```

[House Report 116-161]
[From the U.S. Government Publishing Office]

   116th Congress }                                  {   Report
                        HOUSE OF REPRESENTATIVES 
   1st Session    }                                  {  116-161
                                                       
_______________________________________________________________________

                                     

             PROMOTING RESPECT FOR INDIVIDUALS' DIGNITY AND
                          EQUALITY ACT OF 2019

                               ----------                              

                              R E P O R T

                                 OF THE

                      COMMITTEE ON WAYS AND MEANS
                        HOUSE OF REPRESENTATIVES

                                   on

                               H.R. 3299

      [Including cost estimate of the Congressional Budget Office]

                             together with

                             MINORITY VIEWS
                             

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                 July 18, 2019.--Ordered to be printed
                 
                 
                 
                 

             PROMOTING RESPECT FOR INDIVIDUALS' DIGNITY AND

                          EQUALITY ACT OF 2019
                          
                          
                          
                          
                          
                          
116th Congress   }                                          {     Report
                         HOUSE OF REPRESENTATIVES                 
1st Session      }                                          {    116-161
_______________________________________________________________________

                                     

             PROMOTING RESPECT FOR INDIVIDUALS' DIGNITY AND

                          EQUALITY ACT OF 2019

                               __________

                              R E P O R T

                                 OF THE

                      COMMITTEE ON WAYS AND MEANS

                        HOUSE OF REPRESENTATIVES

                                   on

                               H.R. 3299

      [Including cost estimate of the Congressional Budget Office]

                             together with

                             MINORITY VIEWS
                             
                             

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                 July 18, 2019.--Ordered to be printed
                 
                            ________
                 
                 U.S. GOVERNMENT PUBLISHING OFFICE
                   
37-115                 WASHINGTON : 2019    
 
 
 
                 
                 
                            C O N T E N T S

                                                                   Page
I. SUMMARY AND BACKGROUND........................................     7
    A. Purpose and Summary.......................................     7
    B. Background and Need for Legislation.......................     8
    C. Legislative History.......................................     8
II. EXPLANATION OF THE BILL......................................     9
    A. Extension of period of limitation for certain legally 
      married couples (sec. 2 of the bill and sec. 6511 of the 
      Code)......................................................     9
    B. Rules relating to all legally married couples, and rules 
      relating to the gender of spouses, etc. (secs. 3 and 4 of 
      the bill)..................................................    11
III. VOTES OF THE COMMITTEE......................................    12
IV. BUDGET EFFECTS OF THE BILL...................................    12
    A. Committee Estimate of Budgetary Effects...................    12
    B. Statement Regarding New Budget Authority and Tax 
      Expenditures Budget Authority..............................    14
    C. Cost Estimate Prepared by the Congressional Budget Office.    14
V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE....    15
    A. Committee Oversight Findings and Recommendations..........    15
    B. Statement of General Performance Goals and Objectives.....    16
    C. Information Relating to Unfunded Mandates.................    16
    D. Applicability of House Rule XXI, Clause 5(b)..............    16
    E. Tax Complexity Analysis...................................    16
    F. Congressional Earmarks, Limited Tax Benefits, and Limited 
      Tariff Benefits............................................    16
    G. Duplication of Federal Programs...........................    17
    H. Hearings..................................................    17
VI. CHANGES IN EXISTING LAW MADE BY THE BILL.....................    17
    A. Changes in Existing Law Proposed by the Bill..............    17
VII. MINORITY VIEWS..............................................   588

116th Congress   }                                           {   Report
                        HOUSE OF REPRESENTATIVES
 1st Session     }                                           {  116-161

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

 
  PROMOTING RESPECT FOR INDIVIDUALS' DIGNITY AND EQUALITY ACT OF 2019

                                _______
                                

 July 18, 2019.--Committed to the Committee of the Whole House on the 
              State of the Union and ordered to be printed

                                _______
                                

Mr. Neal, from the Committee on Ways and Means, submitted the following

                              R E P O R T

                             together with

                             MINORITY VIEWS

                        [To accompany H.R. 3299]

      [Including cost estimate of the Congressional Budget Office]

    The Committee on Ways and Means, to whom was referred the 
bill (H.R. 3299) to permit legally married same-sex couples to 
amend their filing status for income tax returns outside the 
statute of limitations, to amend the Internal Revenue Code of 
1986 to clarify that all provisions shall apply to legally 
married same-sex couples in the same manner as other married 
couples, and for other purposes, having considered the same, 
report favorably thereon with an amendment and recommend that 
the bill as amended do pass.
    The amendment is as follows:
  Strike all after the enacting clause and insert the 
following:

SECTION 1. SHORT TITLE.

  This Act may be cited as the ``Promoting Respect for Individuals' 
Dignity and Equality Act of 2019'' or as the ``PRIDE Act of 2019''.

SEC. 2. EXTENSION OF PERIOD OF LIMITATION FOR CERTAIN LEGALLY MARRIED 
                    COUPLES.

  (a) In General.--In the case of an individual first treated as 
married for purposes of the Internal Revenue Code of 1986 by the 
application of the holdings of Revenue Ruling 2013-17--
          (1) if such individual filed a return (other than a joint 
        return) for a taxable year ending before September 16, 2013, 
        for which a joint return could have been made by the individual 
        and the individual's spouse but for the fact that such holdings 
        were not effective at the time of filing, such return shall be 
        treated as a separate return within the meaning of section 
        6013(b) of such Code and the time prescribed by section 
        6013(b)(2)(A) of such Code for filing a joint return after 
        filing a separate return shall not expire before the date 
        prescribed by law (including extensions) for filing the return 
        of tax for the taxable year that includes the date of the 
        enactment of this Act, and
          (2) in the case of a joint return filed pursuant to paragraph 
        (1)--
                  (A) the period of limitation prescribed by section 
                6511(a) of such Code for any such taxable year shall be 
                extended until the date prescribed by law (including 
                extensions) for filing the return of tax for the 
                taxable year that includes the date of the enactment of 
                this Act, and
                  (B) section 6511(b)(2) of such Code shall not apply 
                to any claim of credit or refund with respect to such 
                return.
  (b) Amendments, etc. Restricted to Change in Marital Status.--
Subsection (a) shall apply only with respect to amendments to the 
return of tax, and claims for credit or refund, relating to a change in 
the marital status for purposes of the Internal Revenue Code of 1986 of 
the individual.

SEC. 3. RULES RELATING TO ALL LEGALLY MARRIED COUPLES.

  (a) In General.--The Internal Revenue Code of 1986 is amended--
          (1) in section 21(d)(2)--
                  (A) by striking ``himself'' in the heading and 
                inserting ``self''; and
                  (B) by striking ``any husband and wife'' and 
                inserting ``any married couple'';
          (2) in section 22(e)(1)--
                  (A) by striking ``husband and wife who live'' and 
                inserting ``married couple who lives''; and
                  (B) by striking ``the taxpayer and his spouse'' and 
                inserting ``the taxpayer and the spouse of the 
                taxpayer'';
          (3) in section 38(c)(6)(A), by striking ``husband or wife who 
        files'' and inserting ``married individual who files'';
          (4) in section 42(j)(5)(C), by striking clause (i) and 
        inserting the following new clause:
                          ``(i) Married couple treated as 1 partner.--
                        For purposes of subparagraph (B), individuals 
                        married to one another (and their estates) 
                        shall be treated as 1 partner.'';
          (5) in section 62(b)(3)--
                  (A) in subparagraph (A)--
                          (i) by striking ``husband and wife who lived 
                        apart'' and inserting ``married couple who 
                        lived apart''; and
                          (ii) by striking ``the taxpayer and his 
                        spouse'' and inserting ``the taxpayer and the 
                        spouse of the taxpayer''; and
                  (B) in subparagraph (D), by striking ``husband and 
                wife'' and inserting ``married couple'';
          (6) in section 121--
                  (A) in subsection (b)(2), by striking ``husband and 
                wife who make'' and inserting ``married couple who 
                makes''; and
                  (B) in subsection (d)(1), by striking ``husband and 
                wife make'' and inserting ``married couple makes'';
          (7) in section 165(h)(4)(B), by striking ``husband and wife'' 
        and inserting ``married couple'';
          (8) in section 179(b)(4), by striking ``a husband and wife 
        filing'' and inserting ``individuals married to one another who 
        file'';
          (9) in section 213(d)(8), by striking ``status as husband and 
        wife'' and inserting ``marital status'';
          (10) in section 219(g)(4), in the matter preceding 
        subparagraph (A), by striking ``A husband and wife'' and 
        inserting ``Married individuals'';
          (11) in section 274(b)(2)(B), by striking ``husband and 
        wife'' and inserting ``married couple'';
          (12) in section 643(f), by striking ``husband and wife'' in 
        the second sentence and inserting ``married couple'';
          (13) in section 761(f)--
                  (A) in paragraph (1), by striking ``husband and 
                wife'' and inserting ``married couple''; and
                  (B) in paragraph (2)(A), by striking ``husband and 
                wife'' and inserting ``married couple'';
          (14) in section 911--
                  (A) in subsection (b)(2), by striking subparagraph 
                (C) and inserting the following new subparagraph:
                  ``(C) Treatment of community income.--In applying 
                subparagraph (A) with respect to amounts received from 
                services performed by a married individual which are 
                community income under community property laws 
                applicable to such income, the aggregate amount which 
                may be excludable from the gross income of such 
                individual and such individual's spouse under 
                subsection (a)(1) for any taxable year shall equal the 
                amount which would be so excludable if such amounts did 
                not constitute community income.''; and
                  (B) in subsection (d)(9)(A), by striking ``where a 
                husband and wife each have'' and inserting ``where both 
                spouses have'';
          (15) in section 1244(b)(2), by striking ``a husband and wife 
        filing'';
          (16) in section 1272(a)(2)(D), by striking clause (iii) and 
        inserting the following new clause:
                          ``(iii) Treatment of a married couple.--For 
                        purposes of this subparagraph, a married couple 
                        shall be treated as 1 person. The preceding 
                        sentence shall not apply where the spouses 
                        lived apart at all times during the taxable 
                        year in which the loan is made.'';
          (17) in section 1313(c)(1), by striking ``husband and wife'' 
        and inserting ``spouses'';
          (18) in section 1361(c)(1)(A)(i), by striking ``a husband and 
        wife'' and inserting ``a married couple'';
          (19) in section 2040(b), by striking ``Certain Joint 
        Interests of Husband and Wife'' in the heading and inserting 
        ``Certain Joint Interests of Married Couple'';
          (20) in section 2513--
                  (A) by striking ``gift by husband 
                or wife to third party'' 
                in the heading and inserting ``gift by 
                spouse to third party''; and
                  (B) by striking paragraph (1) of subsection (a) and 
                inserting the following new paragraph:
          ``(1) In general.--A gift made by one individual to any 
        person other than such individual's spouse shall, for the 
        purposes of this chapter, be considered as made one-half by the 
        individual and one-half by such individual's spouse, but only 
        if at the time of the gift each spouse is a citizen or resident 
        of the United States. This paragraph shall not apply with 
        respect to a gift by an individual of an interest in property 
        if such individual creates in the individual's spouse a general 
        power of appointment, as defined in section 2514(c), over such 
        interest. For purposes of this section, an individual shall be 
        considered as the spouse of another only if the individual is 
        married to the individual's spouse at the time of the gift and 
        does not remarry during the remainder of the calendar year.'';
          (21) in section 2516--
                  (A) by striking ``Where a husband and wife enter'' 
                and inserting the following:
  ``(a) In General.--Where a married couple enters''; and
                  (B) by adding at the end the following new 
                subsection:
  ``(b) Spouse.--For purposes of this section, if the spouses referred 
to are divorced, wherever appropriate to the meaning of this section, 
the term `spouse' shall read `former spouse'.'';
          (22) in section 5733(d)(2), by striking ``husband or wife'' 
        and inserting ``married individual'';
          (23) in section 6013--
                  (A) by striking ``joint returns of
                income tax by husband and
                wife'' in the heading and inserting ``joint 
                returns of income tax by
                a married couple'';
                  (B) in subsection (a), in the matter preceding 
                paragraph (1), by striking ``husband and wife'' and 
                inserting ``married couple'';
                  (C) in subsection (a)(1), by striking ``either the 
                husband or wife'' and inserting ``either spouse'';
                  (D) in subsection (a)(2)--
                          (i) by striking ``husband and wife'' and 
                        inserting ``spouses''; and
                          (ii) by striking ``his taxable year'' and 
                        inserting ``such spouse's taxable year'';
                  (E) in subsection (a)(3)--
                          (i) by striking ``his executor or 
                        administrator'' and inserting ``the decedent's 
                        executor or administrator'';
                          (ii) by striking ``with respect to both 
                        himself and the decedent'' and inserting ``with 
                        respect to both the surviving spouse and the 
                        decedent''; and
                          (iii) by striking ``constitute his separate 
                        return'' and inserting ``constitute the 
                        survivor's separate return'';
                  (F) in subsection (b), by striking paragraph (1) and 
                inserting the following new paragraph:
          ``(1) In general.--Except as provided in paragraph (2), if an 
        individual has filed a separate return for a taxable year for 
        which a joint return could have been made by the individual and 
        the individual's spouse under subsection (a) and the time 
        prescribed by law for filing the return for such taxable year 
        has expired, such individual and such spouse may nevertheless 
        make a joint return for such taxable year. A joint return filed 
        under this subsection shall constitute the return of the 
        individual and the individual's spouse for such taxable year, 
        and all payments, credits, refunds, or other repayments made or 
        allowed with respect to the separate return of either spouse 
        for such taxable year shall be taken into account in 
        determining the extent to which the tax based upon the joint 
        return has been paid. If a joint return is made under this 
        subsection, any election (other than the election to file a 
        separate return) made by either spouse in a separate return for 
        such taxable year with respect to the treatment of any income, 
        deduction, or credit of such spouse shall not be changed in the 
        making of the joint return where such election would have been 
        irrevocable if the joint return had not been made. If a joint 
        return is made under this subsection after the death of either 
        spouse, such return with respect to the decedent can be made 
        only by the decedent's executor or administrator.'';
                  (G) in subsection (c), by striking ``husband and 
                wife'' and inserting ``spouses'';
                  (H) in subsection (d)(1), by striking ``status as 
                husband and wife'' and inserting ``the marital status 
                with respect to each other'';
                  (I) in subsection (d)(2), by striking ``his spouse'' 
                and inserting ``the spouse of the individual'';
                  (J) in subsection (f)(2)(B), by striking ``such 
                individual, his spouse, and his estate shall be 
                determined as if he were alive'' and inserting ``such 
                individual, the individual's spouse, and the 
                individual's estate shall be determined as if the 
                individual were alive''; and
                  (K) in subsection (f)(3)--
                          (i) in subparagraph (A), by striking ``for 
                        which he is entitled'' and inserting ``for 
                        which such member is entitled''; and
                          (ii) in subparagraph (B), by striking ``for 
                        which he is entitled'' and inserting ``for 
                        which such employee is entitled'';
          (24) in section 6014(b), by striking ``husband and wife'' in 
        the second sentence and inserting ``a married couple'';
          (25) in section 6017, by striking ``husband and wife'' and 
        inserting ``married couple'';
          (26) in section 6096(a), by striking ``of husband and wife 
        having'' and inserting ``reporting'';
          (27) in section 6166(b)(2), by striking subparagraph (B) and 
        inserting the following new subparagraph:
                  ``(B) Certain interests held by married couple.--
                Stock or a partnership interest which--
                          ``(i) is community property of a married 
                        couple (or the income from which is community 
                        income) under the applicable community property 
                        law of a State, or
                          ``(ii) is held by a married couple as joint 
                        tenants, tenants by the entirety, or tenants in 
                        common,
                shall be treated as owned by 1 shareholder or 1 
                partner, as the case may be.'';
          (28) in section 6212(b)(2)--
                  (A) by striking ``return filed by husband and wife'' 
                and inserting ``return''; and
                  (B) by striking ``his last known address'' and 
                inserting ``the last known address of such spouse'';
          (29) in section 7428(c)(2)(A), by striking ``husband and 
        wife'' and inserting ``married couple'';
          (30) in section 7701(a)--
                  (A) by striking paragraph (17); and
                  (B) in paragraph (38), by striking ``husband and 
                wife'' and inserting ``married couple''; and
          (31) in section 7872(f), by striking paragraph (7) and 
        inserting the following new paragraph:
          ``(7) Married couple treated as 1 person.--A married couple 
        shall be treated as 1 person.''.
  (b) Conforming Amendments.--
          (1) The table of sections for subchapter B of chapter 12 of 
        the Internal Revenue Code of 1986 is amended by striking the 
        item relating to section 2513 and inserting the following new 
        item:

``Sec. 2513. Gift by spouse to third party.''.

          (2) The table of sections for subpart B of part II of 
        subchapter A of chapter 61 of such Code is amended by striking 
        the item relating to section 6013 and inserting the following 
        new item:

``Sec. 6013. Joint returns of income tax by a married couple.''.

SEC. 4. RULES RELATING TO THE GENDER OF SPOUSES, ETC.

  (a) In General.--The following provisions of the Internal Revenue 
Code of 1986 are each amended by striking ``his spouse'' each place it 
appears and inserting ``the individual's spouse'':
          (1) Subsections (a)(1) and (d) of section 1.
          (2) Section 2(b)(2)(A).
          (3) Subsections (d)(1)(B) and (e)(3) of section 21.
          (4) Section 36(c)(5).
          (5) Section 179(d)(2)(A).
          (6) Section 318(a)(1)(A)(i).
          (7) Section 408(d)(6).
          (8) Section 469(i)(5)(B)(ii).
          (9) Section 507(d)(2)(B)(iii).
          (10) Clauses (ii) and (iii) of section 613A(c)(8)(D).
          (11) Section 672(e)(2).
          (12) Section 704(e)(2).
          (13) Subparagraphs (A) and (B)(ii) of section 911(c)(3).
          (14) Section 1235(c)(2).
          (15) Section 1563(e)(5).
          (16) Section 3121(b)(3)(B).
          (17) Section 4946(d).
          (18) Section 4975(e)(6).
          (19) Subparagraphs (A)(iv) and (B) of section 6012(a)(1).
          (20) Section 7703(a).
  (b) Conforming Amendments.--
          (1) The following provisions of the Internal Revenue Code of 
        1986 are each amended by striking ``his spouse'' each place it 
        appears and inserting ``the taxpayer's spouse'':
                  (A) Section 2(a)(2)(B).
                  (B) Subparagraphs (B) and (C) of section 2(b)(2).
                  (C) Paragraphs (2) and (6)(A) of section 21(e).
                  (D) Section 36B(e)(1).
                  (E) Section 63(e)(3)(B).
                  (F) Section 86(c)(1)(C)(ii).
                  (G) Section 105(c)(1).
                  (H) Section 135(d)(3).
                  (I) Section 151(b).
                  (J) Subsections (a) and (d)(7) of section 213.
                  (K) Section 1233(e)(2)(C).
                  (L) Section 1239(b)(2).
                  (M) Section 6504(2).
          (2) The following provisions of the Internal Revenue Code of 
        1986 are each amended by striking ``his spouse'' each place it 
        appears and inserting ``the employee's spouse'':
                  (A) Section 132(m)(1).
                  (B) Section 401(h)(6).
                  (C) Section 3402(l)(3).
          (3) The following provisions of the Internal Revenue Code of 
        1986 are each amended by striking ``his taxable year'' each 
        place it appears and inserting ``the individual's taxable 
        year'':
                  (A) Section 2(b)(1).
                  (B) Section 7703(a)(1).
          (4) The following provisions of the Internal Revenue Code of 
        1986 are each amended by striking ``his taxable year'' each 
        place it appears and inserting ``the taxpayer's taxable year'':
                  (A) Subparagraphs (B) and (C) of section 2(b)(2) (as 
                amended by paragraph (1)(B)).
                  (B) Section 63(f)(1)(A).
          (5) The following provisions of the Internal Revenue Code of 
        1986 are each amended by striking ``his home'' and inserting 
        ``the individual's home'':
                  (A) Section 2(b)(1)(A).
                  (B) Section 21(e)(4)(A)(i).
                  (C) Section 7703(b)(1).
          (6) The Internal Revenue Code of 1986, as amended by this 
        section, is amended--
                  (A) in section 2(a)(1)(A), by striking ``his two 
                taxable years'' and inserting ``the taxpayer's two 
                taxable years'';
                  (B) in section 2(a)(1)(B), by striking ``his home'' 
                and inserting ``the taxpayer's home'';
                  (C) in paragraphs (1)(A) and (2)(A) of section 63(f), 
                by striking ``for himself if he'' both places it 
                appears and inserting ``for the taxpayer if the 
                taxpayer'';
                  (D) in section 63(f)(4), by striking ``his'' both 
                places it appears and inserting ``the individual's'';
                  (E) in section 105(b)--
                          (i) by striking ``his spouse, his 
                        dependents'' and inserting ``the taxpayer's 
                        spouse, the taxpayer's dependents''; and
                          (ii) by striking ``by him'';
                  (F) in the heading of section 119(a), by striking ``, 
                His Spouse, and His Dependents'' and inserting ``and 
                the Employee's Spouse and Dependents'';
                  (G) in section 119(a), by striking ``him, his spouse, 
                or any of his dependents by or on behalf of his 
                employer'' and inserting ``the employee or the 
                employee's spouse or dependents by or on behalf of the 
                employer of the employee'';
                  (H) in section 119(a)(2), by striking ``his'' both 
                places it appears and inserting ``the employee's'';
                  (I) in section 119(d)(3)(B), by striking ``his 
                spouse, and any of his dependents'' and inserting ``the 
                employee's spouse, and any of the employee's 
                dependents'';
                  (J) in section 129(b)(2), by striking ``himself'' and 
                inserting ``the spouse's self'';
                  (K) in section 170(b)(1)(F)(iii)--
                          (i) by striking ``his spouse'' and inserting 
                        ``the spouse of such donor''; and
                          (ii) by striking ``his death or after the 
                        death of his surviving spouse if she'' and 
                        inserting ``the death of the donor or after the 
                        death of the donor's surviving spouse if such 
                        surviving spouse'';
                  (L) in section 213(c)(1)--
                          (i) by striking ``his estate'' and inserting 
                        ``the estate of the taxpayer''; and
                          (ii) by striking ``his death'' and inserting 
                        ``the death of the taxpayer'';
                  (M) in section 213(d)(7), by striking ``he'' and 
                inserting ``the taxpayer'';
                  (N) in section 217(g)--
                          (i) by striking ``, his spouse, or his 
                        dependents'' in paragraph (2) and inserting 
                        ``or the spouse or dependents of such member'';
                          (ii) by striking ``his dependents'' in 
                        paragraph (3) and inserting ``dependents''; and
                          (iii) by striking ``his spouse'' each place 
                        it appears in paragraph (3) and inserting ``the 
                        member's spouse'';
                  (O) in section 217(i)(3)(A), by striking ``his'';
                  (P) in section 267(c), by striking ``his'' each place 
                it appears and inserting ``the individual's'';
                  (Q) in section 318(a)(1)(A)(ii), by striking ``his'' 
                and inserting ``the individual's'';
                  (R) in section 402(l)(4)(D), by striking ``, his 
                spouse, and dependents'' and inserting ``and the spouse 
                and dependents of such officer'';
                  (S) in section 415(l)(2)(B), by striking ``, his 
                spouse, or his dependents'' and inserting ``or the 
                participant's spouse or dependents'';
                  (T) in section 420(f)(6)(A), by striking ``his 
                covered spouse and dependents'' each place it appears 
                and inserting ``the covered spouse and dependents of 
                such retiree'';
                  (U) in section 424(d)(1), by striking ``his'' and 
                inserting ``the individual's'';
                  (V) in section 544(a)(2), by striking ``his'' each 
                place it appears and inserting ``the individual's'';
                  (W) in section 911(c)(3), by striking ``him'' each 
                place it appears in subparagraphs (A) and (B)(ii) and 
                inserting ``the individual'';
                  (X) in section 1015(d)(3), by striking ``his spouse'' 
                and inserting ``the donor's spouse'';
                  (Y) in section 1563(e)--
                          (i) by striking ``his children'' both places 
                        it appears in paragraphs (5)(D) and (6)(A) and 
                        inserting ``the individual's children''; and
                          (ii) by striking ``his parents'' both places 
                        it appears in subparagraphs (A) and (B) of 
                        paragraph (6) and inserting ``the individual's 
                        parents'';
                  (Z) in section 1563(f)(2)(B), by striking ``him'' and 
                inserting ``the individual'';
                  (AA) in section 2012(c), by striking ``his spouse'' 
                and inserting ``the decedent's spouse'';
                  (BB) in section 2032A(e)(10), by striking ``his 
                surviving spouse'' and inserting ``the decedent's 
                surviving spouse'';
                  (CC) in section 2035(b)--
                          (i) by striking ``his estate'' and inserting 
                        ``the decedent's estate''; and
                          (ii) by striking ``his spouse'' and inserting 
                        ``the decedent's spouse'';
                  (DD) in subsections (a) and (b)(5) of section 2056, 
                by striking ``his'';
                  (EE) in section 2523(b)--
                          (i) by striking ``(or his heirs or assigns) 
                        or such person (or his heirs or assigns)'' in 
                        paragraph (1) and inserting ``(or the donor's 
                        heirs or assigns) or such person (or such 
                        person's heirs or assigns)'';
                          (ii) by striking ``himself'' in paragraph (1) 
                        and inserting ``the donor's self'';
                          (iii) by striking ``he'' in paragraph (2) and 
                        inserting ``the donor''; and
                          (iv) by striking ``him'' each place it 
                        appears in the matter following paragraph (2) 
                        and inserting ``the donor'';
                  (FF) in section 2523(d), by striking ``himself'' and 
                inserting ``the donor's self'';
                  (GG) in section 2523(e), by striking ``his spouse'' 
                and inserting ``the donor's spouse'';
                  (HH) in section 3121(b)(3)--
                          (i) by striking ``his father'' in 
                        subparagraph (A) and inserting ``the child's 
                        father'';
                          (ii) by striking ``his father'' in 
                        subparagraph (B) and inserting ``the 
                        individual's father''; and
                          (iii) by striking ``his son'' in subparagraph 
                        (B) and inserting ``the individual's son'';
                  (II) in section 3306(c)(5)--
                          (i) by striking ``his son'' and inserting 
                        ``the individual's son''; and
                          (ii) by striking ``his father'' and inserting 
                        ``the child's father'';
                  (JJ) in section 3402(l)--
                          (i) by striking ``he'' each place it appears 
                        in paragraphs (2) and (3)(A) and inserting 
                        ``the employee''; and
                          (ii) by striking ``his taxable year'' both 
                        places it appears in paragraph (3)(B) and 
                        inserting ``the employee's taxable year'';
                  (KK) in section 4905(a), by striking ``his spouse'' 
                and inserting ``such person's spouse'';
                  (LL) in section 6046(c), by striking ``his'' both 
                places it appears and inserting ``the individual's'';
                  (MM) in section 6103(e)(1)(A)(ii), by striking 
                ``him'' and inserting ``the individual'';
                  (NN) in section 7448(a)(8), by striking ``his death'' 
                and inserting ``the individual's death'';
                  (OO) in subsections (d), (m), and (n) of section 
                7448, by striking ``his'' each place it appears and 
                inserting ``the individual's'';
                  (PP) in subsection (m) of section 7448, as so 
                amended, by striking ``he'' each place it appears and 
                inserting ``such judge or special trial judge''; and
                  (QQ) in section 7448(q)--
                          (i) by striking ``his'' both places it 
                        appears and inserting ``such judge's''; and
                          (ii) by striking ``to bring himself'' and 
                        inserting ``to come''.

                       I. SUMMARY AND BACKGROUND

                         A. Purpose and Summary

    The bill H.R. 3999, the Promoting Respect for Individuals' 
Dignity and Equality (PRIDE) Act of 2019, as ordered reported 
by the Committee on Ways and Means on June 20, 2019, amends the 
Internal Revenue Code of 1986 so as to provide lawfully married 
same-sex couples with the ability to file claims for credits 
and refunds related to a change in marital status back to their 
year of marriage, and to amend such code so that provisions 
that apply to married couples use gender-neutral language.

                 B. Background and Need for Legislation

    The Promoting Respect for Individuals' Dignity and Equality 
(PRIDE) Act of 2019 makes long-overdue changes to the tax code 
for same-sex married couples. June 28, 2019 is the 50th 
anniversary of the Stonewall riots. To commemorate that moment 
in the LGBTQ+ movement, the PRIDE Act scrubs the tax code of 
any gendered language related to married couples.
    Additionally, the legislation resolves a problem related to 
the mismatched timing of IRS guidance changes and state-level 
same-sex marriage legalization. Specifically, after the 2013 
Supreme Court ruling in United States v. Windsor, 570 U.S. 744 
(2013), the IRS updated its procedures to allow same-sex 
couples to amend old returns from 2010 onwards to reflect their 
marital status and claim overpayment credits for years they 
were married but unable to file jointly. H.R. 3299 allows same-
sex couples to file federal income tax adjustments back to the 
date of marriage providing additional relief for those couples 
who were lawfully married under state law before 2010.

                         C. Legislative History

Background

    H.R. 3299, the ``Promoting Respect for Individuals' Dignity 
and Equality Act of 2019,'' was introduced on June 18, 2019, 
and was referred to the Committee on Ways and Means.

Committee action

    The Committee on Ways and Means marked up H.R. 3299 on June 
20, 2019, and ordered the bill, as amended, favorably reported 
(with a quorum being present).

Committee hearings

    The Committee on Ways and Means heard testimony from Rep. 
