I 

108TH CONGRESS 

1ST SESSION H. R. 22

To simplify certain provisions of the Internal Revenue Code of 1986 and 

to establish a uniform pass-thru regime. 

IN THE HOUSE OF REPRESENTATIVES 

JANUARY 7, 2003

Mr. HOUGHTON introduced the following bill; which was referred to the 

Committee on Ways and Means 

A BILL

To simplify certain provisions of the Internal Revenue Code 

of 1986 and to establish a uniform pass-thru regime.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. SHORT TITLE; ETC. 

4 (a) SHORT TITLE.—This Act may be cited as the 

5 ‘‘Individual and Small Business Tax Simplification Act of 

6 2003’’. 

7 (b) REFERENCES TO INTERNAL REVENUE CODE OF

8 1986.—Except as otherwise expressly provided, whenever 

9 in this Act an amendment or repeal is expressed in terms 

10 of an amendment to, or repeal of, a section or other provi-
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1 sion, the reference shall be considered to be made to a 

2 section or other provision of the Internal Revenue Code 

3 of 1986. 

4 (c) TABLE OF CONTENTS.—

Sec. 1. Short title; etc. 

TITLE I—INDIVIDUAL INCOME TAX SIMPLIFICATION 

Subtitle A—General Provisions 

Sec. 101. Alternative minimum tax reform. 

Sec. 102. Head of household filing status replaced with special personal exemption. 

Sec. 103. Simplification of tax on social security benefits. 

Sec. 104. Simplification of capital gains tax. 

Sec. 105. Repeal of 2-percent floor on miscellaneous itemized deductions. 

Sec. 106. Simplification of deduction for points on home mortgage. 

Sec. 107. Taxation of minor children. 

Sec. 108. Simplification of dependent care tax benefits. 

Sec. 109. Acceleration of phaseout of overall limitation on itemized deductions. 

Sec. 110. Acceleration of repeal of phaseout of personal exemptions. 

Sec. 111. Repeal of personal holding company tax. 

Subtitle B—Uniform Definition of Child 

Sec. 121. Uniform definition of child. 

Sec. 122. Treatment of government benefits in determining support and cost of 

maintaining household. 

Sec. 123. Effective date. 

Subtitle C—Education Tax Incentives 

Sec. 131. Hope and Lifetime Learning credits combined. 

Sec. 132. Uniform definition of qualifying higher education expenses. 

TITLE II—SMALL BUSINESS TAX SIMPLIFICATION 

Sec. 201. Unified pass-thru entity regime. 

Sec. 202. Increase in expensing under section 179. 

Sec. 203. Rollover of property held for productive use or investment. 

Sec. 204. Repeal of collapsible corporations. 

Sec. 205. References to general partners. 

Sec. 206. References to limited partners. 

Sec. 207. Partnership income attributable to capital excluded from net earnings 

from self-employment. 

Sec. 208. Repeal of ability to elect large partnership reporting rules.
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1 TITLE I—INDIVIDUAL INCOME 

2 TAX SIMPLIFICATION 

3 Subtitle A—General Provisions 

4 SEC. 101. ALTERNATIVE MINIMUM TAX REFORM. 

5 (a) INCREASE IN ALTERNATIVE MINIMUM TAX EX6 EMPTION AMOUNT.—

7 (1) Subparagraph (A) of section 55(d)(1) (re8 lating to exemption amount for taxpayers other than 

9 corporations) is amended by striking ‘‘$45,000’’ and 

10 all that follows through ‘‘2004)’’ and inserting 

11 ‘‘$75,000’’. 

12 (2) Subparagraph (B) of section 55(d)(1) is 

13 amended by striking ‘‘$33,750’’ and all that follows 

14 through ‘‘2004)’’ and inserting ‘‘$56,000’’. 

15 (b) ADJUSTMENT FOR INFLATION.—Subsection (d) 

16 of section 55 is amended by adding at the end the fol17 lowing new paragraph: 

18 ‘‘(4) INFLATION ADJUSTMENT.—

19 ‘‘(A) IN GENERAL.—In the case of a tax20 able year beginning in a calendar year after 

21 2004, each of the dollar amounts contained in 

22 subparagraphs (A) and (B) of paragraph (1) 

23 shall be increased by an amount equal to—

24 ‘‘(i) such dollar amount, multiplied by 
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1 ‘‘(ii) the cost-of-living adjustment de2 termined under section 1(f )(3) for the cal3 endar year in which the taxable year be4 gins, determined by substituting ‘calendar 

5 year 2003’ for ‘calendar year 1992’ in sub6 paragraph (B) thereof. 

7 ‘‘(B) ROUNDING.—Any increase deter8 mined under subparagraph (A) shall be rounded 

9 to the nearest multiple of $100.’’. 

10 (c) REPEAL OF LIMIT ON DEDUCTION FOR STATE

11 AND LOCAL TAXES.—Subparagraph (A) of section 

12 56(b)(1) is amended to read as follows: 

13 ‘‘(A) IN GENERAL.—No deduction shall be 

14 allowed for any miscellaneous itemized deduc15 tion (as defined in section 67(b)).’’. 

16 (d) EFFECTIVE DATE.—The amendments made by 

17 this section shall apply to taxable years beginning after 

18 December 31, 2003.

19 SEC. 102. HEAD OF HOUSEHOLD FILING STATUS REPLACED 

20 WITH SPECIAL PERSONAL EXEMPTION. 

21 (a) INCREASED PERSONAL EXEMPTION FOR SINGLE

22 PARENTS, ETC.—Section 151 is amended by redesignating 

23 subsections (d) and (e) as subsection (e) and (f) and by 

24 inserting after subsection (c) the following new subsection:
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1 ‘‘(d) ADDITIONAL EXEMPTION FOR SINGLE PAR2 ENTS, ETC.—

3 ‘‘(1) IN GENERAL.—An exemption of $3,700 in 

4 the case of an individual who—

5 ‘‘(A) is not married at the close of the tax6 able year, 

7 ‘‘(B) is not a surviving spouse, and 

8 ‘‘(C)(i) maintains as his home a household 

9 which constitutes for more than one-half of 

10 such taxable year the principal place of abode, 

11 as a member of such household, of—

12 ‘‘(I) a qualifying child (as defined in 

13 subsection (c)), or 

14 ‘‘(II) any other person who is a de15 pendent of the taxpayer, if the taxpayer is 

16 entitled to a deduction for the taxable year 

17 for such person under subsection (c), or 

18 ‘‘(ii) maintains a household which con19 stitutes for such taxable year the principal place 

20 of abode of the father or mother of the tax21 payer, if the taxpayer is entitled to a deduction 

22 for the taxable year for such father or mother 

23 under subsection (c). 

24 For purposes of this paragraph, an individual shall 

25 be considered as maintaining a household only if 
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1 over half of the cost of maintaining the household 

2 during the taxable year is furnished by such indi3 vidual. 

4 ‘‘(2) MARITAL STATUS.—Marital status shall be 

5 determined in accordance with section 7703; except 

6 that an individual shall be treated as not married for 

7 purposes of this subsection if at any during such 

8 year the spouse of such individual is a nonresident 

9 alien. 

10 ‘‘(3) LIMITATIONS.—Paragraph (1) shall not 

11 apply to any individual—

12 ‘‘(A) if at any time during the taxable year 

13 he is a nonresident alien, or 

14 ‘‘(B) by reason of an individual who would 

15 not be a dependent for the taxable year but 

16 for—

17 ‘‘(i) paragraph (9) of section 152(a), 

18 or 

19 ‘‘(ii) subsection (c) of section 152. 

20 ‘‘(4) INFLATION ADJUSTMENT.—

21 ‘‘(A) IN GENERAL.—In the case of a tax22 able year beginning in a calendar year after 

23 2004, the dollar amount contained in paragraph 

24 (1) shall be increased by an amount equal to—

25 ‘‘(i) such dollar amount, multiplied by 
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1 ‘‘(ii) the cost-of-living adjustment de2 termined under section 1(f )(3) for the cal3 endar year in which the taxable year be4 gins, determined by substituting ‘calendar 

5 year 2003’ for ‘calendar year 1992’ in sub6 paragraph (B) thereof. 

7 ‘‘(B) ROUNDING.—Any increase deter8 mined under subparagraph (A) shall be rounded 

9 to the nearest multiple of $50.’’. 

10 (b) REPEAL OF HEAD OF HOUSEHOLD FILING STA11 TUS.—Subsection (b) of section 1 (relating to heads of 

12 household) is repealed. 

13 (c) CONFORMING AMENDMENTS.—

14 (1) Section 1(c) is amended—

15 (A) in the heading by striking ‘‘SPOUSES

16 AND HEADS OF HOUSEHOLDS).—’’ and insert17 ing ‘‘SPOUSES).—’’, and 

18 (B) by striking ‘‘or the head of a house19 hold as defined in section 2(b)’’. 

20 (2) Section 2 is amended by striking subsection 

21 (b) and by redesignating subsections (c), (d), and (e) 

22 as subsections (b), (c), and (d), respectively. 

23 (3) Section 25B(b) is amended by striking the 

24 portion of the table related to head of a household. 

25 (4) Section 63(c)(2) is amended—
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1 (A) by striking subparagraph (B), and 

2 (B) by redesignating subparagraphs (C) 

3 and (D) as subparagraphs (B) and (C), respec4 tively. 

5 (5) Section 151(c)(6)(B)(iii) is amended by 

6 striking ‘‘or a head of a household (as such terms 

7 are defined in section 2)’’ and inserting ‘‘(as defined 

8 in section 2)’’. 

9 (6) Section 151(c)(6)(C) is amended by striking 

10 ‘‘, section 2(b)(1)(A),’’. 

11 (7) Section 151(e)(3)(C) is amended—

12 (A) by striking clause (ii), 

13 (B) in clause (iii), by striking ‘‘or head of 

14 a household’’, and 

15 (C) by redesignating clauses (iii) and (iv) 

16 as clauses (ii) and (iii), respectively. 

17 (8) Section 3402(r)(2)(A) is amended by strik18 ing ‘‘section 63(c)(2)(C)’’ and inserting ‘‘section 

19 63(c)(2)(B)’’. 

20 (9) Section 6012(a)(1)(A) is amended—

21 (A) in clause (i), by striking ‘‘is not a head 

22 of a household (as defined in section 2(b)),’’, 

23 (B) by striking clause (ii), 

24 (C) by redesignating clauses (iii) and (iv) 

25 as clauses (ii) and (iii), respectively, and
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1 (D) in the last sentence, by striking 

2 ‘‘Clause (iv)’’ and inserting ‘‘Clause (iii)’’ and 

3 by striking ‘‘151(c)’’ and inserting ‘‘151(d)’’. 

4 (10) Section 6012(a)(1)(B) is amended—

5 (A) by striking ‘‘clause (i), (ii), or (iii)’’ 

6 and inserting ‘‘clause (i) or (ii)’’, and 

7 (B) by striking ‘‘clause (iv)’’ and inserting 

8 ‘‘clause (iii)’’. 

9 (11)(A) Paragraph (6) of section 1(f) is amend10 ed by striking ‘‘151(d)(4)(A)’’ and inserting 

11 ‘‘151(e)(4)(A)’’. 

12 (B) Subparagraph (C) of section 642(b)(2), as 

13 amended by section 105, is amended—

14 (i) by striking ‘‘151(d)’’ and inserting 

15 ‘‘151(e)’’, and 

16 (ii) by striking ‘‘151(d)(3)(C)(iii)’’ and in17 serting ‘‘151(e)(3)(C)(ii)’’. 

18 (C) Paragraph (1) of section 3402(f) is amend19 ed by striking ‘‘151(d)(2)’’ and inserting 

20 ‘‘151(e)(2)’’. 

21 (D) Subparagraph (B) of section 3402(r)(2) is 

22 amended by striking ‘‘151(d)’’ and inserting 

23 ‘‘151(e)’’. 

24 (E) Clause (ii) of section 6012(a)(1)(D) is 

25 amended—
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1 (i) by striking ‘‘151(d)’’ and inserting 

2 ‘‘151(e)’’, and 

3 (ii) by striking ‘‘151(d)(2)’’ and inserting 

4 ‘‘151(e)(2)’’. 

5 (F) The next to the last sentence of section 

6 6013(b)(3)(A) is amended by striking ‘‘151(d)’’ and 

7 inserting ‘‘151(e)’’. 

8 (d) EFFECTIVE DATE.—The amendments made by 

9 this section shall apply to taxable years beginning after 

10 December 31, 2003. 

11 SEC. 103. SIMPLIFICATION OF TAX ON SOCIAL SECURITY 

12 BENEFITS. 

13 (a) REPEAL OF 1993 INCREASE.—

14 (1) IN GENERAL.—Subsection (a) of section 86 

15 (relating to social security and tier 1 railroad retire16 ment benefits) is amended to read as follows: 

17 ‘‘(a) IN GENERAL.—Gross income for the taxable 

18 year of any taxpayer described in subsection (b) (notwith19 standing section 207 of the Social Security Act) includes 

20 social security benefits in an amount equal to the lesser 

21 of—

22 ‘‘(1) one-half of the social security benefits re23 ceived during the taxable year, or 

24 ‘‘(2) one-half of the excess described in sub25 section (b)(1).’’
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1 (2) CONFORMING AMENDMENTS.—

2 (A) Subsection (c) of section 86 is amend3 ed to read as follows: 

4 ‘‘(c) BASE AMOUNT.—For purposes of this section, 

5 the term ‘base amount’ means—

6 ‘‘(1) except as otherwise provided in this sub7 section, $25,000, 

8 ‘‘(2) $32,000 in the case of a joint return, and 

9 ‘‘(3) zero in the case of a taxpayer who—

10 ‘‘(A) is married as of the close of the tax11 able year (within the meaning of section 7703) 

12 but does not file a joint return for such year, 

13 and 

14 ‘‘(B) does not live apart from his spouse at 

15 all times during the taxable year.’’

16 (B) Paragraph (3) of section 871(a) is 

17 amended by striking ‘‘85 percent’’ in subpara18 graph (A) and inserting ‘‘50 percent’’. 

19 (C)(i) Subparagraph (A) of section 

20 121(e)(1) of the Social Security Amendments of 

21 1983 (Public Law 98–21) is amended—

22 (I) by striking ‘‘(A) There’’ and in23 serting ‘‘There’’; 

24 (II) by striking ‘‘(i)’’ immediately fol25 lowing ‘‘amounts equivalent to’’; and 
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1 (III) by striking ‘‘, less (ii)’’ and all 

2 that follows and inserting a period. 

3 (ii) Paragraph (1) of section 121(e) of 

4 such Act is amended by striking subparagraph 

5 (B). 

6 (iii) Paragraph (3) of section 121(e) of 

7 such Act is amended by striking subparagraph 

8 (B) and by redesignating subparagraph (C) as 

9 subparagraph (B). 

10 (iv) Paragraph (2) of section 121(e) of 

11 such Act is amended in the first sentence by 

12 striking ‘‘paragraph (1)(A)’’ and inserting 

13 ‘‘paragraph (1)’’. 

