In the case of a taxpayer 
                other than a corporation, taxable income from sources 
                outside the United States shall include gain from the 
                sale or exchange of capital assets only to the extent 
                of foreign source capital gain net income.''.
            (B) Subparagraph (A) of section 904(b)(2), as so 
        redesignated, is amended--
                    (i) by striking all that precedes clause (i) and 
                inserting the following:
                    ``(A) Corporations.--In the case of a corporation--
                '', and
                    (ii) by striking in clause (i) ``in lieu of 
                applying subparagraph (A),''.
            (C) Paragraph (3) of section 904(b) is amended by striking 
        subparagraphs (D) and (E) and inserting the following new 
        subparagraph:
                    ``(D) Rate differential portion.--The rate 
                differential portion of foreign source net capital 
                gain, net capital gain, or the excess of net capital 
                gain from sources within the United States over net 
                capital gain, as the case may be, is the same 
                proportion of such amount as the excess of the highest 
                rate of tax specified in section 11(b) over the 
                alternative rate of tax under section 1201(a) bears to 
                the highest rate of tax specified in section 11(b).''.
            (14) Paragraph (1) of section 1402(i) is amended by 
        inserting ``, and the deduction provided by section 1203 shall 
        not apply'' before the period at the end thereof.
            (15) Paragraph (1) of section 1445(e) is amended by 
        striking ``20 percent'' and inserting ``24.5 percent''.
            (16)(A) The second sentence of section 7518(g)(6)(A) is 
        amended--
                    (i) by striking ``during a taxable year to which 
                section 1(h) or 1201(a) applies'', and
                    (ii) by striking ``20 percent'' and inserting 
                ``24.5 percent''.
            (B) The second sentence of section 607(h)(6)(A) of the 
        Merchant Marine Act, 1936, is amended--
                    (i) by striking ``during a taxable year to which 
                section 1(h) or 1201(a) of such Code applies'', and
                    (ii) by striking ``20 percent'' and inserting 
                ``24.5 percent''.
    (e) Clerical Amendment.--The table of sections for part I of 
subchapter P of chapter 1 is amended by adding at the end the following 
new item:

                              ``Sec. 1203. Capital gains deduction.''.
    (f) 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, 2003.
            (2) Withholding.--The amendments made by subsection (d)(15) 
        shall apply only to amounts paid after December 31, 2003.
            (3) Coordination with prior transition rule.--Any amount 
        treated as long-term capital gain by reason of paragraph (3) of 
        section 1122(h) of the Tax Reform Act of 1986 shall not be 
        taken into account for purposes of applying section 1203 of the 
        Internal Revenue Code of 1986 (as added by this section).

TITLE III--REPEAL OF CERTAIN HIDDEN MARGINAL RATE INCREASES; REPEAL OF 
                         INDIVIDUAL MINIMUM TAX

                          Subtitle A--Repeals

SEC. 301. REPEAL OF OVERALL LIMITATION ON ITEMIZED DEDUCTIONS.

    (a) In General.--Section 68 (relating to overall limitation on 
itemized deductions) is hereby repealed.
    (b) Conforming Amendments.--
            (1) Subparagraph (A) of section 1(f)(6) is amended by 
        striking ``section 68(b)(2)''.
            (2) Subparagraph (B) of section 773(a)(3) is amended by 
        striking clause (i) and by redesignating clauses (ii), (iii), 
        and (iv), as clauses (i), (ii), and (iii), respectively.
            (3) The table of sections for subchapter B of chapter 1 is 
        amended by striking the item relating to section 68.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2003.

SEC. 302. REPEAL OF PHASEOUT OF PERSONAL EXEMPTIONS.

    (a) In General.--Subsection (d) of section 151 (relating to 
allowance of deductions for personal exemptions) is amended by striking 
paragraph (3) and by redesignating paragraph (4) as paragraph (3).
    (b) Conforming Amendments.--
            (1) Paragraph (6) of section 1(f) is amended--
                    (A) by striking ``section 151(d)(4)'' in 
                subparagraph (A) and inserting ``section 151(d)(3)'', 
                and
                    (B) by striking ``section 151(d)(4)(A)'' in 
                subparagraph (B) and inserting ``section 151(d)(3)''.
            (2) Paragraph (3) of section 151(d), as redesignated by 
        subsection (a), is amended to read as follows:
            ``(3) Inflation adjustment.--In the case of any taxable 
        year beginning in a calendar year after 1989, the dollar amount 
contained 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(f)(3) for the calendar year in which 
                the taxable year begins, by substituting `calendar year 
                1988' for `calendar year 1992' in subparagraph (B) 
                thereof.''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2003.