Andy Levin on June 4, 2019 regarding H.R. 1244, the Equal 
Dignity for Married Taxpayers Act of 2019. Additionally, on 
June 4, 2019, the Committee heard testimony from Rep. Judy Chu 
regarding H.R. 3294, the Refund Equality Act of 2019. 
Provisions substantially similar to both H.R. 1244 and H.R. 
3294 are included in H.R. 3299.

                      II. EXPLANATION OF THE BILL

   A. Extension of Period of Limitation for Certain Legally Married 
         Couples (Sec. 2 of the Bill and Sec. 6511 of the Code)

                              PRESENT LAW

Statute of limitations on credit or refund

    In general, a taxpayer must file a claim for credit or 
refund within three years of the filing of the tax return or 
within two years of the payment of the tax, whichever expires 
later (if no tax return is filed, the two-year limit 
applies).\1\ A claim for credit or refund that is not filed 
within these time periods is rejected as untimely. In addition, 
the amount of credit or refund is limited to the portion of tax 
paid within the three-year period (plus any filing extension) 
or the two-year period, as applicable, immediately preceding 
the filing of the claim.\2\
---------------------------------------------------------------------------
    \1\Sec. 6511(a).
    \2\Sec. 6511(b)(2).
---------------------------------------------------------------------------

Limitation on filing a joint return after filing a separate return

    An individual filing a separate return for a tax year for 
which the individual and the individual's spouse could have 
filed a joint return may file a joint return amending the prior 
separate return for the tax year after the due date for filing 
the return has passed.\3\ However, an individual cannot elect 
to file a joint return after having filed a separate return 
more than three years after the due date of the return (without 
regard to any extensions) for the applicable tax year.\4\
---------------------------------------------------------------------------
    \3\Sec. 6013(b)(1).
    \4\Sec. 6013(b)(2).
---------------------------------------------------------------------------

Federal tax treatment of same-sex marriage

    Prior to the Supreme Court's decision in United States v. 
Windsor,\5\ section 3 of the Defense of Marriage Act (DOMA)\6\ 
prohibited the IRS from recognizing same-sex marriages for 
purposes of the provisions of the Code that refer to the 
marital status of the taxpayer and convey benefits upon such 
status. In Windsor, the Supreme Court held that section 3 of 
DOMA was unconstitutional because it violated principles of 
equal protection.
---------------------------------------------------------------------------
    \5\570 U.S. 744 (2013).
    \6\1 U.S.C. sec. 7.
---------------------------------------------------------------------------
    Following the Windsor decision, the IRS issued Revenue 
Ruling 2013-17\7\ (the ``Revenue Ruling''), which provided 
guidance on the effect of the Windsor decision on the IRS's 
interpretation of the provisions of the Code that refer to a 
taxpayer's marital status. In the Revenue Ruling, the IRS 
recognized the validity of same-sex marriages that were lawful 
in the State where they occurred. In particular, the Revenue 
Ruling made three specific holdings for Federal tax purposes:
---------------------------------------------------------------------------
    \7\2013-38 I.R.B. 201.
---------------------------------------------------------------------------
          1. The terms ``spouse,'' ``husband and wife,'' 
        ``husband,'' and ``wife'' include an individual married 
        to a person of the same sex if the individuals are 
        lawfully married under State law, and the term 
        ``marriage'' includes such a marriage between 
        individuals of the same sex.
          2. The IRS adopts a general rule recognizing a 
        marriage of same-sex individuals that was validly 
        entered into in a State whose laws authorize the 
        marriage of two individuals of the same sex even if the 
        married couple is domiciled in a State that does not 
        recognize the validity of same-sex marriages.
          3. The terms ``spouse,'' ``husband and wife,'' 
        ``husband,'' and ``wife'' do not include individuals 
        (whether of the opposite sex or the same sex) who have 
        entered into a registered domestic partnership, civil 
        union, or other similar formal relationship recognized 
        under State law that is not denominated as a marriage 
        under the laws of that State, and the term ``marriage'' 
        does not include such formal relationships.
    The holdings of Revenue Ruling 2013-17 were applied 
prospectively as of September 16, 2013. The Revenue Ruling 
allowed affected taxpayers to rely on the ruling for purposes 
of filing original returns, amended returns, adjusted returns, 
or claims for credit or refund resulting from its holdings but 
only if the applicable limitations period for filing such 
claims had not expired. Thus, taxpayers lawfully married under 
State law during tax years for which the statute of limitations 
was closed as of September 16, 2013, could not claim the tax 
benefits of Federal recognition of same-sex marriage. Among 
those that were affected were residents of Massachusetts and 
several other States that recognized same-sex marriage during 
years for which the statute of limitations generally was closed 
as of September 16, 2013.\8\ Accordingly, some lawfully married 
same-sex couples were not able to claim Federal tax benefits 
associated with their marital status for all tax years for 
which they were lawfully married.
---------------------------------------------------------------------------
    \8\The States that recognized same-sex marriage prior to 2010 (the 
years for which the statute of limitations would generally be closed 
for taxpayers amending their returns in calendar year 2013) are 
Massachusetts, California (during a portion of 2008), Connecticut, Iowa 
and Vermont.
---------------------------------------------------------------------------

                           REASONS FOR CHANGE

    The Committee believes that lawfully married same-sex 
couples should be entitled to the Federal tax benefits of their 
marital status for all years for which their marriages are 
recognized under State law. Although the Revenue Ruling 
provided limited relief for married same-sex couples, the IRS 
does not have the authority to allow claims for years for which 
the statute of limitations was closed. This provision provides 
full relief to married same-sex couples and ensures equal 
Federal tax treatment between same-sex married couples and 
other married couples for all applicable years.

                        EXPLANATION OF PROVISION

    Under the provision, lawfully married same-sex couples may 
file an amended return (including a joint return after filing a 
return other than a joint return\9\) and a claim for credit or 
refund relating to a change in marital status as a result of 
the holdings in Revenue Ruling 2013-17 for taxable years ending 
before September 16, 2013. The period for filing an amended 
return or claim for refund under the provision expires on the 
filing date (including extensions) of the return for the tax 
year that includes the date of enactment of the provision. In 
addition, the limitation on the dollar amounts recoverable is 
made inapplicable for newly-filed joint returns.
---------------------------------------------------------------------------
    \9\Because this legislation involves the novel situation of a 
retroactive change in the marital status of an individual for purpose 
of the Code, the provision clarifies that in applying section 6013(b) 
in this situation, the term ``separate return'' means any return other 
than a joint return. No inference is intended as the application of 
section 6013(b) in any other situation.
---------------------------------------------------------------------------

                             EFFECTIVE DATE

    The provision is effective on the date of enactment.

B. Rules Relating to All Legally Married Couples, and Rules Relating to 
        the Gender of Spouses, Etc. (Secs. 3 and 4 of the Bill)

                              PRESENT LAW

    The Code contains a number of provisions that apply to 
married couples. While these provisions apply to both opposite-
sex and same-sex married couples,\10\ they generally refer to 
``husband and wife'' or otherwise use gendered language in 
describing the couple or one or both spouses.
---------------------------------------------------------------------------
    \10\Rev. Rul. 2013-17. For a full description of Revenue Ruling 
2013-17, see discussion above.
---------------------------------------------------------------------------
    For example, the Code allows taxpayers to claim a 
nonrefundable child and dependent care credit, for which the 
allowable credit is an applicable percentage of employment-
related expenses. For purposes of this credit, qualifying 
expenses are limited by the earned income of the taxpayer. A 
special rule applies in the case of married couples:

          Section 21(d)(2). Special rule for spouse who is a 
        student or incapable of caring for himself. In the case 
        of a spouse who is a student or a qualifying individual 
        described in subsection (b)(1)(C), for purposes of the 
        paragraph (1), such spouse shall be deemed for each 
        month during which such spouse is a full-time student 
        at an educational institution, or is such a qualifying 
        individual, to be gainfully employed and to have earned 
        income of not less than--
          (A) $250 if subsection (c)(1) applies for the taxable 
        year, or
          (B) $500 if subsection (c)(2) applies for the taxable 
        year.
          In the case of any husband and wife, this paragraph 
        shall apply with respect to only one spouse for any one 
        month.

                           REASONS FOR CHANGE

    The Committee believes that the Code should be modernized 
to remove outdated references relating to marriage and replace 
them with gender-neutral terms. This provision ensures equal 
dignity for all taxpayers.

                       EXPLANATION OF PROVISIONS

    The provisions amend the Code so that provisions that apply 
to married couples use gender-neutral language, by changing 
terms such as ``husband and wife'' or other gendered language.
    For example, with respect to section 21(d)(2), quoted 
above, the provisions change ``himself'' to ``self'' and 
``husband and wife'' to ``any married couple.''

                             EFFECTIVE DATE

    The provisions are effective on the date of enactment.

                      III. VOTES OF THE COMMITTEE

    Pursuant to clause 3(b) of rule XIII of the Rules of the 
House of Representatives, the following statement is made 
concerning the vote of the Committee on Ways and Means during 
the markup consideration of H.R. 3299, the ``Promoting Respect 
for Individuals' Dignity and Equality Act of 2019'' on June 20, 
2019.
    The amendment in the nature of a substitute was agreed to 
by voice vote (with a quorum being present).
    The bill, H.R. 3299, as amended, was ordered favorably 
reported to the House of Representatives by voice vote (with a 
quorum being present).

                     IV. BUDGET EFFECTS OF THE BILL

               A. Committee Estimate of Budgetary Effects

    In compliance with clause 3(d) of rule XIII of the Rules of 
the House of Representatives, the following statement is made 
concerning the effects on the budget of the bill, H.R. 3299, as 
ordered reported.
    The bill is estimated to decrease Federal fiscal year 
budget receipts by $57 million dollars for the period 2019 
through 2029.

   ESTIMATED BUDGET EFFECTS OF H.R. 3299, THE ``PROMPTING RESPECT FOR INDIVIDUALS' DIGNITY AND EQUALITY ACT OF 2019,'' AS REPORTED BY THE COMMITTEE ON WAYS AND MEANS--Fiscal Years 2019-2029
                                                                                      [Millions of Dollars]
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
              Provision                       Effective           2019      2020      2021      2022      2023      2024      2025      2026      2027      2028      2029    2019- 24  2019- 29
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1. Extension of period of limitation   DOE....................       [1]       -57       [1]     - - -     - - -     - - -     - - -     - - -     - - -     - - -     - - -       -57       -57
 for certain legally married couples.
2. Rules relating to all legally       DOE....................  ........                                                     No Revenue Effect
 married couples.
3. Rules relating to the gender of     .......................                                                          No Revenue Effect
 spouses, etc..
                                      ----------------------------------------------------------------------------------------------------------------------------------------------------------
    NET TOTAL........................  .......................       [1]       -57       [1]       [2]       [2]       [2]       [2]       [2]       [2]       [2]       [2]       -57       -57
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Joint Committee on Taxation
----------------------
NOTE: Details may not add to totals due to rounding.
Legend for "Effective" column: DOE = date of enactment
[1]Loss of less than $500,000.
[2]No revenue effect.

B. Statement Regarding New Budget Authority and Tax Expenditures Budget 
                               Authority

    Pursuant to clause 3(c)(2) of rule XIII of the Rules of the 
House of Representatives, the Committee states that the bill 
involves no new or increased budget authority. The Committee 
further states that the bill involves no new tax expenditure.

      C. Cost Estimate Prepared by the Congressional Budget Office

    Pursuant to clause 3(c)(3) of rule XIII of the Rules of the 
House of Representatives, requiring a cost estimate prepared by 
CBO, the following statement by CBO is provided.

                                     U.S. Congress,
                               Congressional Budget Office,
                                     Washington, DC, June 25, 2019.
Hon. Richard Neal,
Chairman, Committee on Ways and Means,
House of Representatives, Washington, DC.
    Dear Mr. Chairman: The Congressional Budget Office has 
prepared the enclosed cost estimate for H.R. 3299, the 
Promoting Respect for Individuals' Dignity and Equality Act of 
2019.
    If you wish further details on this estimate, we will be 
pleased to provide them. The CBO staff contact is Shannon Mok.
            Sincerely,
                                             Mark P. Hadley
                                 (For Phillip L. Swagel, Director).
    Enclosure.

    
    

    The bill would
           Extend the statute of limitations for 
        certain lawfully married same-sex couples to file 
        amended tax returns and claims for credit or refund
           Amend the Internal Revenue Code to use 
        gender-neutral language
    Estimated budgetary effects would primarily stem from
           A reduction in tax liability from filing a 
        joint return
    The Congressional Budget Act of 1974, as amended, 
stipulates that revenue estimates provided by the staff of the 
Joint Committee on Taxation (JCT) are the official estimates 
for all tax legislation considered by the Congress. CBO 
therefore incorporates such estimates into its cost estimates 
of the effects of legislation. All of the estimates for the 
provisions of H.R. 3299 were provided by JCT.
    Bill summary: H.R. 3299 would extend the statute of 
limitations for filing amended returns or claims for credit or 
refund for same-sex couples who were married prior to the 
federal recognition of same-sex marriage and for whom the 
statute of limitations had closed as of September 16, 2013. The 
extended statute of limitations would expire on the filing date 
(including extensions) of the return for the tax year in which 
the proposal is enacted. In addition, it would amend the 
Internal Revenue Code to use gender-neutral language in 
describing couples and spouses.
    Estimated Federal cost: The estimated budgetary effect of 
H.R. 3299 is shown in Table 1.

                                                   TABLE 1.--ESTIMATED BUDGETARY EFFECTS OF H.R. 3299
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                By fiscal year, millions of dollars--
                                           -------------------------------------------------------------------------------------------------------------
                                             2019    2020    2021    2022    2023    2024    2025    2026    2027    2028    2029   2019-2024  2019-2029
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                Decreases (-) in Revenues
 
Estimated Revenues........................       *     -57       *       0       0       0       0       0       0       0       0       -57        -57
 
                                                    Increases in the Deficit From Changes in Revenues
 
Effect on the Deficit.....................       *      57       *       0       0       0       0       0       0       0       0        57         57
--------------------------------------------------------------------------------------------------------------------------------------------------------
Source: Staff of the Joint Committee on Taxation.
Components may not sum to totals because of rounding; * = between -$500,000 and $500,000.

    Basis of estimate: The Congressional Budget Act of 1974, as 
amended, stipulates that revenue estimates provided by the 
staff of the Joint Committee on Taxation (JCT) are the official 
estimates for all tax legislation considered by the Congress. 
CBO therefore incorporates such estimates into its cost 
estimates of the effects of legislation. All of the estimates 
for the provisions of H.R. 3299 were provided by JCT.\1\
---------------------------------------------------------------------------
    \1\For JCT's estimates of the provisions, which include detail 
beyond the summary presented below, see Joint Committee on Taxation, 
Estimated Revenue Effects of H.R. 3299, The ``Promoting Respect for 
Individuals' Dignity and Equality Act of 2019,'' JCX-27-19 (June 18, 
2019) https://go.usa.gov/xyCgv
---------------------------------------------------------------------------
    Revenues: On net, JCT estimates, enacting the bill would 
decrease revenues by $57 million over the 2019-2029 period.

     V. OTHER MATTERS TO BE DISCUSSED UNDER THE RULES OF THE HOUSE

          A. Committee Oversight Findings and Recommendations

    Pursuant to clause 3(c)(1) of rule XIII of the Rules of the 
House of Representatives, the Committee advises that the 
findings and recommendations of the Committee, based on 
oversight activities under clause 2(b)(1) of rule X of the 
Rules of the House of Representatives, are incorporated into 
the explanations of the provisions in this report.

        B. Statement of General Performance Goals and Objectives

    Pursuant to clause 3(c)(4) of rule XIII of the Rules of the 
House of Representatives, the Committee states that, because 
the bill contains no measure that authorizes funding, no 
statement of general performance goals and objectives is 
required.

              C. Information Relating to Unfunded Mandates

    Pursuant to section 423 of Public Law 104-4, the Unfunded 
Mandates Reform Act of 1995, the Committee has determined that 
the bill does not contain Federal mandates on the private 
sector. Further, the Committee has determined that the bill 
does not impose a Federal intergovernmental mandate on State, 
local, or tribal governments.

            D. Applicability of House Rule XXI, Clause 5(b)

    Clause 5(b) of rule XXI of the Rules of the House of 
Representatives provides, in part, that ``It shall not be in 
order to consider a bill, joint resolution, amendment, or 
conference report carrying a retroactive Federal income tax 
rate increase.'' The Committee, after careful review, states 
that the bill does not involve any retroactive Federal income 
tax rate increase within the meaning of the rule.

                       E. Tax Complexity Analysis

    Section 4022(b) of Public Law 105-206, the Internal Revenue 
Service Restructuring and Reform Act of 1998 (the ``RRA''), 
requires the staff of the Joint Committee on Taxation (in 
consultation with the Internal Revenue Service and the Treasury 
Department) to provide a tax complexity analysis. The 
complexity analysis is required for all legislation reported by 
the Senate Committee on Finance, the House Committee on Ways 
and Means, or any committee of conference if the legislation 
includes a provision that directly or indirectly amends the 
Internal Revenue Code of 1986 and has widespread applicability 
to individuals or small businesses.
    Pursuant to clause 3(h)(1) of rule XIII of the Rules of the 
House of Representatives, the staff of the Joint Committee on 
Taxation has determined that a complexity analysis is not 
required under section 4022(b) of the RRA because the bill 
contains no provision that amends the Internal Revenue Code of 
1986 and has ``widespread applicability'' to individuals or 
small businesses within the meaning of the rule.

  F. Congressional Earmarks, Limited Tax Benefits, and Limited Tariff 
                                Benefits

    With respect to clause 9 of rule XXI of the Rules of the 
House of Representatives, the Committee, after careful review, 
states that no provision of the bill contains any congressional 
earmark, limited tax benefit, or limited tariff benefit within 
the meaning of the rule.

                   G. Duplication of Federal Programs

    Pursuant to clause 3(c)(5) of rule XIII of the Rules of the 
House of Representatives, the Committee states that no 
provision of the bill establishes or reauthorizes: (1) a 
program of the Federal Government known to be duplicative of 
another Federal program, (2) a program included in any report 
from the Government Accountability Office to Congress pursuant 
to section 21 of Public Law 111-139, or (3) a program related 
to a program identified in the most recent Catalog of Federal 
Domestic Assistance, published pursuant to section 6104 of 
title 31, United States Code.

                              H. Hearings

    In compliance with Sec. 103(i) of H. Res. 6 (116th 
Congress) the following hearing was used to develop or consider 
H.R. 3299: House Ways and Means Committee Member Day Hearing 
held on June 4, 2019 during which Representative Andy Levin (D-
MI) and Representative Judy Chu (D-CA) testified regarding 
legislation that is incorporated into H.R. 3299.

              VI. CHANGES IN EXISTING LAW MADE BY THE BILL

            A. Changes in Existing Law Proposed by the Bill

    Pursuant to clause 3(e)(1)(B) of rule XIII of the Rules of 
the House of Representatives, changes in existing law proposed 
by the bill are shown as follows (existing law proposed to be 
omitted is enclosed in black brackets, new matter is printed in 
italics, existing law in which no change is proposed is shown 
in roman):

         Changes in Existing Law Made by the Bill, as Reported

  In compliance with clause 3(e) of rule XIII of the Rules of 
the House of Representatives, changes in existing law made by 
the bill, as reported, are shown as follows (existing law 
proposed to be omitted is enclosed in black brackets, new 
matter is printed in italics, and existing law in which no 
change is proposed is shown in roman):

                     INTERNAL REVENUE CODE OF 1986

           *       *       *       *       *       *       *
Subtitle A--Income Taxes

           *       *       *       *       *       *       *

CHAPTER 1--NORMAL TAXES AND SURTAXES

           *       *       *       *       *       *       *

Subchapter A--DETERMINATION OF TAX LIABILITY

           *       *       *       *       *       *       *

PART I--TAX ON INDIVIDUALS

           *       *       *       *       *       *       *

SEC. 1. TAX IMPOSED.

  (a) Married individuals filing joint returns and surviving 
spouses.--There is hereby imposed on the taxable income of--
          (1) every married individual (as defined in section 
        7703) who makes a single return jointly with [his 
        spouse] the individual's spouse under section 6013, and
          (2) every surviving spouse (as defined in section 
        2(a)),
a tax determined in accordance with the following table:
  (b) Heads of households.--There is hereby imposed on the 
taxable income of every head of a household (as defined in 
section 2(b)) a tax determined in accordance with the following 
table:
  (c) Unmarried individuals (other than surviving spouses and 
heads of households).--There is hereby imposed on the taxable 
income of every individual (other than a surviving spouse as 
defined in section 2(a) or the head of a household as defined 
in section 2(b)) who is not a married individual (as defined in 
section 7703) a tax determined in accordance with the following 
table:
  (d) Married individuals filing separate returns.--There is 
hereby imposed on the taxable income of every married 
individual (as defined in section 7703) who does not make a 
single return jointly with [his spouse] the individual's spouse 
under section 6013, a tax determined in accordance with the 
following table:
  (e) Estates and trusts.--There is hereby imposed on the 
taxable income of--
          (1) every estate, and
          (2) every trust,
taxable under this subsection a tax determined in accordance 
with the following table:
  (f) Phaseout of marriage penalty in 15-percent bracket; 
adjustments in tax tables so that inflation will not result in 
tax increases.--
          (1) In general.--Not later than December 15 of 1993, 
        and each subsequent calendar year, the Secretary shall 
        prescribe tables which shall apply in lieu of the 
        tables contained in subsections (a), (b), (c), (d), and 
        (e) with respect to taxable years beginning in the 
        succeeding calendar year.
          (2) Method of prescribing tables.--The table which 
        under paragraph (1) is to apply in lieu of the table 
        contained in subsection (a), (b), (c), (d), or (e), as 
        the case may be, with respect to taxable years 
        beginning in any calendar year shall be prescribed--
                  (A) except as provided in paragraph (8), by 
                increasing the minimum and maximum dollar 
                amounts for each bracket for which a tax is 
                imposed under such table by the cost-of-living 
                adjustment for such calendar year, determined--
                          (i) except as provided in clause 
                        (ii), by substituting ``1992'' for 
                        ``2016'' in paragraph (3)(A)(ii), and
                          (ii) in the case of adjustments to 
                        the dollar amounts at which the 36 
                        percent rate bracket begins or at which 
                        the 39.6 percent rate bracket begins, 
                        by substituting ``1993'' for ``2016'' 
                        in paragraph (3)(A)(ii),
                  (B) by not changing the rate applicable to 
                any rate bracket as adjusted under subparagraph 
                (A), and
                  (C) by adjusting the amounts setting forth 
                the tax to the extent necessary to reflect the 
                adjustments in the rate brackets.
          (3) Cost-of-living adjustment.--For purposes of this 
        subsection--
                  (A) In general.--The cost-of-living 
                adjustment for any calendar year is the 
                percentage (if any) by which--
                          (i) the C-CPI-U for the preceding 
                        calendar year, exceeds
                          (ii) the CPI for calendar year 2016, 
                        multiplied by the amount determined 
                        under subparagraph (B).
                  (B) Amount determined.--The amount determined 
                under this clause is the amount obtained by 
                dividing--
                          (i) the C-CPI-U for calendar year 
                        2016, by
                          (ii) the CPI for calendar year 2016.
                  (C) Special rule for adjustments with a base 
                year after 2016.--For purposes of any provision 
                of this title which provides for the 
                substitution of a year after 2016 for ``2016'' 
                in subparagraph (A)(ii), subparagraph (A) shall 
                be applied by substituting ``the C-CPI-U for 
                calendar year 2016'' for ``the CPI for calendar 
                year 2016'' and all that follows in clause (ii) 
                thereof.
          (4) CPI for any calendar year.--For purposes of 
        paragraph (3), the CPI for any calendar year is the 
        average of the Consumer Price Index as of the close of 
        the 12-month period ending on August 31 of such 
        calendar year.
          (5) Consumer Price Index.--For purposes of paragraph 
        (4), the term ``Consumer Price Index'' means the last 
        Consumer Price Index for all-urban consumers published 
        by the Department of Labor. For purposes of the 
        preceding sentence, the revision of the Consumer Price 
        Index which is most consistent with the Consumer Price 
        Index for calendar year 1986 shall be used.
          (6) C-CPI-U.--For purposes of this subsection--
                  (A) In general.--The term ``C-CPI-U'' means 
                the Chained Consumer Price Index for All Urban 
                Consumers (as published by the Bureau of Labor 
                Statistics of the Department of Labor). The 
                values of the Chained Consumer Price Index for 
                All Urban Consumers taken into account for 
                purposes of determining the cost-of-living 
                adjustment for any calendar year under this 
                subsection shall be the latest values so 
                published as of the date on which such Bureau 
                publishes the initial value of the Chained 
                Consumer Price Index for All Urban Consumers 
                for the month of August for the preceding 
                calendar year.
                  (B) Determination for calendar year.--The C-
                CPI-U for any calendar year is the average of 
                the C-CPI-U as of the close of the 12-month 
                period ending on August 31 of such calendar 
                year.
          (7) Rounding.--
                  (A) In general.--If any increase determined 
                under paragraph (2)(A), section 63(c)(4), 
                section 68(b)(2) or section 151(d)(4) is not a 
                multiple of $50, such increase shall be rounded 
                to the next lowest multiple of $50.
                  (B) Table for married individuals filing 
                separately.--In the case of a married 
                individual filing a separate return, 
                subparagraph (A) (other than with respect to 
                sections 63(c)(4) and 151(d)(4)(A)) shall be 
                applied by substituting ``$25'' for ``$50'' 
                each place it appears.
          (8) Elimination of marriage penalty in 15-percent 
        bracket.--With respect to taxable years beginning after 
        December 31, 2003, in prescribing the tables under 
        paragraph (1)--
                  (A) the maximum taxable income in the 15-
                percent rate bracket in the table contained in 
                subsection (a) (and the minimum taxable income 
                in the next higher taxable income bracket in 
                such table) shall be 200 percent of the maximum 
                taxable income in the 15-percent rate bracket 
                in the table contained in subsection (c) (after 
                any other adjustment under this subsection), 
                and
                  (B) the comparable taxable income amounts in 
                the table contained in subsection (d) shall be 
                1/2 of the amounts determined under 
                subparagraph (A).
  (g) Certain unearned income of children taxed as if parent's 
income.--
          (1) In general.--In the case of any child to whom 
        this subsection applies, the tax imposed by this 
        section shall be equal to the greater of--
                  (A) the tax imposed by this section without 
                regard to this subsection, or
                  (B) the sum of--
                          (i) the tax which would be imposed by 
                        this section if the taxable income of 
                        such child for the taxable year were 
                        reduced by the net unearned income of 
                        such child, plus
                          (ii) such child's share of the 
                        allocable parental tax.
          (2) Child to whom subsection applies.--This 
        subsection shall apply to any child for any taxable 
        year if--
                  (A) such child--
                          (i) has not attained age 18 before 
                        the close of the taxable year, or
                          (ii)(I) has attained age 18 before 
                        the close of the taxable year and meets 
                        the age requirements of section 
                        152(c)(3) (determined without regard to 
                        subparagraph (B) thereof), and
                          (II) whose earned income (as defined 
                        in section 911(d)(2)) for such taxable 
                        year does not exceed one-half of the 
                        amount of the individual's support 
                        (within the meaning of section 
                        152(c)(1)(D) after the application of 
                        section 152(f)(5) (without regard to 
                        subparagraph (A) thereof)) for such 
                        taxable year,
                  (B) either parent of such child is alive at 
                the close of the taxable year, and
                  (C) such child does not file a joint return 
                for the taxable year.
          (3) Allocable parental tax.--For purposes of this 
        subsection--
                  (A) In general.--The term ``allocable 
                parental tax'' means the excess of--
                          (i) the tax which would be imposed by 
                        this section on the parent's taxable 
                        income if such income included the net 
                        unearned income of all children of the 
                        parent to whom this subsection applies, 
                        over
                          (ii) the tax imposed by this section 
                        on the parent without regard to this 
                        subsection.
                For purposes of clause (i), net unearned income 
                of all children of the parent shall not be 
                taken into account in computing any exclusion, 
                deduction, or credit of the parent.
                  (B) Child's share.--A child's share of any 
                allocable parental tax of a parent shall be 
                equal to an amount which bears the same ratio 
                to the total allocable parental tax as the 
                child's net unearned income bears to the 
                aggregate net unearned income of all children 
                of such parent to whom this subsection applies.
                  (C) Special rule where parent has different 
                taxable year.--Except as provided in 
                regulations, if the parent does not have the 
                same taxable year as the child, the allocable 
                parental tax shall be determined on the basis 
                of the taxable year of the parent ending in the 
                child's taxable year.
          (4) Net unearned income.--For purposes of this 
        subsection--
                  (A) In general.--The term ``net unearned 
                income'' means the excess of--
                          (i) the portion of the adjusted gross 
                        income for the taxable year which is 
                        not attributable to earned income (as 
                        defined in section 911(d)(2)), over
                          (ii) the sum of--
                                  (I) the amount in effect for 
                                the taxable year under section 
                                63(c)(5)(A) (relating to 
                                limitation on standard 
                                deduction in the case of 
                                certain dependents), plus
                                  (II) the greater of the 
                                amount described in subclause 
                                (I) or, if the child itemizes 
                                his deductions for the taxable 
                                year, the amount of the 
                                itemized deductions allowed by 
                                this chapter for the taxable 
                                year which are directly 
                                connected with the production 
                                of the portion of adjusted 
                                gross income referred to in 
                                clause (i).
                  (B) Limitation based on taxable income.--The 
                amount of the net unearned income for any 
                taxable year shall not exceed the individual's 
                taxable income for such taxable year.