14 (b) USE OF ADJUSTED GROSS INCOME WITHOUT

15 MODIFICATIONS.—

16 (1) IN GENERAL.—Subsection (b) of section 86 

17 is amended to read as follows: 

18 ‘‘(b) TAXPAYERS TO WHOM SUBSECTION (a) AP19 PLIES.—A taxpayer is described in this subsection if—

20 ‘‘(1) the sum of—

21 ‘‘(A) the adjusted gross income of the tax22 payer for the taxable year (determined without 

23 regard to this section), plus 

24 ‘‘(B) one-half of the social security benefits 

25 received during the taxable year, exceeds
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1 ‘‘(2) the base amount.’’

2 (2) CONFORMING AMENDMENTS.—

3 (A) Subparagraph (A) of section 219(g)(3) 

4 is amended—

5 (i) by striking ‘‘sections 86 and 469’’ 

6 in clause (i) and inserting ‘‘section 469’’, 

7 and 

8 (ii) by inserting ‘‘86,’’ before ‘‘135’’ in 

9 clause (ii). 

10 (B) Paragraph (4) of section 135(c) is 

11 amended—

12 (i) by inserting ‘‘86,’’ before ‘‘137’’ in 

13 clause (i), and 

14 (ii) by striking ‘‘sections 86, 469,’’ in 

15 clause (ii) and inserting ‘‘sections 469’’. 

16 (C) Paragraph (3) of section 137(b) is 

17 amended—

18 (i) by inserting ‘‘86,’’ before ‘‘221’’ in 

19 clause (i), and 

20 (ii) by striking ‘‘86,’’ in clause (ii). 

21 (D) Subparagraph (C) of section 221(b)(2) 

22 is amended—

23 (i) by inserting ‘‘86,’’ before ‘‘222’’ in 

24 clause (i), and 

25 (ii) by striking ‘‘86,’’ in clause (ii). 
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1 (E) Subparagraph (C) of section 222(b)(2) 

2 is amended—

3 (i) by inserting ‘‘86,’’ before ‘‘911’’ in 

4 clause (i), and 

5 (ii) by striking ‘‘86,’’ in clause (ii). 

6 (c) EFFECTIVE DATES.—

7 (1) IN GENERAL.—Except as provided in para8 graphs (2) and (3), the amendments made by this 

9 section shall apply to taxable years beginning after 

10 December 31, 2003. 

11 (2) SUBSECTION (a)(2)(B).—The amendment 

12 made by subsection (a)(2)(B) shall apply to benefits 

13 paid after December 31, 2003. 

14 (3) SUBSECTION (a)(2)(C).—The amendments 

15 made by subsection (a)(2)(C) shall apply to tax li16 abilities for taxable years beginning after December 

17 31, 2003. 

18 (d) MAINTENANCE OF TRANSFERS TO TRUST

19 FUNDS.—There are hereby appropriated to the trust 

20 funds established under the Social Security Act amounts 

21 equal to the reduction in revenues to the Treasury by rea22 son of the enactment of this section. Amounts appro23 priated by the preceding sentence shall be transferred 

24 from the general fund at such times and in such manner 

25 so as to replicate to the extent possible the transfers which 
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1 would have occurred to such Trust Funds had this section 

2 not been enacted. 

3 SEC. 104. SIMPLIFICATION OF CAPITAL GAINS TAX. 

4 (a) IN GENERAL.—Part I of subchapter P of chapter 

5 1 (relating to treatment of capital gains) is amended by 

6 adding at the end the following new section: 

7 ‘‘SEC. 1203. CAPITAL GAINS DEDUCTION. 

8 ‘‘If for any taxable year a taxpayer other than a cor9 poration has a net capital gain, 50 percent of such gain 

10 shall be a deduction from gross income.’’. 

11 (b) DEDUCTION ALLOWABLE WHETHER OR NOT

12 TAXPAYER ITEMIZES OTHER DEDUCTIONS.—

13 (1) Subsection (b) of section 63 is amended by 

14 striking ‘‘and’’ at the end of paragraph (1), by strik15 ing the period at the end of paragraph (2) and in16 serting ‘‘, and’’, and by adding at the end the fol17 lowing new paragraph: 

18 ‘‘(3) the deduction allowed by section 1203.’’. 

19 (2) Subsection (d) of section 63 is amended by 

20 striking ‘‘and’’ at the end of paragraph (1), by strik21 ing the period at the end of paragraph (2) and in22 serting ‘‘, and’’, and by adding at the end the fol23 lowing new paragraph: 

24 ‘‘(3) the deduction allowed by section 1203.’’. 

25 (c) MINIMUM TAX TREATMENT.—
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1 (1) Paragraph (1) of section 56(b) is amended 

2 by adding at the end the following new subpara3 graph: 

4 ‘‘(G) CAPITAL GAIN DEDUCTION NOT AP5 PLICABLE.—Section 1203 shall not apply.’’. 

6 (2) Subsection (b) of section 55 is amended by 

7 striking paragraph (3) and inserting the following 

8 new paragraphs: 

9 ‘‘(3) MAXIMUM TAX ON NET CAPITAL GAIN.—

10 The amount of tax determined under the first sen11 tence of paragraph (1)(A)(i) shall not exceed the 

12 sum of—

13 ‘‘(A) the amount determined under such 

14 first sentence computed at the rates and in the 

15 same manner as if this paragraph had not been 

16 enacted on the taxable excess reduced by the 

17 net capital gain, plus 

18 ‘‘(B) a tax on the net capital gain deter19 mined by using the regular tax capital gains tax 

20 rates. 

21 ‘‘(4) REGULAR TAX ON NET CAPITAL GAIN.—

22 For purposes of paragraph (3), the tax on the net 

23 capital gain determined by using the regular tax 

24 capital gains tax rates is the excess of—
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1 ‘‘(A) the tax that would be computed 

2 under section 1 if net capital gain were deter3 mined with the adjustments under this part, 

4 over 

5 ‘‘(B) the tax that would be so computed 

6 under section 1 if the taxable income were re7 duced by 50 percent of the net capital gain as 

8 so determined.’’. 

9 (d) TECHNICAL AND CONFORMING AMENDMENTS.—

10 (1) Section 1 is amended by striking subsection 

11 (h). 

12 (2) Paragraph (7) of section 57(a) is amended 

13 by striking the last sentence. 

14 (3) Subparagraph (E) of section 163(d)(4) is 

15 amended to read as follows: 

16 ‘‘(E) COORDINATION WITH CAPITAL GAINS

17 DEDUCTION.—The net capital gain taken into 

18 account under section 1203 for any taxable 

19 year shall be reduced (but not below zero) by 

20 the amount which the taxpayer takes into ac21 count as investment income under subpara22 graph (B)(iii) for such year.’’. 

23 (4) Paragraph (1) of section 170(e) is amended 

24 by striking ‘‘the amount of gain’’ in the material fol25 lowing subparagraph (B)(ii) and inserting ‘‘50 per-
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1 cent (100 percent in the case of a corporation) of 

2 the amount of gain’’. 

3 (5) Subparagraph (B) of section 172(d)(2) is 

4 amended to read as follows: 

5 ‘‘(B) the exclusion under section 1202 and 

6 the deduction under section 1203 shall not be 

7 allowed.’’. 

8 (6) The last sentence of section 453A(c)(3) is 

9 amended by striking all that follows ‘‘long-term cap10 ital gain,’’ and inserting ‘‘the maximum rate on net 

11 capital gain under section 1201 or the deduction 

12 under section 1203 (whichever is appropriate) shall 

13 be taken into account.’’. 

14 (7)(A) Section 641(c)(2)(A) is amended by 

15 striking ‘‘Except as provided in section 1(h), the’’ 

16 and inserting ‘‘The’’. 

17 (B) Section 641(c)(2)(C) is amended by insert18 ing after clause (iii) the following new clause: 

19 ‘‘(iv) The deduction under section 

20 1203.’’. 

21 (8) Paragraph (4) of section 642(c) is amended 

22 to read as follows: 

23 ‘‘(4) ADJUSTMENTS.—To the extent that the 

24 amount otherwise allowable as a deduction under 

25 this subsection consists of gain from the sale or ex-
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1 change of capital assets held for more than 1 year, 

2 proper adjustment shall be made for any exclusion 

3 allowable under section 1202 and any deduction al4 lowable under section 1203 to the estate or trust. In 

5 the case of a trust, the deduction allowed by this 

6 subsection shall be subject to section 681 (relating 

7 to unrelated business income).’’. 

8 (9) Section 642 is amended by adding at the 

9 end the following new subsection: 

10 ‘‘(j) CAPITAL GAINS DEDUCTION.—The deduction 

11 under section 1203 to an estate or trust shall be computed 

12 by excluding the portion (if any) of the gains for the tax13 able year which is includible by the income beneficiaries 

14 under sections 652 and 662 (relating to inclusions of 

15 amounts in gross income of beneficiaries of trusts) as gain 

16 derived from the sale or exchange of capital assets.’’. 

17 (10) The last sentence of section 643(a)(3) is 

18 amended to read as follows: ‘‘The exclusion under 

19 section 1202 and the deduction under section 1203 

20 shall not be taken into account.’’. 

21 (11) Subparagraph (C) of section 643(a)(6) is 

22 amended by inserting ‘‘(i)’’ before ‘‘there shall’’ and 

23 by inserting before the period ‘‘, and (ii) the deduc24 tion under section 1203 (relating to capital gains de25 duction) shall not be taken into account’’.
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1 (12) Paragraph (4) of section 691(c) is amend2 ed by striking ‘‘1(h),’’ and by inserting ‘‘1203,’’ 

3 after ‘‘1202,’’. 

4 (13) The second sentence of paragraph (2) of 

5 section 871(a) is amended by striking ‘‘section 

6 1202’’ and inserting ‘‘sections 1202 and 1203’’. 

7 (14)(A) Paragraph (2) of section 904(b) is 

8 amended by striking subparagraphs (A) and (C), by 

9 redesignating subparagraph (B) as subparagraph 

10 (A), and by inserting after subparagraph (A) (as so 

11 redesignated) the following new subparagraph: 

12 ‘‘(B) OTHER TAXPAYERS.—In the case of 

13 a taxpayer other than a corporation, taxable in14 come from sources outside the United States 

15 shall include gain from the sale or exchange of 

16 capital assets only to the extent of foreign 

17 source capital gain net income.’’. 

18 (B) Subparagraph (A) of section 904(b)(2), as 

19 so redesignated, is amended—

20 (i) by striking all that precedes clause (i) 

21 and inserting the following: 

22 ‘‘(A) CORPORATIONS.—In the case of a 

23 corporation—’’, and 

24 (ii) by striking in clause (i) ‘‘in lieu of ap25 plying subparagraph (A),’’.
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1 (C) Paragraph (3) of section 904(b) is amended 

2 by striking subparagraphs (D) and (E) and inserting 

3 the following new subparagraph: 

4 ‘‘(D) RATE DIFFERENTIAL PORTION.—The 

5 rate differential portion of foreign source net 

6 capital gain, net capital gain, or the excess of 

7 net capital gain from sources within the United 

8 States over net capital gain, as the case may 

9 be, is the same proportion of such amount as 

10 the excess of the highest rate of tax specified in 

11 section 11(b) over the alternative rate of tax 

12 under section 1201(a) bears to the highest rate 

13 of tax specified in section 11(b).’’. 

14 (15) Paragraph (1) of section 1402(i) is amend15 ed by inserting ‘‘, and the deduction provided by sec16 tion 1203 shall not apply’’ before the period at the 

17 end thereof. 

18 (16) Paragraph (1) of section 1445(e) is 

19 amended by striking ‘‘20 percent’’ and inserting 

20 ‘‘one-half of the maximum rate of tax in effect under 

21 section 1’’. 

22 (17)(A) The second sentence of section 

23 7518(g)(6)(A) is amended—

24 (i) by striking ‘‘during a taxable year to 

25 which section 1(h) or 1201(a) applies’’, and 
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1 (ii) by striking ‘‘20 percent’’ and inserting 

2 ‘‘one-half of the maximum rate of tax in effect 

3 under section 1’’. 

4 (B) The second sentence of section 

5 607(h)(6)(A) of the Merchant Marine Act, 1936, is 

6 amended—

7 (i) by striking ‘‘during a taxable year to 

8 which section 1(h) or 1201(a) of such Code ap9 plies’’, and 

10 (ii) by striking ‘‘20 percent’’ and inserting 

11 ‘‘one-half of the maximum rate of tax in effect 

12 under section 1 of such Code’’. 

13 (e) CLERICAL AMENDMENT.—The table of sections 

14 for part I of subchapter P of chapter 1 is amended by 

15 adding at the end the following new item:

‘‘Sec. 1203. Capital gains deduction.’’.

16 (f) EFFECTIVE DATES.—

17 (1) IN GENERAL.—Except as otherwise pro18 vided in this subsection, the amendments made by 

19 this section shall apply to taxable years beginning 

20 after December 31, 2003. 

21 (2) WITHHOLDING.—The amendments made by 

22 subsection (d)(16) shall apply only to amounts paid 

23 after December 31, 2003. 

24 (3) COORDINATION WITH PRIOR TRANSITION

25 RULE.—Any amount treated as long-term capital 
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1 gain by reason of paragraph (3) of section 1122(h) 

2 of the Tax Reform Act of 1986 shall not be taken 

3 into account for purposes of applying section 1203 

4 of the Internal Revenue Code of 1986 (as added by 

5 this section). 

6 SEC. 105. REPEAL OF 2-PERCENT FLOOR ON MISCELLA7 NEOUS ITEMIZED DEDUCTIONS. 

8 (a) TERMINATION.—Section 67 (relating to 2-percent 

9 floor on miscellaneous itemized deductions) is hereby re10 pealed. 

11 (b) CONFORMING AMENDMENTS.—

12 (1) Subparagraph (A) of section 56(b)(1), as 

13 amended by section 101, is hereby repealed. 

14 (2) Clause (i) of section 642(b)(2)(C) is amend15 ed to read as follows: 

16 ‘‘(i) IN GENERAL.—A qualified dis17 ability trust shall be allowed a deduction 

18 equal to the exemption amount under sec19 tion 151(d), determined by treating such 

20 trust as an individual described in section 

21 151(d)(3)(C)(iii).’’

22 (3) Paragraph (3) of section 772(c) is amended 

23 to read as follows: 

24 ‘‘(3) INCOME OR LOSS FROM OTHER ACTIVI25 TIES.—For purposes of this chapter, any partner’s 
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1 distributive share of any income or loss described in 

2 subsection (a)(2) shall be treated as an item of in3 come or expense (as the case may be) with respect 

4 to property held for investment.’’

5 (4) Paragraph (3) of section 773(b) is hereby 

6 repealed. 

7 (5) Clause (iii) of section 6654(d)(1)(C) is 

8 amended to read as follows: 

9 ‘‘(iii) DETERMINATION OF ADJUSTED

10 GROSS INCOME IN CASE OF ESTATES AND

11 TRUSTS.—For purposes of this section, the 

12 adjusted gross income of an estate or trust 

13 shall be computed in the same manner as 

14 in the case of an individual, except that—

15 ‘‘(I) the deductions for costs 

16 which are paid or incurred in connec17 tion with the administration of the es18 tate or trust and which would not 

19 have been incurred if the property 

20 were not held in such trust or estate, 

21 and 

22 ‘‘(II) the deductions allowable 

23 under sections 642(b), 651, and 661,

24 shall be treated as allowable in arriv25 ing at adjusted gross income. Under 
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1 regulations, appropriate adjustments 

2 shall be made in the application of 

3 part I of subchapter J of this chapter 

4 to take into account the provisions of 

5 this section.’’