SEC. 303. REPEAL OF ALTERNATIVE MINIMUM TAX ON INDIVIDUALS.

    (a) In General.--Subsection (a) of section 55 (relating to 
alternative minimum tax imposed) is amended by adding at the end the 
following new flush sentence:
``Except in the case of a corporation, no tax shall be imposed by this 
section for any taxable year beginning after December 31, 2003, and the 
tentative minimum tax of any taxpayer other than a corporation shall be 
zero for purposes of this title.''
    (b) Conforming Amendments.--
            (1) Subparagraph (B) of section 1(g)(7) is amended by 
        adding ``and'' at the end of clause (i), by striking ``, and'' 
        at the end of clause (ii) and inserting a period, and by 
        striking clause (iii).
            (2) Section 2(d) is amended by striking ``sections 1 and 
        55'' and inserting ``section 1''.
            (3) Section 5(a) is amended by striking paragraph (4).
            (4) Subsection (d) of section 26 (as redesignated by 
        section 102) is amended by inserting before the period ``; 
        except that such amount shall be treated as being zero in the 
        case of a taxpayer other than a corporation.''
            (5) Paragraph (6) of section 29(b) is amended to read as 
        follows:
            ``(6) Application with other credits.--The credit allowed 
        by subsection (a) for any taxable year shall not exceed the 
        regular tax for the taxable year reduced by the sum of the 
        credits allowable under subpart A and section 27. In the case 
        of a corporation, the limitation under the preceding sentence 
        shall be reduced (but not below zero) by the tentative minimum 
        tax for the taxable year.''.
            (6) Paragraph (3) of section 30(b) is amended to read as 
        follows:
            ``(3) Application with other credits.--The credit allowed 
        by subsection (a) for any taxable year shall not exceed the 
        regular tax for the taxable year reduced by the sum of the 
        credits allowable under subpart A and sections 27 and 29. In 
        the case of a corporation, the limitation under the preceding 
        sentence shall be reduced (but not below zero) by the tentative 
        minimum tax for the taxable year.''.
            (7) Subsection (d) of section 53(d) is amended to read as 
        follows:
    ``(d) Definitions.--For purposes of this section--
            ``(1) Net minimum tax.--The term `net minimum tax' means 
        the tax imposed by section 55 increased by the amount of the 
        credit not allowed under section 29 (relating to credit for 
        producing fuel from a nonconventional source) solely by reason 
        of the application of the last sentence of section 29(b)(6), or 
        not allowed under section 30 solely by reason of the 
        application of the last sentence of section 30(b)(3).
            ``(2) Tentative minimum tax.--The term `tentative minimum 
        tax' has the meaning given to such term by section 55(b); 
        except that such tax shall be treated as being zero in the case 
        of a taxpayer other than a corporation.''.
            (8)(A) Subsection (b) of section 55 (relating to 
        alternative minimum tax imposed) is amended to read as follows:
    ``(b) Tentative Minimum Tax.--For purposes of this part--
            ``(1) Amount of tentative tax.--The tentative minimum tax 
        for the taxable year is--
                    ``(A) 20 percent of so much of the alternative 
                minimum taxable income for the taxable year as exceeds 
                the exemption amount, reduced by
                    ``(B) the alternative minimum tax foreign tax 
                credit for the taxable year.
            ``(2) Alternative minimum taxable income.--The term 
        `alternative minimum taxable income' means the taxable income 
        of the taxpayer for the taxable year--
                    ``(A) determined with the adjustments provided in 
                section 56, and
                    ``(B) increased by the amount of the items of tax 
                preference described in section 57.
        If a taxpayer is subject to the regular tax, such taxpayer 
        shall be subject to the tax imposed by this section (and, if 
        the regular tax is determined by reference to an amount other 
        than taxable income, such amount shall be treated as the 
        taxable income of such taxpayer for purposes of the preceding 
        sentence).''.
            (B) Subsection (d) of section 55 is amended to read as 
        follows:
    ``(d) Exemption Amount.--For purposes of this section--
            ``(1) In general.--The term `exemption amount' means 
        $40,000.
            ``(2) Phase-out of exemption amount.--The exemption amount 
        of any taxpayer shall be reduced (but not below zero) by an 
        amount equal to 25 percent of the amount by which the 
        alternative minimum taxable income of the taxpayer exceeds 
        $150,000.''.
            (9)(A) Paragraph (6) of section 56(a) is amended to read as 
        follows:
            ``(6) Adjusted basis.--The adjusted basis of any property 
        to which paragraph (1) or (5) applies (or with respect to which 
        there are any expenditures to which paragraph (2) applies) 
        shall be determined on the basis of the treatment prescribed in 
        paragraph (1), (2), or (5), whichever applies.''.
            (B) Section 56 is amended by striking subsection (b).
            (C) Subsection (c) of section 56 is amended by striking so 
        much of the subsection as precedes paragraph (1), by 
        redesignating paragraphs (1), (2), and (3) as paragraphs (8), 
        (9), and (10), respectively, and moving them to the end of 
        subsection (a).
            (D) Paragraph (8) of section 56(a), as redesignating by 
        paragraph (12)(C), is amended by striking ``subsection (g)'' 
        and inserting ``subsection (c)''.
            (E) Section 56 is amended by striking subsection (e) and by 
        redesignating subsections (d) and (g) as subsections (b) and 