                  (C) Treatment of distributions from qualified 
                disability trusts.--For purposes of this 
                subsection, in the case of any child who is a 
                beneficiary of a qualified disability trust (as 
                defined in section 642(b)(2)(C)(ii)), any 
                amount included in the income of such child 
                under sections 652 and 662 during a taxable 
                year shall be considered earned income of such 
                child for such taxable year.
          (5) Special rules for determining parent to whom 
        subsection applies.--For purposes of this subsection, 
        the parent whose taxable income shall be taken into 
        account shall be--
                  (A) in the case of parents who are not 
                married (within the meaning of section 7703), 
                the custodial parent (within the meaning of 
                section 152(e)) of the child, and
                  (B) in the case of married individuals filing 
                separately, the individual with the greater 
                taxable income.
          (6) Providing of parent's TIN.--The parent of any 
        child to whom this subsection applies for any taxable 
        year shall provide the TIN of such parent to such child 
        and such child shall include such TIN on the child's 
        return of tax imposed by this section for such taxable 
        year.
          (7) Election to claim certain unearned income of 
        child on parent's return.--
                  (A) In general.--If--
                          (i) any child to whom this subsection 
                        applies has gross income for the 
                        taxable year only from interest and 
                        dividends (including Alaska Permanent 
                        Fund dividends),
                          (ii) such gross income is more than 
                        the amount described in paragraph 
                        (4)(A)(ii)(I) and less than 10 times 
                        the amount so described,
                          (iii) no estimated tax payments for 
                        such year are made in the name and TIN 
                        of such child, and no amount has been 
                        deducted and withheld under section 
                        3406, and
                          (iv) the parent of such child (as 
                        determined under paragraph (5)) elects 
                        the application of subparagraph (B),
                such child shall be treated (other than for 
                purposes of this paragraph) as having no gross 
                income for such year and shall not be required 
                to file a return under section 6012.
                  (B) Income included on parent's return.--In 
                the case of a parent making the election under 
                this paragraph--
                          (i) the gross income of each child to 
                        whom such election applies (to the 
                        extent the gross income of such child 
                        exceeds twice the amount described in 
                        paragraph (4)(A)(ii)(I)) shall be 
                        included in such parent's gross income 
                        for the taxable year,
                          (ii) the tax imposed by this section 
                        for such year with respect to such 
                        parent shall be the amount equal to the 
                        sum of--
                                  (I) the amount determined 
                                under this section after the 
                                application of clause (i), plus
                                  (II) for each such child, 10 
                                percent of the lesser of the 
                                amount described in paragraph 
                                (4)(A)(ii)(I) or the excess of 
                                the gross income of such child 
                                over the amount so described, 
                                and
                          (iii) any interest which is an item 
                        of tax preference under section 
                        57(a)(5) of the child shall be treated 
                        as an item of tax preference of such 
                        parent (and not of such child).
                  (C) Regulations.--The Secretary shall 
                prescribe such regulations as may be necessary 
                or appropriate to carry out the purposes of 
                this paragraph.
  (h) Maximum capital gains rate.--
          (1) In general.--If a taxpayer has a net capital gain 
        for any taxable year, the tax imposed by this section 
        for such taxable year shall not exceed the sum of--
                  (A) a tax computed at the rates and in the 
                same manner as if this subsection had not been 
                enacted on the greater of--
                          (i) taxable income reduced by the net 
                        capital gain; or
                          (ii) the lesser of--
                                  (I) the amount of taxable 
                                income taxed at a rate below 25 
                                percent; or
                                  (II) taxable income reduced 
                                by the adjusted net capital 
                                gain;
                  (B) 0 percent of so much of the adjusted net 
                capital gain (or, if less, taxable income) as 
                does not exceed the excess (if any) of--
                          (i) the amount of taxable income 
                        which would (without regard to this 
                        paragraph) be taxed at a rate below 25 
                        percent, over
                          (ii) the taxable income reduced by 
                        the adjusted net capital gain;
                  (C) 15 percent of the lesser of--
                          (i) so much of the adjusted net 
                        capital gain (or, if less, taxable 
                        income) as exceeds the amount on which 
                        a tax is determined under subparagraph 
                        (B), or
                          (ii) the excess of--
                                  (I) the amount of taxable 
                                income which would (without 
                                regard to this paragraph) be 
                                taxed at a rate below 39.6 
                                percent, over
                                  (II) the sum of the amounts 
                                on which a tax is determined 
                                under subparagraphs (A) and 
                                (B),
                  (D) 20 percent of the adjusted net capital 
                gain (or, if less, taxable income) in excess of 
                the sum of the amounts on which tax is 
                determined under subparagraphs (B) and (C),
                  (E) 25 percent of the excess (if any) of--
                          (i) the unrecaptured section 1250 
                        gain (or, if less, the net capital gain 
                        (determined without regard to paragraph 
                        (11))), over
                          (ii) the excess (if any) of--
                                  (I) the sum of the amount on 
                                which tax is determined under 
                                subparagraph (A) plus the net 
                                capital gain, over
                                  (II) taxable income; and
                  (F) 28 percent of the amount of taxable 
                income in excess of the sum of the amounts on 
                which tax is determined under the preceding 
                subparagraphs of this paragraph.
          (2) Net capital gain taken into account as investment 
        income.--For purposes of this subsection, the net 
        capital gain for any taxable year shall be reduced (but 
        not below zero) by the amount which the taxpayer takes 
        into account as investment income under section 
        163(d)(4)(B)(iii).
          (3) Adjusted net capital gain.--For purposes of this 
        subsection, the term ``adjusted net capital gain'' 
        means the sum of--
                  (A) net capital gain (determined without 
                regard to paragraph (11)) reduced (but not 
                below zero) by the sum of--
                          (i) unrecaptured section 1250 gain, 
                        and
                          (ii) 28-percent rate gain, plus
                  (B) qualified dividend income (as defined in 
                paragraph (11)).
          (4) 28-percent rate gain.--For purposes of this 
        subsection, the term ``28-percent rate gain'' means the 
        excess (if any) of--
                  (A) the sum of--
                          (i) collectibles gain; and
                          (ii) section 1202 gain, over
                  (B) the sum of--
                          (i) collectibles loss;
                          (ii) the net short-term capital loss; 
                        and
                          (iii) the amount of long-term capital 
                        loss carried under section 
                        1212(b)(1)(B) to the taxable year.
          (5) Collectibles gain and loss.--For purposes of this 
        subsection--
                  (A) In general.--The terms ``collectibles 
                gain'' and ``collectibles loss'' mean gain or 
                loss (respectively) from the sale or exchange 
                of a collectible (as defined in section 408(m) 
                without regard to paragraph (3) thereof) which 
                is a capital asset held for more than 1 year 
                but only to the extent such gain is taken into 
                account in computing gross income and such loss 
                is taken into account in computing taxable 
                income.
                  (B) Partnerships, etc..--For purposes of 
                subparagraph (A), any gain from the sale of an 
                interest in a partnership, S corporation, or 
                trust which is attributable to unrealized 
                appreciation in the value of collectibles shall 
                be treated as gain from the sale or exchange of 
                a collectible. Rules similar to the rules of 
                section 751 shall apply for purposes of the 
                preceding sentence.
          (6) Unrecaptured section 1250 gain.--For purposes of 
        this subsection--
                  (A) In general.--The term ``unrecaptured 
                section 1250 gain'' means the excess (if any) 
                of--
                          (i) the amount of long-term capital 
                        gain (not otherwise treated as ordinary 
                        income) which would be treated as 
                        ordinary income if section 1250(b)(1) 
                        included all depreciation and the 
                        applicable percentage under section 
                        1250(a) were 100 percent, over
                          (ii) the excess (if any) of--
                                  (I) the amount described in 
                                paragraph (4)(B); over
                                  (II) the amount described in 
                                paragraph (4)(A).
                  (B) Limitation with respect to section 1231 
                property.--The amount described in subparagraph 
                (A)(i) from sales, exchanges, and conversions 
                described in section 1231(a)(3)(A) for any 
                taxable year shall not exceed the net section 
                1231 gain (as defined in section 1231(c)(3)) 
                for such year.
          (7) Section 1202 gain.--For purposes of this 
        subsection, the term ``section 1202 gain'' means the 
        excess of--
                  (A) the gain which would be excluded from 
                gross income under section 1202 but for the 
                percentage limitation in section 1202(a), over
                  (B) the gain excluded from gross income under 
                section 1202.
          (8) Coordination with recapture of net ordinary 
        losses under section 1231.--If any amount is treated as 
        ordinary income under section 1231(c), such amount 
        shall be allocated among the separate categories of net 
        section 1231 gain (as defined in section 1231(c)(3)) in 
        such manner as the Secretary may by forms or 
        regulations prescribe.
          (9) Regulations.--The Secretary may prescribe such 
        regulations as are appropriate (including regulations 
        requiring reporting) to apply this subsection in the 
        case of sales and exchanges by pass-thru entities and 
        of interests in such entities.
          (10) Pass-thru entity defined.--For purposes of this 
        subsection, the term ``pass-thru entity'' means--
                  (A) a regulated investment company;
                  (B) a real estate investment trust;
                  (C) an S corporation;
                  (D) a partnership;
                  (E) an estate or trust;
                  (F) a common trust fund; and
                  (G) a qualified electing fund (as defined in 
                section 1295).
          (11) Dividends taxed as net capital gain.--
                  (A) In general.--For purposes of this 
                subsection, the term ``net capital gain'' means 
                net capital gain (determined without regard to 
                this paragraph) increased by qualified dividend 
                income.
                  (B) Qualified dividend income.--For purposes 
                of this paragraph--
                          (i) In general.--The term ``qualified 
                        dividend income'' means dividends 
                        received during the taxable year from--
                                  (I) domestic corporations, 
                                and
                                  (II) qualified foreign 
                                corporations.
                          (ii) Certain dividends excluded.--
                        Such term shall not include--
                                  (I) any dividend from a 
                                corporation which for the 
                                taxable year of the corporation 
                                in which the distribution is 
                                made, or the preceding taxable 
                                year, is a corporation exempt 
                                from tax under section 501 or 
                                521,
                                  (II) any amount allowed as a 
                                deduction under section 591 
                                (relating to deduction for 
                                dividends paid by mutual 
                                savings banks, etc.), and
                                  (III) any dividend described 
                                in section 404(k).
                          (iii) Coordination with section 
                        246(c).--Such term shall not include 
                        any dividend on any share of stock--
                                  (I) with respect to which the 
                                holding period requirements of 
                                section 246(c) are not met 
                                (determined by substituting in 
                                section 246(c) ``60 days'' for 
                                ``45 days'' each place it 
                                appears and by substituting 
                                ``121-day period'' for ``91-day 
                                period''), or
                                  (II) to the extent that the 
                                taxpayer is under an obligation 
                                (whether pursuant to a short 
                                sale or otherwise) to make 
                                related payments with respect 
                                to positions in substantially 
                                similar or related property.
                  (C) Qualified foreign corporations.--
                          (i) In general.--Except as otherwise 
                        provided in this paragraph, the term 
                        ``qualified foreign corporation'' means 
                        any foreign corporation if--
                                  (I) such corporation is 
                                incorporated in a possession of 
                                the United States, or
                                  (II) such corporation is 
                                eligible for benefits of a 
                                comprehensive income tax treaty 
                                with the United States which 
                                the Secretary determines is 
                                satisfactory for purposes of 
                                this paragraph and which 
                                includes an exchange of 
                                information program.
                          (ii) Dividends on stock readily 
                        tradable on United States securities 
                        market.--A foreign corporation not 
                        otherwise treated as a qualified 
                        foreign corporation under clause (i) 
                        shall be so treated with respect to any 
                        dividend paid by such corporation if 
                        the stock with respect to which such 
                        dividend is paid is readily tradable on 
                        an established securities market in the 
                        United States.
                          (iii) Exclusion of dividends of 
                        certain foreign corporations.--Such 
                        term shall not include--
                                  (I) any foreign corporation 
                                which for the taxable year of 
                                the corporation in which the 
                                dividend was paid, or the 
                                preceding taxable year, is a 
                                passive foreign investment 
                                company (as defined in section 
                                1297), and
                                  (II) any corporation which 
                                first becomes a surrogate 
                                foreign corporation (as defined 
                                in section 7874(a)(2)(B)) after 
                                the date of the enactment of 
                                this subclause, other than a 
                                foreign corporation which is 
                                treated as a domestic 
                                corporation under section 
                                7874(b).
                          (iv) Coordination with foreign tax 
                        credit limitation.--Rules similar to 
                        the rules of section 904(b)(2)(B) shall 
                        apply with respect to the dividend rate 
                        differential under this paragraph.
                  (D) Special rules.--
                          (i) Amounts taken into account as 
                        investment income.--Qualified dividend 
                        income shall not include any amount 
                        which the taxpayer takes into account 
                        as investment income under section 
                        163(d)(4)(B).
                          (ii) Extraordinary dividends.--If a 
                        taxpayer to whom this section applies 
                        receives, with respect to any share of 
                        stock, qualified dividend income from 1 
                        or more dividends which are 
                        extraordinary dividends (within the 
                        meaning of section 1059(c)), any loss 
                        on the sale or exchange of such share 
                        shall, to the extent of such dividends, 
                        be treated as long-term capital loss.
                          (iii) Treatment of dividends from 
                        regulated investment companies and real 
                        estate investment trusts.--A dividend 
                        received from a regulated investment 
                        company or a real estate investment 
                        trust shall be subject to the 
                        limitations prescribed in sections 854 
                        and 857.
  (i) Rate reductions after 2000.--
          (1) 10-percent rate bracket.--
                  (A) In general.--In the case of taxable years 
                beginning after December 31, 2000--
                          (i) the rate of tax under subsections 
                        (a), (b), (c), and (d) on taxable 
                        income not over the initial bracket 
                        amount shall be 10 percent, and
                          (ii) the 15 percent rate of tax shall 
                        apply only to taxable income over the 
                        initial bracket amount but not over the 
                        maximum dollar amount for the 15-
                        percent rate bracket.
                  (B) Initial bracket amount.--For purposes of 
                this paragraph, the initial bracket amount is--
                          (i) $14,000 in the case of subsection 
                        (a),
                          (ii) $10,000 in the case of 
                        subsection (b), and
                          (iii) 1/2 the amount applicable under 
                        clause (i) (after adjustment, if any, 
                        under subparagraph (C)) in the case of 
                        subsections (c) and (d).
                  (C) Inflation adjustment.--In prescribing the 
                tables under subsection (f) which apply with 
                respect to taxable years beginning in calendar 
                years after 2003--
                          (i) the cost-of-living adjustment 
                        shall be determined under subsection 
                        (f)(3) by substituting ``2002'' for 
                        ``2016'' in subparagraph (A)(ii) 
                        thereof, and
                          (ii) the adjustments under clause (i) 
                        shall not apply to the amount referred 
                        to in subparagraph (B)(iii).
                If any amount after adjustment under the 
                preceding sentence is not a multiple of $50, 
                such amount shall be rounded to the next lowest 
                multiple of $50.
          (2) 25-, 28-, and 33-percent rate brackets.--The 
        tables under subsections (a), (b), (c), (d), and (e) 
        shall be applied--
                  (A) by substituting ``25%'' for ``28%'' each 
                place it appears (before the application of 
                subparagraph (B)),
                  (B) by substituting ``28%'' for ``31%'' each 
                place it appears, and
                  (C) by substituting ``33%'' for ``36%'' each 
                place it appears.
          (3) Modifications to income tax brackets for high-
        income taxpayers.--
                  (A) 35-percent rate bracket.--In the case of 
                taxable years beginning after December 31, 
                2012--
                          (i) the rate of tax under subsections 
                        (a), (b), (c), and (d) on a taxpayer's 
                        taxable income in the highest rate 
                        bracket shall be 35 percent to the 
                        extent such income does not exceed an 
                        amount equal to the excess of--
                                  (I) the applicable threshold, 
                                over
                                  (II) the dollar amount at 
                                which such bracket begins, and
                          (ii) the 39.6 percent rate of tax 
                        under such subsections shall apply only 
                        to the taxpayer's taxable income in 
                        such bracket in excess of the amount to 
                        which clause (i) applies.
                  (B) Applicable threshold.--For purposes of 
                this paragraph, the term ``applicable 
                threshold'' means--
                          (i) $450,000 in the case of 
                        subsection (a),
                          (ii) $425,000 in the case of 
                        subsection (b),
                          (iii) $400,000 in the case of 
                        subsection (c), and
                          (iv) 1/2 the amount applicable under 
                        clause (i) (after adjustment, if any, 
                        under subparagraph (C)) in the case of 
                        subsection (d).
                  (C) Inflation adjustment.--For purposes of 
                this paragraph, with respect to taxable years 
                beginning in calendar years after 2013, each of 
                the dollar amounts under clauses (i), (ii), and 
                (iii) of subparagraph (B) shall be adjusted in 
                the same manner as under paragraph (1)(C)(i), 
                except that subsection (f)(3)(A)(ii) shall be 
                applied by substituting ``2012'' for ``2016''.
          (4) Adjustment of tables.--The Secretary shall adjust 
        the tables prescribed under subsection (f) to carry out 
        this subsection.
  (j) Modifications for taxable years 2018 through 2025.--
          (1) In general.--In the case of a taxable year 
        beginning after December 31, 2017, and before January 
        1, 2026--
                  (A) subsection (i) shall not apply, and
                  (B) this section (other than subsection (i)) 
                shall be applied as provided in paragraphs (2) 
                through (6).
          (2) Rate tables.--
                  (A) Married individuals filing joint returns 
                and surviving spouses.--The following table 
                shall be applied in lieu of the table contained 
                in subsection (a):
                  (B) Heads of households.--The following table 
                shall be applied in lieu of the table contained 
                in subsection (b):
                  (C) Unmarried individuals other than 
                surviving spouses and heads of households.--The 
                following table shall be applied in lieu of the 
                table contained in subsection (c):
                  (D) Married individuals filing separate 
                returns.--The following table shall be applied 
                in lieu of the table contained in subsection 
                (d):
                  (E) Estates and trusts.--The following table 
                shall be applied in lieu of the table contained 
                in subsection (e):
                  (F) References to rate tables.--Any reference 
                in this title to a rate of tax under subsection 
                (c) shall be treated as a reference to the 
                corresponding rate bracket under subparagraph 
                (C) of this paragraph, except that the 
                reference in section 3402(q)(1) to the third 
                lowest rate of tax applicable under subsection 
                (c) shall be treated as a reference to the 
                fourth lowest rate of tax under subparagraph 
                (C).
          (3) Adjustments.--
                  (A) No adjustment in 2018.--The tables 
                contained in paragraph (2) shall apply without 
                adjustment for taxable years beginning after 
                December 31, 2017, and before January 1, 2019.
                  (B) Subsequent years.--For taxable years 
                beginning after December 31, 2018, the 
                Secretary shall prescribe tables which shall 
                apply in lieu of the tables contained in 
                paragraph (2) in the same manner as under 
                paragraphs (1) and (2) of subsection (f) 
                (applied without regard to clauses (i) and (ii) 
                of subsection (f)(2)(A)), except that in 
                prescribing such tables--
                          (i) subsection (f)(3) shall be 
                        applied by substituting ``calendar year 
                        2017'' for ``calendar year 2016'' in 
                        subparagraph (A)(ii) thereof,
                          (ii) subsection (f)(7)(B) shall apply 
                        to any unmarried individual other than 
                        a surviving spouse or head of 
                        household, and
                          (iii) subsection (f)(8) shall not 
                        apply.
          (4) Special rules for certain children with unearned 
        income.--
                  (A) In general.--In the case of a child to 
                whom subsection (g) applies for the taxable 
                year, the rules of subparagraphs (B) and (C) 
                shall apply in lieu of the rule under 
                subsection (g)(1).
                  (B) Modifications to applicable rate 
                brackets.--In determining the amount of tax 
                imposed by this section for the taxable year on 
                a child described in subparagraph (A), the 
                income tax table otherwise applicable under 
                this subsection to the child shall be applied 
                with the following modifications:
                          (i) 24-percent bracket.--The maximum 
                        taxable income which is taxed at a rate 
                        below 24 percent shall not be more than 
                        the sum of--
                                  (I) the earned taxable income 
                                of such child, plus
                                  (II) the minimum taxable 
                                income for the 24-percent 
                                bracket in the table under 
                                paragraph (2)(E) (as adjusted 
                                under paragraph (3)) for the 
                                taxable year.
                          (ii) 35-percent bracket.--The maximum 
                        taxable income which is taxed at a rate 
                        below 35 percent shall not be more than 
                        the sum of--
                                  (I) the earned taxable income 
                                of such child, plus
                                  (II) the minimum taxable 
                                income for the 35-percent 
                                bracket in the table under 
                                paragraph (2)(E) (as adjusted 
                                under paragraph (3)) for the 
                                taxable year.
                          (iii) 37-percent bracket.--The 
                        maximum taxable income which is taxed 
                        at a rate below 37 percent shall not be 
                        more than the sum of--
                                  (I) the earned taxable income 
                                of such child, plus
                                  (II) the minimum taxable 
                                income for the 37-percent 
                                bracket in the table under 
                                paragraph (2)(E) (as adjusted 
                                under paragraph (3)) for the 
                                taxable year.
                  (C) Coordination with capital gains rates.--
                For purposes of applying section 1(h) (after 
                the modifications under paragraph (5)(A))--
                          (i) the maximum zero rate amount 
                        shall not be more than the sum of--
                                  (I) the earned taxable income 
                                of such child, plus
                                  (II) the amount in effect 
                                under paragraph (5)(B)(i)(IV) 
                                for the taxable year, and
                          (ii) the maximum 15-percent rate 
                        amount shall not be more than the sum 
                        of--
                                  (I) the earned taxable income 
                                of such child, plus
                                  (II) the amount in effect 
                                under paragraph (5)(B)(ii)(IV) 
                                for the taxable year.
                  (D) Earned taxable income.--For purposes of 
                this paragraph, the term ``earned taxable 
                income'' means, with respect to any child for 
                any taxable year, the taxable income of such 
                child reduced (but not below zero) by the net 
                unearned income (as defined in subsection 
                (g)(4)) of such child.
          (5) Application of current income tax brackets to 
        capital gains brackets.--
                  (A) In general.--Section 1(h)(1) shall be 
                applied--
                          (i) by substituting ``below the 
                        maximum zero rate amount'' for ``which 
                        would (without regard to this 
                        paragraph) be taxed at a rate below 25 
                        percent'' in subparagraph (B)(i), and
                          (ii) by substituting ``below the 
                        maximum 15-percent rate amount'' for 
                        ``which would (without regard to this 
                        paragraph) be taxed at a rate below 
                        39.6 percent'' in subparagraph 
                        (C)(ii)(I).
                  (B) Maximum amounts defined.--For purposes of 
                applying section 1(h) with the modifications 
                described in subparagraph (A)--
                          (i) Maximum zero rate amount.--The 
                        maximum zero rate amount shall be--
                                  (I) in the case of a joint 
                                return or surviving spouse, 
                                $77,200,
                                  (II) in the case of an 
                                individual who is a head of 
                                household (as defined in 
                                section 2(b)), $51,700,
                                  (III) in the case of any 
                                other individual (other than an 
                                estate or trust), an amount 
                                equal to 1/2 of the amount in 
                                effect for the taxable year 
                                under subclause (I), and
                                  (IV) in the case of an estate 
                                or trust, $2,600.
                          (ii) Maximum 15-percent rate 
                        amount.--The maximum 15-percent rate 
                        amount shall be--
                                  (I) in the case of a joint 
                                return or surviving spouse, 
                                $479,000 (1/2 such amount in 
                                the case of a married 
                                individual filing a separate 
                                return),
                                  (II) in the case of an 
                                individual who is the head of a 
                                household (as defined in 
                                section 2(b)), $452,400,
                                  (III) in the case of any 
                                other individual (other than an 
                                estate or trust), $425,800, and
                                  (IV) in the case of an estate 
                                or trust, $12,700.
                  (C) Inflation adjustment.--In the case of any 
                taxable year beginning after 2018, each of the 
                dollar amounts in clauses (i) and (ii) of 
                subparagraph (B) shall be increased by an 
                amount equal to--
                          (i) such dollar amount, multiplied by
                          (ii) the cost-of-living adjustment 
                        determined under subsection (f)(3) for 
                        the calendar year in which the taxable 
                        year begins, determined by substituting 
                        ``calendar year 2017'' for ``calendar 
                        year 2016'' in subparagraph (A)(ii) 
                        thereof.
                If any increase under this subparagraph is not 
                a multiple of $50, such increase shall be 
                rounded to the next lowest multiple of $50.
          (6) Section 15 not to apply.--Section 15 shall not 
        apply to any change in a rate of tax by reason of this 
        subsection.

SEC. 2. DEFINITIONS AND SPECIAL RULES.

  (a) Definition of surviving spouse.--
          (1) In general.--For purposes of section 1, the term 
        ``surviving spouse'' means a taxpayer--
                  (A) whose spouse died during either of [his 
                two taxable years] the taxpayer's two taxable 
                years immediately preceding the taxable year, 
                and
                  (B) who maintains as [his home] the 
                taxpayer's home a household which constitutes 
                for the taxable year the principal place of 
                abode (as a member of such household) of a 
                dependent (i) who (within the meaning of 
                section 152, determined without regard to 
                subsections (b)(1), (b)(2), and (d)(1)(B) 
                thereof) is a son, stepson, daughter, or 
                stepdaughter of the taxpayer, and (ii) with 
                respect to whom the taxpayer is entitled to a 
                deduction for the taxable year under section 
                151.
        For purposes of this paragraph, an individual shall be 
        considered as maintaining a household only if over half 
        of the cost of maintaining the household during the 
        taxable year is furnished by such individual.
          (2) Limitations.--Notwithstanding paragraph (1), for 
        purposes of section 1 a taxpayer shall not be 
        considered to be a surviving spouse--
                  (A) if the taxpayer has remarried at any time 
                before the close of the taxable year, or
                  (B) unless, for the taxpayer's taxable year 
                during which [his spouse] the taxpayer's spouse 
                died, a joint return could have been made under 
                the provisions of section 6013 (without regard 
                to subsection (a)(3) thereof).
          (3) Special rule where deceased spouse was in missing 
        status.--If an individual was in a missing status 
        (within the meaning of section 6013(f)(3)) as a result 
        of service in a combat zone (as determined for purposes 
        of section 112) and if such individual remains in such 
        status until the date referred to in subparagraph (A) 
        or (B), then, for purposes of paragraph (1)(A), the 
        date on which such individual died shall be treated as 
        the earlier of the date determined under subparagraph 
        (A) or the date determined under subparagraph (B):
                  (A) the date on which the determination is 
                made under section 556 of title 37 of the 
                United States Code or under section 5566 of 
                title 5 of such Code (whichever is applicable) 
                that such individual died while in such missing 
                status, or
                  (B) except in the case of the combat zone 
                designated for purposes of the Vietnam 
                conflict, the date which is 2 years after the 
                date designated under section 112 as the date 
                of termination of combatant activities in that 
                zone.
  (b) Definition of head of household.--
          (1) In general.--For purposes of this subtitle, an 
        individual shall be considered a head of a household 
        if, and only if, such individual is not married at the 
        close of his taxable year, is not a surviving spouse 
        (as defined in subsection (a)), and either--
                  (A) maintains as his home a household which 
                constitutes for more than one-half of such 
                taxable year the principal place of abode, as a 
                member of such household, of--
                          (i) a qualifying child of the 
                        individual (as defined in section 
                        152(c), determined without regard to 
                        section 152(e)), but not if such 
                        child--
                                  (I) is married at the close 
                                of the taxpayer's taxable year, 
                                and
                                  (II) is not a dependent of 
                                such individual by reason of 
                                section 152(b)(2) or 152(b)(3), 
                                or both, or
                          (ii) any other person who is a 
                        dependent of the taxpayer, if the 
                        taxpayer is entitled to a deduction for 
                        the taxable year for such person under 
                        section 151, or
                  (B) maintains a household which constitutes 
                for such taxable year the principal place of 
                abode of the father or mother of the taxpayer, 
                if the taxpayer is entitled to a deduction for 
                the taxable year for such father or mother 
                under section 151.
        For purposes of this paragraph, an individual shall be 
        considered as maintaining a household only if over half 
        of the cost of maintaining the household during the 
        taxable year is furnished by such individual.
          (2) Determination of status.--For purposes of this 
        subsection--
                  (A) an individual who is legally separated 
                from [his spouse] the individual's spouse under 
                a decree of divorce or of separate maintenance 
                shall not be considered as married;
                  (B) a taxpayer shall be considered as not 
                married at the close of [his taxable year] the 
                taxpayer's taxable year if at any time during 
                the taxable year [his spouse] the taxpayer's 
                spouse is a nonresident alien; and
                  (C) a taxpayer shall be considered as married 
                at the close of [his taxable year] the 
                taxpayer's taxable year if [his spouse] the 
                taxpayer's spouse (other than a spouse 
                described in subparagraph (B)) died during the 
                taxable year.
          (3) Limitations.--Notwithstanding paragraph (1), for 
        purposes of this subtitle a taxpayer shall not be 
        considered to be a head of a household--
                  (A) if at any time during the taxable year he 
                is a nonresident alien; or
                  (B) by reason of an individual who would not 
                be a dependent for the taxable year but for--
                          (i) subparagraph (H) of section 
                        152(d)(2), or
                          (ii) paragraph (3) of section 152(d).
  (c) Certain married individuals living apart.--For purposes 
of this part, an individual shall be treated as not married at 
the close of the taxable year if such individual is so treated 
under the provisions of section 7703(b).
  (d) Nonresident aliens.--In the case of a nonresident alien 
individual, the taxes imposed by sections 1 and 55 shall apply 
only as provided by section 871 or 877.
  (e) Cross reference.--For definition of taxable income, see 
section 63.

           *       *       *       *       *       *       *

PART IV--CREDITS AGAINST TAX

           *       *       *       *       *       *       *

Subpart A--NONREFUNDABLE PERSONAL CREDITS

           *       *       *       *       *       *       *

SEC. 21. EXPENSES FOR HOUSEHOLD AND DEPENDENT CARE SERVICES NECESSARY 
                    FOR GAINFUL EMPLOYMENT.