6 (c) EFFECTIVE DATE.—The amendments made by 

7 this section shall apply to taxable years beginning after 

8 December 31, 2003. 

9 SEC. 106. SIMPLIFICATION OF DEDUCTION FOR POINTS ON 

10 HOME MORTGAGE. 

11 (a) IN GENERAL.—Subsection (g) of section 461 (re12 lating to prepaid interest) is amended by adding at the 

13 end the following new paragraph: 

14 ‘‘(3) EXCEPTION FOR CERTAIN

15 REFINANCINGS.—

16 ‘‘(A) IN GENERAL.—This subsection shall 

17 not apply to points paid in respect of indebted18 ness secured by such residence resulting from 

19 the refinancing of indebtedness meeting the re20 quirements of the preceding sentence (or this 

21 sentence). 

22 ‘‘(B) LIMITATION.—Subparagraph (A) 

23 shall apply only to the extent the amount of the 

24 indebtedness resulting from such refinancing 

25 does not exceed the sum of—
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1 ‘‘(i) the amount of the refinanced in2 debtedness, plus 

3 ‘‘(ii) the lesser of $10,000 or the 

4 points paid in respect of the indebtedness 

5 resulting from the refinancing to the ex6 tent that the indebtedness resulting from 

7 the refinancing does not exceed the refi8 nanced indebtedness.’’. 

9 (b) CONFORMING AMENDMENT.—The heading of 

10 paragraph (2) of section 461(g) is amended by inserting 

11 ‘‘BASED ON BUSINESS PRACTICE’’ after ‘‘EXCEPTION’’. 

12 (c) EFFECTIVE DATE.—The amendments made by 

13 this section shall apply to taxable years beginning after 

14 December 31, 2003. 

15 SEC. 107. TAXATION OF MINOR CHILDREN. 

16 (a) APPLICATION OF TRUST RATE SCHEDULE TO

17 NET UNEARNED INCOME OF MINOR CHILDREN.—Sub18 section (g) of section 1 (relating to certain unearned in19 come of minor children taxed as if parent’s income) is 

20 amended—

21 (1) by striking paragraphs (1), (3) and (5), 

22 (2) by redesignating paragraphs (4), (6), and 

23 (7) as paragraphs (3), (4), and (5), respectively, and 

24 (3) by inserting before paragraph (2) the fol25 lowing new paragraph:
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1 ‘‘(1) IN GENERAL.—In the case of a child to 

2 whom this subsection applies, the tax imposed by 

3 this section shall be the sum of—

4 ‘‘(A) a tax computed at the rates and in 

5 the same manner as if this subsection had not 

6 been enacted on taxable income reduced by net 

7 unearned income, plus 

8 ‘‘(B) the excess (if any) of the tax deter9 mined under subsection (e) on total taxable in10 come over the tax determined under subsection 

11 (e) on taxable income reduced by net unearned 

12 income.’’. 

13 (b) EXPANSION OF PARENTAL ELECTION.—Para14 graph (5) of section 1(g) (as redesignated under sub15 section (a)) is amended to read as follows: 

16 ‘‘(5) ELECTION TO CLAIM INCOME OF CHILD ON

17 PARENT’S RETURN.—

18 ‘‘(A) IN GENERAL.—If the parent of any 

19 child to whom this subsection applies elects the 

20 application of subparagraph (B), such child—

21 ‘‘(i) shall be treated (other than for 

22 purposes of this paragraph)—

23 ‘‘(I) as having no gross income 

24 for such year, and 
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1 ‘‘(II) as not being entitled to any 

2 deductions or credits for such year, 

3 and 

4 ‘‘(ii) shall not be required to file a re5 turn under section 6012 for such year. 

6 ‘‘(B) INCOME INCLUDED ON PARENT’S RE7 TURN.—In the case of a parent making the 

8 election under this paragraph—

9 ‘‘(i) the gross income of each child to 

10 whom such election applies shall be in11 cluded in such parent’s gross income for 

12 the taxable year, 

13 ‘‘(ii) the deductions to which such 

14 child would be entitled without regard to 

15 such election shall be allowed to such par16 ent but only to the extent the aggregate of 

17 such deductions does not exceed the gross 

18 income of such child, 

19 ‘‘(iii) any estimated tax payment, and 

20 any amount which has been deducted and 

21 withheld under chapter 24, for such year 

22 that is made in the name and TIN of such 

23 child shall be treated as an estimated tax 

24 payment or as an amount deducted and 

25 withheld in the name and TIN of such par-
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1 ent for such year (including for purposes 

2 of section 31), and 

3 ‘‘(iv) any interest which is an item of 

4 tax preference under section 57(a)(5) of 

5 the child shall be treated as an item of tax 

6 preference of such parent (and not of such 

7 child). 

8 ‘‘(C) SPECIAL RULE FOR DETERMINING

9 WHICH PARENT MAY MAKE ELECTION.—For 

10 purposes of this paragraph, the parent of a 

11 child to whom this subsection applies who may 

12 make an election under this paragraph shall 

13 be—

14 ‘‘(i) in the case of parents who are not 

15 married (within the meaning of section 

16 7703), the custodial parent (within the 

17 meaning of section 151(c)(7)) of the child, 

18 and 

19 ‘‘(ii) in the case of married individuals 

20 filing separately, the individual with the 

21 greater taxable income. 

22 ‘‘(D) CARRYOVERS ALLOWED.—Subpara23 graph (A)(i)(II) shall not prohibit the carryover

24 of any amount that the child would be entitled 
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1 to carryover without regard to the election 

2 under this paragraph. 

3 ‘‘(E) REGULATIONS.—The Secretary shall 

4 prescribe such regulations as may be necessary 

5 or appropriate to carry out the purposes of this 

6 paragraph.’’. 

7 (c) CONFORMING AMENDMENT.—The heading for 

8 subsection (g) of section 1 is amended to read as follows: 

9 ‘‘(g) TREATMENT OF CERTAIN INCOME OF MINOR

10 CHILDREN.—’’. 

11 (d) EFFECTIVE DATE.—The amendments made by 

12 this section shall apply to taxable years beginning after 

13 December 31, 2003. 

14 SEC. 108. SIMPLIFICATION OF DEPENDENT CARE TAX BEN15 EFITS. 

16 (a) REPEAL OF REDUCTION OF CREDIT BASED ON

17 ADJUSTED GROSS INCOME.—Subsection (a) of section 21 

18 (relating to allowance of credit) is amended—

19 (1) in paragraph (1), by striking ‘‘applicable 

20 percentage’’ and inserting ‘‘35 percent’’, 

21 (2) by striking paragraph (2), and 

22 (3) by striking ‘‘(1) IN GENERAL.—’’ and mov23 ing the text 2 ems to the left. 
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1 (b) DOLLAR LIMIT ON AMOUNT CREDITABLE MADE

2 $5,500 REGARDLESS OF NUMBER OF QUALIFYING INDI3 VIDUALS.—

4 (1) IN GENERAL.—Subsection (c) of section 21 

5 (relating to dollar limit on amount creditable) is 

6 amended to read as follows: 

7 ‘‘(c) DOLLAR LIMIT ON AMOUNT CREDITABLE.—The 

8 amount of employment-related expenses incurred during 

9 any taxable year which may be taken into account under 

10 subsection (a) shall not exceed $5,500, reduced by the ag11 gregate amount excludable from gross income under sec12 tion 129 for the taxable year.’’. 

13 (2) EXCLUSION.—Subparagraph (A) of section 

14 129(a)(2) is amended by striking ‘‘$5,000 ($2,500’’ 

15 and inserting ‘‘$5,500 ($2,750’’.

16 (c) EFFECTIVE DATE.—The amendments made by 

17 this section shall apply to taxable years beginning after 

18 December 31, 2003. 

19 SEC. 109. ACCELERATION OF PHASEOUT OF PHASEOUT OF 

20 OVERALL LIMITATION ON ITEMIZED DEDUC21 TIONS. 

22 (a) IN GENERAL.—Section 68 (relating to overall 

23 limitation on itemized deductions) is hereby repealed. 

24 (b) CONFORMING AMENDMENTS.—
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1 (1) Section 1(f)(6)(A) is amended by striking ‘‘, 

2 section 68(b)(2)’’. 

3 (2) Section 773(a)(3)(B) is amended by strik4 ing clause (i) and redesignating clauses (ii), (iii), 

5 and (iv) as clauses (i), (ii), and (iii), respectively. 

6 (3) The table of sections for part I of sub7 chapter B of chapter 1 is amended by striking the 

8 item relating to section 68. 

9 (c) EFFECTIVE DATE.—The amendments by this sec10 tion shall apply to taxable years beginning after December 

11 31, 2003. 

12 SEC. 110. ACCELERATION OF REPEAL OF PHASEOUT OF 

13 PERSONAL EXEMPTIONS. 

14 (a) IN GENERAL.—Subsection (e) of section 151 (re15 lating to phaseout of exemption amount), as amended by 

16 the preceding sections of this Act, is amended by striking 

17 paragraph (3) and redesignating paragraph (4) as para18 graph (3). 

19 (b) CONFORMING AMENDMENTS.—

20 (1) Paragraph (3) of section 151(e), as amend21 ed by subsection (a), is amended to read as follows: 

22 ‘‘(3) INFLATION ADJUSTMENT.—In the case of 

23 any taxable year beginning in a calendar year after 

24 1989, the dollar amount contained in paragraph (1) 

25 shall be increased by an amount equal to—
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1 ‘‘(A) such dollar amount, multiplied by 

2 ‘‘(B) the cost-of-living adjustment deter3 mined under section 1(f)(3) for the calendar 

4 year in which the taxable year begins, by sub5 stituting ‘calendar year 1988’ for ‘calendar year 

6 1992’ in subparagraph (B) thereof.’’. 

7 (2) Section 1(f)(6) is amended—

8 (A) in subparagraph (A) by striking 

9 ‘‘151(e)(4)’’ and inserting ‘‘151(e)(3)’’, and 

10 (B) in subparagraph (B), both as in effect 

11 on the date of the enactment of this Act and as 

12 amended by the Economic Growth and Tax Re13 lief Reconciliation Act of 2001, by striking 

14 ‘‘151(e)(4)(A)’’ and inserting ‘‘151(e)(3)’’. 

15 (3) Subparagraph (C) of section 642(b)(2), as 

16 amended by the preceding sections of this Act, is 

17 amended by striking ‘‘, determined by treating such 

18 trust as an individual described in section 

19 151(e)(3)(C)(ii)’’. 

20 (c) EFFECTIVE DATE.—The amendments made by 

21 this section shall apply to taxable years beginning after 

22 December 31, 2003. 
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1 SEC. 111. REPEAL OF PERSONAL HOLDING COMPANY TAX. 

2 (a) IN GENERAL.—Part II of subchapter G of chap3 ter 1 (relating to personal holding companies) is hereby 

4 repealed. 

5 (b) CONFORMING AMENDMENTS.—

6 (1) Section 12(2) is amended to read as follows:

7 ‘‘(2) For accumulated earnings tax, see part I 

8 of subchapter G (sec. 531 and following).’’. 

9 (2) Section 26(b)(2) is amended by striking 

10 subparagraph (G) and by redesignating the suc11 ceeding subparagraphs accordingly. 

12 (3) Section 30A(c) is amended by striking para13 graph (3) and by redesignating paragraph (4) as 

14 paragraph (3). 

15 (4) Section 41(e)(7)(E) is amended by adding 

16 ‘‘and’’ at the end of clause (i), by striking clause 

17 (ii), and by redesignating clause (iii) as clause (ii). 

18 (5) Section 56(b)(2) is amended by striking 

19 subparagraph (C) and by redesignating subpara20 graph (D) as subparagraph (C). 

21 (6) Section 170(e)(4)(D) is amended by adding 

22 ‘‘and’’ at the end of clause (i), by striking clause 

23 (ii), and by redesignating clause (iii) as clause (ii). 

24 (7) Section 111(d) is amended to read as fol25 lows: 
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1 ‘‘(d) SPECIAL RULES FOR ACCUMULATED EARNINGS

2 TAX.—In applying subsection (a) for the purpose of deter3 mining the accumulated earnings tax under section 531—

4 ‘‘(1) any excluded amount under subsection (a) 

5 allowed for purposes of this subtitle (other than sec6 tion 531) shall be allowed whether or not such 

7 amount resulted in a reduction of the tax under sec8 tion 531 for the prior taxable year, and 

9 ‘‘(2) where any excluded amount under sub10 section (a) was not allowed as a deduction for the 

11 prior taxable year for purposes of this subtitle other 

12 than section 531 but was allowable for the same tax13 able year under section 531, then such excluded 

14 amount shall be allowable if it did not result in a re15 duction of the tax under section 531.’’. 

16 (8)(A) Section 316(b) is amended by striking 

17 paragraph (2) and by redesignating paragraph (3) 

18 as paragraph (2). 

19 (B) Section 331(b) is amended by striking 

20 ‘‘(other than a distribution referred to in paragraph 

21 (2)(B) of section 316(b))’’. 

22 (9) Section 341(d) is amended—

23 (A) by striking ‘‘section 544(a)’’ and in24 serting ‘‘section 465(f)’’, and 
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1 (B) by inserting before the period at the 

2 end of the next to the last sentence ‘‘and such 

3 paragraph (2) shall be applied by inserting ‘by 

4 or for his partner’ after ‘his family’ ’’. 

5 (10) Section 381(c) is amended by striking 

6 paragraphs (14) and (17). 

7 (11) Section 443(e) is amended by striking 

8 paragraph (2) and by redesignating paragraphs (3), 

9 (4), and (5) as paragraphs (2), (3), and (4), respec10 tively. 

11 (12) Section 447(g)(4)(A) is amended by strik12 ing ‘‘other than—’’ and all that follows and insert13 ing ‘‘other than an S corporation.’’

14 (13)(A) Section 465(a)(1)(B) is amended to 

15 read as follows: 

16 ‘‘(B) a C corporation which is closely 

17 held,’’. 

18 (B) Section 465(a)(3) is amended to read as 

19 follows:

20 ‘‘(3) CLOSELY HELD DETERMINATION.—For 

21 purposes of paragraph (1), a corporation is closely 

22 held if, at any time during the last half of the tax23 able year, more than 50 percent in value of its out24 standing stock is owned, directly or indirectly, by or 

25 for not more than 5 individuals. For purposes of this
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1 paragraph, an organization described in section 

2 401(a), 501(c)(17), or 509(a) or a portion of a trust 

3 permanently set aside or to be used exclusively for 

4 the purposes described in section 642(c) shall be 

5 considered an individual.’’