        (c), respectively.
            (10)(A) Section 58 is hereby repealed.
            (B) Clause (i) of section 56(b)(2)(A) (as redesignated by 
        paragraph (12)(E), is amended by inserting ``, in the case of 
        taxable years beginning before January 1, 2004,'' before 
        ``section 58''.
            (C) Subsection (h) of section 59 is amended--
                    (i) by striking ``, 465, and 1366(d)'' and 
                inserting ``and 465'', and
                    (ii) by striking ``56, 57, and 58'' and inserting 
                ``56 and 57''.
            (11)(A) Subparagraph (C) of section 59(a)(1) is amended by 
        striking ``subparagraph (A)(i) or (B)(i) of section 55(b)(1) 
        (whichever applies)'' and inserting ``section 55(b)(1)(A)''.
            (B) Paragraph (3) of section 59(a) is amended to read as 
        follows:
            ``(3) Pre-credit tentative minimum tax.--For purposes of 
        this subsection, the term `pre-credit tentative minimum tax' 
        means the amount determined under section 55(b)(1)(A).''.
            (C) Section 59 is amended by striking subsection (c).
            (D) Section 59 is amended by striking subsection (j).
            (12) Paragraph (7) of section 382(l) is amended by striking 
        ``section 56(d)'' and inserting ``section 56(b)''.
            (13) Paragraph (2) of section 641(c) is amended by striking 
        subparagraph (B) and by redesignating subparagraphs (C) and (D) 
        as subparagraphs (B) and (C), respectively.
            (14) Subsections (b) and (c) of section 666 are each 
        amended by striking ``(other than the tax imposed by section 
        55)''.
            (15) Subsections (c)(5) and (d)(3)(B) of section 772 are 
        each amended by striking ``56, 57, and 58'' and inserting ``56 
        and 57''.
            (16) Sections 847 and 848(i) are each amended by striking 
        ``section 56(g)'' and inserting ``section 56(c)''.
            (17) Sections 871(b)(1) and 877(b) are each amended by 
        striking ``or 55''.
            (18) Subsection (a) of section 897 is amended to read as 
        follows:
    ``(a) General Rule.--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.''.
            (19) Paragraph (1) of section 962(a) is amended by striking 
        ``sections 1 and 55'' and inserting ``section 1''.
            (20) Paragraph (1) of section 1397E(c) is amended to read 
        as follows:
            ``(1) the regular tax liability (as defined in section 
        26(b), over''
            (21) The last sentence of section 1563(a) is amended by 
        striking ``section 55(d)(3)'' and inserting ``section 
        55(d)(2)''.
            (22) Subparagraph (B) of section 6015(d)(2) is amended by 
        striking ``or 55''.
    (c) Effective Date.--The amendments made by this section shall 
apply to taxable years beginning after December 31, 2003.
    (d) Transitional Rule Relating to Minimum Tax Credit.--
            (1) In general.--The pre-effective date minimum tax credit 
        of a taxpayer other than a corporation shall not be allowed 
        under section 53 of the Internal Revenue Code of 1986 but shall 
        be allowed under this subsection.
            (2) Pre-effective date minimum tax
        credit.--For purposes of this subsection, the term ``pre-
        effective date minimum tax credit'' means the amount determined 
        under section 53(b) of such Code for the first taxable year 
        beginning after December 31, 2003.
            (3) Amount of credit.--
                    (A) In general.--The pre-effective date minimum tax 
                credit of a taxpayer other than a corporation shall be 
                allowed ratably over the period of 10 taxable years 
                beginning with the first taxable year beginning after 
                December 31, 2003.
                    (B) Limitation.--The credit allowable by this 
                subsection for any taxable year shall not exceed the 
                regular tax liability of the taxpayer for such taxable 
                year reduced by the sum of the credits allowable under 
                subparts A, B, D, E, and F of part IV of subchapter A 
                of chapter 1 of the Internal Revenue Code of 1986.
                    (C) Carryforward.--If the credit allowable by this 
                subsection exceeds the limitation imposed by 
                subparagraph (B), such excess shall be carried to the 
                succeeding taxable year and added to the credit 
                allowable under this subsection for such succeeding 
                taxable year.
            (4) Acceleration of credit where previously taxed income.--
                    (A) In general.--The credit allowed under this 
                subsection for any taxable year shall not be less than 
                so much of the limitation described in paragraph (3)(B) 
                for the taxable year as is attributable to previously 
taxed incentive stock option gain. Proper adjustments shall be made in 
the amount allowed under this subsection for subsequent taxable years 
to take into account any increased credit allowed by reason of this 
paragraph.
                    (B) Incentive stock option gain.--For purposes of 
                subparagraph (A), the term ``previously taxed incentive 
                stock option gain'' means the amount of gain recognized 
                during the taxable year on account of the disposition 
                of stock acquired by exercising an incentive stock 
                option (as defined in section 422 of such Code) to the 
                extent such gain does not exceed the amount of gain 
                previously taken into account by reason of section 
                56(b)(3) of such Code (as in effect on the day before 
                the date of the enactment of this Act) with respect to 
                such option.
            (5) Definitions.--Terms used in this subsection which are 
        also used in section 53 of such Code shall have the respective 
        meanings given to such terms by such section 53.