  (a) Allowance of credit.--
          (1) In general.--In the case of an individual for 
        which there are 1 or more qualifying individuals (as 
        defined in subsection (b)(1)) with respect to such 
        individual, there shall be allowed as a credit against 
        the tax imposed by this chapter for the taxable year an 
        amount equal to the applicable percentage of the 
        employment-related expenses (as defined in subsection 
        (b)(2)) paid by such individual during the taxable 
        year.
          (2) Applicable percentage defined.--For purposes of 
        paragraph (1), the term ``applicable percentage'' means 
        35 percent reduced (but not below 20 percent) by 1 
        percentage point for each $2,000 (or fraction thereof) 
        by which the taxpayer's adjusted gross income for the 
        taxable year exceeds $15,000.
  (b) Definitions of qualifying individual and employment-
related expenses.--For purposes of this section--
          (1) Qualifying individual.--The term ``qualifying 
        individual'' means--
                  (A) a dependent of the taxpayer (as defined 
                in section 152(a)(1)) who has not attained age 
                13,
                  (B) a dependent of the taxpayer (as defined 
                in section 152, determined without regard to 
                subsections (b)(1), (b)(2), and (d)(1)(B)) who 
                is physically or mentally incapable of caring 
                for himself or herself and who has the same 
                principal place of abode as the taxpayer for 
                more than one-half of such taxable year, or
                  (C) the spouse of the taxpayer, if the spouse 
                is physically or mentally incapable of caring 
                for himself or herself and who has the same 
                principal place of abode as the taxpayer for 
                more than one-half of such taxable year.
          (2) Employment-related expenses.--
                  (A) In general.--The term ``employment-
                related expenses'' means amounts paid for the 
                following expenses, but only if such expenses 
                are incurred to enable the taxpayer to be 
                gainfully employed for any period for which 
                there are 1 or more qualifying individuals with 
                respect to the taxpayer:
                          (i) expenses for household services, 
                        and
                          (ii) expenses for the care of a 
                        qualifying individual.
                Such term shall not include any amount paid for 
                services outside the taxpayer's household at a 
                camp where the qualifying individual stays 
                overnight.
                  (B) Exception.--Employment-related expenses 
                described in subparagraph (A) which are 
                incurred for services outside the taxpayer's 
                household shall be taken into account only if 
                incurred for the care of--
                          (i) a qualifying individual described 
                        in paragraph (1)(A), or
                          (ii) a qualifying individual (not 
                        described in paragraph (1)(A)) who 
                        regularly spends at least 8 hours each 
                        day in the taxpayer's household.
                  (C) Dependent care centers.--Employment-
                related expenses described in subparagraph (A) 
                which are incurred for services provided 
                outside the taxpayer's household by a dependent 
                care center (as defined in subparagraph (D)) 
                shall be taken into account only if--
                          (i) such center complies with all 
                        applicable laws and regulations of a 
                        State or unit of local government, and
                          (ii) the requirements of subparagraph 
                        (B) are met.
                  (D) Dependent care center defined.--For 
                purposes of this paragraph, the term 
                ``dependent care center'' means any facility 
                which--
                          (i) provides care for more than six 
                        individuals (other than individuals who 
                        reside at the facility), and
                          (ii) receives a fee, payment, or 
                        grant for providing services for any of 
                        the individuals (regardless of whether 
                        such facility is operated for profit).
  (c) Dollar limit on amount creditable.--The amount of the 
employment-related expenses incurred during any taxable year 
which may be taken into account under subsection (a) shall not 
exceed--
          (1) $3,000 if there is 1 qualifying individual with 
        respect to the taxpayer for such taxable year, or
          (2) $6,000 if there are 2 or more qualifying 
        individuals with respect to the taxpayer for such 
        taxable year.
The amount determined under paragraph (1) or (2) (whichever is 
applicable) shall be reduced by the aggregate amount excludable 
from gross income under section 129 for the taxable year.
  (d) Earned income limitation.--
          (1) In general.--Except as otherwise provided in this 
        subsection, the amount of the employment-related 
        expenses incurred during any taxable year which may be 
        taken into account under subsection (a) shall not 
        exceed--
                  (A) in the case of an individual who is not 
                married at the close of such year, such 
                individual's earned income for such year, or
                  (B) in the case of an individual who is 
                married at the close of such year, the lesser 
                of such individual's earned income or the 
                earned income of [his spouse] the individual's 
                spouse for such year.
          (2) Special rule for spouse who is a student or 
        incapable of caring for [himself] self.--In the case of 
        a spouse who is a student or a qualifying individual 
        described in subsection (b)(1)(C), for purposes of 
        paragraph (1), such spouse shall be deemed for each 
        month during which such spouse is a full-time student 
        at an educational institution, or is such a qualifying 
        individual, to be gainfully employed and to have earned 
        income of not less than--
                  (A) $250 if subsection (c)(1) applies for the 
                taxable year, or
                  (B) $500 if subsection (c)(2) applies for the 
                taxable year.
        In the case of [any husband and wife] any married 
        couple, this paragraph shall apply with respect to only 
        one spouse for any one month.
  (e) Special rules.--For purposes of this section--
          (1) Place of abode.--An individual shall not be 
        treated as having the same principal place of abode of 
        the taxpayer if at any time during the taxable year of 
        the taxpayer the relationship between the individual 
        and the taxpayer is in violation of local law.
          (2) Married couples must file joint return.--If the 
        taxpayer is married at the close of the taxable year, 
        the credit shall be allowed under subsection (a) only 
        if the taxpayer and [his spouse] the taxpayer's spouse 
        file a joint return for the taxable year.
          (3) Marital status.--An individual legally separated 
        from [his spouse] the individual's spouse under a 
        decree of divorce or of separate maintenance shall not 
        be considered as married.
          (4) Certain married individuals living apart.--If--
                  (A) an individual who is married and who 
                files a separate return--
                          (i) maintains as [his home] the 
                        individual's home a household which 
                        constitutes for more than one-half of 
                        the taxable year the principal place of 
                        abode of a qualifying individual, and
                          (ii) furnishes over half of the cost 
                        of maintaining such household during 
                        the taxable year, and
                  (B) during the last 6 months of such taxable 
                year such individual's spouse is not a member 
                of such household,
        such individual shall not be considered as married.
          (5) Special dependency test in case of divorced 
        parents, etc..--If--
                  (A) section 152(e) applies to any child with 
                respect to any calendar year, and
                  (B) such child is under the age of 13 or is 
                physically or mentally incapable of caring for 
                himself,
        in the case of any taxable year beginning in such 
        calendar year, such child shall be treated as a 
        qualifying individual described in subparagraph (A) or 
        (B) of subsection (b)(1) (whichever is appropriate) 
        with respect to the custodial parent (as defined in 
        section 152(e)(4)(A)), and shall not be treated as a 
        qualifying individual with respect to the noncustodial 
        parent.
          (6) Payments to related individuals.--No credit shall 
        be allowed under subsection (a) for any amount paid by 
        the taxpayer to an individual--
                  (A) with respect to whom, for the taxable 
                year, a deduction under section 151(c) 
                (relating to deduction for personal exemptions 
                for dependents) is allowable either to the 
                taxpayer or [his spouse] the taxpayer's spouse, 
                or
                  (B) who is a child of the taxpayer (within 
                the meaning of section 152(f)(1)) who has not 
                attained the age of 19 at the close of the 
                taxable year.
        For purposes of this paragraph, the term ``taxable 
        year'' means the taxable year of the taxpayer in which 
        the service is performed.
          (7) Student.--The term ``student'' means an 
        individual who during each of 5 calendar months during 
        the taxable year is a full-time student at an 
        educational organization.
          (8) Educational organization.--The term ``educational 
        organization'' means an educational organization 
        described in section 170(b)(1)(A)(ii).
          (9) Identifying information required with respect to 
        service provider.--No credit shall be allowed under 
        subsection (a) for any amount paid to any person 
        unless--
                  (A) the name, address, and taxpayer 
                identification number of such person are 
                included on the return claiming the credit, or
                  (B) if such person is an organization 
                described in section 501(c)(3) and exempt from 
                tax under section 501(a), the name and address 
                of such person are included on the return 
                claiming the credit.
        In the case of a failure to provide the information 
        required under the preceding sentence, the preceding 
        sentence shall not apply if it is shown that the 
        taxpayer exercised due diligence in attempting to 
        provide the information so required.
          (10) Identifying information required with respect to 
        qualifying individuals.--No credit shall be allowed 
        under this section with respect to any qualifying 
        individual unless the TIN of such individual is 
        included on the return claiming the credit.
  (f) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary to carry out the purposes of 
this section.

SEC. 22. CREDIT FOR THE ELDERLY AND THE PERMANENTLY AND TOTALLY 
                    DISABLED.

  (a) General rule.--In the case of a qualified individual, 
there shall be allowed as a credit against the tax imposed by 
this chapter for the taxable year an amount equal to 15 percent 
of such individual's section 22 amount for such taxable year.
  (b) Qualified individual.--For purposes of this section, the 
term ``qualified individual'' means any individual--
          (1) who has attained age 65 before the close of the 
        taxable year, or
          (2) who retired on disability before the close of the 
        taxable year and who, when he retired, was permanently 
        and totally disabled.
  (c) Section 22 amount.--For purposes of subsection (a)--
          (1) In general.--An individual's section 22 amount 
        for the taxable year shall be the applicable initial 
        amount determined under paragraph (2), reduced as 
        provided in paragraph (3) and in subsection (d).
          (2) Initial amount.--
                  (A) In general.--Except as provided in 
                subparagraph (B), the initial amount shall be--
                          (i) $5,000 in the case of a single 
                        individual, or a joint return where 
                        only one spouse is a qualified 
                        individual,
                          (ii) $7,500 in the case of a joint 
                        return where both spouses are qualified 
                        individuals, or
                          (iii) $3,750 in the case of a married 
                        individual filing a separate return.
                  (B) Limitation in case of individuals who 
                have not attained age 65.--
                          (i) In general.--In the case of a 
                        qualified individual who has not 
                        attained age 65 before the close of the 
                        taxable year, except as provided in 
                        clause (ii), the initial amount shall 
                        not exceed the disability income for 
                        the taxable year.
                          (ii) Special rules in case of joint 
                        return.--In the case of a joint return 
                        where both spouses are qualified 
                        individuals and at least one spouse has 
                        not attained age 65 before the close of 
                        the taxable year--
                                  (I) if both spouses have not 
                                attained age 65 before the 
                                close of the taxable year, the 
                                initial amount shall not exceed 
                                the sum of such spouses' 
                                disability income, or
                                  (II) if one spouse has 
                                attained age 65 before the 
                                close of the taxable year, the 
                                initial amount shall not exceed 
                                the sum of $5,000 plus the 
                                disability income for the 
                                taxable year of the spouse who 
                                has not attained age 65 before 
                                the close of the taxable year.
                          (iii) Disability income.--For 
                        purposes of this subparagraph, the term 
                        ``disability income'' means the 
                        aggregate amount includable in the 
                        gross income of the individual for the 
                        taxable year under section 72 or 105(a) 
                        to the extent such amount constitutes 
                        wages (or payments in lieu of wages) 
                        for the period during which the 
                        individual is absent from work on 
                        account of permanent and total 
                        disability.
          (3) Reduction.--
                  (A) In general.--The reduction under this 
                paragraph is an amount equal to the sum of the 
                amounts received by the individual (or, in the 
                case of a joint return, by either spouse) as a 
                pension or annuity or as a disability benefit--
                          (i) which is excluded from gross 
                        income and payable under--
                                  (I) title II of the Social 
                                Security Act,
                                  (II) the Railroad Retirement 
                                Act of 1974, or
                                  (III) a law administered by 
                                the Department of Veterans 
                                Affairs, or
                          (ii) which is excluded from gross 
                        income under any provision of law not 
                        contained in this title.
                No reduction shall be made under clause 
                (i)(III) for any amount described in section 
                104(a)(4).
                  (B) Treatment of certain workmen's 
                compensation benefits.--For purposes of 
                subparagraph (A), any amount treated as a 
                social security benefit under section 86(d)(3) 
                shall be treated as a disability benefit 
                received under title II of the Social Security 
                Act.
  (d) Adjusted gross income limitation.--If the adjusted gross 
income of the taxpayer exceeds--
          (1) $7,500 in the case of a single individual,
          (2) $10,000 in the case of a joint return, or
          (3) $5,000 in the case of a married individual filing 
        a separate return,
the section 22 amount shall be reduced by one-half of the 
excess of the adjusted gross income over $7,500, $10,000, or 
$5,000, as the case may be.
  (e) Definitions and special rules.--For purposes of this 
section--
          (1) Married couple must file joint return.--Except in 
        the case of a [husband and wife who live] married 
        couple who lives apart at all times during the taxable 
        year, if the taxpayer is married at the close of the 
        taxable year, the credit provided by this section shall 
        be allowed only if [the taxpayer and his spouse] the 
        taxpayer and the spouse of the taxpayer file a joint 
        return for the taxable year.
          (2) Marital status.--Marital status shall be 
        determined under section 7703.
          (3) Permanent and total disability defined.--An 
        individual is permanently and totally disabled if he is 
        unable to engage in any substantial gainful activity by 
        reason of any medically determinable physical or mental 
        impairment which can be expected to result in death or 
        which has lasted or can be expected to last for a 
        continuous period of not less than 12 months. An 
        individual shall not be considered to be permanently 
        and totally disabled unless he furnishes proof of the 
        existence thereof in such form and manner, and at such 
        times, as the Secretary may require.
  (f) Nonresident alien ineligible for credit.--No credit shall 
be allowed under this section to any nonresident alien.

           *       *       *       *       *       *       *

Subpart C--REFUNDABLE CREDITS

           *       *       *       *       *       *       *

SEC. 36. FIRST-TIME HOMEBUYER CREDIT.

  (a) Allowance of credit.--In the case of an individual who is 
a first-time homebuyer of a principal residence in the United 
States during a taxable year, there shall be allowed as a 
credit against the tax imposed by this subtitle for such 
taxable year an amount equal to 10 percent of the purchase 
price of the residence.
  (b) Limitations.--
          (1) Dollar limitation.--
                  (A) In general.--Except as otherwise provided 
                in this paragraph, the credit allowed under 
                subsection (a) shall not exceed $8,000.
                  (B) Married individuals filing separately.--
                In the case of a married individual filing a 
                separate return, subparagraph (A) shall be 
                applied by substituting ``$4,000'' for 
                ``$8,000''.
                  (C) Other individuals.--If two or more 
                individuals who are not married purchase a 
                principal residence, the amount of the credit 
                allowed under subsection (a) shall be allocated 
                among such individuals in such manner as the 
                Secretary may prescribe, except that the total 
                amount of the credits allowed to all such 
                individuals shall not exceed $8,000.
                  (D) Special rule for long-time residents of 
                same principal residence.--In the case of a 
                taxpayer to whom a credit under subsection (a) 
                is allowed by reason of subsection (c)(6), 
                subparagraphs (A), (B), and (C) shall be 
                applied by substituting ``$6,500'' for 
                ``$8,000'' and ``$3,250'' for ``$4,000''.
          (2) Limitation based on modified adjusted gross 
        income.--
                  (A) In general.--The amount allowable as a 
                credit under subsection (a) (determined without 
                regard to this paragraph) for the taxable year 
                shall be reduced (but not below zero) by the 
                amount which bears the same ratio to the amount 
                which is so allowable as--
                          (i) the excess (if any) of--
                                  (I) the taxpayer's modified 
                                adjusted gross income for such 
                                taxable year, over
                                  (II) $125,000 ($225,000 in 
                                the case of a joint return), 
                                bears to
                          (ii) $20,000.
                  (B) Modified adjusted gross income.--For 
                purposes of subparagraph (A), the term 
                ``modified adjusted gross income'' means the 
                adjusted gross income of the taxpayer for the 
                taxable year increased by any amount excluded 
                from gross income under section 911, 931, or 
                933.
          (3) Limitation based on purchase price.--No credit 
        shall be allowed under subsection (a) for the purchase 
        of any residence if the purchase price of such 
        residence exceeds $800,000.
          (4) Age limitation.--No credit shall be allowed under 
        subsection (a) with respect to the purchase of any 
        residence unless the taxpayer has attained age 18 as of 
        the date of such purchase. In the case of any taxpayer 
        who is married (within the meaning of section 7703), 
        the taxpayer shall be treated as meeting the age 
        requirement of the preceding sentence if the taxpayer 
        or the taxpayer's spouse meets such age requirement.
  (c) Definitions.--For purposes of this section--
          (1) First-time homebuyer.--The term ``first-time 
        homebuyer'' means any individual if such individual 
        (and if married, such individual's spouse) had no 
        present ownership interest in a principal residence 
        during the 3-year period ending on the date of the 
        purchase of the principal residence to which this 
        section applies.
          (2) Principal residence.--The term ``principal 
        residence'' has the same meaning as when used in 
        section 121.
          (3) Purchase.--
                  (A) In general.--The term ``purchase'' means 
                any acquisition, but only if--
                          (i) the property is not acquired from 
                        a person related to the person 
                        acquiring such property (or, if 
                        married, such individual's spouse), and
                          (ii) the basis of the property in the 
                        hands of the person acquiring such 
                        property is not determined--
                                  (I) in whole or in part by 
                                reference to the adjusted basis 
                                of such property in the hands 
                                of the person from whom 
                                acquired, or
                                  (II) under section 1014(a) 
                                (relating to property acquired 
                                from a decedent).
                  (B) Construction.--A residence which is 
                constructed by the taxpayer shall be treated as 
                purchased by the taxpayer on the date the 
                taxpayer first occupies such residence.
          (4) Purchase price.--The term ``purchase price'' 
        means the adjusted basis of the principal residence on 
        the date such residence is purchased.
          (5) Related persons.--A person shall be treated as 
        related to another person if the relationship between 
        such persons would result in the disallowance of losses 
        under section 267 or 707(b) (but, in applying section 
        267(b) and (c) for purposes of this section, paragraph 
        (4) of section 267(c) shall be treated as providing 
        that the family of an individual shall include only 
        [his spouse] the individual's spouse , ancestors, and 
        lineal descendants).
          (6) Exception for long-time residents of same 
        principal residence.--In the case of an individual 
        (and, if married, such individual's spouse) who has 
        owned and used the same residence as such individual's 
        principal residence for any 5-consecutive-year period 
        during the 8-year period ending on the date of the 
        purchase of a subsequent principal residence, such 
        individual shall be treated as a first-time homebuyer 
        for purposes of this section with respect to the 
        purchase of such subsequent residence.
  (d) Exceptions.--No credit under subsection (a) shall be 
allowed to any taxpayer for any taxable year with respect to 
the purchase of a residence if--
          (1) the taxpayer is a nonresident alien,
          (2) the taxpayer disposes of such residence (or such 
        residence ceases to be the principal residence of the 
        taxpayer (and, if married, the taxpayer's spouse)) 
        before the close of such taxable year,
          (3) a deduction under section 151 with respect to 
        such taxpayer is allowable to another taxpayer for such 
        taxable year, or
          (4) the taxpayer fails to attach to the return of tax 
        for such taxable year a properly executed copy of the 
        settlement statement used to complete such purchase.
  (e) Reporting.--If the Secretary requires information 
reporting under section 6045 by a person described in 
subsection (e)(2) thereof to verify the eligibility of 
taxpayers for the credit allowable by this section, the 
exception provided by section 6045(e) shall not apply.
  (f) Recapture of credit.--
          (1) In general.--Except as otherwise provided in this 
        subsection, if a credit under subsection (a) is allowed 
        to a taxpayer, the tax imposed by this chapter shall be 
        increased by 62/3 percent of the amount of such credit 
        for each taxable year in the recapture period.
          (2) Acceleration of recapture.--If a taxpayer 
        disposes of the principal residence with respect to 
        which a credit was allowed under subsection (a) (or 
        such residence ceases to be the principal residence of 
        the taxpayer (and, if married, the taxpayer's spouse)) 
        before the end of the recapture period--
                  (A) the tax imposed by this chapter for the 
                taxable year of such disposition or cessation 
                shall be increased by the excess of the amount 
                of the credit allowed over the amounts of tax 
                imposed by paragraph (1) for preceding taxable 
                years, and
                  (B) paragraph (1) shall not apply with 
                respect to such credit for such taxable year or 
                any subsequent taxable year.
          (3) Limitation based on gain.--In the case of the 
        sale of the principal residence to a person who is not 
        related to the taxpayer, the increase in tax determined 
        under paragraph (2) shall not exceed the amount of gain 
        (if any) on such sale. Solely for purposes of the 
        preceding sentence, the adjusted basis of such 
        residence shall be reduced by the amount of the credit 
        allowed under subsection (a) to the extent not 
        previously recaptured under paragraph (1).
          (4) Exceptions.--
                  (A) Death of taxpayer.--Paragraphs (1) and 
                (2) shall not apply to any taxable year ending 
                after the date of the taxpayer's death.
                  (B) Involuntary conversion.--Paragraph (2) 
                shall not apply in the case of a residence 
                which is compulsorily or involuntarily 
                converted (within the meaning of section 
                1033(a)) if the taxpayer acquires a new 
                principal residence during the 2-year period 
                beginning on the date of the disposition or 
                cessation referred to in paragraph (2). 
                Paragraph (2) shall apply to such new principal 
                residence during the recapture period in the 
                same manner as if such new principal residence 
                were the converted residence.
                  (C) Transfers between spouses or incident to 
                divorce.--In the case of a transfer of a 
                residence to which section 1041(a) applies--
                          (i) paragraph (2) shall not apply to 
                        such transfer, and
                          (ii) in the case of taxable years 
                        ending after such transfer, paragraphs 
                        (1) and (2) shall apply to the 
                        transferee in the same manner as if 
                        such transferee were the transferor 
                        (and shall not apply to the 
                        transferor).
                  (D) Waiver of recapture for purchases in 2009 
                and 2010.--In the case of any credit allowed 
                with respect to the purchase of a principal 
                residence after December 31, 2008--
                          (i) paragraph (1) shall not apply, 
                        and
                          (ii) paragraph (2) shall apply only 
                        if the disposition or cessation 
                        described in paragraph (2) with respect 
                        to such residence occurs during the 36-
                        month period beginning on the date of 
                        the purchase of such residence by the 
                        taxpayer.
                  (E) Special rule for members of the armed 
                forces, etc..--
                          (i) In general.--In the case of the 
                        disposition of a principal residence by 
                        an individual (or a cessation referred 
                        to in paragraph (2)) after December 31, 
                        2008, in connection with Government 
                        orders received by such individual, or 
                        such individual's spouse, for qualified 
                        official extended duty service--
                                  (I) paragraph (2) and 
                                subsection (d)(2) shall not 
                                apply to such disposition (or 
                                cessation), and
                                  (II) if such residence was 
                                acquired before January 1, 
                                2009, paragraph (1) shall not 
                                apply to the taxable year in 
                                which such disposition (or 
                                cessation) occurs or any 
                                subsequent taxable year.
                          (ii) Qualified official extended duty 
                        service.--For purposes of this section, 
                        the term ``qualified official extended 
                        duty service'' means service on 
                        qualified official extended duty as--
                                  (I) a member of the uniformed 
                                services,
                                  (II) a member of the Foreign 
                                Service of the United States, 
                                or
                                  (III) an employee of the 
                                intelligence community.
                          (iii) Definitions.--Any term used in 
                        this subparagraph which is also used in 
                        paragraph (9) of section 121(d) shall 
                        have the same meaning as when used in 
                        such paragraph.
          (5) Joint returns.--In the case of a credit allowed 
        under subsection (a) with respect to a joint return, 
        half of such credit shall be treated as having been 
        allowed to each individual filing such return for 
        purposes of this subsection.
          (6) Return requirement.--If the tax imposed by this 
        chapter for the taxable year is increased under this 
        subsection, the taxpayer shall, notwithstanding section 
        6012, be required to file a return with respect to the 
        taxes imposed under this subtitle.
          (7) Recapture period.--For purposes of this 
        subsection, the term ``recapture period'' means the 15 
        taxable years beginning with the second taxable year 
        following the taxable year in which the purchase of the 
        principal residence for which a credit is allowed under 
        subsection (a) was made.
  (g) Election to treat purchase in prior year.--In the case of 
a purchase of a principal residence after December 31, 2008, a 
taxpayer may elect to treat such purchase as made on December 
31 of the calendar year preceding such purchase for purposes of 
this section (other than subsections (b)(4), (c), (f)(4)(D), 
and (h)).
  (h) Application of section.--
          (1) In general.--This section shall only apply to a 
        principal residence purchased by the taxpayer on or 
        after April 9, 2008, and before May 1, 2010.
          (2) Exception in case of binding contract.--In the 
        case of any taxpayer who enters into a written binding 
        contract before May 1, 2010, to close on the purchase 
        of a principal residence before July 1, 2010, and who 
        purchases such residence before October 1, 2010, 
        paragraph (1) shall be applied by substituting 
        ``October 1, 2010'' for ``May 1, 2010''.
          (3) Special rule for individuals on qualified 
        official extended duty outside the United States.--In 
        the case of any individual who serves on qualified 
        official extended duty service (as defined in section 
        121(d)(9)(C)(i)) outside the United States for at least 
        90 days during the period beginning after December 31, 
        2008, and ending before May 1, 2010, and, if married, 
        such individual's spouse--
                  (A) paragraphs (1) and (2) shall each be 
                applied by substituting ``May 1, 2011'' for 
                ``May 1, 2010'', and
                  (B) paragraph (2) shall be applied by 
                substituting ``July 1, 2011'' for ``July 1, 
                2010'', and for ``October 1, 2010''.

           *       *       *       *       *       *       *

SEC. 36B. REFUNDABLE CREDIT FOR COVERAGE UNDER A QUALIFIED HEALTH PLAN.

  (a) In general.--In the case of an applicable taxpayer, there 
shall be allowed as a credit against the tax imposed by this 
subtitle for any taxable year an amount equal to the premium 
assistance credit amount of the taxpayer for the taxable year.
  (b) Premium assistance credit amount.--For purposes of this 
section--
          (1) In general.--The term ``premium assistance credit 
        amount'' means, with respect to any taxable year, the 
        sum of the premium assistance amounts determined under 
        paragraph (2) with respect to all coverage months of 
        the taxpayer occurring during the taxable year.
          (2) Premium assistance amount.--The premium 
        assistance amount determined under this subsection with 
        respect to any coverage month is the amount equal to 
        the lesser of--
                  (A) the monthly premiums for such month for 1 
                or more qualified health plans offered in the 
                individual market within a State which cover 
                the taxpayer, the taxpayer's spouse, or any 
                dependent (as defined in section 152) of the 
                taxpayer and which were enrolled in through an 
                Exchange established by the State under 1311 of 
                the Patient Protection and Affordable Care Act, 
                or
                  (B) the excess (if any) of--
                          (i) the adjusted monthly premium for 
                        such month for the applicable second 
                        lowest cost silver plan with respect to 
                        the taxpayer, over
                          (ii) an amount equal to 1/12 of the 
                        product of the applicable percentage 
                        and the taxpayer's household income for 
                        the taxable year.
          (3) Other terms and rules relating to premium 
        assistance amounts.--For purposes of paragraph (2)--
                  (A) Applicable percentage.--
                          (i) In general.--Except as provided 
                        in clause (ii), the applicable 
                        percentage for any taxable year shall 
                        be the percentage such that the 
                        applicable percentage for any taxpayer 
                        whose household income is within an 
                        income tier specified in the following 
                        table shall increase, on a sliding 
                        scale in a linear manner, from the 
                        initial premium percentage to the final 
                        premium percentage specified in such 
                        table for such income tier:
                          (ii) Indexing.--
                                  (I) In general.--Subject to 
                                subclause (II), in the case of 
                                taxable years beginning in any 
                                calendar year after 2014, the 
                                initial and final applicable 
                                percentages under clause (i) 
                                (as in effect for the preceding 
                                calendar year after application 
                                of this clause) shall be 
                                adjusted to reflect the excess 
                                of the rate of premium growth 
                                for the preceding calendar year 
                                over the rate of income growth 
                                for the preceding calendar 
                                year.
                                  (II) Additional adjustment.--
                                Except as provided in subclause 
                                (III), in the case of any 
                                calendar year after 2018, the 
                                percentages described in 
                                subclause (I) shall, in 
                                addition to the adjustment 
                                under subclause (I), be 
                                adjusted to reflect the excess 
                                (if any) of the rate of premium 
                                growth estimated under 
                                subclause (I) for the preceding 
                                calendar year over the rate of 
                                growth in the consumer price 
                                index for the preceding 
                                calendar year.
                                  (III) Failsafe.--Subclause 
                                (II) shall apply for any 
                                calendar year only if the 
                                aggregate amount of premium tax 
                                credits under this section and 
                                cost-sharing reductions under 
                                section 1402 of the Patient 
                                Protection and Affordable Care 
                                Act for the preceding calendar 
                                year exceeds an amount equal to 
                                0.504 percent of the gross 
                                domestic product for the 
                                preceding calendar year.
                  (B) Applicable second lowest cost silver 
                plan.--The applicable second lowest cost silver 
                plan with respect to any applicable taxpayer is 
                the second lowest cost silver plan of the 
                individual market in the rating area in which 
                the taxpayer resides which--
                          (i) is offered through the same 
                        Exchange through which the qualified 
                        health plans taken into account under 
                        paragraph (2)(A) were offered, and
                          (ii) provides--
                                  (I) self-only coverage in the 
                                case of an applicable 
                                taxpayer--
                                          (aa) whose tax for 
                                        the taxable year is 
                                        determined under 
                                        section 1(c) (relating 
                                        to unmarried 
                                        individuals other than 
                                        surviving spouses and 
                                        heads of households) 
                                        and who is not allowed 
                                        a deduction under 
                                        section 151 for the 
                                        taxable year with 
                                        respect to a dependent, 
                                        or
                                          (bb) who is not 
                                        described in item (aa) 
                                        but who purchases only 
                                        self-only coverage, and
                                  (II) family coverage in the 
                                case of any other applicable 
                                taxpayer.