6 (C) Section 465 is amended by adding at the 

7 end the following new subsection: 

8 ‘‘(f) CONSTRUCTIVE OWNERSHIP RULES.—For pur9 poses of subsection (a)(3)—

10 ‘‘(1) STOCK NOT OWNED BY INDIVIDUAL.—

11 Stock owned, directly or indirectly, by or for a cor12 poration, partnership, estate, or trust shall be con13 sidered as being owned proportionately by its share14 holders, partners, or beneficiaries. 

15 ‘‘(2) FAMILY OWNERSHIP.—An individual shall 

16 be considered as owning the stock owned, directly or 

17 indirectly, by or for his family. For purposes of this 

18 paragraph, the family of an individual includes only 

19 his brothers and sisters (whether by the whole or 

20 half blood), spouse, ancestors, and lineal descend21 ants. 

22 ‘‘(3) OPTIONS.—If any person has an option to 

23 acquire stock, such stock shall be considered as 

24 owned by such person. For purposes of this para25 graph, an option to acquire such an option, and each 
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1 one of a series of such options, shall be considered 

2 as an option to acquire such stock. 

3 ‘‘(4) APPLICATION OF FAMILY AND OPTION

4 RULES.—Paragraphs (2) and (3) shall be applied if, 

5 but only if, the effect is to make the corporation 

6 closely held under subsection (a)(3). 

7 ‘‘(5) CONSTRUCTIVE OWNERSHIP AS ACTUAL

8 OWNERSHIP.—Stock constructively owned by a per9 son by reason of the application of paragraph (1) or 

10 (3), shall, for purposes of applying paragraph (1) or 

11 (2), be treated as actually owned by such person; 

12 but stock constructively owned by an individual by 

13 reason of the application of paragraph (2) shall not 

14 be treated as owned by him for purposes of again 

15 applying such paragraph in order to make another 

16 the constructive owner of such stock. 

17 ‘‘(6) OPTION RULE IN LIEU OF FAMILY

18 RULE.—If stock may be considered as owned by an 

19 individual under either paragraph (2) or (3) it shall 

20 be considered as owned by him under paragraph (3). 

21 ‘‘(7) CONVERTIBLE SECURITIES.—Outstanding 

22 securities convertible into stock (whether or not con23 vertible during the taxable year) shall be considered 

24 as outstanding stock if the effect of the inclusion of 

25 all such securities is to make the corporation closely 
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1 held under subsection (a)(3). The requirement under 

2 the preceding sentence that all convertible securities 

3 must be included if any are to be included shall be 

4 subject to the exception that, where some of the out5 standing securities are convertible only after a later 

6 date than in the case of others, the class having the 

7 earlier conversion date may be included although the 

8 others are not included, but no convertible securities 

9 shall be included unless all outstanding securities 

10 having a prior conversion date are also included.’’

11 (D) Section 465(c)(7)(B) is amended by strik12 ing clause (i) and by redesignating clauses (ii) and 

13 (iii) as clauses (i) and (ii), respectively. 

14 (E) Section 465(c)(7)(G) is amended to read as 

15 follows: 

16 ‘‘(G) LOSS OF 1 MEMBER OF AFFILIATED

17 GROUP MAY NOT OFFSET INCOME OF PERSONAL

18 SERVICE CORPORATION.—Nothing in this para19 graph shall permit any loss of a member of an 

20 affiliated group to be used as an offset against 

21 the income of any other member of such group 

22 which is a personal service corporation (as de23 fined in section 269A(b) but determined by sub24 stituting ‘5 percent’ for ‘10 percent’ in section 

25 269A(b)(2)).’’
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1 (14) Sections 508(d), 4947, and 4948(c)(4) are 

2 each amended by striking ‘‘545(b)(2),’’ each place it 

3 appears. 

4 (15) Section 532(b) is amended by striking 

5 paragraph (1) and by redesignating paragraphs (2), 

6 (3), and (4) as paragraphs (1), (2), and (3), respec7 tively. 

8 (16) Sections 535(b)(1) and 556(b)(1) are each 

9 amended by striking ‘‘section 541’’ and inserting 

10 ‘‘section 541 (as in effect before its repeal)’’. 

11 (17)(A) Section 553(a)(1) is amended by strik12 ing ‘‘section 543(d)’’ and inserting ‘‘subsection (c)’’. 

13 (B) Section 553 is amended by adding at the 

14 end the following new subsection:

15 ‘‘(c) ACTIVE BUSINESS COMPUTER SOFTWARE ROY16 ALTIES.—

17 ‘‘(1) IN GENERAL.—For purposes of subsection 

18 (a), the term ‘active business computer software roy19 alties’ means any royalties—

20 ‘‘(A) received by any corporation during 

21 the taxable year in connection with the licensing 

22 of computer software, and 

23 ‘‘(B) with respect to which the require24 ments of paragraphs (2), (3), (4), and (5) are 

25 met. 
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1 ‘‘(2) ROYALTIES MUST BE RECEIVED BY COR2 PORATION ACTIVELY ENGAGED IN COMPUTER SOFT3 WARE BUSINESS.—The requirements of this para4 graph are met if the royalties described in paragraph 

5 (1)—

6 ‘‘(A) are received by a corporation engaged 

7 in the active conduct of the trade or business 

8 of developing, manufacturing, or producing 

9 computer software, and 

10 ‘‘(B) are attributable to computer software 

11 which—

12 ‘‘(i) is developed, manufactured, or 

13 produced by such corporation (or its prede14 cessor) in connection with the trade or 

15 business described in subparagraph (A), or 

16 ‘‘(ii) is directly related to such trade 

17 or business. 

18 ‘‘(3) ROYALTIES MUST CONSTITUTE AT LEAST

19 50 PERCENT OF INCOME.—The requirements of this 

20 paragraph are met if the royalties described in para21 graph (1) constitute at least 50 percent of the ordi22 nary gross income of the corporation for the taxable 

23 year.
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1 ‘‘(4) DEDUCTIONS UNDER SECTIONS 162 AND

2 174 RELATING TO ROYALTIES MUST EQUAL OR EX3 CEED 25 PERCENT OF ORDINARY GROSS INCOME.—

4 ‘‘(A) IN GENERAL.—The requirements of 

5 this paragraph are met if—

6 ‘‘(i) the sum of the deductions allow7 able to the corporation under sections 162, 

8 174, and 195 for the taxable year which 

9 are properly allocable to the trade or busi10 ness described in paragraph (2) equals or 

11 exceeds 25 percent of the ordinary gross 

12 income of such corporation for such tax13 able year, or 

14 ‘‘(ii) the average of such deductions 

15 for the 5-taxable year period ending with 

16 such taxable year equals or exceeds 25 per17 cent of the average ordinary gross income 

18 of such corporation for such period. 

19 If a corporation has not been in existence dur20 ing the 5-taxable year period described in clause 

21 (ii), then the period of existence of such cor22 poration shall be substituted for such 5-taxable 

23 year period. 

24 ‘‘(B) DEDUCTIONS ALLOWABLE UNDER

25 SECTION 162.—For purposes of subparagraph
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1 (A), a deduction shall not be treated as allow2 able under section 162 if it is specifically allow3 able under another section. 

4 ‘‘(C) LIMITATION ON ALLOWABLE DEDUC5 TIONS.—For purposes of subparagraph (A), no 

6 deduction shall be taken into account with re7 spect to compensation for personal services ren8 dered by the 5 individual shareholders holding 

9 the largest percentage (by value) of the out10 standing stock of the corporation. For purposes 

11 of the preceding sentence individuals holding 

12 less than 5 percent (by value) of the stock of 

13 such corporation shall not be taken into ac14 count.’’

15 (18) Section 561(a) is amended by striking 

16 paragraph (3), by inserting ‘‘and’’ at the end of 

17 paragraph (1), and by striking ’’, and’’ at the end 

18 of paragraph (2) and inserting a period. 

19 (19) Section 562(b) is amended to read as fol20 lows: 

21 ‘‘(b) DISTRIBUTIONS IN LIQUIDATION.—Except in 

22 the case of a foreign personal holding company described 

23 in section 552—

24 ‘‘(1) in the case of amounts distributed in liq25 uidation, the part of such distribution which is prop-
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1 erly chargeable to earnings and profits accumulated 

2 after February 28, 1913, shall be treated as a divi3 dend for purposes of computing the dividends paid 

4 deduction, and 

5 ‘‘(2) in the case of a complete liquidation occur6 ring within 24 months after the adoption of a plan 

7 of liquidation, any distribution within such period 

8 pursuant to such plan shall, to the extent of the 

9 earnings and profits (computed without regard to 

10 capital losses) of the corporation for the taxable year 

11 in which such distribution is made, be treated as a 

12 dividend for purposes of computing the dividends 

13 paid deduction. 

14 For purposes of paragraph (1), a liquidation includes a 

15 redemption of stock to which section 302 applies. Except 

16 to the extent provided in regulations, the preceding sen17 tence shall not apply in the case of any mere holding or 

18 investment company which is not a regulated investment 

19 company.’’

20 (20) Section 563 is amended by striking sub21 section (b). 

22 (21) Section 564 is hereby repealed. 

23 (22) Section 631(c) is amended by striking ‘‘or 

24 section 545(b)(5)’’. 
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1 (23) Section 852(b)(1) is amended by striking 

2 ‘‘which is a personal holding company (as defined in 

3 section 542) or’’. 

4 (24)(A) Section 856(h)(1) is amended to read 

5 as follows: 

6 ‘‘(1) IN GENERAL.—For purposes of subsection 

7 (a)(6), a corporation, trust, or association is closely 

8 held if the stock ownership requirement of section 

9 465(a)(3) is met.’’

10 (B) Section 856(h)(3)(A)(i) is amended by 

11 striking ‘‘section 542(a)(2)’’ and inserting ‘‘section 

12 465(a)(3)’’.

13 (C) Paragraph (3) of section 856(h) is amended 

14 by striking subparagraph (B) and by redesignating 

15 subparagraphs (C) and (D) as subparagraphs (B) 

16 and (C), respectively. 

17 (D) Subparagraph (C) of section 856(h)(3), as 

18 redesignating by the preceding subparagraph, is 

19 amended by striking ‘‘subparagraph (C)’’ and insert20 ing ‘‘subparagraph (B)’’. 

21 (25) The last sentence of section 882(c)(2) is 

22 amended to read as follows: 

23 ‘‘The preceding sentence shall not be construed to 

24 deny the credit provided by section 33 for tax with-
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1 held at source or the credit provided by section 34 

2 for certain uses of gasoline.’’. 

3 (26) Section 936(a)(3) is amended by striking 

4 subparagraph (C), by inserting ‘‘or’’ at the end of 

5 subparagraph (B), and by redesignating subpara6 graph (D) as subparagraph (C). 

7 (27) Section 992(d) is amended by striking 

8 paragraph (2) and by redesignating succeeding para9 graphs accordingly. 

10 (28) Section 992(e) is amended by striking 

11 ‘‘and section 541 (relating to personal holding com12 pany tax)’’. 

13 (29) Section 1202(e)(8) is amended by striking 

14 ‘‘section 543(d)(1)’’ and inserting ‘‘section 

15 553(c)(1)’’. 

16 (30) Section 1362(d)(3)(C)(iii) is amended by 

17 adding at the end the following new sentence: ‘‘Ref18 erences to section 542 in the preceding sentence 

19 shall be treated as references to such section as in 

20 effect on the day before its repeal.’’

21 (31) Section 1504(c)(2)(B) is amended by add22 ing ‘‘and’’ at the end of clause (i), by striking clause 

23 (ii), and by redesignating clause (iii) as clause (ii). 

24 (32) Section 2057(e)(2)(C) is amended by add25 ing at the end the following new sentence: ‘‘Ref-
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1 erences to sections 542 and 543 in the preceding 

2 sentence shall be treated as references to such sec3 tions as in effect on the day before their repeal.’’

4 (33) Sections 6422 is amended by striking 

5 paragraph (3) and by redesignating paragraphs (4) 

6 through (12) and paragraphs (3) through (11), re7 spectively. 

8 (34) Section 6501 is amended by striking sub9 section (f). 

10 (35) Section 6503(k) is amended by striking 

11 paragraph (1) and by redesignating paragraphs (2) 

12 through (5) as paragraphs (1) through (4), respec13 tively. 

14 (36) Section 6515 is amended by striking para15 graph (1) and by redesignating paragraphs (2) 

16 through (6) as paragraphs (1) through (5), respec17 tively. 

18 (37) Subsections (d)(1)(B) and (e)(2) of section 

19 6662 are each amended by striking ‘‘or a personal 

20 holding company (as defined in section 542)’’. 

21 (38) Section 6683 is hereby repealed. 

22 (c) CLERICAL AMENDMENTS.—

23 (1) The table of parts for subchapter G of 

24 chapter 1 is amended by striking the item relating 

25 to part II.
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1 (2) The table of sections for part IV of such 

2 subchapter G is amended by striking the item relat3 ing to section 564. 

4 (3) The table of sections for part I of sub5 chapter B of chapter 68 is amended by striking the 

6 item relating to section 6683. 

7 (d) EFFECTIVE DATE.—The amendments made by 

8 this Act shall apply to taxable years beginning after De9 cember 31, 2003. 

10 Subtitle B—Uniform Definition of 

11 Child 

12 SEC. 121. UNIFORM DEFINITION OF CHILD. 

13 (a) PERSONAL EXEMPTION.—

14 (1) IN GENERAL.—Section 151, as amended by 

15 the preceding sections of this Act, is amended by re16 designating subsections (c), (d), (e), and (f) as sub17 sections (d), (e), (f), and (g), respectively, and by in18 serting after subsection (b) the following new sub19 section: 

20 ‘‘(c) ADDITIONAL EXEMPTION FOR QUALIFYING

21 CHILDREN.—

22 ‘‘(1) IN GENERAL.—An exemption of the ex23 emption amount for each qualifying child. 

24 ‘‘(2) QUALIFYING CHILD.—For purposes of this 

25 section, the term ‘qualifying child’ means, with re-
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1 spect to any taxpayer for any taxable year, an indi2 vidual—

3 ‘‘(A) who bears a relationship to the tax4 payer described in paragraph (3), 

5 ‘‘(B) who has the same principal place of 

abode as the taxpayer for more than 1 6 ⁄2 of such 

7 taxable year, and 

8 ‘‘(C) who meets the age requirements of 

9 paragraph (4).

10 An individual shall not be treated as failing to meet 

11 the requirements of subparagraph (B) by reason of 

12 time of birth or death or by reason of temporary ab13 sences or other circumstances specified in the regu14 lations prescribed by the Secretary. 

15 ‘‘(3) RELATIONSHIP TEST.—

16 ‘‘(A) IN GENERAL.—For purposes of para17 graph (2)(A), an individual bears a relationship 

18 to the taxpayer described in this paragraph if 

19 such individual is—

20 ‘‘(i) a son, daughter, stepson, or step21 daughter of the taxpayer or a descendant 

22 of any such relative, 

23 ‘‘(ii) a brother, sister, stepbrother, or 

24 stepsister of the taxpayer or a descendant 
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1 of any such relative, whom the taxpayer 

2 cares for as the taxpayer’s own child, or 

3 ‘‘(iii) an eligible foster child of the 

4 taxpayer. 