                      Subtitle B--Revenue Offsets

SEC. 311. ADDITIONAL INCOME TAX.

    (a) In General.--Section 1 is amended by adding at the end the 
following new subsection:
    ``(h) Additional Income Tax.--
            ``(1) In general.--If the adjusted gross income of an 
        individual exceeds the initial threshold amount, the tax 
        imposed by this section (determined without regard to this 
        subsection) shall be increased by an amount equal to the sum 
        of--
                    ``(A) the applicable rate of so much of the 
                adjusted gross income as exceeds the initial threshold 
                amount but does not exceed the second threshold amount, 
                and
                    ``(B) twice the applicable rate of so much of the 
                adjusted gross income as exceeds the second threshold 
                amount.
            ``(2) Applicable rate.--For purposes of this section, the 
        applicable rate is the rate estimated by the Secretary which 
        will result in the Individual Tax Simplification Act of 2003 
        being revenue neutral over the first 10 years after its 
        enactment.
            ``(3) Threshold amounts.--For purposes of this subsection--
                    ``(A) Initial threshold amount.--The initial 
                threshold amount is--
                            ``(i) $120,000 in the case of a joint 
                        return,
                            ``(ii) $90,000 in the case of an individual 
                        who is not married, and
                            ``(iii) \1/2\ the dollar amount applicable 
                        under clause (i) in the case of a married 
                        individual filing a separate return.
                    ``(B) Second threshold amount.--The second 
                threshold amount is--
                            ``(i) $150,000 in the case of a joint 
                        return,
                            ``(ii) $112,000 in the case of an 
                        individual who is not married, and
                            ``(iii) \1/2\ the dollar amount applicable 
                        under clause (i) in the case of a married 
                        individual filing a separate return.
                    ``(C) Marital status.--For purposes of this 
                paragraph, marital status shall be determined under 
                section 7703.
            ``(4) Inflation adjustment.--In the case of any taxable 
        year beginning in a calendar year after 2004, each dollar 
        amount contained in paragraph (2) shall be increased by an 
        amount equal to--
                    ``(A) such dollar amount, multiplied by
                    ``(B) the cost-of-living adjustment determined 
                under subsection (f)(3) for the calendar year in which 
                the taxable year begins, by substituting `calendar year 
                2003' for `calendar year 1992' in subparagraph (B) 
                thereof.
        If any increase under the preceding sentence is not a multiple 
        of $50, such increase shall be rounded to the nearest multiple 
        of $50.
            ``(5) Tax not to apply to estates and trusts.--This 
        subsection shall not apply to an estate or trust.''.
    (b) Effective Date.--The amendment made by this section shall apply 
to taxable years beginning after December 31, 2003.
    (c) Section 15 Not To Apply.--The amendment made by this section 
shall not be treated as a change in a rate of tax for purposes of 
section 15 of such Code.
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