                If a taxpayer files a joint return and no 
                credit is allowed under this section with 
                respect to 1 of the spouses by reason of 
                subsection (e), the taxpayer shall be treated 
                as described in clause (ii)(I) unless a 
                deduction is allowed under section 151 for the 
                taxable year with respect to a dependent other 
                than either spouse and subsection (e) does not 
                apply to the dependent.
                  (C) Adjusted monthly premium.--The adjusted 
                monthly premium for an applicable second lowest 
                cost silver plan is the monthly premium which 
                would have been charged (for the rating area 
                with respect to which the premiums under 
                paragraph (2)(A) were determined) for the plan 
                if each individual covered under a qualified 
                health plan taken into account under paragraph 
                (2)(A) were covered by such silver plan and the 
                premium was adjusted only for the age of each 
                such individual in the manner allowed under 
                section 2701 of the Public Health Service Act. 
                In the case of a State participating in the 
                wellness discount demonstration project under 
                section 2705(d) of the Public Health Service 
                Act, the adjusted monthly premium shall be 
                determined without regard to any premium 
                discount or rebate under such project.
                  (D) Additional benefits.--If--
                          (i) a qualified health plan under 
                        section 1302(b)(5) of the Patient 
                        Protection and Affordable Care Act 
                        offers benefits in addition to the 
                        essential health benefits required to 
                        be provided by the plan, or
                          (ii) a State requires a qualified 
                        health plan under section 1311(d)(3)(B) 
                        of such Act to cover benefits in 
                        addition to the essential health 
                        benefits required to be provided by the 
                        plan,
                the portion of the premium for the plan 
                properly allocable (under rules prescribed by 
                the Secretary of Health and Human Services) to 
                such additional benefits shall not be taken 
                into account in determining either the monthly 
                premium or the adjusted monthly premium under 
                paragraph (2).
                  (E) Special rule for pediatric dental 
                coverage.--For purposes of determining the 
                amount of any monthly premium, if an individual 
                enrolls in both a qualified health plan and a 
                plan described in section 1311(d)(2)(B)(ii)(I) 
                of the Patient Protection and Affordable Care 
                Act for any plan year, the portion of the 
                premium for the plan described in such section 
                that (under regulations prescribed by the 
                Secretary) is properly allocable to pediatric 
                dental benefits which are included in the 
                essential health benefits required to be 
                provided by a qualified health plan under 
                section 1302(b)(1)(J) of such Act shall be 
                treated as a premium payable for a qualified 
                health plan.
  (c) Definition and rules relating to applicable taxpayers, 
coverage months, and qualified health plan.--For purposes of 
this section--
          (1) Applicable taxpayer.--
                  (A) In general.--The term ``applicable 
                taxpayer'' means, with respect to any taxable 
                year, a taxpayer whose household income for the 
                taxable year equals or exceeds 100 percent but 
                does not exceed 400 percent of an amount equal 
                to the poverty line for a family of the size 
                involved.
                  (B) Special rule for certain individuals 
                lawfully present in the United States.--If--
                          (i) a taxpayer has a household income 
                        which is not greater than 100 percent 
                        of an amount equal to the poverty line 
                        for a family of the size involved, and
                          (ii) the taxpayer is an alien 
                        lawfully present in the United States, 
                        but is not eligible for the medicaid 
                        program under title XIX of the Social 
                        Security Act by reason of such alien 
                        status,
                the taxpayer shall, for purposes of the credit 
                under this section, be treated as an applicable 
                taxpayer with a household income which is equal 
                to 100 percent of the poverty line for a family 
                of the size involved.
                  (C) Married couples must file joint return.--
                If the taxpayer is married (within the meaning 
                of section 7703) at the close of the taxable 
                year, the taxpayer shall be treated as an 
                applicable taxpayer only if the taxpayer and 
                the taxpayer's spouse file a joint return for 
                the taxable year.
                  (D) Denial of credit to dependents.--No 
                credit shall be allowed under this section to 
                any individual with respect to whom a deduction 
                under section 151 is allowable to another 
                taxpayer for a taxable year beginning in the 
                calendar year in which such individual's 
                taxable year begins.
          (2) Coverage month.--For purposes of this 
        subsection--
                  (A) In general.--The term ``coverage month'' 
                means, with respect to an applicable taxpayer, 
                any month if--
                          (i) as of the first day of such month 
                        the taxpayer, the taxpayer's spouse, or 
                        any dependent of the taxpayer is 
                        covered by a qualified health plan 
                        described in subsection (b)(2)(A) that 
                        was enrolled in through an Exchange 
                        established by the State under section 
                        1311 of the Patient Protection and 
                        Affordable Care Act, and
                          (ii) the premium for coverage under 
                        such plan for such month is paid by the 
                        taxpayer (or through advance payment of 
                        the credit under subsection (a) under 
                        section 1412 of the Patient Protection 
                        and Affordable Care Act).
                  (B) Exception for minimum essential 
                coverage.--
                          (i) In general.--The term ``coverage 
                        month'' shall not include any month 
                        with respect to an individual if for 
                        such month the individual is eligible 
                        for minimum essential coverage other 
                        than eligibility for coverage described 
                        in section 5000A(f)(1)(C) (relating to 
                        coverage in the individual market).
                          (ii) Minimum essential coverage.--The 
                        term ``minimum essential coverage'' has 
                        the meaning given such term by section 
                        5000A(f).
                  (C) Special rule for employer-sponsored 
                minimum essential coverage.--For purposes of 
                subparagraph (B)--
                          (i) Coverage must be affordable.--
                        Except as provided in clause (iii), an 
                        employee shall not be treated as 
                        eligible for minimum essential coverage 
                        if such coverage--
                                  (I) consists of an eligible 
                                employer-sponsored plan (as 
                                defined in section 
                                5000A(f)(2)), and
                                  (II) the employee's required 
                                contribution (within the 
                                meaning of section 
                                5000A(e)(1)(B)) with respect to 
                                the plan exceeds 9.5 percent of 
                                the applicable taxpayer's 
                                household income.
                 This clause shall also apply to an individual 
                who is eligible to enroll in the plan by reason 
                of a relationship the individual bears to the 
                employee.
                          (ii) Coverage must provide minimum 
                        value.--Except as provided in clause 
                        (iii), an employee shall not be treated 
                        as eligible for minimum essential 
                        coverage if such coverage consists of 
                        an eligible employer-sponsored plan (as 
                        defined in section 5000A(f)(2)) and the 
                        plan's share of the total allowed costs 
                        of benefits provided under the plan is 
                        less than 60 percent of such costs.
                          (iii) Employee or family must not be 
                        covered under employer plan.--Clauses 
                        (i) and (ii) shall not apply if the 
                        employee (or any individual described 
                        in the last sentence of clause (i)) is 
                        covered under the eligible employer-
                        sponsored plan or the grandfathered 
                        health plan.
                          (iv) Indexing.--In the case of plan 
                        years beginning in any calendar year 
                        after 2014, the Secretary shall adjust 
                        the 9.5 percent under clause (i)(II) in 
                        the same manner as the percentages are 
                        adjusted under subsection 
                        (b)(3)(A)(ii).
          (3) Definitions and other rules.--
                  (A) Qualified health plan.--The term 
                ``qualified health plan'' has the meaning given 
                such term by section 1301(a) of the Patient 
                Protection and Affordable Care Act, except that 
                such term shall not include a qualified health 
                plan which is a catastrophic plan described in 
                section 1302(e) of such Act.
                  (B) Grandfathered health plan.--The term 
                ``grandfathered health plan'' has the meaning 
                given such term by section 1251 of the Patient 
                Protection and Affordable Care Act.
          (4) Special rules for qualified small employer health 
        reimbursement arrangements.--
                  (A) In general.--The term ``coverage month'' 
                shall not include any month with respect to an 
                employee (or any spouse or dependent of such 
                employee) if for such month the employee is 
                provided a qualified small employer health 
                reimbursement arrangement which constitutes 
                affordable coverage.
                  (B) Denial of double benefit.--In the case of 
                any employee who is provided a qualified small 
                employer health reimbursement arrangement for 
                any coverage month (determined without regard 
                to subparagraph (A)), the credit otherwise 
                allowable under subsection (a) to the taxpayer 
                for such month shall be reduced (but not below 
                zero) by the amount described in subparagraph 
                (C)(i)(II) for such month.
                  (C) Affordable coverage.--For purposes of 
                subparagraph (A), a qualified small employer 
                health reimbursement arrangement shall be 
                treated as constituting affordable coverage for 
                a month if--
                          (i) the excess of--
                                  (I) the amount that would be 
                                paid by the employee as the 
                                premium for such month for 
                                self-only coverage under the 
                                second lowest cost silver plan 
                                offered in the relevant 
                                individual health insurance 
                                market, over
                                  (II) 1/
                                12 of the employee's 
                                permitted benefit (as defined 
                                in section 9831(d)(3)(C)) under 
                                such arrangement, does not 
                                exceed--
                          (ii) 1/12 of 
                        9.5 percent of the employee's household 
                        income.
                  (D) Qualified small employer health 
                reimbursement arrangement.--For purposes of 
                this paragraph, the term ``qualified small 
                employer health reimbursement arrangement'' has 
                the meaning given such term by section 
                9831(d)(2).
                  (E) Coverage for less than entire year.--In 
                the case of an employee who is provided a 
                qualified small employer health reimbursement 
                arrangement for less than an entire year, 
                subparagraph (C)(i)(II) shall be applied by 
                substituting ``the number of months during the 
                year for which such arrangement was provided'' 
                for ``12''.
                  (F) Indexing.--In the case of plan years 
                beginning in any calendar year after 2014, the 
                Secretary shall adjust the 9.5 percent amount 
                under subparagraph (C)(ii) in the same manner 
                as the percentages are adjusted under 
                subsection (b)(3)(A)(ii).
  (d) Terms relating to income and families.--For purposes of 
this section--
          (1) Family size.--The family size involved with 
        respect to any taxpayer shall be equal to the number of 
        individuals for whom the taxpayer is allowed a 
        deduction under section 151 (relating to allowance of 
        deduction for personal exemptions) for the taxable 
        year.
          (2) Household income.--
                  (A) Household income.--The term ``household 
                income'' means, with respect to any taxpayer, 
                an amount equal to the sum of--
                          (i) the modified adjusted gross 
                        income of the taxpayer, plus
                          (ii) the aggregate modified adjusted 
                        gross incomes of all other individuals 
                        who--
                                  (I) were taken into account 
                                in determining the taxpayer's 
                                family size under paragraph 
                                (1), and
                                  (II) were required to file a 
                                return of tax imposed by 
                                section 1 for the taxable year.
                  (B) Modified adjusted gross income.--The term 
                ``modified adjusted gross income'' means 
                adjusted gross income increased by--
                          (i) any amount excluded from gross 
                        income under section 911,
                          (ii) any amount of interest received 
                        or accrued by the taxpayer during the 
                        taxable year which is exempt from tax, 
                        and
                          (iii) an amount equal to the portion 
                        of the taxpayer's social security 
                        benefits (as defined in section 86(d)) 
                        which is not included in gross income 
                        under section 86 for the taxable year.
          (3) Poverty line.--
                  (A) In general.--The term ``poverty line'' 
                has the meaning given that term in section 
                2110(c)(5) of the Social Security Act (42 
                U.S.C. 1397jj(c)(5)).
                  (B) Poverty line used.--In the case of any 
                qualified health plan offered through an 
                Exchange for coverage during a taxable year 
                beginning in a calendar year, the poverty line 
                used shall be the most recently published 
                poverty line as of the 1st day of the regular 
                enrollment period for coverage during such 
                calendar year.
  (e) Rules for individuals not lawfully present.--
          (1) In general.--If 1 or more individuals for whom a 
        taxpayer is allowed a deduction under section 151 
        (relating to allowance of deduction for personal 
        exemptions) for the taxable year (including the 
        taxpayer or [his spouse] the taxpayer's spouse ) are 
        individuals who are not lawfully present--
                  (A) the aggregate amount of premiums 
                otherwise taken into account under clauses (i) 
                and (ii) of subsection (b)(2)(A) shall be 
                reduced by the portion (if any) of such 
                premiums which is attributable to such 
                individuals, and
                  (B) for purposes of applying this section, 
                the determination as to what percentage a 
                taxpayer's household income bears to the 
                poverty level for a family of the size involved 
                shall be made under one of the following 
                methods:
                          (i) A method under which--
                                  (I) the taxpayer's family 
                                size is determined by not 
                                taking such individuals into 
                                account, and
                                  (II) the taxpayer's household 
                                income is equal to the product 
                                of the taxpayer's household 
                                income (determined without 
                                regard to this subsection) and 
                                a fraction--
                                          (aa) the numerator of 
                                        which is the poverty 
                                        line for the taxpayer's 
                                        family size determined 
                                        after application of 
                                        subclause (I), and
                                          (bb) the denominator 
                                        of which is the poverty 
                                        line for the taxpayer's 
                                        family size determined 
                                        without regard to 
                                        subclause (I).
                          (ii) A comparable method reaching the 
                        same result as the method under clause 
                        (i).
          (2) Lawfully present.--For purposes of this section, 
        an individual shall be treated as lawfully present only 
        if the individual is, and is reasonably expected to be 
        for the entire period of enrollment for which the 
        credit under this section is being claimed, a citizen 
        or national of the United States or an alien lawfully 
        present in the United States.
          (3) Secretarial authority.--The Secretary of Health 
        and Human Services, in consultation with the Secretary, 
        shall prescribe rules setting forth the methods by 
        which calculations of family size and household income 
        are made for purposes of this subsection. Such rules 
        shall be designed to ensure that the least burden is 
        placed on individuals enrolling in qualified health 
        plans through an Exchange and taxpayers eligible for 
        the credit allowable under this section.
  (f) Reconciliation of credit and advance credit.--
          (1) In general.--The amount of the credit allowed 
        under this section for any taxable year shall be 
        reduced (but not below zero) by the amount of any 
        advance payment of such credit under section 1412 of 
        the Patient Protection and Affordable Care Act.
          (2) Excess advance payments.--
                  (A) In general.--If the advance payments to a 
                taxpayer under section 1412 of the Patient 
                Protection and Affordable Care Act for a 
                taxable year exceed the credit allowed by this 
                section (determined without regard to paragraph 
                (1)), the tax imposed by this chapter for the 
                taxable year shall be increased by the amount 
                of such excess.
                  (B) Limitation on increase.--
                          (i) In general.--In the case of a 
                        taxpayer whose household income is less 
                        than 400 percent of the poverty line 
                        for the size of the family involved for 
                        the taxable year, the amount of the 
                        increase under subparagraph (A) shall 
                        in no event exceed the applicable 
                        dollar amount determined in accordance 
                        with the following table (one-half of 
                        such amount in the case of a taxpayer 
                        whose tax is determined under section 
                        1(c) for the taxable year):
                          (ii) Indexing of amount.--In the case 
                        of any calendar year beginning after 
                        2014, each of the dollar amounts in the 
                        table contained under clause (i) shall 
                        be increased by an amount equal to--
                                  (I) such dollar amount, 
                                multiplied by
                                  (II) the cost-of-living 
                                adjustment determined under 
                                section 1(f)(3) for the 
                                calendar year, determined by 
                                substituting ``calendar year 
                                2013'' for ``calendar year 
                                2016'' in subparagraph (A)(ii) 
                                thereof.
                 If the amount of any increase under clause (i) 
                is not a multiple of $50, such increase shall 
                be rounded to the next lowest multiple of $50.
          (3) Information requirement.--Each Exchange (or any 
        person carrying out 1 or more responsibilities of an 
        Exchange under section 1311(f)(3) or 1321(c) of the 
        Patient Protection and Affordable Care Act) shall 
        provide the following information to the Secretary and 
        to the taxpayer with respect to any health plan 
        provided through the Exchange:
                  (A) The level of coverage described in 
                section 1302(d) of the Patient Protection and 
                Affordable Care Act and the period such 
                coverage was in effect.
                  (B) The total premium for the coverage 
                without regard to the credit under this section 
                or cost-sharing reductions under section 1402 
                of such Act.
                  (C) The aggregate amount of any advance 
                payment of such credit or reductions under 
                section 1412 of such Act.
                  (D) The name, address, and TIN of the primary 
                insured and the name and TIN of each other 
                individual obtaining coverage under the policy.
                  (E) Any information provided to the Exchange, 
                including any change of circumstances, 
                necessary to determine eligibility for, and the 
                amount of, such credit.
                  (F) Information necessary to determine 
                whether a taxpayer has received excess advance 
                payments.
  (g) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary to carry out the provisions of 
this section, including regulations which provide for--
          (1) the coordination of the credit allowed under this 
        section with the program for advance payment of the 
        credit under section 1412 of the Patient Protection and 
        Affordable Care Act, and
          (2) the application of subsection (f) where the 
        filing status of the taxpayer for a taxable year is 
        different from such status used for determining the 
        advance payment of the credit.

           *       *       *       *       *       *       *

Subpart D--BUSINESS RELATED CREDITS

           *       *       *       *       *       *       *

SEC. 38. GENERAL BUSINESS CREDIT.

  (a) Allowance of credit.--There shall be allowed as a credit 
against the tax imposed by this chapter for the taxable year an 
amount equal to the sum of--
          (1) the business credit carryforwards carried to such 
        taxable year,
          (2) the amount of the current year business credit, 
        plus
          (3) the business credit carrybacks carried to such 
        taxable year.
  (b) Current year business credit.--For purposes of this 
subpart, the amount of the current year business credit is the 
sum of the following credits determined for the taxable year:
          (1) the investment credit determined under section 
        46,
          (2) the work opportunity credit determined under 
        section 51(a),
          (3) the alcohol fuels credit determined under section 
        40(a),
          (4) the research credit determined under section 
        41(a),
          (5) the low-income housing credit determined under 
        section 42(a),
          (6) the enhanced oil recovery credit under section 
        43(a),
          (7) in the case of an eligible small business (as 
        defined in section 44(b)), the disabled access credit 
        determined under section 44(a),
          (8) the renewable electricity production credit under 
        section 45(a),
          (9) the empowerment zone employment credit determined 
        under section 1396(a),
          (10) the Indian employment credit as determined under 
        section 45A(a),
          (11) the employer social security credit determined 
        under section 45B(a),
          (12) the orphan drug credit determined under section 
        45C(a),
          (13) the new markets tax credit determined under 
        section 45D(a),
          (14) in the case of an eligible employer (as defined 
        in section 45E(c)), the small employer pension plan 
        startup cost credit determined under section 45E(a),
          (15) the employer-provided child care credit 
        determined under section 45F(a),
          (16) the railroad track maintenance credit determined 
        under section 45G(a),
          (17) the biodiesel fuels credit determined under 
        section 40A(a),
          (18) the low sulfur diesel fuel production credit 
        determined under section 45H(a),
          (19) the marginal oil and gas well production credit 
        determined under section 45I(a),
          (20) the distilled spirits credit determined under 
        section 5011(a),
          (21) the advanced nuclear power facility production 
        credit determined under section 45J(a),
          (22) the nonconventional source production credit 
        determined under section 45K(a),
          (23) the new energy efficient home credit determined 
        under section 45L(a),
          (24) the portion of the alternative motor vehicle 
        credit to which section 30B(g)(1) applies,
          (25) the portion of the alternative fuel vehicle 
        refueling property credit to which section 30C(d)(1) 
        applies,
          (26) the mine rescue team training credit determined 
        under section 45N(a),
          (27) in the case of an eligible agricultural business 
        (as defined in section 45O(e)), the agricultural 
        chemicals security credit determined under section 
        45O(a),
          (28) the differential wage payment credit determined 
        under section 45P(a),
          (29) the carbon dioxide sequestration credit 
        determined under section 45Q(a),
          (30) the portion of the new qualified plug-in 
        electric drive motor vehicle credit to which section 
        30D(c)(1) applies,
          (31) the small employer health insurance credit 
        determined under section 45R, plus
          (32) in the case of an eligible employer (as defined 
        in section 45S(c)), the paid family and medical leave 
        credit determined under section 45S(a).
  (c) Limitation based on amount of tax.--
          (1) In general.--The credit allowed under subsection 
        (a) for any taxable year shall not exceed the excess 
        (if any) of the taxpayer's net income tax over the 
        greater of--
                  (A) the tentative minimum tax for the taxable 
                year, or
                  (B) 25 percent of so much of the taxpayer's 
                net regular tax liability as exceeds $25,000.
        For purposes of the preceding sentence, the term ``net 
        income tax'' means the sum of the regular tax liability 
        and the tax imposed by section 55, reduced by the 
        credits allowable under subparts A and B of this part, 
        and the term ``net regular tax liability'' means the 
        regular tax liability reduced by the sum of the credits 
        allowable under subparts A and B of this part.
          (2) Empowerment zone employment credit may offset 25 
        percent of minimum tax.--
                  (A) In general.--In the case of the 
                empowerment zone employment credit--
                          (i) this section and section 39 shall 
                        be applied separately with respect to 
                        such credit, and
                          (ii) for purposes of applying 
                        paragraph (1) to such credit--
                                  (I) 75 percent of the 
                                tentative minimum tax shall be 
                                substituted for the tentative 
                                minimum tax under subparagraph 
                                (A) thereof, and
                                  (II) the limitation under 
                                paragraph (1) (as modified by 
                                subclause (I)) shall be reduced 
                                by the credit allowed under 
                                subsection (a) for the taxable 
                                year (other than the 
                                empowerment zone employment 
                                credit and the specified 
                                credits).
                  (B) Empowerment zone employment credit.--For 
                purposes of this paragraph, the term 
                ``empowerment zone employment credit'' means 
                the portion of the credit under subsection (a) 
                which is attributable to the credit determined 
                under section 1396 (relating to empowerment 
                zone employment credit).
          (4) Special rules for specified credits.--
                  (A) In general.--In the case of specified 
                credits--
                          (i) this section and section 39 shall 
                        be applied separately with respect to 
                        such credits, and
                          (ii) in applying paragraph (1) to 
                        such credits--
                                  (I) the tentative minimum tax 
                                shall be treated as being zero, 
                                and
                                  (II) the limitation under 
                                paragraph (1) (as modified by 
                                subclause (I)) shall be reduced 
                                by the credit allowed under 
                                subsection (a) for the taxable 
                                year (other than the specified 
                                credits).
                  (B) Specified credits.--For purposes of this 
                subsection, the term ``specified credits'' 
                means--
                          (i) for taxable years beginning after 
                        December 31, 2004, the credit 
                        determined under section 40,
                          (ii) the credit determined under 
                        section 41 for the taxable year with 
                        respect to an eligible small business 
                        (as defined in paragraph (5)(A) after 
                        application of the rules of paragraph 
                        (5)(B)),
                          (iii) the credit determined under 
                        section 42 to the extent attributable 
                        to buildings placed in service after 
                        December 31, 2007,
                          (iv) the credit determined under 
                        section 45 to the extent that such 
                        credit is attributable to electricity 
                        or refined coal produced--
                                  (I) at a facility which is 
                                originally placed in service 
                                after the date of the enactment 
                                of this paragraph, and
                                  (II) during the 4-year period 
                                beginning on the date that such 
                                facility was originally placed 
                                in service,
                          (v) the credit determined under 
                        section 45 to the extent that such 
                        credit is attributable to section 
                        45(e)(10) (relating to Indian coal 
                        production facilities),
                          (vi) the credit determined under 
                        section 45B,
                          (vii) the credit determined under 
                        section 45G,
                          (viii) the credit determined under 
                        section 45R,
                          (ix) the credit determined under 
                        section 45S,
                          (x) the credit determined under 
                        section 46 to the extent that such 
                        credit is attributable to the energy 
                        credit determined under section 48,
                          (xi) the credit determined under 
                        section 46 to the extent that such 
                        credit is attributable to the 
                        rehabilitation credit under section 47, 
                        but only with respect to qualified 
                        rehabilitation expenditures properly 
                        taken into account for periods after 
                        December 31, 2007, and
                          (xii) the credit determined under 
                        section 51.
          (5) Rules related to eligible small businesses.--
                  (A) Eligible small business.--For purposes of 
                this subsection, the term ``eligible small 
                business'' means, with respect to any taxable 
                year--
                          (i) a corporation the stock of which 
                        is not publicly traded,
                          (ii) a partnership, or
                          (iii) a sole proprietorship,
                if the average annual gross receipts of such 
                corporation, partnership, or sole 
                proprietorship for the 3-taxable-year period 
                preceding such taxable year does not exceed 
                $50,000,000. For purposes of applying the test 
                under the preceding sentence, rules similar to 
                the rules of paragraphs (2) and (3) of section 
                448(c) shall apply.
                  (B) Treatment of partners and S corporation 
                shareholders.--For purposes of paragraph 
                (4)(B)(ii), any credit determined under section 
                41 with respect to a partnership or S 
                corporation shall not be treated as a specified 
                credit by any partner or shareholder unless 
                such partner or shareholder meets the gross 
                receipts test under subparagraph (A) for the 
                taxable year in which such credit is treated as 
                a current year business credit.
          (6) Special rules.--
                  (A) Married individuals.--In the case of a 
                [husband or wife who files] married individual 
                who files a separate return, the amount 
                specified under subparagraph (B) of paragraph 
                (1) shall be $12,500 in lieu of $25,000. This 
                subparagraph shall not apply if the spouse of 
                the taxpayer has no business credit 
                carryforward or carryback to, and has no 
                current year business credit for, the taxable 
                year of such spouse which ends within or with 
                the taxpayer's taxable year.
                  (B) Controlled groups.--In the case of a 
                controlled group, the $25,000 amount specified 
                under subparagraph (B) of paragraph (1) shall 
                be reduced for each component member of such 
                group by apportioning $25,000 among the 
                component members of such group in such manner 
                as the Secretary shall by regulations 
                prescribe. For purposes of the preceding 
                sentence, the term ``controlled group'' has the 
                meaning given to such term by section 1563(a).
                  (C) Limitations with respect to certain 
                persons.--In the case of a person described in 
                subparagraph (A) or (B) of section 46(e)(1) (as 
                in effect on the day before the date of the 
                enactment of the Revenue Reconciliation Act of 
                1990), the $25,000 amount specified under 
                subparagraph (B) of paragraph (1) shall equal 
                such person's ratable share (as determined 
                under section 46(e)(2) (as so in effect) of 
                such amount.
                  (D) Estates and trusts.--In the case of an 
                estate or trust, the $25,000 amount specified 
                under subparagraph (B) of paragraph (1) shall 
                be reduced to an amount which bears the same 
                ratio to $25,000 as the portion of the income 
                of the estate or trust which is not allocated 
                to beneficiaries bears to the total income of 
                the estate or trust.
                  (E) Corporations.--In the case of a 
                corporation, this subsection shall be applied 
                by treating the corporation as having a 
                tentative minimum tax of zero.
  (d) Ordering rules.--For purposes of any provision of this 
title where it is necessary to ascertain the extent to which 
the credits determined under any section referred to in 
subsection (b) are used in a taxable year or as a carryback or 
carryforward--
          (1) In general.--The order in which such credits are 
        used shall be determined on the basis of the order in 
        which they are listed in subsection (b) as of the close 
        of the taxable year in which the credit is used.
          (2) Components of investment credit.--The order in 
        which the credits listed in section 46 are used shall 
        be determined on the basis of the order in which such 
        credits are listed in section 46 as of the close of the 
        taxable year in which the credit is used.

           *       *       *       *       *       *       *

SEC. 42. LOW-INCOME HOUSING CREDIT.

  (a) In general.--For purposes of section 38, the amount of 
the low-income housing credit determined under this section for 
any taxable year in the credit period shall be an amount equal 
to--
          (1) the applicable percentage of
          (2) the qualified basis of each qualified low-income 
        building.
  (b) Applicable percentage: 70 percent present value credit 
for certain new buildings; 30 percent present value credit for 
certain other buildings.--
          (1) Determination of applicable percentage.--For 
        purposes of this section--
                  (A) In general.--The term ``applicable 
                percentage'' means, with respect to any 
                building, the appropriate percentage prescribed 
                by the Secretary for the earlier of--
                          (i) the month in which such building 
                        is placed in service, or
                          (ii) at the election of the 
                        taxpayer--
                                  (I) the month in which the 
                                taxpayer and the housing credit 
                                agency enter into an agreement 
                                with respect to such building 
                                (which is binding on such 
                                agency, the taxpayer, and all 
                                successors in interest) as to 
                                the housing credit dollar 
                                amount to be allocated to such 
                                building, or
                                  (II) in the case of any 
                                building to which subsection 
                                (h)(4)(B) applies, the month in 
                                which the tax-exempt 
                                obligations are issued.
                 A month may be elected under clause (ii) only 
                if the election is made not later than the 5th 
                day after the close of such month. Such an 
                election, once made, shall be irrevocable.
                  (B) Method of prescribing percentages.--The 
                percentages prescribed by the Secretary for any 
                month shall be percentages which will yield 
                over a 10-year period amounts of credit under 
                subsection (a) which have a present value equal 
                to--
                          (i) 70 percent of the qualified basis 
                        of a new building which is not 
                        federally subsidized for the taxable 
                        year, and
                          (ii) 30 percent of the qualified 
                        basis of a building not described in 
                        clause (i).
                  (C) Method of discounting.--The present value 
                under subparagraph (B) shall be determined--
                          (i) as of the last day of the 1st 
                        year of the 10-year period referred to 
                        in subparagraph (B),
                          (ii) by using a discount rate equal 
                        to 72 percent of the average of the 
                        annual Federal mid-term rate and the 
                        annual Federal long-term rate 
                        applicable under section 1274(d)(1) to 
                        the month applicable under clause (i) 
                        or (ii) of subparagraph (A) and 
                        compounded annually, and
                          (iii) by assuming that the credit 
                        allowable under this section for any 
                        year is received on the last day of 
                        such year.