5 ‘‘(B) ADOPTED CHILD.—For purposes of 

6 subparagraph (A), a child who is legally adopt7 ed, or who is placed with the taxpayer by an 

8 authorized placement agency for adoption by 

9 the taxpayer, shall be treated as a child by 

10 blood. 

11 ‘‘(C) ELIGIBLE FOSTER CHILD.—For pur12 poses of subparagraph (A), the term ‘eligible 

13 foster child’ means an individual—

14 ‘‘(i) who is placed with the taxpayer 

15 by an authorized placement agency or by 

16 judgment, decree, or other order of any 

17 court of competent jurisdiction, and 

18 ‘‘(ii) whom the taxpayer cares for as 

19 the taxpayer’s own child. 

20 ‘‘(4) AGE REQUIREMENTS.—For purposes of 

21 paragraph (2)(C), an individual meets the require22 ments of this paragraph if such individual—

23 ‘‘(A) has not attained the age of 19 as of 

24 the close of the calendar year in which the tax25 able year of the taxpayer begins,
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1 ‘‘(B) is a student who has not attained the 

2 age of 24 as of the close of such calendar year, 

3 or 

4 ‘‘(C) is permanently and totally disabled 

5 (as defined in section 22(e)(3)) at any time 

6 during the taxable year. 

7 ‘‘(5) SPECIAL RULES.—

8 ‘‘(A) MARRIED DEPENDENTS.—An indi9 vidual shall not be a qualifying child of a tax10 payer if such individual makes a joint return 

11 with the individual’s spouse under section 6013 

12 for the taxable year beginning in the calendar 

13 year in which the taxable year of the taxpayer 

14 begins. 

15 ‘‘(B) INDIVIDUALS WHO SUPPORT THEM16 SELVES.—An individual shall not be a quali17 fying child of a taxpayer if such individual pro18 vides over half of such individual’s own support 

19 for the calendar year in which the taxable year 

20 of the taxpayer begins. 

21 ‘‘(C) ONLY 1 EXEMPTION AMOUNT.—An 

22 individual who is a qualifying child of any tax23 payer shall not be treated as the dependent of 

24 any taxpayer for purposes of this part.
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1 ‘‘(6) SPECIAL RULE RELATING TO 2 OR MORE

2 CLAIMING QUALIFYING CHILD.—

3 ‘‘(A) IN GENERAL.—Except as provided in 

4 paragraph (7), if an individual would (but for 

5 this paragraph) be a qualifying child of 2 or 

6 more taxpayers for taxable years beginning in 

7 the same calendar year, such individual shall be 

8 treated as the qualifying child of the taxpayer 

9 who is—

10 ‘‘(i) a parent of the individual, or 

11 ‘‘(ii) if none of such taxpayers is a 

12 parent of the individual, the taxpayer with 

13 the highest adjusted gross income for such 

14 taxable year. 

15 ‘‘(B) PARENTS NOT FILING JOINT RE16 TURNS.—If an individual would (but for this 

17 paragraph) be a qualifying child of both parents 

18 of such individual and such parents do not file 

19 a joint return together, such child shall be 

20 treated as the qualifying child of—

21 ‘‘(i) the parent with whom the child 

22 resided for the longest period during the 

23 taxable year, or 

24 ‘‘(ii) if the child resides with both par25 ents for the same length of time during 
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1 such taxable year, the parent with the 

2 highest adjusted gross income. 

3 ‘‘(C) FOSTER CHILDREN.—For purposes of 

4 this paragraph, the taxpayer shall be treated as 

5 a parent of any eligible foster child who has the 

6 same principal place of abode as the taxpayer 

7 for more than one-half of such taxable year. 

8 ‘‘(7) SPECIAL RULE FOR CERTAIN PRE-2005 IN9 STRUMENTS.—

10 ‘‘(A) IN GENERAL.—Notwithstanding para11 graph (6), a child who has parents who—

12 ‘‘(i) are divorced or legally separated 

13 under a decree of divorce or separate 

14 maintenance, 

15 ‘‘(ii) are separated under a written 

16 separation agreement, or 

17 ‘‘(iii) live apart at all times during the 

18 last 6 months of the calendar year, 

19 shall be treated as being the qualifying child of 

20 the noncustodial parent for a calendar year if 

21 the requirements of subparagraph (B) are met. 

22 ‘‘(B) REQUIREMENTS.—For purposes of 

23 subparagraph (A), the requirements of this sub24 paragraph are met if—
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1 ‘‘(i) such child would, but for this 

2 paragraph, be the qualifying child of the 

3 custodial parent, and 

4 ‘‘(ii) a qualified pre-2005 instrument 

5 between the parents is applicable to such 

6 child for the taxable year beginning in such 

7 calendar year. 

8 In the case of an agreement executed before 

9 January 1, 1985, the requirements of this sub10 paragraph are met only if, in addition to meet11 ing the requirements of clauses (i) and (ii), the 

12 noncustodial parent provides at least $600 for 

13 the support of such child during such calendar 

14 year. 

15 ‘‘(C) QUALIFIED PRE-2005 INSTRUMENT.—

16 For purposes of this paragraph, the term 

17 ‘qualified pre-2005 instrument’ means any writ18 ten declaration referred to in subsection (e)(2) 

19 (as in effect on the day before the date of the 

20 enactment of the Individual and Small Business 

21 Tax Simplification Act of 2003)— 

22 ‘‘(i) which is executed before January 

23 1, 2005, and 

24 ‘‘(ii) which is not modified on or after 

25 such date in a modification which expressly 
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1 provides that this subsection shall not 

2 apply to such declaration. 

3 ‘‘(D) CUSTODIAL PARENT AND NONCUSTO4 DIAL PARENT.—For purposes of this sub5 section—

6 ‘‘(i) CUSTODIAL PARENT.—The term 

7 ‘custodial parent’ means the parent with 

8 whom a child shared the same principal 

9 place of abode for the greater portion of 

10 the calendar year. 

11 ‘‘(ii) NONCUSTODIAL PARENT.—The 

12 term ‘noncustodial parent’ means the par13 ent who is not the custodial parent. 

14 ‘‘(E) SPECIAL RULES FOR SUPPORT.—For 

15 purposes of this subsection—

16 ‘‘(i) amounts expended for the support 

17 of a child or children shall be treated as 

18 received from the noncustodial parent to 

19 the extent that such parent provided 

20 amounts for such support, and 

21 ‘‘(ii) in the case of the remarriage of 

22 a parent, support of a child received from 

23 the parent’s spouse shall be treated as re24 ceived from the parent.’’. 

25 (2) CONFORMING AMENDMENTS.—
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1 (A) Section 152 is amended by striking 

2 subsection (g) (relating to support test in case 

3 of child of divorced parents, etc.), as redesig4 nated by the preceding sections this Act. 

5 (B) Paragraph (6) of section 1(f), as 

6 amended by the preceding sections of this Act, 

7 is amended by striking ‘‘151(e)(3)(A)’’ and in8 serting ‘‘151(f)(3)(A)’’. 

9 (C) Paragraph (5) of section 21(e) is 

10 amended—

11 (i) by striking ‘‘paragraph (2) or (4) 

12 of section 152(e)’’ and inserting ‘‘section 

13 151(c)(7)’’, and 

14 (ii) by striking ‘‘section 152(e)(1)’’ 

15 and inserting ‘‘section 151(c)(7)’’. 

16 (D) Sections 21(e)(6) and 129(c) are each 

17 amended—

18 (i) by striking ‘‘151(c)’’ and inserting 

19 ‘‘151(d)’’, and 

20 (ii) by striking ‘‘151(c)(3)’’ and in21 serting ‘‘151(d)(3)’’. 

22 (E) Sections 25(c)(2)(B), 32(c)(3)(C)(ii), 

23 152(d)(2), and 2032A(c)(7)(D) are each 

24 amended by striking ‘‘151(c)(4)’’ and inserting 

25 ‘‘151(d)(4)’’.
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1 (F) Sections 72(t)(7)(A)(iii) and 

2 132(h)(2)(B) are each amended by striking 

3 ‘‘151(c)(3)’’ and inserting ‘‘151(d)(3)’’. 

4 (G) Subparagraph (C) of section 

5 642(b)(2), as amended by the preceding sec6 tions of this Act, is amended by striking 

7 ‘‘151(e)’’ and inserting ‘‘151(f)’’. 

8 (H) Paragraph (1) of section 3402(f) is 

9 amended by striking ‘‘151(e)(2)’’ and inserting 

10 ‘‘151(f)(2)’’. 

11 (I) Subparagraph (B) of section 

12 3402(r)(2), as so amended, is amended by 

13 striking ‘‘151(e)’’ and inserting ‘‘151(f)’’. 

14 (J) Clause (ii) of section 6012(a)(1)(D), as 

15 so amended, is amended—

16 (i) by striking ‘‘151(e)’’ and inserting 

17 ‘‘151(f)’’, and 

18 (ii) by striking ‘‘151(e)(2)’’ and in19 serting ‘‘151(f)(2)’’. 

20 (K) The last sentence of section 

21 6013(b)(3)(A), as so amended is amended by 

22 striking ‘‘151(e)’’ and inserting ‘‘151(f)’’. 

23 (b) APPLICATION OF UNIFORM DEFINITION TO DE24 PENDENT CARE CREDIT.—Section 21(b)(1)(A) is amend25 ed to read as follows: 
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1 ‘‘(A) a qualifying child of the taxpayer (as 

2 defined in section 151(c)) who has not attained 

3 age 13,’’. 

4 (c) APPLICATION OF UNIFORM DEFINITION TO

5 CHILD TAX CREDIT.—Section 24(c)(1) is amended to 

6 read as follows: 

7 ‘‘(1) IN GENERAL.—The term ‘qualifying child’ 

8 means a qualifying child of the taxpayer (as defined 

9 in section 151(c)) who has not attained age 17 as

10 of the close of the calendar year in which the taxable 

11 year of the taxpayer begins.’’. 

12 (d) APPLICATION OF UNIFORM DEFINITION TO

13 EARNED INCOME CREDIT.—

14 (1) IN GENERAL.—Paragraph (3) of section 

15 32(c) is amended to read as follows: 

16 ‘‘(3) QUALIFYING CHILD.—

17 ‘‘(A) IN GENERAL.—The term ‘qualifying 

18 child’ means a qualifying child of the taxpayer 

19 (as defined in section 151(c)). 

20 ‘‘(B) PLACE OF ABODE.—For purposes of 

21 subparagraph (A), the requirements of section 

22 151(c)(2)(B) shall be met only if the principal 

23 place of abode is in the United States. 

24 ‘‘(C) IDENTIFICATION REQUIREMENTS.—
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1 ‘‘(i) IN GENERAL—A qualifying child 

2 shall not be taken into account under sub3 section (b) unless the taxpayer includes the 

4 name, age, and TIN of the qualifying child 

5 on the return of tax for the taxable year. 

6 ‘‘(ii) OTHER METHODS.—The Sec7 retary may prescribe other methods for 

8 providing the information described in 

9 clause (i).’’. 

10 (2) CONFORMING AMENDMENTS.—

11 (A) Section 32(c)(1) is amended by strik12 ing subparagraph (C) and by redesignating sub13 paragraphs (D), (E), (F), and (G) as subpara14 graphs (C), (D), (E), and (F), respectively. 

15 (B) Section 32(c)(4) is amended by strik16 ing ‘‘(3)(E)’’ and inserting ‘‘(3)(B)’’. 

17 (C) Section 32(m) is amended by striking 

18 ‘‘subsections (c)(1)(F)’’ and inserting ‘‘sub19 sections (c)(1)(E)’’. 

20 SEC. 122. TREATMENT OF GOVERNMENT BENEFITS IN DE21 TERMINING SUPPORT AND COST OF MAIN22 TAINING HOUSEHOLD. 

23 (a) DEPENDENCY EXEMPTION.—Section 152 is 

24 amended by adding at the end the following new sub25 section: 
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1 ‘‘(f) SPECIAL RULE RELATING TO TREATMENT OF

2 GOVERNMENT BENEFITS IN DETERMINING SUPPORT.—

3 For purposes of this part, any means-tested benefits ob4 tained under programs described in section 6103(l)(7) or 

5 substantially similar government programs shall not be 

6 taken into account for purposes of determining—

7 ‘‘(1) whether over half of the support of an in8 dividual for a calendar year is received from a tax9 payer, and 

10 ‘‘(2) whether over half of the cost of maintain11 ing a household is furnished by a taxpayer.’’. 

12 (b) DEPENDENT CARE CREDIT.—Section 21(e)(1) is 

13 amended by adding at the end the following: ‘‘Any means14 tested benefits obtained under programs described in sec15 tion 6103(l)(7) or substantially similar government pro16 grams shall not be taken into account for purposes of de17 termining whether over half of the cost of maintaining a 

18 household is furnished by the individual.’’. 

19 (c) MARITAL STATUS.—Section 7703 (relating to de20 termination of marital status) is amended by adding at 

21 the end the following new subsection: 

22 ‘‘(c) SPECIAL RULE RELATING TO TREATMENT OF

23 GOVERNMENT BENEFITS IN DETERMINING COST OF

24 MAINTAINING HOUSEHOLD.—For purposes of subsection 

25 (b)(2), any means-tested benefits obtained under pro-
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1 grams described in section 6103(l)(7) or substantially 

2 similar government programs shall not be taken into ac3 count for purposes of determining whether over half of the 

4 cost of maintaining a household is furnished by the indi5 vidual.’’. 

6 SEC. 123. EFFECTIVE DATE. 

7 The amendments made by this subtitle shall apply to 

8 taxable years beginning after December 31, 2003. 

9 Subtitle C—Education Tax 

10 Incentives 

11 SEC. 131. HOPE AND LIFETIME LEARNING CREDITS COM12 BINED. 

13 (a) IN GENERAL.—So much of section 25A (relating 

14 to Hope and Lifetime Learning Credits) as precedes sub15 section (d) is amended to read as follows: 

16 ‘‘SEC. 25A. EDUCATION CREDIT. 

17 ‘‘(a) ALLOWANCE OF CREDIT.—In the case of an in18 dividual, there shall be allowed as a credit against the tax 

19 imposed by this chapter for the taxable year the amount 

20 equal to 50 percent of so much of the qualified expenses 

21 paid by the taxpayer during the taxable year (for edu22 cation furnished to an individual during any academic pe23 riod beginning in such taxable year) as does not exceed 

24 $3,000 for such taxable year with respect to such indi25 vidual. 
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1 ‘‘(b) QUALIFIED EXPENSES.—For purposes of sub2 section (a), the term ‘qualified expenses’ means the sum 

3 of—

4 ‘‘(1) qualified higher education expenses, and 

5 ‘‘(2) the expenses described in subsection (d)(1) 

6 with respect to any course of instruction at an eligi7 ble educational institution to acquire or improve job 

8 skills of the individual.’’. 

9 (b) CONFORMING AMENDMENTS TO CREDIT.—

10 (1) Section 25A is amended—

11 (A) by striking subsection (h), and 

12 (B) by redesignating subsections (e), (f), 

13 (g), and (i) as subsections (c), (d), (e), and (f), 

14 respectively. 

15 (2) Subsection (e)(2) of section 25A, as so re16 designated, is amended by striking ‘‘(before the ap17 plication of subsections (b), (c), and (d))’’. 