          (2) Minimum credit rate for non-federally subsidized 
        new buildings.--In the case of any new building--
                  (A) which is placed in service by the 
                taxpayer after the date of the enactment of 
                this paragraph, and
                  (B) which is not federally subsidized for the 
                taxable year,
        the applicable percentage shall not be less than 9 
        percent.
          (3) Cross references.--
                  (A) For treatment of certain rehabilitation 
                expenditures as separate new buildings, see 
                subsection (e).
                  (B) For determination of applicable 
                percentage for increases in qualified basis 
                after the 1st year of the credit period, see 
                subsection (f)(3).
                  (C) For authority of housing credit agency to 
                limit applicable percentage and qualified basis 
                which may be taken into account under this 
                section with respect to any building, see 
                subsection (h)(7).
  (c) Qualified basis; qualified low-income building.--For 
purposes of this section--
          (1) Qualified basis.--
                  (A) Determination.--The qualified basis of 
                any qualified low-income building for any 
                taxable year is an amount equal to--
                          (i) the applicable fraction 
                        (determined as of the close of such 
                        taxable year) of
                          (ii) the eligible basis of such 
                        building (determined under subsection 
                        (d)(5)).
                  (B) Applicable fraction.--For purposes of 
                subparagraph (A), the term ``applicable 
                fraction'' means the smaller of the unit 
                fraction or the floor space fraction.
                  (C) Unit fraction.--For purposes of 
                subparagraph (B), the term ``unit fraction'' 
                means the fraction--
                          (i) the numerator of which is the 
                        number of low-income units in the 
                        building, and
                          (ii) the denominator of which is the 
                        number of residential rental units 
                        (whether or not occupied) in such 
                        building.
                  (D) Floor space fraction.--For purposes of 
                subparagraph (B), the term ``floor space 
                fraction'' means the fraction--
                          (i) the numerator of which is the 
                        total floor space of the low-income 
                        units in such building, and
                          (ii) the denominator of which is the 
                        total floor space of the residential 
                        rental units (whether or not occupied) 
                        in such building.
                  (E) Qualified basis to include portion of 
                building used to provide supportive services 
                for homeless.--In the case of a qualified low-
                income building described in subsection 
                (i)(3)(B)(iii), the qualified basis of such 
                building for any taxable year shall be 
                increased by the lesser of--
                          (i) so much of the eligible basis of 
                        such building as is used throughout the 
                        year to provide supportive services 
                        designed to assist tenants in locating 
                        and retaining permanent housing, or
                          (ii) 20 percent of the qualified 
                        basis of such building (determined 
                        without regard to this subparagraph).
          (2) Qualified low-income building.--The term 
        ``qualified low-income building'' means any building--
                  (A) which is part of a qualified low-income 
                housing project at all times during the 
                period--
                          (i) beginning on the 1st day in the 
                        compliance period on which such 
                        building is part of such a project, and
                          (ii) ending on the last day of the 
                        compliance period with respect to such 
                        building, and
                  (B) to which the amendments made by section 
                201(a) of the Tax Reform Act of 1986 apply.
  (d) Eligible basis.--For purposes of this section--
          (1) New buildings.--The eligible basis of a new 
        building is its adjusted basis as of the close of the 
        1st taxable year of the credit period.
          (2) Existing buildings.--
                  (A) In general.--The eligible basis of an 
                existing building is--
                          (i) in the case of a building which 
                        meets the requirements of subparagraph 
                        (B), its adjusted basis as of the close 
                        of the 1st taxable year of the credit 
                        period, and
                          (ii) zero in any other case.
                  (B) Requirements.--A building meets the 
                requirements of this subparagraph if--
                          (i) the building is acquired by 
                        purchase (as defined in section 
                        179(d)(2)),
                          (ii) there is a period of at least 10 
                        years between the date of its 
                        acquisition by the taxpayer and the 
                        date the building was last placed in 
                        service,
                          (iii) the building was not previously 
                        placed in service by the taxpayer or by 
                        any person who was a related person 
                        with respect to the taxpayer as of the 
                        time previously placed in service, and
                          (iv) except as provided in subsection 
                        (f)(5), a credit is allowable under 
                        subsection (a) by reason of subsection 
                        (e) with respect to the building.
                  (C) Adjusted basis.--For purposes of 
                subparagraph (A), the adjusted basis of any 
                building shall not include so much of the basis 
                of such building as is determined by reference 
                to the basis of other property held at any time 
                by the person acquiring the building.
                  (D) Special rules for subparagraph (B).--
                          (i) Special rules for certain 
                        transfers.--For purposes of determining 
                        under subparagraph (B)(ii) when a 
                        building was last placed in service, 
                        there shall not be taken into account 
                        any placement in service--
                                  (I) in connection with the 
                                acquisition of the building in 
                                a transaction in which the 
                                basis of the building in the 
                                hands of the person acquiring 
                                it is determined in whole or in 
                                part by reference to the 
                                adjusted basis of such building 
                                in the hands of the person from 
                                whom acquired,
                                  (II) by a person whose basis 
                                in such building is determined 
                                under section 1014(a) (relating 
                                to property acquired from a 
                                decedent),
                                  (III) by any governmental 
                                unit or qualified nonprofit 
                                organization (as defined in 
                                subsection (h)(5)) if the 
                                requirements of subparagraph 
                                (B)(ii) are met with respect to 
                                the placement in service by 
                                such unit or organization and 
                                all the income from such 
                                property is exempt from Federal 
                                income taxation,
                                  (IV) by any person who 
                                acquired such building by 
                                foreclosure (or by instrument 
                                in lieu of foreclosure) of any 
                                purchase-money security 
                                interest held by such person if 
                                the requirements of 
                                subparagraph (B)(ii) are met 
                                with respect to the placement 
                                in service by such person and 
                                such building is resold within 
                                12 months after the date such 
                                building is placed in service 
                                by such person after such 
                                foreclosure, or
                                  (V) of a single-family 
                                residence by any individual who 
                                owned and used such residence 
                                for no other purpose than as 
                                his principal residence.
                          (ii) Related person.--For purposes of 
                        subparagraph (B)(iii), a person 
                        (hereinafter in this subclause referred 
                        to as the ``related person'') is 
                        related to any person if the related 
                        person bears a relationship to such 
                        person specified in section 267(b) or 
                        707(b)(1), or the related person and 
                        such person are engaged in trades or 
                        businesses under common control (within 
                        the meaning of subsections (a) and (b) 
                        of section 52).
          (3) Eligible basis reduced where disproportionate 
        standards for units.--
                  (A) In general.--Except as provided in 
                subparagraph (B), the eligible basis of any 
                building shall be reduced by an amount equal to 
                the portion of the adjusted basis of the 
                building which is attributable to residential 
                rental units in the building which are not low-
                income units and which are above the average 
                quality standard of the low-income units in the 
                building.
                  (B) Exception where taxpayer elects to 
                exclude excess costs.--
                          (i) In general.--Subparagraph (A) 
                        shall not apply with respect to a 
                        residential rental unit in a building 
                        which is not a low-income unit if--
                                  (I) the excess described in 
                                clause (ii) with respect to 
                                such unit is not greater than 
                                15 percent of the cost 
                                described in clause (ii)(II), 
                                and
                                  (II) the taxpayer elects to 
                                exclude from the eligible basis 
                                of such building the excess 
                                described in clause (ii) with 
                                respect to such unit.
                          (ii) Excess.--The excess described in 
                        this clause with respect to any unit is 
                        the excess of--
                                  (I) the cost of such unit, 
                                over
                                  (II) the amount which would 
                                be the cost of such unit if the 
                                average cost per square foot of 
                                low-income units in the 
                                building were substituted for 
                                the cost per square foot of 
                                such unit.
                 The Secretary may by regulation provide for 
                the determination of the excess under this 
                clause on a basis other than square foot costs.
          (4) Special rules relating to determination of 
        adjusted basis.--For purposes of this subsection--
                  (A) In general.--Except as provided in 
                subparagraphs (B) and (C), the adjusted basis 
                of any building shall be determined without 
                regard to the adjusted basis of any property 
                which is not residential rental property.
                  (B) Basis of property in common areas, etc., 
                included.--The adjusted basis of any building 
                shall be determined by taking into account the 
                adjusted basis of property (of a character 
                subject to the allowance for depreciation) used 
                in common areas or provided as comparable 
                amenities to all residential rental units in 
                such building.
                  (C) Inclusion of basis of property used to 
                provide services for certain nontenants.--
                          (i) In general.--The adjusted basis 
                        of any building located in a qualified 
                        census tract (as defined in paragraph 
                        (5)(B)(ii)) shall be determined by 
                        taking into account the adjusted basis 
                        of property (of a character subject to 
                        the allowance for depreciation and not 
                        otherwise taken into account) used 
                        throughout the taxable year in 
                        providing any community service 
                        facility.
                          (ii) Limitation.--The increase in the 
                        adjusted basis of any building which is 
                        taken into account by reason of clause 
                        (i) shall not exceed the sum of--
                                  (I) 25 percent of so much of 
                                the eligible basis of the 
                                qualified low-income housing 
                                project of which it is a part 
                                as does not exceed $15,000,000, 
                                plus
                                  (II) 10 percent of so much of 
                                the eligible basis of such 
                                project as is not taken into 
                                account under subclause (I).
                 For purposes of the preceding sentence, all 
                community service facilities which are part of 
                the same qualified low-income housing project 
                shall be treated as one facility.
                          (iii) Community service facility.--
                        For purposes of this subparagraph, the 
                        term ``community service facility'' 
                        means any facility designed to serve 
                        primarily individuals whose income is 
                        60 percent or less of area median 
                        income (within the meaning of 
                        subsection (g)(1)(B)).
                  (D) No reduction for depreciation.--The 
                adjusted basis of any building shall be 
                determined without regard to paragraphs (2) and 
                (3) of section 1016(a).
          (5) Special rules for determining eligible basis.--
                  (A) Federal grants not taken into account in 
                determining eligible basis.--The eligible basis 
                of a building shall not include any costs 
                financed with the proceeds of a federally 
                funded grant.
                  (B) Increase in credit for buildings in high 
                cost areas.--
                          (i) In general.--In the case of any 
                        building located in a qualified census 
                        tract or difficult development area 
                        which is designated for purposes of 
                        this subparagraph--
                                  (I) in the case of a new 
                                building, the eligible basis of 
                                such building shall be 130 
                                percent of such basis 
                                determined without regard to 
                                this subparagraph, and
                                  (II) in the case of an 
                                existing building, the 
                                rehabilitation expenditures 
                                taken into account under 
                                subsection (e) shall be 130 
                                percent of such expenditures 
                                determined without regard to 
                                this subparagraph.
                          (ii) Qualified census tract.--
                                  (I) In general.--The term 
                                ``qualified census tract'' 
                                means any census tract which is 
                                designated by the Secretary of 
                                Housing and Urban Development 
                                and, for the most recent year 
                                for which census data are 
                                available on household income 
                                in such tract, either in which 
                                50 percent or more of the 
                                households have an income which 
                                is less than 60 percent of the 
                                area median gross income for 
                                such year or which has a 
                                poverty rate of at least 25 
                                percent. If the Secretary of 
                                Housing and Urban Development 
                                determines that sufficient data 
                                for any period are not 
                                available to apply this clause 
                                on the basis of census tracts, 
                                such Secretary shall apply this 
                                clause for such period on the 
                                basis of enumeration districts.
                                  (II) Limit on MSA's 
                                designated.--The portion of a 
                                metropolitan statistical area 
                                which may be designated for 
                                purposes of this subparagraph 
                                shall not exceed an area having 
                                20 percent of the population of 
                                such metropolitan statistical 
                                area.
                                  (III) Determination of 
                                areas.--For purposes of this 
                                clause, each metropolitan 
                                statistical area shall be 
                                treated as a separate area and 
                                all nonmetropolitan areas in a 
                                State shall be treated as 1 
                                area.
                          (iii) Difficult development areas.--
                                  (I) In general.--The term 
                                ``difficult development areas'' 
                                means any area designated by 
                                the Secretary of Housing and 
                                Urban Development as an area 
                                which has high construction, 
                                land, and utility costs 
                                relative to area median gross 
                                income.
                                  (II) Limit on areas 
                                designated.--The portions of 
                                metropolitan statistical areas 
                                which may be designated for 
                                purposes of this subparagraph 
                                shall not exceed an aggregate 
                                area having 20 percent of the 
                                population of such metropolitan 
                                statistical areas. A comparable 
                                rule shall apply to 
                                nonmetropolitan areas.
                          (iv) Special rules and definitions.--
                        For purposes of this subparagraph--
                                  (I) population shall be 
                                determined on the basis of the 
                                most recent decennial census 
                                for which data are available,
                                  (II) area median gross income 
                                shall be determined in 
                                accordance with subsection 
                                (g)(4),
                                  (III) the term ``metropolitan 
                                statistical area'' has the same 
                                meaning as when used in section 
                                143(k)(2)(B), and
                                  (IV) the term 
                                ``nonmetropolitan area'' means 
                                any county (or portion thereof) 
                                which is not within a 
                                metropolitan statistical area.
                          (v) Buildings designated by State 
                        housing credit agency.--Any building 
                        which is designated by the State 
                        housing credit agency as requiring the 
                        increase in credit under this 
                        subparagraph in order for such building 
                        to be financially feasible as part of a 
                        qualified low-income housing project 
                        shall be treated for purposes of this 
                        subparagraph as located in a difficult 
                        development area which is designated 
                        for purposes of this subparagraph. The 
                        preceding sentence shall not apply to 
                        any building if paragraph (1) of 
                        subsection (h) does not apply to any 
                        portion of the eligible basis of such 
                        building by reason of paragraph (4) of 
                        such subsection.
          (6) Credit allowable for certain buildings acquired 
        during 10-year period described in paragraph 
        (2)(B)(ii).--
                  (A) In general.--Paragraph (2)(B)(ii) shall 
                not apply to any federally- or State-assisted 
                building.
                  (B) Buildings acquired from insured 
                depository institutions in default.--On 
                application by the taxpayer, the Secretary may 
                waive paragraph (2)(B)(ii) with respect to any 
                building acquired from an insured depository 
                institution in default (as defined in section 3 
                of the Federal Deposit Insurance Act) or from a 
                receiver or conservator of such an institution.
                  (C) Federally- or State-assisted building.--
                For purposes of this paragraph--
                          (i) Federally-assisted building.--The 
                        term ``federally-assisted building'' 
                        means any building which is 
                        substantially assisted, financed, or 
                        operated under section 8 of the United 
                        States Housing Act of 1937, section 
                        221(d)(3), 221(d)(4), or 236 of the 
                        National Housing Act, section 515 of 
                        the Housing Act of 1949, or any other 
                        housing program administered by the 
                        Department of Housing and Urban 
                        Development or by the Rural Housing 
                        Service of the Department of 
                        Agriculture.
                          (ii) State-assisted building.--The 
                        term ``State-assisted building'' means 
                        any building which is substantially 
                        assisted, financed, or operated under 
                        any State law similar in purposes to 
                        any of the laws referred to in clause 
                        (i).
          (7) Acquisition of building before end of prior 
        compliance period.--
                  (A) In general.--Under regulations prescribed 
                by the Secretary, in the case of a building 
                described in subparagraph (B) (or interest 
                therein) which is acquired by the taxpayer--
                          (i) paragraph (2)(B) shall not apply, 
                        but
                          (ii) the credit allowable by reason 
                        of subsection (a) to the taxpayer for 
                        any period after such acquisition shall 
                        be equal to the amount of credit which 
                        would have been allowable under 
                        subsection (a) for such period to the 
                        prior owner referred to in subparagraph 
                        (B) had such owner not disposed of the 
                        building.
                  (B) Description of building.--A building is 
                described in this subparagraph if--
                          (i) a credit was allowed by reason of 
                        subsection (a) to any prior owner of 
                        such building, and
                          (ii) the taxpayer acquired such 
                        building before the end of the 
                        compliance period for such building 
                        with respect to such prior owner 
                        (determined without regard to any 
                        disposition by such prior owner).
  (e) Rehabilitation expenditures treated as separate new 
building.--
          (1) In general.--Rehabilitation expenditures paid or 
        incurred by the taxpayer with respect to any building 
        shall be treated for purposes of this section as a 
        separate new building.
          (2) Rehabilitation expenditures.--For purposes of 
        paragraph (1)--
                  (A) In general.--The term ``rehabilitation 
                expenditures'' means amounts chargeable to 
                capital account and incurred for property (or 
                additions or improvements to property) of a 
                character subject to the allowance for 
                depreciation in connection with the 
                rehabilitation of a building.
                  (B) Cost of acquisition, etc., not 
                included.--Such term does not include the cost 
                of acquiring any building (or interest therein) 
                or any amount not permitted to be taken into 
                account under paragraph (3) or (4) of 
                subsection (d).
          (3) Minimum expenditures to qualify.--
                  (A) In general.--Paragraph (1) shall apply to 
                rehabilitation expenditures with respect to any 
                building only if--
                          (i) the expenditures are allocable to 
                        1 or more low-income units or 
                        substantially benefit such units, and
                          (ii) the amount of such expenditures 
                        during any 24-month period meets the 
                        requirements of whichever of the 
                        following subclauses requires the 
                        greater amount of such expenditures:
                                  (I) The requirement of this 
                                subclause is met if such amount 
                                is not less than 20 percent of 
                                the adjusted basis of the 
                                building (determined as of the 
                                1st day of such period and 
                                without regard to paragraphs 
                                (2) and (3) of section 
                                1016(a)).
                                  (II) The requirement of this 
                                subclause is met if the 
                                qualified basis attributable to 
                                such amount, when divided by 
                                the number of low-income units 
                                in the building, is $6,000 or 
                                more.
                  (B) Exception from 10 percent 
                rehabilitation.--In the case of a building 
                acquired by the taxpayer from a governmental 
                unit, at the election of the taxpayer, 
                subparagraph (A)(ii)(I) shall not apply and the 
                credit under this section for such 
                rehabilitation expenditures shall be determined 
                using the percentage applicable under 
                subsection (b)(2)(B)(ii).
                  (C) Date of determination.--The determination 
                under subparagraph (A) shall be made as of the 
                close of the 1st taxable year in the credit 
                period with respect to such expenditures.
                  (D) Inflation adjustment.--In the case of any 
                expenditures which are treated under paragraph 
                (4) as placed in service during any calendar 
                year after 2009, the $6,000 amount in 
                subparagraph (A)(ii)(II) shall be increased by 
                an amount equal to--
                          (i) such dollar amount, multiplied by
                          (ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for 
                        such calendar year by substituting 
                        ``calendar year 2008'' for ``calendar 
                        year 2016'' in subparagraph (A)(ii) 
                        thereof.
                Any increase under the preceding sentence which 
                is not a multiple of $100 shall be rounded to 
                the nearest multiple of $100.
          (4) Special rules.--For purposes of applying this 
        section with respect to expenditures which are treated 
        as a separate building by reason of this subsection--
                  (A) such expenditures shall be treated as 
                placed in service at the close of the 24-month 
                period referred to in paragraph (3)(A), and
                  (B) the applicable fraction under subsection 
                (c)(1) shall be the applicable fraction for the 
                building (without regard to paragraph (1)) with 
                respect to which the expenditures were 
                incurred.
        Nothing in subsection (d)(2) shall prevent a credit 
        from being allowed by reason of this subsection.
          (5) No double counting.--Rehabilitation expenditures 
        may, at the election of the taxpayer, be taken into 
        account under this subsection or subsection 
        (d)(2)(A)(i) but not under both such subsections.
          (6) Regulations to apply subsection with respect to 
        group of units in building.--The Secretary may 
        prescribe regulations, consistent with the purposes of 
        this subsection, treating a group of units with respect 
        to which rehabilitation expenditures are incurred as a 
        separate new building.
  (f) Definition and special rules relating to credit period.--
          (1) Credit period defined.--For purposes of this 
        section, the term ``credit period'' means, with respect 
        to any building, the period of 10 taxable years 
        beginning with--
                  (A) the taxable year in which the building is 
                placed in service, or
                  (B) at the election of the taxpayer, the 
                succeeding taxable year,
        but only if the building is a qualified low-income 
        building as of the close of the 1st year of such 
        period. The election under subparagraph (B), once made, 
        shall be irrevocable.
          (2) Special rule for 1st year of credit period.--
                  (A) In general.--The credit allowable under 
                subsection (a) with respect to any building for 
                the 1st taxable year of the credit period shall 
                be determined by substituting for the 
                applicable fraction under subsection (c)(1) the 
                fraction--
                          (i) the numerator of which is the sum 
                        of the applicable fractions determined 
                        under subsection (c)(1) as of the close 
                        of each full month of such year during 
                        which such building was in service, and
                          (ii) the denominator of which is 12.
                  (B) Disallowed 1st year credit allowed in 
                11th year.--Any reduction by reason of 
                subparagraph (A) in the credit allowable 
                (without regard to subparagraph (A)) for the 
                1st taxable year of the credit period shall be 
                allowable under subsection (a) for the 1st 
                taxable year following the credit period.
          (3) Determination of applicable percentage with 
        respect to increases in qualified basis after 1st year 
        of credit period.--
                  (A) In general.--In the case of any building 
                which was a qualified low-income building as of 
                the close of the 1st year of the credit period, 
                if--
                          (i) as of the close of any taxable 
                        year in the compliance period (after 
                        the 1st year of the credit period) the 
                        qualified basis of such building 
                        exceeds
                          (ii) the qualified basis of such 
                        building as of the close of the 1st 
                        year of the credit period,
                the applicable percentage which shall apply 
                under subsection (a) for the taxable year to 
                such excess shall be the percentage equal to 2/
                3 of the applicable percentage which (after the 
                application of subsection (h)) would but for 
                this paragraph apply to such basis.
                  (B) 1st year computation applies.--A rule 
                similar to the rule of paragraph (2)(A) shall 
                apply to any increase in qualified basis to 
                which subparagraph (A) applies for the 1st year 
                of such increase.
          (4) Dispositions of property.--If a building (or an 
        interest therein) is disposed of during any year for 
        which credit is allowable under subsection (a), such 
        credit shall be allocated between the parties on the 
        basis of the number of days during such year the 
        building (or interest) was held by each. In any such 
        case, proper adjustments shall be made in the 
        application of subsection (j).
          (5) Credit period for existing buildings not to begin 
        before rehabilitation credit allowed.--
                  (A) In general.--The credit period for an 
                existing building shall not begin before the 
                1st taxable year of the credit period for 
                rehabilitation expenditures with respect to the 
                building.
                  (B) Acquisition credit allowed for certain 
                buildings not allowed a rehabilitation 
                credit.--
                          (i) In general.--In the case of a 
                        building described in clause (ii)--
                                  (I) subsection (d)(2)(B)(iv) 
                                shall not apply, and
                                  (II) the credit period for 
                                such building shall not begin 
                                before the taxable year which 
                                would be the 1st taxable year 
                                of the credit period for 
                                rehabilitation expenditures 
                                with respect to the building 
                                under the modifications 
                                described in clause (ii)(II).
                          (ii) Building described.--A building 
                        is described in this clause if--
                                  (I) a waiver is granted under 
                                subsection (d)(6)(B) with 
                                respect to the acquisition of 
                                the building, and
                                  (II) a credit would be 
                                allowed for rehabilitation 
                                expenditures with respect to 
                                such building if subsection 
                                (e)(3)(A)(ii)(I) did not apply 
                                and if the dollar amount in 
                                effect under subsection 
                                (e)(3)(A)(ii)(II) were two-
                                thirds of such amount.
  (g) Qualified low-income housing project.--For purposes of 
this section--
          (1) In general.--The term ``qualified low-income 
        housing project'' means any project for residential 
        rental property if the project meets the requirements 
        of subparagraph (A), (B), or (C) whichever is elected 
        by the taxpayer:
                  (A) 20-50 test.--The project meets the 
                requirements of this subparagraph if 20 percent 
                or more of the residential units in such 
                project are both rent-restricted and occupied 
                by individuals whose income is 50 percent or 
                less of area median gross income.
                  (B) 40-60 test.--The project meets the 
                requirements of this subparagraph if 40 percent 
                or more of the residential units in such 
                project are both rent-restricted and occupied 
                by individuals whose income is 60 percent or 
                less of area median gross income.
                  (C) Average income test.--
                          (i) In general.--The project meets 
                        the minimum requirements of this 
                        subparagraph if 40 percent or more (25 
                        percent or more in the case of a 
                        project described in section 142(d)(6)) 
                        of the residential units in such 
                        project are both rent-restricted and 
                        occupied by individuals whose income 
                        does not exceed the imputed income 
                        limitation designated by the taxpayer 
                        with respect to the respective unit.
                          (ii) Special rules relating to income 
                        limitation.--For purposes of clause 
                        (i)--
                                  (I) Designation.--The 
                                taxpayer shall designate the 
                                imputed income limitation of 
                                each unit taken into account 
                                under such clause.
                                  (II) Average test.--The 
                                average of the imputed income 
                                limitations designated under 
                                subclause (I) shall not exceed 
                                60 percent of area median gross 
                                income.
                                  (III) 10-percent 
                                increments.--The designated 
                                imputed income limitation of 
                                any unit under subclause (I) 
                                shall be 20 percent, 30 
                                percent, 40 percent, 50 
                                percent, 60 percent, 70 
                                percent, or 80 percent of area 
                                median gross income.
        Any election under this paragraph, once made, shall be 
        irrevocable. For purposes of this paragraph, any 
        property shall not be treated as failing to be 
        residential rental property merely because part of the 
        building in which such property is located is used for 
        purposes other than residential rental purposes.
          (2) Rent-restricted units.--
                  (A) In general.--For purposes of paragraph 
                (1), a residential unit is rent-restricted if 
                the gross rent with respect to such unit does 
                not exceed 30 percent of the imputed income 
                limitation applicable to such unit. For 
                purposes of the preceding sentence, the amount 
                of the income limitation under paragraph (1) 
                applicable for any period shall not be less 
                than such limitation applicable for the 
                earliest period the building (which contains 
                the unit) was included in the determination of 
                whether the project is a qualified low-income 
                housing project.
                  (B) Gross rent.--For purposes of subparagraph 
                (A), gross rent--
                          (i) does not include any payment 
                        under section 8 of the United States 
                        Housing Act of 1937 or any comparable 
                        rental assistance program (with respect 
                        to such unit or occupants thereof),
                          (ii) includes any utility allowance 
                        determined by the Secretary after 
                        taking into account such determinations 
                        under section 8 of the United States 
                        Housing Act of 1937,
                          (iii) does not include any fee for a 
                        supportive service which is paid to the 
                        owner of the unit (on the basis of the 
                        low-income status of the tenant of the 
                        unit) by any governmental program of 
                        assistance (or by an organization 
                        described in section 501(c)(3) and 
                        exempt from tax under section 501(a)) 
                        if such program (or organization) 
                        provides assistance for rent and the 
                        amount of assistance provided for rent 
                        is not separable from the amount of 
                        assistance provided for supportive 
                        services, and
                          (iv) does not include any rental 
                        payment to the owner of the unit to the 
                        extent such owner pays an equivalent 
                        amount to the Farmers' Home 
                        Administration under section 515 of the 
                        Housing Act of 1949.
                For purposes of clause (iii), the term 
                ``supportive service'' means any service 
                provided under a planned program of services 
                designed to enable residents of a residential 
                rental property to remain independent and avoid 
                placement in a hospital, nursing home, or 
                intermediate care facility for the mentally or 
                physically handicapped. In the case of a 
                single-room occupancy unit or a building 
                described in subsection (i)(3)(B)(iii), such 
                term includes any service provided to assist 
                tenants in locating and retaining permanent 
                housing.
                  (C) Imputed income limitation applicable to 
                unit.--For purposes of this paragraph, the 
                imputed income limitation applicable to a unit 
                is the income limitation which would apply 
                under paragraph (1) to individuals occupying 
                the unit if the number of individuals occupying 
                the unit were as follows:
                          (i) In the case of a unit which does 
                        not have a separate bedroom, 1 
                        individual.
                          (ii) In the case of a unit which has 
                        1 or more separate bedrooms, 1.5 
                        individuals for each separate bedroom.
                In the case of a project with respect to which 
                a credit is allowable by reason of this section 
                and for which financing is provided by a bond 
                described in section 142(a)(7), the imputed 
                income limitation shall apply in lieu of the 
                otherwise applicable income limitation for 
                purposes of applying section 142(d)(4)(B)(ii).
                  (D) Treatment of units occupied by 
                individuals whose incomes rise above limit.--
                          (i) In general.--Except as provided 
                        in clauses (ii), (iii), and (iv), 
                        notwithstanding an increase in the 
                        income of the occupants of a low-income 
                        unit above the income limitation 
                        applicable under paragraph (1), such 
                        unit shall continue to be treated as a 
                        low-income unit if the income of such 
                        occupants initially met such income 
                        limitation and such unit continues to 
                        be rent-restricted.
                          (ii) Rental of next available unit in 
                        case of 20-50 or 40-60 test.--In the 
                        case of a project with respect to which 
                        the taxpayer elects the requirements of 
                        subparagraph (A) or (B) of paragraph 
                        (1), if the income of the occupants of 
                        the unit increases above 140 percent of 
                        the income limitation applicable under 
                        paragraph (1), clause (i) shall cease 
                        to apply to such unit if any 
                        residential rental unit in the building 
                        (of a size comparable to, or smaller 
                        than, such unit) is occupied by a new 
                        resident whose income exceeds such 
                        income limitation.