18 (c) OTHER CONFORMING AND CLERICAL AMEND19 MENTS.—

20 (1) The following provisions are each amended 

21 by striking ‘‘section 25A(g)(2)’’ and inserting ‘‘sec22 tion 25A(e)(2)’’: 

23 (A) Section 72(t)(7)(B). 

24 (B) Section 221(d)(2)(B).
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1 (C) Section 222(d)(1) (as amended by sec2 tion 132 of this Act). 

3 (D) Section 529(c)(3)(B)(v)(I). 

4 (E) Section 530(b)(2)(A). 

5 (F) Section 530(d)(2)(C)(i)(I). 

6 (G) Section 530(d)(4)(B)(iii). 

7 (2) Section 221(d) is amended—

8 (A) in paragraph (2) by striking ‘‘section 

9 25A(f)(2)’’ and inserting ‘‘section 25A(d)(2)’’, 

10 and 

11 (B) by amending paragraph (3) to read as 

12 follows: 

13 ‘‘(3) ELIGIBLE STUDENT.—The term ‘eligible 

14 student’ means, with respect to any academic period, 

15 a student who—

16 ‘‘(A) meets the requirements of section 

17 484(a)(1) of the Higher Education Act of 1965 

18 (20 U.S.C. 1091(a)(1)), as in effect on the date 

19 of the enactment of this section, and 

‘‘(B) is carrying at least 1 20 ⁄2 the normal 

21 full-time work load for the course of study the 

22 student is pursuing.’’. 

23 (3) Section 529(e)(3)(B)(i) is amended by strik24 ing ‘‘section 25A(b)(3)’’ and inserting ‘‘section 

25 221(d)(3)’’. 
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1 (4) The heading of section 529(c)(3)(B)(v) is 

2 amended to read as follows: ‘‘COORDINATION WITH

3 EDUCATION CREDIT.—’’. 

4 (5) The heading of section 530(d)(2)(C) is 

5 amended to read as follows: ‘‘COORDINATION WITH

6 EDUCATION CREDIT AND QUALIFIED TUITION PRO7 GRAMS.—’’. 

8 (6) Section 6050S(e) is amended by striking 

9 ‘‘subsection (g)(2)’’ and inserting ‘‘subsection 

10 (e)(2)’’. 

11 (7) Section 6213(g)(2)(J) is amended by strik12 ing ‘‘section 25A(g)(1)’’ and inserting ‘‘section 

13 25A(e)(1)’’. 

14 (8) The item relating to section 25A in the 

15 table of sections for subpart A of part IV of sub16 chapter A of chapter 1 is amended to read as fol17 lows:

‘‘Sec. 25A. Education Credit.’’.

18 (d) EFFECTIVE DATE.—The amendments made by 

19 this section shall apply to taxable years beginning after 

20 December 31, 2003. 

21 SEC. 132. UNIFORM DEFINITION OF QUALIFYING HIGHER 

22 EDUCATION EXPENSES. 

23 (a) IN GENERAL.—Paragraph (3) of section 529(e) 

24 (relating to other definitions and special rules) is amended 

25 to read as follows: 
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1 ‘‘(3) QUALIFIED HIGHER EDUCATION EX2 PENSES.—

3 ‘‘(A) IN GENERAL.—The term ‘qualified 

4 higher education expenses’ means—

5 ‘‘(i) tuition, fees, books, supplies, and 

6 equipment required for the enrollment or 

7 attendance of a designated beneficiary at 

8 an eligible educational institution; and 

9 ‘‘(ii) expenses for special needs serv10 ices in the case of a special needs bene11 ficiary which are incurred in connection 

12 with such enrollment or attendance. 

13 ‘‘(B) ROOM AND BOARD INCLUDED FOR

14 STUDENTS WHO ARE AT LEAST HALF-TIME.—

15 ‘‘(i) IN GENERAL.—In the case of an 

16 individual who is an eligible student for 

17 any academic period, such term shall also 

18 include reasonable costs for such period (as 

19 determined under the qualified tuition pro20 gram) incurred by the designated bene21 ficiary for room and board while attending 

22 such institution. For purposes of sub23 section (b)(7), a designated beneficiary 

24 shall be treated as meeting the require25 ments of this clause. 
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1 ‘‘(ii) LIMITATION.—The amount treat2 ed as qualified higher education expenses 

3 by reason of clause (i) shall not exceed—

4 ‘‘(I) the allowance (applicable to 

5 the student) for room and board in6 cluded in the cost of attendance (as 

7 defined in section 472 of the Higher 

8 Education Act of 1965 (20 U.S.C. 

9 1087ll), as in effect on the date of the 

10 enactment of the Economic Growth 

11 and Tax Relief Reconciliation Act of 

12 2001) as determined by the eligible 

13 educational institution for such pe14 riod, or 

15 ‘‘(II) if greater, the actual invoice 

16 amount the student residing in hous17 ing owned or operated by the eligible 

18 educational institution is charged by 

19 such institution for room and board 

20 costs for such period. 

21 ‘‘(iii) ELIGIBLE STUDENT.—For pur22 poses of this subparagraph, the term ‘eligi23 ble student’ means, with respect to any 

24 academic period, a student who—
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1 ‘‘(I) meets the requirements of 

2 section 484(a)(1) of the Higher Edu3 cation Act of 1965 (20 U.S.C. 

4 1091(a)(1)), as in effect on the date 

5 of the enactment of this section, and 

‘‘(II) is carrying at least 1 6 ⁄2 the 

7 normal full-time work load for the

8 course of study the student is pur9 suing. 

10 ‘‘(C) EXCEPTIONS.—

11 ‘‘(i) EXCEPTION FOR EDUCATION IN12 VOLVING SPORTS, ETC.—Such term does 

13 not include expenses with respect to any 

14 course or other education involving sports, 

15 games, or hobbies, unless such course or 

16 other education is part of the individual’s 

17 degree program. 

18 ‘‘(ii) EXCEPTION FOR NONACADEMIC

19 FEES.—Such term does not include stu20 dent activity fees, athletic fees, insurance 

21 expenses, or other expenses unrelated to an 

22 individual’s academic course of instruc23 tion.’’. 

24 (b) CONFORMING AMENDMENTS.—
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1 (1) Section 25A and 6050S are each amended 

2 by striking ‘‘qualified tuition and related expenses’’ 

3 each place it appears and inserting ‘‘qualified higher 

4 education expenses’’. 

5 (2) Section 25A(f)(1) is amended to read as fol6 lows: 

7 ‘‘(1) QUALIFIED HIGHER EDUCATION EX8 PENSES.—The term ‘qualified higher education ex9 penses’ means the qualified higher education ex10 penses (as defined by section 529(e)(3) without re11 gard to subparagraph (B) thereof) required for the 

12 enrollment or attendance of—

13 ‘‘(A) the taxpayer, 

14 ‘‘(B) the taxpayer’s spouse, or 

15 ‘‘(C) any dependent of the taxpayer with 

16 respect to whom the taxpayer is allowed a de17 duction under section 151, 

18 at an eligible educational institution for courses of 

19 instruction of such individual at such institution.’’. 

20 (3) Section 135(c)(2) is amended—

21 (A) by striking ‘‘tuition and fees’’ and in22 serting ‘‘the qualified higher education expenses 

23 (as defined by section 529(e)(3) without regard 

24 to subparagraph (B) thereof)’’, and
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1 (B) by striking subparagraph (B) and re2 designating subparagraph (C) as subparagraph 

3 (B). 

4 (4) Section 221(d)(2) is amended by striking 

5 ‘‘the cost of attendance (as defined in section 472 of 

6 the Higher Education Act of 1965, 20 U.S.C. 

7 1087ll, as in effect on the day before the date of the 

8 enactment of this Act)’’ and inserting ‘‘the qualified 

9 higher education expenses (as defined by section 

10 529(e)(3) without regard to subparagraph (B) there11 of) incurred for attendance’’. 

12 (5)(A) Section 222 is amended by striking 

13 ‘‘qualified tuition and related expenses’’ each place 

14 it appears and inserting ‘‘qualified higher education 

15 expenses’’. 

16 (B) Section 222(d)(1) is amended to read as 

17 follows: 

18 ‘‘(1) QUALIFIED HIGHER EDUCATION EX19 PENSES.—The term ‘qualified higher education ex20 penses’ has the meaning given such term by section 

21 529(e)(3) (without regard to subparagraph (B) 

22 thereof). Such expenses shall be reduced in the same 

23 manner as under section 25A(g)(2).’’. 
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1 (C) Section 222(d) is amended by redesignating 

2 paragraph (6) as paragraph (7) and by inserting 

3 after paragraph (5) the following new paragraph: 

4 ‘‘(6) ROOM AND BOARD INCLUDED FOR STU5 DENTS WHO ARE FULL-TIME.—No amount shall be 

6 taken into account under this section for an expense 

7 described in section 529(e)(3)(B) (relating to room 

8 and board included for students who are at least 

9 half-time) unless such individual is an eligible stu10 dent (as defined in section 25A(b)(3), determined by 

11 substituting ‘the normal full-time work load’ in lieu 

of ‘1 12 ⁄2 the normal full-time work load’ in subpara13 graph (B) thereof.’’. 

14 (D) The heading for section 222 is amended by 

15 striking ‘‘TUITION AND RELATED’’ and in16 serting ‘‘HIGHER EDUCATION’’. 

17 (E) The table of sections for part VII of sub18 chapter B of chapter 1 is amended by amending the 

19 item relating to section 222 to read as follows:

‘‘Sec. 222. Qualified higher education expenses.’’.

20 (6)(A) Section 6724(d) is amended—

21 (i) in paragraph (1)(B)(x) by striking 

22 ‘‘qualified tuition and related expenses’’ and in23 serting ‘‘qualified higher education expenses’’, 

24 and 
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1 (ii) in paragraph (2)(Z) by striking ‘‘quali2 fied tuition and related expenses’’ and inserting 

3 ‘‘qualified higher education expenses’’. 

4 (c) EFFECTIVE DATE.—The amendments made by 

5 this section shall apply to amounts paid in taxable years 

6 beginning after December 31, 2003, for education fur7 nished in periods beginning after such date. 

8 TITLE II—SMALL BUSINESS TAX 

9 SIMPLIFICATION 

10 SEC. 201. UNIFIED PASS-THRU ENTITY REGIME. 

11 (a) TERMINATION OF S CORPORATION STATUS.—

12 (1) NO NEW S CORPORATION ELECTIONS.—

13 Subsection (a) of section 1362 is amended by adding 

14 at the end the following new paragraph: 

15 ‘‘(3) TERMINATION OF AUTHORITY TO MAKE

16 ELECTION.—No election may be made under para17 graph (1) for any taxable year beginning after De18 cember 31, 2003.’’. 

19 (2) TERMINATION OF STATUS.—Subsection (d) 

20 of section 1362 (relating to termination) is amended 

21 by adding at the end the following new paragraph: 

22 ‘‘(4) TREATMENT AS PARTNERSHIP AFTER

23 2012.—An election under subsection (a)—

24 ‘‘(A) shall not be effective for any taxable 

25 year beginning after December 31, 2012, and 
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1 ‘‘(B) shall be treated as an election under 

2 section 7701(a)(2)(B)(iii) for taxable years be3 ginning after such date.’’. 

4 (3) EFFECTIVE DATE.—The amendments made 

5 by this subsection shall apply to taxable years begin6 ning after December 31, 2003. 

7 (b) ELECTION BY CERTAIN CORPORATIONS TO BE

8 TAXED AS PARTNERSHIP.—

9 (1) IN GENERAL.—Paragraph (2) of section 

10 7701 (defining partnership and partner) is amended 

11 to read as follows:

12 ‘‘(2) PARTNERSHIP AND PARTNER.—

13 ‘‘(A) IN GENERAL.—The term ‘partner14 ship’ includes a syndicate, group, pool, joint 

15 venture, or other unincorporated organization, 

16 through or by means of which any business, fi17 nancial operation, or venture is carried on, and 

18 which is not, within the meaning of this title, 

19 a trust or estate or a corporation; and the term 

20 ‘partner’ includes a member in such a syn21 dicate, group, pool, joint venture, or organiza22 tion. 

23 ‘‘(B) ELECTION BY CORPORATION TO BE

24 TAXED AS PARTNERSHIP.—
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1 ‘‘(i) IN GENERAL.—An eligible cor2 poration may elect to be treated as a part3 nership for purposes of this title. 

4 ‘‘(ii) ELIGIBLE CORPORATION.—For 

5 purposes of clause (i), the term ‘eligible 

6 corporation’ means an entity—

7 ‘‘(I) which, without regard to this 

8 subparagraph, is a domestic corpora9 tion no stock of which is readily 

10 tradable on an established securities 

11 market or otherwise, and 

12 ‘‘(II) which is not an ineligible 

13 corporation (as defined by section 

14 1361(b)(2)). 

15 ‘‘(iii) ELECTION AND TERMI16 NATION.—For purposes of this subpara17 graph, rules similar to the rules of section 

18 1362 (other than subsections (a)(3), (d)(3) 

19 and (4), and (e) thereof) shall apply. 

20 ‘‘(iv) EFFECT OF ELECTION.—No 

21 gain or loss shall be recognized by the 

22 shareholders or the corporation by reason 

23 of an election under this subparagraph, 

24 and rules similar to the rules of sections 

25 1366(f)(2) and 1374 shall apply. 
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1 ‘‘(v) DISTRIBUTIONS, ETC.—Each 

2 partner shall include in gross income as a 

3 dividend, any amount that would have been 

4 so includible had the entity been an S cor5 poration during the period the entity was 

6 treated as a partnership. Notwithstanding 

7 the preceding sentence, the provisions of 

8 subchapter K of chapter 1 shall apply to 

9 determine the basis of any property dis10 tributed and the basis of any interest in 

11 the partnership.’’. 

12 (2) MODIFICATION TO TREATMENT OF SECTION

13 1374 TAX FOR EARNINGS AND PROFITS PURPOSES.—

14 Paragraph (2) of section 1366(f) is amended to read 

15 as follows: 

16 ‘‘(2) TREATMENT OF TAX IMPOSED ON BUILD17 IN GAINS.—

18 ‘‘(A) IN GENERAL.—The amount of the 

19 items of the net recognized built-in-gain taken 

20 into account under section 1374(b)(1) (reduced 

21 by any deduction allowed under section 

22 1374(b)(2)) shall not be taken into account 

23 under this section. 

24 ‘‘(B) EARNINGS AND PROFITS.—The accu25 mulated earnings and profits of the corporation
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1 shall be increased at the beginning of the tax2 able year by the amount not taken into account 

3 under this section by reason of subparagraph 

4 (A) (determined without regard to section 

5 1374(b)(2)) reduced by the tax imposed by sec6 tion 1374 (net of credits allowed).’’. 

7 (3) EFFECTIVE DATE.—The amendments made 

8 by this subsection shall apply to taxable years begin9 ning after December 31, 2003. 

10 (c) STEP TRANSACTION DOCTRINE NOT TO APPLY

11 TO PARTNERSHIP INCORPORATION FOLLOWED BY COR12 PORATE REORGANIZATION.—

13 (1) IN GENERAL.—Section 351 is amended by 

14 redesignating subsection (h) as subsection (i) and by 

15 inserting after subsection (g) the following new sub16 section: 

17 ‘‘(h) SPECIAL RULE FOR PARTNERSHIPS WHICH IN18 CORPORATE AND SUBSEQUENTLY REORGANIZE.—The 

19 step transaction doctrine and any similar doctrine shall 

20 not apply for purposes of determining whether the control 

21 requirement of subsection (a) is met in any case in 

22 which—

23 ‘‘(1) a partnership engaged in an active trade 

24 or business transfers substantially all of the property 
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1 used in carrying on such trade or business to a cor2 poration which is not publicly traded, and 

3 ‘‘(2) such corporation subsequently enters into 

4 a reorganization under this chapter.’’. 

5 (2) EFFECTIVE DATE.—The amendment made 

6 by this subsection shall apply to transactions after 

7 December 31, 2003. 

8 SEC. 202. INCREASE IN EXPENSING UNDER SECTION 179. 

9 (a) INCREASE IN DOLLAR LIMITATIONS.—

10 (1) IN GENERAL.—Paragraph (1) of section 

11 179(b) (relating to dollar limitation) is amended to 

12 read as follows: 

13 ‘‘(1) DOLLAR LIMITATION.—The aggregate cost 

14 which may be taken into account under subsection 

15 (a) for any taxable year shall not exceed $25,000 

16 ($40,000 in the case of taxable years beginning after 

17 December 31, 2013).’’. 

18 (2) INCREASE IN PHASEOUT THRESHOLD.—

19 Paragraph (2) of section 179(b) is amended by in20 serting before the period ‘‘($325,000 in the case of 

21 taxable years beginning after December 31, 2013).’’. 

22 (b) INFLATION ADJUSTMENTS.—

23 (1) IN GENERAL.—Subsection (b) of section 

24 179 is amended by redesignating paragraphs (3) and 

25 (4) as paragraphs (4) and (5), respectively, and by 
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1 inserting after paragraph (2) the following new 

2 paragraph: 

3 ‘‘(3) INFLATION ADJUSTMENT.—In the case of 

4 any taxable year beginning in a calendar year after 

5 2005, the dollar amounts contained in paragraphs 

6 (1) and (2) which would (but for this paragraph) 

7 apply to such taxable year shall be increased by an 

8 amount equal to the product of—

9 ‘‘(A) such dollar amount, and

10 ‘‘(B) the cost-of-living adjustment deter11 mined under section 1(f)(3) for the calendar 

12 year in which the taxable year begins, deter13 mined by substituting in subparagraph (B) 

14 thereof—

15 ‘‘(i) ‘calendar year 2004’ for ‘calendar 

16 year 1992’ with respect to the $25,000 

17 and $200,000 amounts, and 

18 ‘‘(ii) ‘calendar year 2012’ for ‘cal19 endar year 1992’ with respect to the 

20 $40,000 and $325,000 amounts. 

21 If any amount after adjustment under the preceding 

22 sentence is not a multiple of $1,000, such amount 

23 shall be rounded to the next lowest multiple of 

24 $1,000.’’. 
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1 (2) CONFORMING AMENDMENT.—Subparagraph 

2 (B) of section 179(b)(5), as redesignated by para3 graph (1), is amended by striking ‘‘paragraph (3)’’ 

4 and inserting ‘‘paragraph (4)’’. 

5 (c) EFFECTIVE DATE.—The amendments made by 

6 this section shall apply to taxable years beginning after 

7 December 31, 2003.

8 SEC. 203. ROLLOVER OF PROPERTY HELD FOR PRODUC9 TIVE USE OR INVESTMENT. 

10 (a) IN GENERAL.—Section 1031 (relating to ex11 change of property held for productive use or investment) 

12 is amended to read as follows: 

13 ‘‘SEC. 1031. ROLLOVER OF PROPERTY HELD FOR PRODUC14 TIVE USE OR INVESTMENT. 

15 ‘‘(a) NONRECOGNITION OF GAIN.—In the case of the 

16 sale of section 1031 property with respect to which the 

17 taxpayer elects the application of this section, gain from 

18 such sale shall be recognized only to the extent that the 

19 amount realized on such sale exceeds—

20 ‘‘(1) the cost of replacement section 1031 prop21 erty purchased during the rollover period, reduced 

22 by 

23 ‘‘(2) any portion of such cost previously taken 

24 into account under this section. 

25 ‘‘(b) DEFINITIONS.—For purposes of this section—
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1 ‘‘(1) SECTION 1031 PROPERTY.—

2 ‘‘(A) IN GENERAL.—The term ‘section 

3 1031 property’ means any property held for 

4 productive use in a trade or business or for in5 vestment. 

6 ‘‘(B) EXCEPTIONS.—The term ‘section 

7 1031 property’ shall not include the following: 

8 ‘‘(i) Stock in trade or other property 

9 held primarily for sale. 

10 ‘‘(ii) Stocks, bonds, or notes. 

11 ‘‘(iii) Other securities or evidences of 

12 indebtedness or interest. 

13 ‘‘(iv) Interests in a partnership. 

14 ‘‘(v) Certificates of trust or beneficial 

15 interests. 

16 ‘‘(vi) Choses in action. 

17 ‘‘(2) REPLACEMENT SECTION 1031 PROP18 ERTY.—The term ‘replacement section 1031 prop19 erty’ means, with respect to the sale of any section 

20 1031 property, other section 1031 property which is 

21 of a like kind to the section 1031 property sold. 

22 ‘‘(3) ROLLOVER PERIOD.—The term ‘rollover 

23 period’ means, with respect to the sale of any prop24 erty, the period which begins 180 days before the 

25 date of such sale and ends on the earlier of—
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1 ‘‘(A) the date which is 180 days after the 

2 date of such sale, or 

3 ‘‘(B) the due date (determined with regard 

4 to extension) for the taxpayer’s return of the 

5 tax imposed by this chapter for the taxable year 

6 which includes the date of such sale. 

7 ‘‘(c) BASIS ADJUSTMENTS.—If gain from any sale is 

8 not recognized by reason of subsection (a), such gain shall 

9 be applied to reduce the basis for determining the gain 

10 or loss of replacement section 1031 property purchased 

11 during the rollover period. If more than one replacement 

12 section 1031 property is purchased during the rollover pe13 riod, such reduction shall be allocated among such prop14 erties in such amounts as the taxpayer elects. 

15 ‘‘(d) SPECIAL RULES FOR TRANSACTIONS BETWEEN

16 RELATED PERSONS.—

17 ‘‘(1) SALE BY TAXPAYER.—If—

18 ‘‘(A) the taxpayer sells property to a re19 lated person, 

20 ‘‘(B) there is nonrecognition of gain under 

21 this section with respect to such sale (deter22 mined without regard to this subsection), and 

23 ‘‘(C) before the date 2 years after the date 

24 of such sale the related person disposes of such 

25 property,
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1 there shall be no nonrecognition of gain under this 

2 section to the taxpayer with respect to such sale, 

3 and any gain recognized by the taxpayer by reason 

4 of this subsection shall be taken into account as of 

5 the date on which the disposition referred to in sub6 paragraph (C) occurs. 

7 ‘‘(2) PURCHASE BY TAXPAYER.—If the tax8 payer—

9 ‘‘(A) purchases property from a related 

10 person which is taken into account under sub11 section (a)(1) (determined without regard to 

12 this subsection), and 

13 ‘‘(B) disposes of such property before the 

14 date 2 years after the date of such purchase, 

15 such property shall not be taken into account under 

16 subsection (a)(1), and any gain recognized by reason 

17 of this subsection shall be taken into account on the 

18 date on which the disposition referred to in subpara19 graph (B) occurs. 

20 ‘‘(3) CERTAIN DISPOSITIONS NOT TAKEN INTO

21 ACCOUNT.— For purposes of paragraphs (1)(C) and 

22 (2)(B), there shall not be taken into account any 

23 disposition—

24 ‘‘(A) after the earlier of the death of the 

25 taxpayer or the death of the related person, 
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1 ‘‘(B) in a compulsory or involuntary con2 version (within the meaning of section 1033) if 

3 the transaction occurred before the threat or 

4 imminence of such conversion, or 

5 ‘‘(C) with respect to which it is established 

6 to the satisfaction of the Secretary that neither

7 the transaction nor such disposition had as one 

8 of its principal purposes the avoidance of Fed9 eral income tax. 

10 ‘‘(4) RELATED PERSON.— For purposes of this 

11 subsection, the term ‘related person’ means any per12 son bearing a relationship to the taxpayer described 

13 in section 267(b) or 707(b)(1). 

14 ‘‘(5) SPECIAL RULE WHERE SUBSTANTIAL DIMI15 NUTION OF RISK.—

16 ‘‘(A) IN GENERAL.—If subparagraph (B) 

17 applies to any property for any period, the run18 ning of the period set forth in paragraph (1)(C) 

19 with respect to such property shall be sus20 pended during such period. 

21 ‘‘(B) PROPERTY TO WHICH PARAGRAPH

22 APPLIES.—This subparagraph shall apply to 

23 any property for any period during which the 

24 holder’s risk of loss with respect to the property 

25 is substantially diminished by—
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1 ‘‘(i) the holding of a put with respect 

2 to such property, 

3 ‘‘(ii) the holding by another person of 

4 a right to acquire such property, or 

5 ‘‘(iii) a short sale or any other trans6 action. 

7 ‘‘(6) TREATMENT OF CERTAIN TRANS8 ACTIONS.—This section shall not apply to any trans9 action which is part of a series of transactions struc10 tured to avoid the purposes of this subsection. 

11 ‘‘(e) SPECIAL RULES.—For purposes of this sec12 tion—

13 ‘‘(1) EXCHANGES.—A contemporaneous ex14 change by the taxpayer of section 1031 property for 

15 replacement section 1031 property shall be treated 

16 as a sale of such section 1031 property and a pur17 chase of such replacement section 1031 property 

18 without regard to whether the taxpayer makes the 

19 election described in subsection (a). In the case of 

20 such an exchange, no loss shall be recognized. 

21 ‘‘(2) CERTAIN PARTNERSHIPS.—An interest in 

22 a partnership which has in effect a valid election 

23 under section 761(a) to be excluded from the appli24 cation of all of subchapter K shall be treated as an 
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1 interest in each of the assets of such partnership 

2 and not as an interest in a partnership. 

3 ‘‘(3) LIVESTOCK OF DIFFERENT SEXES.—Live4 stock of different sexes are not property of a like 

5 kind. 

6 ‘‘(4) FOREIGN REAL PROPERTY.—Real property 

7 located in the United States and real property lo8 cated outside the United States are not property of 

9 a like kind. 

10 ‘‘(5) FOREIGN PERSONAL PROPERTY.—

11 ‘‘(A) IN GENERAL.—Personal property 

12 used predominantly within the United States 

13 and personal property used predominantly out14 side the United States are not property of a like 

15 kind. 

16 ‘‘(B) PREDOMINANT USE.—Except as pro17 vided in subparagraphs (C) and (D), the pre18 dominant use of any property shall be deter19 mined based on— 

20 ‘‘(i) in the case of the sale of any 

21 property by the taxpayer, the 2-year period 

22 ending on the date of such sale, and 

23 ‘‘(ii) in the case of the purchase of 

24 any property by the taxpayer, the 2-year 
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1 period beginning on the date of such pur2 chase. 

3 ‘‘(C) PROPERTY HELD FOR LESS THAN 2

4 YEARS.—Except in the case of a sale or pur5 chase which is part of a transaction (or series 

6 of transactions) structured to avoid the pur7 poses of this subsection, only the periods the 

8 property was held by the taxpayer (or any re9 lated person) shall be taken into account under 

10 subparagraph (B). 

11 ‘‘(D) SPECIAL RULE FOR CERTAIN PROP12 ERTY.—Property described in any subpara13 graph of section 168(g)(4) shall be treated as 

14 used predominantly in the United States.’’. 

15 (b) PRESERVATION OF CERTAIN GAIN, LOSS, AND

16 BASIS RULES FOR EXCHANGES.—

17 (1) Section 1035 (relating to certain exchanges 

18 of insurance policies) is amended—

19 (A) by striking subsection (d), 

20 (B) by redesignating subsections (b) and 

21 (c) as subsections (e) and (f), respectively, and 

22 (C) by inserting after subsection (a) the 

23 following new subsections: 

24 ‘‘(b) GAIN FROM EXCHANGES NOT SOLELY IN

25 KIND.—If an exchange would be within the provisions of 
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1 subsection (a), of section 1036(a), or of section 1037(a), 

2 if it were not for the fact that the property received in 

3 exchange consists not only of property permitted by such 

4 provisions to be received without the recognition of gain, 

5 but also of other property or money, then the gain, if any, 

6 to the recipient shall be recognized, but in an amount not 

7 in excess of the sum of such money and the fair market 

8 value of such other property. 

9 ‘‘(c) LOSS FROM EXCHANGES NOT SOLELY IN

10 KIND.—If an exchange would be within the provisions of 

11 subsection (a), of section 1036(a), or of section 1037(a), 

12 if it were not for the fact that the property received in 

13 exchange consists not only of property permitted by such 

14 provisions to be received without the recognition of gain 

15 or loss, but also of other property or money, then no loss 

16 from the exchange shall be recognized. 

17 ‘‘(d) BASIS.—If property was acquired on an ex18 change described in subsection (a), section 1036(a), or 

19 section 1037(a), then the basis shall be the same as that 

20 of the property exchanged, decreased in the amount of any 

21 money received by the taxpayer and increased in the 

22 amount of gain or decreased in the amount of loss to the 

23 taxpayer that was recognized on such exchange. If the 

24 property so acquired consisted in part of the type of prop25 erty permitted by subsection (a), section 1036(a), or sec-
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1 tion 1037(a), to be received without the recognition of 

2 gain or loss, and in part of other property, the basis pro3 vided in this subsection shall be allocated between the 

4 properties (other than money) received, and for the pur5 pose of the allocation there shall be assigned to such other 

6 property an amount equivalent to its fair market value at 

7 the date of the exchange. For purposes of subsection (a) 

8 and section 1036(a), where as part of the consideration

9 to the taxpayer another party to the exchange assumed 

10 (as determined under section 357(d)) a liability of the tax11 payer, such assumption shall be considered as money re12 ceived by the taxpayer on the exchange.’’. 

13 (2) Section 83(g), section 424(b), section 

14 424(c)(1)(B), section 454(c)(2), paragraphs (1) and 

15 (2) of section 1036(c), and paragraphs (1) and (2) 

16 of section 1037(c) are each amended by striking 

17 ‘‘section 1031’’ and inserting ‘‘section 1035’’. 

18 (3) Paragraphs (1) and (2) of section 1037(b) 

19 are each amended by striking ‘‘section 1031(b)’’ and 

20 inserting ‘‘section 1035(b)’’. 