                          (iii) Rental of next available unit 
                        in case of average income test.--In the 
                        case of a project with respect to which 
                        the taxpayer elects the requirements of 
                        subparagraph (C) of paragraph (1), if 
                        the income of the occupants of the unit 
                        increases above 140 percent of the 
                        greater of--
                                  (I) 60 percent of area median 
                                gross income, or
                                  (II) the imputed income 
                                limitation designated with 
                                respect to the unit under 
                                paragraph (1)(C)(ii)(I),
                 clause (i) shall cease to apply to any such 
                unit if any residential rental unit in the 
                building (of a size comparable to, or smaller 
                than, such unit) is occupied by a new resident 
                whose income exceeds the limitation described 
                in clause (v).
                          (iv) Deep rent skewed projects.--In 
                        the case of a project described in 
                        section 142(d)(4)(B), clause (ii) or 
                        (iii), whichever is applicable, shall 
                        be applied by substituting ``170 
                        percent'' for ``140 percent'', and--
                                  (I) in the case of clause 
                                (ii), by substituting ``any 
                                low-income unit in the building 
                                is occupied by a new resident 
                                whose income exceeds 40 percent 
                                of area median gross income'' 
                                for ``any residential rental 
                                unit'' and all that follows in 
                                such clause, and
                                  (II) in the case of clause 
                                (iii), by substituting ``any 
                                low-income unit in the building 
                                is occupied by a new resident 
                                whose income exceeds the lesser 
                                of 40 percent of area median 
                                gross income or the imputed 
                                income limitation designated 
                                with respect to such unit under 
                                paragraph (1)(C)(ii)(I)'' for 
                                ``any residential rental unit'' 
                                and all that follows in such 
                                clause.
                          (v) Limitation described.--For 
                        purposes of clause (iii), the 
                        limitation described in this clause 
                        with respect to any unit is--
                                  (I) the imputed income 
                                limitation designated with 
                                respect to such unit under 
                                paragraph (1)(C)(ii)(I), in the 
                                case of a unit which was taken 
                                into account as a low-income 
                                unit prior to becoming vacant, 
                                and
                                  (II) the imputed income 
                                limitation which would have to 
                                be designated with respect to 
                                such unit under such paragraph 
                                in order for the project to 
                                continue to meet the 
                                requirements of paragraph 
                                (1)(C)(ii)(II), in the case of 
                                any other unit.
                  (E) Units where Federal rental assistance is 
                reduced as tenant's income increases.--If the 
                gross rent with respect to a residential unit 
                exceeds the limitation under subparagraph (A) 
                by reason of the fact that the income of the 
                occupants thereof exceeds the income limitation 
                applicable under paragraph (1), such unit 
                shall, nevertheless, be treated as a rent-
                restricted unit for purposes of paragraph (1) 
                if--
                          (i) a Federal rental assistance 
                        payment described in subparagraph 
                        (B)(i) is made with respect to such 
                        unit or its occupants, and
                          (ii) the sum of such payment and the 
                        gross rent with respect to such unit 
                        does not exceed the sum of the amount 
                        of such payment which would be made and 
                        the gross rent which would be payable 
                        with respect to such unit if--
                                  (I) the income of the 
                                occupants thereof did not 
                                exceed the income limitation 
                                applicable under paragraph (1), 
                                and
                                  (II) such units were rent-
                                restricted within the meaning 
                                of subparagraph (A).
                The preceding sentence shall apply to any unit 
                only if the result described in clause (ii) is 
                required by Federal statute as of the date of 
                the enactment of this subparagraph and as of 
                the date the Federal rental assistance payment 
                is made.
          (3) Date for meeting requirements.--
                  (A) In general.--Except as otherwise provided 
                in this paragraph, a building shall be treated 
                as a qualified low-income building only if the 
                project (of which such building is a part) 
                meets the requirements of paragraph (1) not 
                later than the close of the 1st year of the 
                credit period for such building.
                  (B) Buildings which rely on later buildings 
                for qualification.--
                          (i) In general.--In determining 
                        whether a building (hereinafter in this 
                        subparagraph referred to as the ``prior 
                        building'') is a qualified low-income 
                        building, the taxpayer may take into 
                        account 1 or more additional buildings 
                        placed in service during the 12-month 
                        period described in subparagraph (A) 
                        with respect to the prior building only 
                        if the taxpayer elects to apply clause 
                        (ii) with respect to each additional 
                        building taken into account.
                          (ii) Treatment of elected 
                        buildings.--In the case of a building 
                        which the taxpayer elects to take into 
                        account under clause (i), the period 
                        under subparagraph (A) for such 
                        building shall end at the close of the 
                        12-month period applicable to the prior 
                        building.
                          (iii) Date prior building is treated 
                        as placed in service.--For purposes of 
                        determining the credit period and the 
                        compliance period for the prior 
                        building, the prior building shall be 
                        treated for purposes of this section as 
                        placed in service on the most recent 
                        date any additional building elected by 
                        the taxpayer (with respect to such 
                        prior building) was placed in service.
                  (C) Special rule.--A building--
                          (i) other than the 1st building 
                        placed in service as part of a project, 
                        and
                          (ii) other than a building which is 
                        placed in service during the 12-month 
                        period described in subparagraph (A) 
                        with respect to a prior building which 
                        becomes a qualified low-income 
                        building,
                shall in no event be treated as a qualified 
                low-income building unless the project is a 
                qualified low-income housing project (without 
                regard to such building) on the date such 
                building is placed in service.
                  (D) Projects with more than 1 building must 
                be identified.--For purposes of this section, a 
                project shall be treated as consisting of only 
                1 building unless, before the close of the 1st 
                calendar year in the project period (as defined 
                in subsection (h)(1)(F)(ii)), each building 
                which is (or will be) part of such project is 
                identified in such form and manner as the 
                Secretary may provide.
          (4) Certain rules made applicable.--Paragraphs (2) 
        (other than subparagraph (A) thereof), (3), (4), (5), 
        (6), and (7) of section 142(d), and section 6652(j), 
        shall apply for purposes of determining whether any 
        project is a qualified low-income housing project and 
        whether any unit is a low-income unit; except that, in 
        applying such provisions for such purposes, the term 
        ``gross rent'' shall have the meaning given such term 
        by paragraph (2)(B) of this subsection.
          (5) Election to treat building after compliance 
        period as not part of a project.--For purposes of this 
        section, the taxpayer may elect to treat any building 
        as not part of a qualified low-income housing project 
        for any period beginning after the compliance period 
        for such building.
          (6) Special rule where de minimis equity 
        contribution.--Property shall not be treated as failing 
        to be residential rental property for purposes of this 
        section merely because the occupant of a residential 
        unit in the project pays (on a voluntary basis) to the 
        lessor a de minimis amount to be held toward the 
        purchase by such occupant of a residential unit in such 
        project if--
                  (A) all amounts so paid are refunded to the 
                occupant on the cessation of his occupancy of a 
                unit in the project, and
                  (B) the purchase of the unit is not permitted 
                until after the close of the compliance period 
                with respect to the building in which the unit 
                is located.
        Any amount paid to the lessor as described in the 
        preceding sentence shall be included in gross rent 
        under paragraph (2) for purposes of determining whether 
        the unit is rent-restricted.
          (7) Scattered site projects.--Buildings which would 
        (but for their lack of proximity) be treated as a 
        project for purposes of this section shall be so 
        treated if all of the dwelling units in each of the 
        buildings are rent-restricted (within the meaning of 
        paragraph (2)) residential rental units.
          (8) Waiver of certain de minimis errors and 
        recertifications.--On application by the taxpayer, the 
        Secretary may waive--
                  (A) any recapture under subsection (j) in the 
                case of any de minimis error in complying with 
                paragraph (1), or
                  (B) any annual recertification of tenant 
                income for purposes of this subsection, if the 
                entire building is occupied by low-income 
                tenants.
          (9) Clarification of general public use 
        requirement.--A project does not fail to meet the 
        general public use requirement solely because of 
        occupancy restrictions or preferences that favor 
        tenants--
                  (A) with special needs,
                  (B) who are members of a specified group 
                under a Federal program or State program or 
                policy that supports housing for such a 
                specified group, or
                  (C) who are involved in artistic or literary 
                activities.
  (h) Limitation on aggregate credit allowable with respect to 
projects located in a State.--
          (1) Credit may not exceed credit amount allocated to 
        building.--
                  (A) In general.--The amount of the credit 
                determined under this section for any taxable 
                year with respect to any building shall not 
                exceed the housing credit dollar amount 
                allocated to such building under this 
                subsection.
                  (B) Time for making allocation.--Except in 
                the case of an allocation which meets the 
                requirements of subparagraph (C), (D), (E), or 
                (F), an allocation shall be taken into account 
                under subparagraph (A) only if it is made not 
                later than the close of the calendar year in 
                which the building is placed in service.
                  (C) Exception where binding commitment.--An 
                allocation meets the requirements of this 
                subparagraph if there is a binding commitment 
                (not later than the close of the calendar year 
                in which the building is placed in service) by 
                the housing credit agency to allocate a 
                specified housing credit dollar amount to such 
                building beginning in a specified later taxable 
                year.
                  (D) Exception where increase in qualified 
                basis.--
                          (i) In general.--An allocation meets 
                        the requirements of this subparagraph 
                        if such allocation is made not later 
                        than the close of the calendar year in 
                        which ends the taxable year to which it 
                        will 1st apply but only to the extent 
                        the amount of such allocation does not 
                        exceed the limitation under clause 
                        (ii).
                          (ii) Limitation.--The limitation 
                        under this clause is the amount of 
                        credit allowable under this section 
                        (without regard to this subsection) for 
                        a taxable year with respect to an 
                        increase in the qualified basis of the 
                        building equal to the excess of--
                                  (I) the qualified basis of 
                                such building as of the close 
                                of the 1st taxable year to 
                                which such allocation will 
                                apply, over
                                  (II) the qualified basis of 
                                such building as of the close 
                                of the 1st taxable year to 
                                which the most recent prior 
                                housing credit allocation with 
                                respect to such building 
                                applied.
                          (iii) Housing credit dollar amount 
                        reduced by full allocation.--
                        Notwithstanding clause (i), the full 
                        amount of the allocation shall be taken 
                        into account under paragraph (2).
                  (E) Exception where 10 percent of cost 
                incurred.--
                          (i) In general.--An allocation meets 
                        the requirements of this subparagraph 
                        if such allocation is made with respect 
                        to a qualified building which is placed 
                        in service not later than the close of 
                        the second calendar year following the 
                        calendar year in which the allocation 
                        is made.
                          (ii) Qualified building.--For 
                        purposes of clause (i), the term 
                        ``qualified building'' means any 
                        building which is part of a project if 
                        the taxpayer's basis in such project 
                        (as of the date which is 1 year after 
                        the date that the allocation was made) 
                        is more than 10 percent of the 
                        taxpayer's reasonably expected basis in 
                        such project (as of the close of the 
                        second calendar year referred to in 
                        clause (i)). Such term does not include 
                        any existing building unless a credit 
                        is allowable under subsection (e) for 
                        rehabilitation expenditures paid or 
                        incurred by the taxpayer with respect 
                        to such building for a taxable year 
                        ending during the second calendar year 
                        referred to in clause (i) or the prior 
                        taxable year.
                  (F) Allocation of credit on a project 
                basis.--
                          (i) In general.--In the case of a 
                        project which includes (or will 
                        include) more than 1 building, an 
                        allocation meets the requirements of 
                        this subparagraph if--
                                  (I) the allocation is made to 
                                the project for a calendar year 
                                during the project period,
                                  (II) the allocation only 
                                applies to buildings placed in 
                                service during or after the 
                                calendar year for which the 
                                allocation is made, and
                                  (III) the portion of such 
                                allocation which is allocated 
                                to any building in such project 
                                is specified not later than the 
                                close of the calendar year in 
                                which the building is placed in 
                                service.
                          (ii) Project period.--For purposes of 
                        clause (i), the term ``project period'' 
                        means the period--
                                  (I) beginning with the 1st 
                                calendar year for which an 
                                allocation may be made for the 
                                1st building placed in service 
                                as part of such project, and
                                  (II) ending with the calendar 
                                year the last building is 
                                placed in service as part of 
                                such project.
          (2) Allocated credit amount to apply to all taxable 
        years ending during or after credit allocation year.--
        Any housing credit dollar amount allocated to any 
        building for any calendar year--
                  (A) shall apply to such building for all 
                taxable years in the compliance period ending 
                during or after such calendar year, and
                  (B) shall reduce the aggregate housing credit 
                dollar amount of the allocating agency only for 
                such calendar year.
          (3) Housing credit dollar amount for agencies.--
                  (A) In general.--The aggregate housing credit 
                dollar amount which a housing credit agency may 
                allocate for any calendar year is the portion 
                of the State housing credit ceiling allocated 
                under this paragraph for such calendar year to 
                such agency.
                  (B) State ceiling initially allocated to 
                State housing credit agencies.--Except as 
                provided in subparagraphs (D) and (E), the 
                State housing credit ceiling for each calendar 
                year shall be allocated to the housing credit 
                agency of such State. If there is more than 1 
                housing credit agency of a State, all such 
                agencies shall be treated as a single agency.
                  (C) State housing credit ceiling.--The State 
                housing credit ceiling applicable to any State 
                for any calendar year shall be an amount equal 
                to the sum of--
                          (i) the unused State housing credit 
                        ceiling (if any) of such State for the 
                        preceding calendar year,
                          (ii) the greater of--
                                  (I) $1.75 multiplied by the 
                                State population, or
                                  (II) $2,000,000,
                          (iii) the amount of State housing 
                        credit ceiling returned in the calendar 
                        year, plus
                          (iv) the amount (if any) allocated 
                        under subparagraph (D) to such State by 
                        the Secretary.
                For purposes of clause (i), the unused State 
                housing credit ceiling for any calendar year is 
                the excess (if any) of the sum of the amounts 
                described in clauses (ii) through (iv) over the 
                aggregate housing credit dollar amount 
                allocated for such year. For purposes of clause 
                (iii), the amount of State housing credit 
                ceiling returned in the calendar year equals 
                the housing credit dollar amount previously 
                allocated within the State to any project which 
                fails to meet the 10 percent test under 
                paragraph (1)(E)(ii) on a date after the close 
                of the calendar year in which the allocation 
                was made or which does not become a qualified 
                low-income housing project within the period 
                required by this section or the terms of the 
                allocation or to any project with respect to 
                which an allocation is cancelled by mutual 
                consent of the housing credit agency and the 
                allocation recipient.
                  (D) Unused housing credit carryovers 
                allocated among certain States.--
                          (i) In general.--The unused housing 
                        credit carryover of a State for any 
                        calendar year shall be assigned to the 
                        Secretary for allocation among 
                        qualified States for the succeeding 
                        calendar year.
                          (ii) Unused housing credit 
                        carryover.--For purposes of this 
                        subparagraph, the unused housing credit 
                        carryover of a State for any calendar 
                        year is the excess (if any) of--
                                  (I) the unused State housing 
                                credit ceiling for the year 
                                preceding such year, over
                                  (II) the aggregate housing 
                                credit dollar amount allocated 
                                for such year.
                          (iii) Formula for allocation of 
                        unused housing credit carryovers among 
                        qualified States.--The amount allocated 
                        under this subparagraph to a qualified 
                        State for any calendar year shall be 
                        the amount determined by the Secretary 
                        to bear the same ratio to the aggregate 
                        unused housing credit carryovers of all 
                        States for the preceding calendar year 
                        as such State's population for the 
                        calendar year bears to the population 
                        of all qualified States for the 
                        calendar year. For purposes of the 
                        preceding sentence, population shall be 
                        determined in accordance with section 
                        146(j).
                          (iv) Qualified State.--For purposes 
                        of this subparagraph, the term 
                        ``qualified State'' means, with respect 
                        to a calendar year, any State--
                                  (I) which allocated its 
                                entire State housing credit 
                                ceiling for the preceding 
                                calendar year, and
                                  (II) for which a request is 
                                made (not later than May 1 of 
                                the calendar year) to receive 
                                an allocation under clause 
                                (iii).
                  (E) Special rule for States with 
                constitutional home rule cities.--For purposes 
                of this subsection--
                          (i) In general.--The aggregate 
                        housing credit dollar amount for any 
                        constitutional home rule city for any 
                        calendar year shall be an amount which 
                        bears the same ratio to the State 
                        housing credit ceiling for such 
                        calendar year as--
                                  (I) the population of such 
                                city, bears to
                                  (II) the population of the 
                                entire State.
                          (ii) Coordination with other 
                        allocations.--In the case of any State 
                        which contains 1 or more constitutional 
                        home rule cities, for purposes of 
                        applying this paragraph with respect to 
                        housing credit agencies in such State 
                        other than constitutional home rule 
                        cities, the State housing credit 
                        ceiling for any calendar year shall be 
                        reduced by the aggregate housing credit 
                        dollar amounts determined for such year 
                        for all constitutional home rule cities 
                        in such State.
                          (iii) Constitutional home rule 
                        city.--For purposes of this paragraph, 
                        the term ``constitutional home rule 
                        city'' has the meaning given such term 
                        by section 146(d)(3)(C).
                  (F) State may provide for different 
                allocation.--Rules similar to the rules of 
                section 146(e) (other than paragraph (2)(B) 
                thereof) shall apply for purposes of this 
                paragraph.
                  (G) Population.--For purposes of this 
                paragraph, population shall be determined in 
                accordance with section 146(j).
                  (H) Cost-of-living adjustment.--
                          (i) In general.--In the case of a 
                        calendar year after 2002, the 
                        $2,000,000 and $1.75 amounts in 
                        subparagraph (C) shall each be 
                        increased by an amount equal to--
                                  (I) such dollar amount, 
                                multiplied by
                                  (II) the cost-of-living 
                                adjustment determined under 
                                section 1(f)(3) for such 
                                calendar year by substituting 
                                ``calendar year 2001'' for 
                                ``calendar year 2016'' in 
                                subparagraph (A)(ii) thereof.
                          (ii) Rounding.--(I) In the case of 
                        the $2,000,000 amount, any increase 
                        under clause (i) which is not a 
                        multiple of $5,000 shall be rounded to 
                        the next lowest multiple of $5,000.
                          (II) In the case of the $1.75 amount, 
                        any increase under clause (i) which is 
                        not a multiple of 5 cents shall be 
                        rounded to the next lowest multiple of 
                        5 cents.
                  (I) Increase in State housing credit ceiling 
                for 2018, 2019, 2020, and 2021.--In the case of 
                calendar years 2018, 2019, 2020, and 2021, each 
                of the dollar amounts in effect under clauses 
                (I) and (II) of subparagraph (C)(ii) for any 
                calendar year (after any increase under 
                subparagraph (H)) shall be increased by 
                multiplying such dollar amount by 1.125.
          (4) Credit for buildings financed by tax-exempt bonds 
        subject to volume cap not taken into account.--
                  (A) In general.--Paragraph (1) shall not 
                apply to the portion of any credit allowable 
                under subsection (a) which is attributable to 
                eligible basis financed by any obligation the 
                interest on which is exempt from tax under 
                section 103 if--
                          (i) such obligation is taken into 
                        account under section 146, and
                          (ii) principal payments on such 
                        financing are applied within a 
                        reasonable period to redeem obligations 
                        the proceeds of which were used to 
                        provide such financing or such 
                        financing is refunded as described in 
                        section 146(i)(6).
                  (B) Special rule where 50 percent or more of 
                building is financed with tax-exempt bonds 
                subject to volume cap.--For purposes of 
                subparagraph (A), if 50 percent or more of the 
                aggregate basis of any building and the land on 
                which the building is located is financed by 
                any obligation described in subparagraph (A), 
                paragraph (1) shall not apply to any portion of 
                the credit allowable under subsection (a) with 
                respect to such building.
          (5) Portion of State ceiling set-aside for certain 
        projects involving qualified nonprofit organizations.--
                  (A) In general.--Not more than 90 percent of 
                the State housing credit ceiling for any State 
                for any calendar year shall be allocated to 
                projects other than qualified low-income 
                housing projects described in subparagraph (B).
                  (B) Projects involving qualified nonprofit 
                organizations.--For purposes of subparagraph 
                (A), a qualified low-income housing project is 
                described in this subparagraph if a qualified 
                nonprofit organization is to own an interest in 
                the project (directly or through a partnership) 
                and materially participate (within the meaning 
                of section 469(h)) in the development and 
                operation of the project throughout the 
                compliance period.
                  (C) Qualified nonprofit organization.--For 
                purposes of this paragraph, the term 
                ``qualified nonprofit organization'' means any 
                organization if--
                          (i) such organization is described in 
                        paragraph (3) or (4) of section 501(c) 
                        and is exempt from tax under section 
                        501(a),
                          (ii) such organization is determined 
                        by the State housing credit agency not 
                        to be affiliated with or controlled by 
                        a for-profit organization, and
                          (iii) 1 of the exempt purposes of 
                        such organization includes the 
                        fostering of low-income housing.
                  (D) Treatment of certain subsidiaries.--
                          (i) In general.--For purposes of this 
                        paragraph, a qualified nonprofit 
                        organization shall be treated as 
                        satisfying the ownership and material 
                        participation test of subparagraph (B) 
                        if any qualified corporation in which 
                        such organization holds stock satisfies 
                        such test.
                          (ii) Qualified corporation.--For 
                        purposes of clause (i), the term 
                        ``qualified corporation'' means any 
                        corporation if 100 percent of the stock 
                        of such corporation is held by 1 or 
                        more qualified nonprofit organizations 
                        at all times during the period such 
                        corporation is in existence.
                  (E) State may not override set-aside.--
                Nothing in subparagraph (F) of paragraph (3) 
                shall be construed to permit a State not to 
                comply with subparagraph (A) of this paragraph.
          (6) Buildings eligible for credit only if minimum 
        long-term commitment to low-income housing.--
                  (A) In general.--No credit shall be allowed 
                by reason of this section with respect to any 
                building for the taxable year unless an 
                extended low-income housing commitment is in 
                effect as of the end of such taxable year.
                  (B) Extended low-income housing commitment.--
                For purposes of this paragraph, the term 
                ``extended low-income housing commitment'' 
                means any agreement between the taxpayer and 
                the housing credit agency--
                          (i) which requires that the 
                        applicable fraction (as defined in 
                        subsection (c)(1)) for the building for 
                        each taxable year in the extended use 
                        period will not be less than the 
                        applicable fraction specified in such 
                        agreement and which prohibits the 
                        actions described in subclauses (I) and 
                        (II) of subparagraph (E)(ii),
                          (ii) which allows individuals who 
                        meet the income limitation applicable 
                        to the building under subsection (g) 
                        (whether prospective, present, or 
                        former occupants of the building) the 
                        right to enforce in any State court the 
                        requirement and prohibitions of clause 
                        (i),
                          (iii) which prohibits the disposition 
                        to any person of any portion of the 
                        building to which such agreement 
                        applies unless all of the building to 
                        which such agreement applies is 
                        disposed of to such person,
                          (iv) which prohibits the refusal to 
                        lease to a holder of a voucher or 
                        certificate of eligibility under 
                        section 8 of the United States Housing 
                        Act of 1937 because of the status of 
                        the prospective tenant as such a 
                        holder,
                          (v) which is binding on all 
                        successors of the taxpayer, and
                          (vi) which, with respect to the 
                        property, is recorded pursuant to State 
                        law as a restrictive covenant.
                  (C) Allocation of credit may not exceed 
                amount necessary to support commitment.--
                          (i) In general.--The housing credit 
                        dollar amount allocated to any building 
                        may not exceed the amount necessary to 
                        support the applicable fraction 
                        specified in the extended low-income 
                        housing commitment for such building, 
                        including any increase in such fraction 
                        pursuant to the application of 
                        subsection (f)(3) if such increase is 
                        reflected in an amended low-income 
                        housing commitment.
                          (ii) Buildings financed by tax-exempt 
                        bonds.--If paragraph (4) applies to any 
                        building the amount of credit allowed 
                        in any taxable year may not exceed the 
                        amount necessary to support the 
                        applicable fraction specified in the 
                        extended low-income housing commitment 
                        for such building. Such commitment may 
                        be amended to increase such fraction.
                  (D) Extended use period.--For purposes of 
                this paragraph, the term ``extended use 
                period'' means the period--
                          (i) beginning on the 1st day in the 
                        compliance period on which such 
                        building is part of a qualified low-
                        income housing project, and
                          (ii) ending on the later of--
                                  (I) the date specified by 
                                such agency in such agreement, 
                                or
                                  (II) the date which is 15 
                                years after the close of the 
                                compliance period.
                  (E) Exceptions if foreclosure or if no buyer 
                willing to maintain low-income status.--
                          (i) In general.--The extended use 
                        period for any building shall 
                        terminate--
                                  (I) on the date the building 
                                is acquired by foreclosure (or 
                                instrument in lieu of 
                                foreclosure) unless the 
                                Secretary determines that such 
                                acquisition is part of an 
                                arrangement with the taxpayer a 
                                purpose of which is to 
                                terminate such period, or
                                  (II) on the last day of the 
                                period specified in 
                                subparagraph (I) if the housing 
                                credit agency is unable to 
                                present during such period a 
                                qualified contract for the 
                                acquisition of the low-income 
                                portion of the building by any 
                                person who will continue to 
                                operate such portion as a 
                                qualified low-income building.
                 Subclause (II) shall not apply to the extent 
                more stringent requirements are provided in the 
                agreement or in State law.
                          (ii) Eviction, etc. of existing low-
                        income tenants not permitted.--The 
                        termination of an extended use period 
                        under clause (i) shall not be construed 
                        to permit before the close of the 3-
                        year period following such 
                        termination--
                                  (I) the eviction or the 
                                termination of tenancy (other 
                                than for good cause) of an 
                                existing tenant of any low-
                                income unit, or
                                  (II) any increase in the 
                                gross rent with respect to such 
                                unit not otherwise permitted 
                                under this section.
                  (F) Qualified contract.--For purposes of 
                subparagraph (E), the term ``qualified 
                contract'' means a bona fide contract to 
                acquire (within a reasonable period after the 
                contract is entered into) the nonlow-income 
                portion of the building for fair market value 
                and the low-income portion of the building for 
                an amount not less than the applicable fraction 
                (specified in the extended low-income housing 
                commitment) of--
                          (i) the sum of--
                                  (I) the outstanding 
                                indebtedness secured by, or 
                                with respect to, the building,
                                  (II) the adjusted investor 
                                equity in the building, plus
                                  (III) other capital 
                                contributions not reflected in 
                                the amounts described in 
                                subclause (I) or (II), reduced 
                                by
                          (ii) cash distributions from (or 
                        available for distribution from) the 
                        project.
                The Secretary shall prescribe such regulations 
                as may be necessary or appropriate to carry out 
                this paragraph, including regulations to 
                prevent the manipulation of the amount 
                determined under the preceding sentence.
                  (G) Adjusted investor equity.--
                          (i) In general.--For purposes of 
                        subparagraph (E), the term ``adjusted 
                        investor equity'' means, with respect 
                        to any calendar year, the aggregate 
                        amount of cash taxpayers invested with 
                        respect to the project increased by the 
                        amount equal to--
                                  (I) such amount, multiplied 
                                by
                                  (II) the cost-of-living 
                                adjustment for such calendar 
                                year, determined under section 
                                1(f)(3) by substituting the 
                                base calendar year for 
                                ``calendar year 2016'' in 
                                subparagraph (A)(ii) thereof.
                 An amount shall be taken into account as an 
                investment in the project only to the extent 
                there was an obligation to invest such amount 
                as of the beginning of the credit period and to 
                the extent such amount is reflected in the 
                adjusted basis of the project.
                          (ii) Cost-of-living increases in 
                        excess of 5 percent not taken into 
                        account.--Under regulations prescribed 
                        by the Secretary, if the C-CPI-U for 
                        any calendar year (as defined in 
                        section 1(f)(6)) exceeds the C-CPI-U 
                        for the preceding calendar year by more 
                        than 5 percent, the C-CPI-U for the 
                        base calendar year shall be increased 
                        such that such excess shall never be 
                        taken into account under clause (i). In 
                        the case of a base calendar year before 
                        2017, the C-CPI-U for such year shall 
                        be determined by multiplying the CPI 
                        for such year by the amount determined 
                        under section 1(f)(3)(B).
                          (iii) Base calendar year.--For 
                        purposes of this subparagraph, the term 
                        ``base calendar year'' means the 
                        calendar year with or within which the 
                        1st taxable year of the credit period 
                        ends.
                  (H) Low-income portion.--For purposes of this 
                paragraph, the low-income portion of a building 
                is the portion of such building equal to the 
                applicable fraction specified in the extended 
                low-income housing commitment for the building.
                  (I) Period for finding buyer.--The period 
                referred to in this subparagraph is the 1-year 
                period beginning on the date (after the 14th 
                year of the compliance period) the taxpayer 
                submits a written request to the housing credit 
                agency to find a person to acquire the 
                taxpayer's interest in the low-income portion 
                of the building.
                  (J) Effect of noncompliance.--If, during a 
                taxable year, there is a determination that an 
                extended low-income housing agreement was not 
                in effect as of the beginning of such year, 
                such determination shall not apply to any 
                period before such year and subparagraph (A) 
                shall be applied without regard to such 
                determination if the failure is corrected 
                within 1 year from the date of the 
                determination.
                  (K) Projects which consist of more than 1 
                building.--The application of this paragraph to 
                projects which consist of more than 1 building 
                shall be made under regulations prescribed by 
                the Secretary.
          (7) Special rules.--
                  (A) Building must be located within 
                jurisdiction of credit agency.--A housing 
                credit agency may allocate its aggregate 
                housing credit dollar amount only to buildings 
                located in the jurisdiction of the governmental 
                unit of which such agency is a part.
                  (B) Agency allocations in excess of limit.--
                If the aggregate housing credit dollar amounts 
                allocated by a housing credit agency for any 
                calendar year exceed the portion of the State 
                housing credit ceiling allocated to such agency 
                for such calendar year, the housing credit 
                dollar amounts so allocated shall be reduced 
                (to the extent of such excess) for buildings in 
                the reverse of the order in which the 
                allocations of such amounts were made.