21 (c) CONFORMING AMENDMENTS.—

22 (1) Clause (i) of section 197(f)(2)(B) is amend23 ed by inserting ‘‘(including any purchase taken into 

24 account under subsection (a)(1) thereof)’’ after 

25 ‘‘1031’’. 
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1 (2) Paragraph (6) of section 453(f) is amended 

2 to read as follows: 

3 ‘‘(6) LIKE-KIND EXCHANGES.—In the case of 

4 any sale or exchange to which section 1031 applies, 

5 the total contract price, the gross profit from such 

6 sale, and the amount of any payment (other than for 

7 purposes of subsection (b)(1)) shall be reduced to 

8 take into account any amount not recognized by rea9 son of section 1031. Similar rules shall apply in the 

10 case of an exchange which is described in section 

11 356(a) and is not treated as a dividend.’’. 

12 (3) BASIS LIMITATION FOR PLAYER CONTRACTS

13 TRANSFERRED IN CONNECTION WITH THE SALE OF

14 A FRANCHISE.—Paragraph (1) of section 1056(b) is 

15 amended to read as follows: 

16 ‘‘(1) to any sale or exchange to which section 

17 1031 applies, and’’. 

18 (4) VALUATION OF CERTAIN FARM, ETC., REAL

19 PROPERTY.—

20 (A) Clause (i) of section 2032A(e)(14)(C) 

21 is amended to read as follows: 

22 ‘‘(i) QUALIFIED REPLACEMENT PROP23 ERTY.—The term ‘qualified replacement 

24 property’ means any real property the ac25 quisition of which results in the non-
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1 recognition of gain under section 1031 or 

2 1033.’’. 

3 (B) Subclause (I) of section 

4 2032A(e)(14)(C)(ii) is amended by inserting 

5 ‘‘sale or’’ before ‘‘exchange’’. 

6 (C) Subsection (i) of section 2032A is 

7 amended to read as follows: 

8 ‘‘(i) REPLACEMENT OF QUALIFIED REAL PROP9 ERTY.—

10 ‘‘(1) TREATMENT OF PROPERTY SOLD OR EX11 CHANGED.—

12 ‘‘(A) SALES AND EXCHANGES WITH NO

13 RECOGNITION OF GAIN.—If an interest in quali14 fied real property is sold or exchanged and no 

15 gain is recognized under section 1031 by reason 

16 of the acquisition of qualified replacement prop17 erty, no tax shall be imposed by subsection (c) 

18 by reason of such sale or exchange. 

19 ‘‘(B) SALES AND EXCHANGES WITH PAR20 TIAL RECOGNITION OF GAIN.—Except as pro21 vided in paragraph (1), if an interest in quali22 fied real property is sold or exchanged and a 

23 portion of the gain is not recognized under sec24 tion 1031 by reason of the acquisition of quali25 fied replacement property, the amount of the 
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1 tax imposed by subsection (c) by reason such 

2 sale or exchange shall be the amount of tax 

3 which (but for this paragraph) would have been 

4 imposed on such sale or exchange under sub5 section (c)(1), reduced by an amount which— 

6 ‘‘(i) bears the same ratio to such tax, 

7 as 

8 ‘‘(ii) the fair market value of the 

9 qualified replacement property (determined 

10 as of the time or acquisition) bears to the 

11 fair market value of the qualified real 

12 property sold or exchanged (determined as 

13 of the time of disposition). 

14 ‘‘(2) TREATMENT OF QUALIFIED REPLACEMENT

15 PROPERTY.—For purposes of subsection (c)—

16 ‘‘(A) any interest in qualified replacement 

17 property shall be treated in the same manner as 

18 if it were a portion of the interest in the quali19 fied real property which was sold or exchanged, 

20 ‘‘(B) any tax imposed by subsection (c) by 

21 reason of the sale or exchange shall be treated 

22 as a tax imposed on a partial disposition, and 

23 ‘‘(C) paragraph (6) of subsection (c) shall 

24 be applied by treating material participation 

25 with respect to the sold or exchanged property 
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1 as material participation with respect to the 

2 qualified replacement property. 

3 ‘‘(3) QUALIFIED REPLACEMENT PROPERTY.—

4 For purposes of this subsection, the term ‘qualified 

5 replacement property’ means real property which is 

6 to be used for the qualified use set forth in subpara7 graph (A) or (B) of subsection (b)(2) under which 

8 the qualified real property sold in the qualified sale 

9 originally qualified under subsection (a).’’. 

10 (d) CLERICAL AMENDMENT.—The table of sections 

11 for part III of subchapter O of chapter 1 is amended by 

12 striking the item relating to section 1031 and inserting 

13 the following new item:

‘‘Sec. 1031. Rollover of property held for productive use or investment.’’.

14 (e) EFFECTIVE DATE.—The amendments made by 

15 this section shall apply to transfers made after December 

16 31, 2003, in tax years ending after such date. 

17 SEC. 204. REPEAL OF COLLAPSIBLE CORPORATIONS. 

18 (a) IN GENERAL.—Subpart C of part II of sub19 chapter C of chapter 1 (relating to collapsible corpora20 tions) is hereby repealed. 

21 (b) CLERICAL AMENDMENT.—The table of subparts 

22 for part II of subchapter C of chapter 1 is amended by 

23 striking the item relating to subpart C. 
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1 (c) EFFECTIVE DATE.—The amendments made by 

2 this section shall apply to sales, exchanges, and distribu3 tions made after the date of the enactment of this Act. 

4 SEC. 205. REFERENCES TO GENERAL PARTNERS. 

5 (a) EXCLUSION OF CERTAIN ACTIVE BUSINESSES

6 FROM AT RISK RULES.—Subclause (I) of section 

7 465(c)(7)(D)(ii) (defining qualified corporate partner) is 

8 amended to read as follows:

9 ‘‘(I) such corporation is not pro10 hibited or limited under State law 

11 from participation in the management 

12 or business of the partnership.’’. 

13 (b) PAYMENTS TO RETIRING PARTNERS.—Subpara14 graph (B) of section 736(b)(3) (relating to limitation on 

15 application of paragraph (2)) is amended to read as fol16 lows: 

17 ‘‘(B) any portion of the retiring or de18 ceased partner’s distributive share of partner19 ship income was subject to tax under section 

20 1401.’’. 

21 (c) FOREIGN CURRENCY TRANSACTIONS.—Subclause 

22 (I) of section 988(c)(1)(E)(v) is amended to read as fol23 lows: 

24 ‘‘(I) CERTAIN GENERAL PART25 NERS.—The interest of a partner in
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1 the partnership shall not be treated as 

2 failing to meet the 20-percent owner3 ship requirements of clause (iii)(I) for 

4 any taxable year of the partnership if 

5 for the taxable year of the partner in 

6 which such partnership taxable year 

7 ends—

8 ‘‘(aa) the partner is not lim9 ited as to participation in the 

10 management or activity of the 

11 qualified fund, and 

12 ‘‘(bb) such partner (and 

13 each corporation filing a consoli14 dated return with such partner) 

15 had no ordinary income or loss 

16 from a section 988 transaction 

17 which is foreign currency gain or 

18 loss (as the case may be).’’. 

19 (d) SPECIAL VALUATION RULES FOR GENERATION20 SKIPPING TAX.—Clause (ii) of section 2701(b)(2)(B) (re21 lating to partnerships) is amended to read as follows: 

22 ‘‘(ii) in the case of a limited partner23 ship, the holding of any interest as a part24 ner who is not limited as to participation 
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1 in management or activity of the partner2 ship.’’. 

3 (e) TAX MATTERS PARTNER.—Paragraph (7) of sec4 tion 6231(a) (defining tax matters partner) is amended 

5 to read as follows: 

6 ‘‘(7) TAX MATTERS PARTNER.—

7 ‘‘(A) IN GENERAL.—The tax matters part8 ner of any partnership is—

9 ‘‘(i) the partner designated as the tax 

10 matters partner as provided in regulations, 

11 or 

12 ‘‘(ii) if there is no partner who has 

13 been so designated, the partner having the 

14 largest profits interest in the partnership 

15 at the close of the taxable year involved 

16 (or, where there is more than 1 such part17 ner, the 1 of such partners whose name 

18 would appear first in an alphabetical list19 ing). 

20 ‘‘(B) SELECTION BY SECRETARY.—If there 

21 is no partner designated under subparagraph 

22 (A)(i) and the Secretary determines that it is 

23 impracticable to apply subparagraph (A)(ii), the 

24 partner selected by the Secretary shall be treat25 ed as the tax matters partner. The Secretary 
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1 shall, within 30 days of selecting a tax matters 

2 partner under the preceding sentence, notify all 

3 partners required to receive notice under sec4 tion 6223(a) of the name and address of the 

5 person selected. 

6 ‘‘(C) RESTRICTION ON DESIGNATION OF

7 PARTNER.—A partner may not be designated as 

8 a tax matters partner under subparagraph 

9 (A)(i) unless such partner is not limited as to 

10 participation in management or activity of the 

11 partnership.’’. 

12 (f) EFFECTIVE DATE.—The amendments made by 

13 this section shall apply to taxable years beginning after 

14 December 31, 2003. 

15 SEC. 206. REFERENCES TO LIMITED PARTNERS. 

16 (a) LIMITED ENTREPRENEUR.—

17 (1) IN GENERAL.—Subparagraph (A) of section 

18 464(e)(2) (defining limited entrepreneur) is amend19 ed by striking ‘‘than as a limited partner’’. 

20 (2) CONFORMING AMENDMENTS.—

21 (A) Section 464(c) is amended—

22 (i) by striking ‘‘limited partners or’’ 

23 in paragraph (1)(B), 

24 (ii) by striking ‘‘a limited partner or’’ 

25 in paragraph (2). 
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1 (B) Section 1256 is amended—

2 (i) by striking ‘‘limited partners or’’ 

3 each place it appears in subsections 

4 (e)(3)(B) and (f)(4), 

5 (ii) by striking ‘‘a limited partner or’’ 

6 in subsection (e)(3)(C), and

7 (iii) by striking ‘‘limited partner or’’ 

8 both places it appears in subsection 

9 (e)(4)(A)(i). 

10 (C) Section 1258(d)(5)(C) is amended—

11 (i) by striking ‘‘limited partner or’’ in 

12 the matter preceding subclause (i), 

13 (ii) by striking ‘‘limited partner’s (or 

14 limited entrepreneur’s) in subclause (i) and 

15 inserting ‘‘limited entrepreneur’s’’, and 

16 (iii) by striking ‘‘PARTNERS AND LIM17 ITED’’ in the heading. 

18 (b) PASSIVE LOSS RULES.—

19 (1) Subsection (h) of section 469 is amended by 

20 striking paragraph (2) and by redesignating para21 graphs (3), (4), and (5) as paragraphs (2), (3), and 

22 (4), respectively. 

23 (2) Subparagraph (A) of section 469(c)(7) is 

24 amended by striking the last sentence.
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1 (3) Paragraph (6) of section 469(i) is amended 

2 by striking subparagraph (C) and by redesignating 

3 subparagraph (D) as subparagraph (C). 

4 (4) Subsection (f) of section 772 (relating to 

5 special rules for applying passive loss limitations) is 

6 amended to read as follows: 

7 ‘‘(f) SPECIAL RULES FOR APPLYING PASSIVE LOSS

8 LIMITATIONS.—

9 ‘‘(1) IN GENERAL.—If any person holds an in10 terest in an electing large partnership other than as 

11 a partner described in paragraph (3)—

12 ‘‘(A) paragraph (2) of subsection (c) shall 

13 not apply to such partner, and 

14 ‘‘(B) such partner’s distributive share of 

15 the partnership items allocable to passive loss 

16 limitation activities shall be taken into account 

17 separately to the extent necessary to comply 

18 with the provisions of section 469. 

19 ‘‘(2) EXCEPTION.—Paragraph (1) shall not 

20 apply to any items allocable to an interest held as 

21 a partner described in paragraph (3). 

22 ‘‘(3) PARTNER DESCRIBED.—For purposes of 

23 this subsection, a partner is described in this para24 graph if the partner is a person whose participation 
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1 in the management or business activity of the part2 nership is limited under applicable State law.’’. 

3 (c) EFFECTIVE DATE.—The amendments made by 

4 this section shall apply to taxable years beginning after 

5 December 31, 2003.

6 SEC. 207. PARTNERSHIP INCOME ATTRIBUTABLE TO CAP7 ITAL EXCLUDED FROM NET EARNINGS FROM 

8 SELF-EMPLOYMENT. 

9 (a) IN GENERAL.—Paragraph (13) of section 

10 1402(a) is amended to read as follows: 

11 ‘‘(13) there shall be excluded the distributive 

12 share of net income of a partner attributable to cap13 ital;’’. 

14 (b) PARTNERSHIP INCOME ATTRIBUTABLE TO CAP15 ITAL.—Section 1402 is amended by adding at the end the 

16 following new subsection: 

17 ‘‘(l) PARTNERSHIP INCOME ATTRIBUTABLE TO CAP18 ITAL.—

19 ‘‘(1) IN GENERAL.—For purposes of subsection 

20 (a)(13), the following amounts shall be treated as in21 come attributable to capital—

22 ‘‘(A) the amount, if any, in excess of what 

23 would constitute reasonable compensation for 

24 services rendered by such partner to the part25 nership, and 
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1 ‘‘(B) an amount equal to a reasonable rate 

2 of return on unreturned capital of the partner 

3 determined as of the beginning of the taxable 

4 year. 

5 ‘‘(2) DEFINITIONS.—For purposes of paragraph 

6 (1)—

7 ‘‘(A) UNRETURNED CAPITAL.—The term 

8 ‘unreturned capital’ means the excess of the ag9 gregate amount of money and the fair market 

10 value as of the date of contribution of other 

11 consideration (net of liabilities) contributed by 

12 the partner over the aggregate amount of 

13 money and the fair market value as of the date 

14 of distribution of other consideration (net of li15 abilities) distributed by the partnership to the 

16 partner, increased or decreased for the part17 ner’s distributive share of all reportable items 

18 as determined in section 702. If the partner ac19 quires a partnership interest and the partner20 ship makes an election under section 754, the 

21 partner’s unreturned capital shall take into ac22 count appropriate adjustments under section 

23 743. 

24 ‘‘(B) REASONABLE RATE OF RETURN.—A 

25 reasonable rate of return on unreturned capital 
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1 shall equal 150 percent (or such higher rate as 

2 is established in regulations) of the highest ap3 plicable Federal rate, as determined under sec4 tion 1274(d)(1), at the beginning of the part5 nership’s taxable year. 

6 ‘‘(3) REGULATIONS.—The Secretary shall pre7 scribe such regulations as may be necessary to carry 

8 out the purposes of this subsection.’’. 

9 (c) EFFECTIVE DATE.—The amendments made by 

10 this section shall apply with respect to services performed 

11 in taxable years beginning after December 31, 2003. 

12 SEC. 208. REPEAL OF ABILITY TO ELECT LARGE PARTNER13 SHIP REPORTING RULES. 

14 (a) IN GENERAL.—Paragraph (2) of section 775(a) 

15 (relating to election) is amended by adding at the end the 

16 following: ‘‘No election under this subsection shall be 

17 made after December 31, 2003.’’. 

18 (b) EFFECTIVE DATE.—The amendment made by 

19 this section shall apply to partnership taxable years begin20 ning after December 31, 2003.

Æ