                  (C) Credit reduced if allocated credit dollar 
                amount is less than credit which would be 
                allowable without regard to placed in service 
                convention, etc..--
                          (i) In general.--The amount of the 
                        credit determined under this section 
                        with respect to any building shall not 
                        exceed the clause (ii) percentage of 
                        the amount of the credit which would 
                        (but for this subparagraph) be 
                        determined under this section with 
                        respect to such building.
                          (ii) Determination of percentage.--
                        For purposes of clause (i), the clause 
                        (ii) percentage with respect to any 
                        building is the percentage which--
                                  (I) the housing credit dollar 
                                amount allocated to such 
                                building bears to
                                  (II) the credit amount 
                                determined in accordance with 
                                clause (iii).
                          (iii) Determination of credit 
                        amount.--The credit amount determined 
                        in accordance with this clause is the 
                        amount of the credit which would (but 
                        for this subparagraph) be determined 
                        under this section with respect to the 
                        building if--
                                  (I) this section were applied 
                                without regard to paragraphs 
                                (2)(A) and (3)(B) of subsection 
                                (f), and
                                  (II) subsection (f)(3)(A) 
                                were applied without regard to 
                                ``the percentage equal to 2/3 
                                of''.
                  (D) Housing credit agency to specify 
                applicable percentage and maximum qualified 
                basis.--In allocating a housing credit dollar 
                amount to any building, the housing credit 
                agency shall specify the applicable percentage 
                and the maximum qualified basis which may be 
                taken into account under this section with 
                respect to such building. The applicable 
                percentage and maximum qualified basis so 
                specified shall not exceed the applicable 
                percentage and qualified basis determined under 
                this section without regard to this subsection.
          (8) Other definitions.--For purposes of this 
        subsection--
                  (A) Housing credit agency.--The term 
                ``housing credit agency'' means any agency 
                authorized to carry out this subsection.
                  (B) Possessions treated as States.--The term 
                ``State'' includes a possession of the United 
                States.
  (i) Definitions and special rules.--For purposes of this 
section--
          (1) Compliance period.--The term ``compliance 
        period'' means, with respect to any building, the 
        period of 15 taxable years beginning with the 1st 
        taxable year of the credit period with respect thereto.
          (2) Determination of whether building is federally 
        subsidized.--
                  (A) In general.--Except as otherwise provided 
                in this paragraph, for purposes of subsection 
                (b)(1), a new building shall be treated as 
                federally subsidized for any taxable year if, 
                at any time during such taxable year or any 
                prior taxable year, there is or was outstanding 
                any obligation the interest on which is exempt 
                from tax under section 103 the proceeds of 
                which are or were used (directly or indirectly) 
                with respect to such building or the operation 
                thereof.
                  (B) Election to reduce eligible basis by 
                proceeds of obligations.--A tax-exempt 
                obligation shall not be taken into account 
                under subparagraph (A) if the taxpayer elects 
                to exclude from the eligible basis of the 
                building for purposes of subsection (d) the 
                proceeds of such obligation.
                  (C) Special rule for subsidized construction 
                financing.--Subparagraph (A) shall not apply to 
                any tax-exempt obligation used to provide 
                construction financing for any building if--
                          (i) such obligation (when issued) 
                        identified the building for which the 
                        proceeds of such obligation would be 
                        used, and
                          (ii) such obligation is redeemed 
                        before such building is placed in 
                        service.
          (3) Low-income unit.--
                  (A) In general.--The term ``low-income unit'' 
                means any unit in a building if--
                          (i) such unit is rent-restricted (as 
                        defined in subsection (g)(2)), and
                          (ii) the individuals occupying such 
                        unit meet the income limitation 
                        applicable under subsection (g)(1) to 
                        the project of which such building is a 
                        part.
                  (B) Exceptions.--
                          (i) In general.--A unit shall not be 
                        treated as a low-income unit unless the 
                        unit is suitable for occupancy and used 
                        other than on a transient basis.
                          (ii) Suitability for occupancy.--For 
                        purposes of clause (i), the suitability 
                        of a unit for occupancy shall be 
                        determined under regulations prescribed 
                        by the Secretary taking into account 
                        local health, safety, and building 
                        codes.
                          (iii) Transitional housing for 
                        homeless.--For purposes of clause (i), 
                        a unit shall be considered to be used 
                        other than on a transient basis if the 
                        unit contains sleeping accommodations 
                        and kitchen and bathroom facilities and 
                        is located in a building--
                                  (I) which is used exclusively 
                                to facilitate the transition of 
                                homeless individuals (within 
                                the meaning of section 103 of 
                                the McKinney-Vento Homeless 
                                Assistance Act (42 U.S.C. 
                                11302), as in effect on the 
                                date of the enactment of this 
                                clause) to independent living 
                                within 24 months, and
                                  (II) in which a governmental 
                                entity or qualified nonprofit 
                                organization (as defined in 
                                subsection (h)(5)) provides 
                                such individuals with temporary 
                                housing and supportive services 
                                designed to assist such 
                                individuals in locating and 
                                retaining permanent housing.
                          (iv) Single-room occupancy units.--
                        For purposes of clause (i), a single-
                        room occupancy unit shall not be 
                        treated as used on a transient basis 
                        merely because it is rented on a month-
                        by-month basis.
                  (C) Special rule for buildings having 4 or 
                fewer units.--In the case of any building which 
                has 4 or fewer residential rental units, no 
                unit in such building shall be treated as a 
                low-income unit if the units in such building 
                are owned by--
                          (i) any individual who occupies a 
                        residential unit in such building, or
                          (ii) any person who is related (as 
                        defined in subsection (d)(2)(D)(iii)) 
                        to such individual.
                  (D) Certain students not to disqualify 
                unit.--A unit shall not fail to be treated as a 
                low-income unit merely because it is occupied--
                          (i) by an individual who is--
                                  (I) a student and receiving 
                                assistance under title IV of 
                                the Social Security Act,
                                  (II) a student who was 
                                previously under the care and 
                                placement responsibility of the 
                                State agency responsible for 
                                administering a plan under part 
                                B or part E of title IV of the 
                                Social Security Act, or
                                  (III) enrolled in a job 
                                training program receiving 
                                assistance under the Job 
                                Training Partnership Act or 
                                under other similar Federal, 
                                State, or local laws, or
                          (ii) entirely by full-time students 
                        if such students are--
                                  (I) single parents and their 
                                children and such parents are 
                                not dependents (as defined in 
                                section 152, determined without 
                                regard to subsections (b)(1), 
                                (b)(2), and (d)(1)(B) thereof) 
                                of another individual and such 
                                children are not dependents (as 
                                so defined) of another 
                                individual other than a parent 
                                of such children, or
                                  (II) married and file a joint 
                                return.
                  (E) Owner-occupied buildings having 4 or 
                fewer units eligible for credit where 
                development plan.--
                          (i) In general.--Subparagraph (C) 
                        shall not apply to the acquisition or 
                        rehabilitation of a building pursuant 
                        to a development plan of action 
                        sponsored by a State or local 
                        government or a qualified nonprofit 
                        organization (as defined in subsection 
                        (h)(5)(C)).
                          (ii) Limitation on credit.--In the 
                        case of a building to which clause (i) 
                        applies, the applicable fraction shall 
                        not exceed 80 percent of the unit 
                        fraction.
                          (iii) Certain unrented units treated 
                        as owner-occupied.--In the case of a 
                        building to which clause (i) applies, 
                        any unit which is not rented for 90 
                        days or more shall be treated as 
                        occupied by the owner of the building 
                        as of the 1st day it is not rented.
          (4) New building.--The term ``new building'' means a 
        building the original use of which begins with the 
        taxpayer.
          (5) Existing building.--The term ``existing 
        building'' means any building which is not a new 
        building.
          (6) Application to estates and trusts.--In the case 
        of an estate or trust, the amount of the credit 
        determined under subsection (a) and any increase in tax 
        under subsection (j) shall be apportioned between the 
        estate or trust and the beneficiaries on the basis of 
        the income of the estate or trust allocable to each.
          (7) Impact of tenant's right of 1st refusal to 
        acquire property.--
                  (A) In general.--No Federal income tax 
                benefit shall fail to be allowable to the 
                taxpayer with respect to any qualified low-
                income building merely by reason of a right of 
                1st refusal held by the tenants (in cooperative 
                form or otherwise) or resident management 
                corporation of such building or by a qualified 
                nonprofit organization (as defined in 
                subsection (h)(5)(C)) or government agency to 
                purchase the property after the close of the 
                compliance period for a price which is not less 
                than the minimum purchase price determined 
                under subparagraph (B).
                  (B) Minimum purchase price.--For purposes of 
                subparagraph (A), the minimum purchase price 
                under this subparagraph is an amount equal to 
                the sum of--
                          (i) the principal amount of 
                        outstanding indebtedness secured by the 
                        building (other than indebtedness 
                        incurred within the 5-year period 
                        ending on the date of the sale to the 
                        tenants), and
                          (ii) all Federal, State, and local 
                        taxes attributable to such sale.
                Except in the case of Federal income taxes, 
                there shall not be taken into account under 
                clause (ii) any additional tax attributable to 
                the application of clause (ii).
          (8) Treatment of rural projects.--For purposes of 
        this section, in the case of any project for 
        residential rental property located in a rural area (as 
        defined in section 520 of the Housing Act of 1949), any 
        income limitation measured by reference to area median 
        gross income shall be measured by reference to the 
        greater of area median gross income or national non-
        metropolitan median income. The preceding sentence 
        shall not apply with respect to any building if 
        paragraph (1) of section 42(h) does not apply by reason 
        of paragraph (4) thereof to any portion of the credit 
        determined under this section with respect to such 
        building.
          (9) Coordination with low-income housing grants.--
                  (A) Reduction in State housing credit ceiling 
                for low-income housing grants received in 
                2009.--For purposes of this section, the 
                amounts described in clauses (i) through (iv) 
                of subsection (h)(3)(C) with respect to any 
                State for 2009 shall each be reduced by so much 
                of such amount as is taken into account in 
                determining the amount of any grant to such 
                State under section 1602 of the American 
                Recovery and Reinvestment Tax Act of 2009.
                  (B) Special rule for basis.--Basis of a 
                qualified low-income building shall not be 
                reduced by the amount of any grant described in 
                subparagraph (A).
  (j) Recapture of credit.--
          (1) In general.--If--
                  (A) as of the close of any taxable year in 
                the compliance period, the amount of the 
                qualified basis of any building with respect to 
                the taxpayer is less than
                  (B) the amount of such basis as of the close 
                of the preceding taxable year,
        then the taxpayer's tax under this chapter for the 
        taxable year shall be increased by the credit recapture 
        amount.
          (2) Credit recapture amount.--For purposes of 
        paragraph (1), the credit recapture amount is an amount 
        equal to the sum of--
                  (A) the aggregate decrease in the credits 
                allowed to the taxpayer under section 38 for 
                all prior taxable years which would have 
                resulted if the accelerated portion of the 
                credit allowable by reason of this section were 
                not allowed for all prior taxable years with 
                respect to the excess of the amount described 
                in paragraph (1)(B) over the amount described 
                in paragraph (1)(A), plus
                  (B) interest at the overpayment rate 
                established under section 6621 on the amount 
                determined under subparagraph (A) for each 
                prior taxable year for the period beginning on 
                the due date for filing the return for the 
                prior taxable year involved.
        No deduction shall be allowed under this chapter for 
        interest described in subparagraph (B).
          (3) Accelerated portion of credit.--For purposes of 
        paragraph (2), the accelerated portion of the credit 
        for the prior taxable years with respect to any amount 
        of basis is the excess of--
                  (A) the aggregate credit allowed by reason of 
                this section (without regard to this 
                subsection) for such years with respect to such 
                basis, over
                  (B) the aggregate credit which would be 
                allowable by reason of this section for such 
                years with respect to such basis if the 
                aggregate credit which would (but for this 
                subsection) have been allowable for the entire 
                compliance period were allowable ratably over 
                15 years.
          (4) Special rules.--
                  (A) Tax benefit rule.--The tax for the 
                taxable year shall be increased under paragraph 
                (1) only with respect to credits allowed by 
                reason of this section which were used to 
                reduce tax liability. In the case of credits 
                not so used to reduce tax liability, the 
                carryforwards and carrybacks under section 39 
                shall be appropriately adjusted.
                  (B) Only basis for which credit allowed taken 
                into account.--Qualified basis shall be taken 
                into account under paragraph (1)(B) only to the 
                extent such basis was taken into account in 
                determining the credit under subsection (a) for 
                the preceding taxable year referred to in such 
                paragraph.
                  (C) No recapture of additional credit 
                allowable by reason of subsection (f)(3).--
                Paragraph (1) shall apply to a decrease in 
                qualified basis only to the extent such 
                decrease exceeds the amount of qualified basis 
                with respect to which a credit was allowable 
                for the taxable year referred to in paragraph 
                (1)(B) by reason of subsection (f)(3).
                  (D) No credits against tax.--Any increase in 
                tax under this subsection shall not be treated 
                as a tax imposed by this chapter for purposes 
                of determining the amount of any credit under 
                this chapter.
                  (E) No recapture by reason of casualty 
                loss.--The increase in tax under this 
                subsection shall not apply to a reduction in 
                qualified basis by reason of a casualty loss to 
                the extent such loss is restored by 
                reconstruction or replacement within a 
                reasonable period established by the Secretary.
                  (F) No recapture where de minimis changes in 
                floor space.--The Secretary may provide that 
                the increase in tax under this subsection shall 
                not apply with respect to any building if--
                          (i) such increase results from a de 
                        minimis change in the floor space 
                        fraction under subsection (c)(1), and
                          (ii) the building is a qualified low-
                        income building after such change.
          (5) Certain partnerships treated as the taxpayer.--
                  (A) In general.--For purposes of applying 
                this subsection to a partnership to which this 
                paragraph applies--
                          (i) such partnership shall be treated 
                        as the taxpayer to which the credit 
                        allowable under subsection (a) was 
                        allowed,
                          (ii) the amount of such credit 
                        allowed shall be treated as the amount 
                        which would have been allowed to the 
                        partnership were such credit allowable 
                        to such partnership,
                          (iii) paragraph (4)(A) shall not 
                        apply, and
                          (iv) the amount of the increase in 
                        tax under this subsection for any 
                        taxable year shall be allocated among 
                        the partners of such partnership in the 
                        same manner as such partnership's 
                        taxable income for such year is 
                        allocated among such partners.
                  (B) Partnerships to which paragraph 
                applies.--This paragraph shall apply to any 
                partnership which has 35 or more partners 
                unless the partnership elects not to have this 
                paragraph apply.
                  (C) Special rules.--
                          [(i) Husband and wife treated as 1 
                        partner.--For purposes of subparagraph 
                        (B)(i), a husband and wife (and their 
                        estates) shall be treated as 1 
                        partner.]
                          (i) Married couple treated as 1 
                        partner.--For purposes of subparagraph 
                        (B), individuals married to one another 
                        (and their estates) shall be treated as 
                        1 partner.
                          (ii) Election irrevocable.--Any 
                        election under subparagraph (B), once 
                        made, shall be irrevocable.
          (6) No recapture on disposition of building which 
        continues in qualified use.--
                  (A) In general.--The increase in tax under 
                this subsection shall not apply solely by 
                reason of the disposition of a building (or an 
                interest therein) if it is reasonably expected 
                that such building will continue to be operated 
                as a qualified low-income building for the 
                remaining compliance period with respect to 
                such building.
                  (B) Statute of limitations.--If a building 
                (or an interest therein) is disposed of during 
                any taxable year and there is any reduction in 
                the qualified basis of such building which 
                results in an increase in tax under this 
                subsection for such taxable or any subsequent 
                taxable year, then--
                          (i) the statutory period for the 
                        assessment of any deficiency with 
                        respect to such increase in tax shall 
                        not expire before the expiration of 3 
                        years from the date the Secretary is 
                        notified by the taxpayer (in such 
                        manner as the Secretary may prescribe) 
                        of such reduction in qualified basis, 
                        and
                          (ii) such deficiency may be assessed 
                        before the expiration of such 3-year 
                        period notwithstanding the provisions 
                        of any other law or rule of law which 
                        would otherwise prevent such 
                        assessment.
  (k) Application of at-risk rules.--For purposes of this 
section--
          (1) In general.--Except as otherwise provided in this 
        subsection, rules similar to the rules of section 
        49(a)(1) (other than subparagraphs (D)(ii)(II) and 
        (D)(iv)(I) thereof), section 49(a)(2), and section 
        49(b)(1) shall apply in determining the qualified basis 
        of any building in the same manner as such sections 
        apply in determining the credit base of property.
          (2) Special rules for determining qualified person.--
        For purposes of paragraph (1)--
                  (A) In general.--If the requirements of 
                subparagraphs (B), (C), and (D) are met with 
                respect to any financing borrowed from a 
                qualified nonprofit organization (as defined in 
                subsection (h)(5)), the determination of 
                whether such financing is qualified commercial 
                financing with respect to any qualified low-
                income building shall be made without regard to 
                whether such organization--
                          (i) is actively and regularly engaged 
                        in the business of lending money, or
                          (ii) is a person described in section 
                        49(a)(1)(D)(iv)(II).
                  (B) Financing secured by property.--The 
                requirements of this subparagraph are met with 
                respect to any financing if such financing is 
                secured by the qualified low-income building, 
                except that this subparagraph shall not apply 
                in the case of a federally assisted building 
                described in subsection (d)(6)(C) if--
                          (i) a security interest in such 
                        building is not permitted by a Federal 
                        agency holding or insuring the mortgage 
                        secured by such building, and
                          (ii) the proceeds from the financing 
                        (if any) are applied to acquire or 
                        improve such building.
                  (C) Portion of building attributable to 
                financing.--The requirements of this 
                subparagraph are met with respect to any 
                financing for any taxable year in the 
                compliance period if, as of the close of such 
                taxable year, not more than 60 percent of the 
                eligible basis of the qualified low-income 
                building is attributable to such financing 
                (reduced by the principal and interest of any 
                governmental financing which is part of a wrap-
                around mortgage involving such financing).
                  (D) Repayment of principal and interest.--The 
                requirements of this subparagraph are met with 
                respect to any financing if such financing is 
                fully repaid on or before the earliest of--
                          (i) the date on which such financing 
                        matures,
                          (ii) the 90th day after the close of 
                        the compliance period with respect to 
                        the qualified low-income building, or
                          (iii) the date of its refinancing or 
                        the sale of the building to which such 
                        financing relates.
                In the case of a qualified nonprofit 
                organization which is not described in section 
                49(a)(1)(D)(iv)(II) with respect to a building, 
                clause (ii) of this subparagraph shall be 
                applied as if the date described therein were 
                the 90th day after the earlier of the date the 
                building ceases to be a qualified low-income 
                building or the date which is 15 years after 
                the close of a compliance period with respect 
                thereto.
          (3) Present value of financing.--If the rate of 
        interest on any financing described in paragraph (2)(A) 
        is less than the rate which is 1 percentage point below 
        the applicable Federal rate as of the time such 
        financing is incurred, then the qualified basis (to 
        which such financing relates) of the qualified low-
        income building shall be the present value of the 
        amount of such financing, using as the discount rate 
        such applicable Federal rate. For purposes of the 
        preceding sentence, the rate of interest on any 
        financing shall be determined by treating interest to 
        the extent of government subsidies as not payable.
          (4) Failure to fully repay.--
                  (A) In general.--To the extent that the 
                requirements of paragraph (2)(D) are not met, 
                then the taxpayer's tax under this chapter for 
                the taxable year in which such failure occurs 
                shall be increased by an amount equal to the 
                applicable portion of the credit under this 
                section with respect to such building, 
                increased by an amount of interest for the 
                period--
                          (i) beginning with the due date for 
                        the filing of the return of tax imposed 
                        by chapter 1 for the 1st taxable year 
                        for which such credit was allowable, 
                        and
                          (ii) ending with the due date for the 
                        taxable year in which such failure 
                        occurs,
                determined by using the underpayment rate and 
                method under section 6621.
                  (B) Applicable portion.--For purposes of 
                subparagraph (A), the term ``applicable 
                portion'' means the aggregate decrease in the 
                credits allowed to a taxpayer under section 38 
                for all prior taxable years which would have 
                resulted if the eligible basis of the building 
                were reduced by the amount of financing which 
                does not meet requirements of paragraph (2)(D).
                  (C) Certain rules to apply.--Rules similar to 
                the rules of subparagraphs (A) and (D) of 
                subsection (j)(4) shall apply for purposes of 
                this subsection.
  (l) Certifications and other reports to Secretary.--
          (1) Certification with respect to 1st year of credit 
        period.--Following the close of the 1st taxable year in 
        the credit period with respect to any qualified low-
        income building, the taxpayer shall certify to the 
        Secretary (at such time and in such form and in such 
        manner as the Secretary prescribes)--
                  (A) the taxable year, and calendar year, in 
                which such building was placed in service,
                  (B) the adjusted basis and eligible basis of 
                such building as of the close of the 1st year 
                of the credit period,
                  (C) the maximum applicable percentage and 
                qualified basis permitted to be taken into 
                account by the appropriate housing credit 
                agency under subsection (h),
                  (D) the election made under subsection (g) 
                with respect to the qualified low-income 
                housing project of which such building is a 
                part, and
                  (E) such other information as the Secretary 
                may require.
        In the case of a failure to make the certification 
        required by the preceding sentence on the date 
        prescribed therefor, unless it is shown that such 
        failure is due to reasonable cause and not to willful 
        neglect, no credit shall be allowable by reason of 
        subsection (a) with respect to such building for any 
        taxable year ending before such certification is made.
          (2) Annual reports to the Secretary.--The Secretary 
        may require taxpayers to submit an information return 
        (at such time and in such form and manner as the 
        Secretary prescribes) for each taxable year setting 
        forth--
                  (A) the qualified basis for the taxable year 
                of each qualified low-income building of the 
                taxpayer,
                  (B) the information described in paragraph 
                (1)(C) for the taxable year, and
                  (C) such other information as the Secretary 
                may require.
        The penalty under section 6652(j) shall apply to any 
        failure to submit the return required by the Secretary 
        under the preceding sentence on the date prescribed 
        therefor.
          (3) Annual reports from housing credit agencies.--
        Each agency which allocates any housing credit amount 
        to any building for any calendar year shall submit to 
        the Secretary (at such time and in such manner as the 
        Secretary shall prescribe) an annual report 
        specifying--
                  (A) the amount of housing credit amount 
                allocated to each building for such year,
                  (B) sufficient information to identify each 
                such building and the taxpayer with respect 
                thereto, and
                  (C) such other information as the Secretary 
                may require.
        The penalty under section 6652(j) shall apply to any 
        failure to submit the report required by the preceding 
        sentence on the date prescribed therefor.
  (m) Responsibilities of housing credit agencies.--
          (1) Plans for allocation of credit among projects.--
                  (A) In general.--Notwithstanding any other 
                provision of this section, the housing credit 
                dollar amount with respect to any building 
                shall be zero unless--
                          (i) such amount was allocated 
                        pursuant to a qualified allocation plan 
                        of the housing credit agency which is 
                        approved by the governmental unit (in 
                        accordance with rules similar to the 
                        rules of section 147(f)(2) (other than 
                        subparagraph (B)(ii) thereof)) of which 
                        such agency is a part,
                          (ii) such agency notifies the chief 
                        executive officer (or the equivalent) 
                        of the local jurisdiction within which 
                        the building is located of such project 
                        and provides such individual a 
                        reasonable opportunity to comment on 
                        the project,
                          (iii) a comprehensive market study of 
                        the housing needs of low-income 
                        individuals in the area to be served by 
                        the project is conducted before the 
                        credit allocation is made and at the 
                        developer's expense by a disinterested 
                        party who is approved by such agency, 
                        and
                          (iv) a written explanation is 
                        available to the general public for any 
                        allocation of a housing credit dollar 
                        amount which is not made in accordance 
                        with established priorities and 
                        selection criteria of the housing 
                        credit agency.
                  (B) Qualified allocation plan.--For purposes 
                of this paragraph, the term ``qualified 
                allocation plan'' means any plan--
                          (i) which sets forth selection 
                        criteria to be used to determine 
                        housing priorities of the housing 
                        credit agency which are appropriate to 
                        local conditions,
                          (ii) which also gives preference in 
                        allocating housing credit dollar 
                        amounts among selected projects to--
                                  (I) projects serving the 
                                lowest income tenants,
                                  (II) projects obligated to 
                                serve qualified tenants for the 
                                longest periods, and
                                  (III) projects which are 
                                located in qualified census 
                                tracts (as defined in 
                                subsection (d)(5)(B)(ii)) and 
                                the development of which 
                                contributes to a concerted 
                                community revitalization plan, 
                                and
                          (iii) which provides a procedure that 
                        the agency (or an agent or other 
                        private contractor of such agency) will 
                        follow in monitoring for noncompliance 
                        with the provisions of this section and 
                        in notifying the Internal Revenue 
                        Service of such noncompliance which 
                        such agency becomes aware of and in 
                        monitoring for noncompliance with 
                        habitability standards through regular 
                        site visits.
                  (C) Certain selection criteria must be 
                used.--The selection criteria set forth in a 
                qualified allocation plan must include
                          (i) project location,
                          (ii) housing needs characteristics,
                          (iii) project characteristics, 
                        including whether the project includes 
                        the use of existing housing as part of 
                        a community revitalization plan,
                          (iv) sponsor characteristics,
                          (v) tenant populations with special 
                        housing needs,
                          (vi) public housing waiting lists,
                          (vii) tenant populations of 
                        individuals with children,
                          (viii) projects intended for eventual 
                        tenant ownership,
                          (ix) the energy efficiency of the 
                        project, and
                          (x) the historic nature of the 
                        project.
                  (D) Application to bond financed projects.--
                Subsection (h)(4) shall not apply to any 
                project unless the project satisfies the 
                requirements for allocation of a housing credit 
                dollar amount under the qualified allocation 
                plan applicable to the area in which the 
                project is located.
          (2) Credit allocated to building not to exceed amount 
        necessary to assure project feasibility.--
                  (A) In general.--The housing credit dollar 
                amount allocated to a project shall not exceed 
                the amount the housing credit agency determines 
                is necessary for the financial feasibility of 
                the project and its viability as a qualified 
                low-income housing project throughout the 
                credit period.
                  (B) Agency evaluation.--In making the 
                determination under subparagraph (A), the 
                housing credit agency shall consider--
                          (i) the sources and uses of funds and 
                        the total financing planned for the 
                        project,
                          (ii) any proceeds or receipts 
                        expected to be generated by reason of 
                        tax benefits,
                          (iii) the percentage of the housing 
                        credit dollar amount used for project 
                        costs other than the cost of 
                        intermediaries, and
                          (iv) the reasonableness of the 
                        developmental and operational costs of 
                        the project.
                Clause (iii) shall not be applied so as to 
                impede the development of projects in hard-to-
                develop areas. Such a determination shall not 
                be construed to be a representation or warranty 
                as to the feasibility or viability of the 
                project.
                  (C) Determination made when credit amount 
                applied for and when building placed in 
                service.--
                          (i) In general.--A determination 
                        under subparagraph (A) shall be made as 
                        of each of the following times:
                                  (I) The application for the 
                                housing credit dollar amount.
                                  (II) The allocation of the 
                                housing credit dollar amount.
                                  (III) The date the building 
                                is placed in service.
                          (ii) Certification as to amount of 
                        other subsidies.--Prior to each 
                        determination under clause (i), the 
                        taxpayer shall certify to the housing 
                        credit agency the full extent of all 
                        Federal, State, and local subsidies 
                        which apply (or which the taxpayer 
                        expects to apply) with respect to the 
                        building.
                  (D) Application to bond financed projects.--
                Subsection (h)(4) shall not apply to any 
                project unless the governmental unit which 
                issued the bonds (or on behalf of which the 
                bonds were issued) makes a determination under 
                rules similar to the rules of subparagraphs (A) 
                and (B).
  (n) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary or appropriate to carry out the 
purposes of this section, including regulations--
          (1) dealing with--
                  (A) projects which include more than 1 
                building or only a portion of a building,
                  (B) buildings which are placed in service in 
                portions,
          (2) providing for the application of this section to 
        short taxable years,
          (3) preventing the avoidance of the rules of this 
        section, and
          (4) providing the opportunity for housing credit 
        agencies to correct administrative errors and omissions 
        with respect to allocations and record keeping within a 
        reasonable period after their discovery, taking into 
        account the availability of regulations and other 
        administrative guidance from the Secretary.

Subchapter B--COMPUTATION OF TAXABLE INCOME

           *       *       *       *       *       *       *

  PART I--DEFINITION OF GROSS INCOME, ADJUSTED GROSS INCOME, TAXABLE 
INCOME, ETC.

           *       *       *       *       *       *       *

SEC. 62. ADJUSTED GROSS INCOME DEFINED.

  (a) General rule.--For purposes of this subtitle, the term 
``adjusted gross income'' means, in the case of an individual, 
gross income minus the following deductions:
          (1) Trade and business deductions.--The deductions 
        allowed by this chapter (other than by part VII of this 
        subchapter) which are attributable to a trade or 
        business carried on by the taxpayer, if such trade or 
        business does not consist of the performance of 
        services by the taxpayer as an employee.
          (2) Certain trade and business deductions of 
        employees.--
                  (A) Reimbursed expenses of employees.--The 
                deductions allowed by part VI (section 161 and 
                following) which consist of expenses paid or 
                incurred by the taxpayer, in connection with 
                the performance by him of services as an 
                employee, under a reimbursement or other 
                expense allowance arrangement with his 
                employer. The fact that the reimbursement may 
                be provided by a third party shall not be 
                determinative of whether or not the preceding 
                sentence applies.
                  (B) Certain expenses of performing artists.--
                The deductions allowed by section 162 which 
                consist of expenses paid or incurred by a 
                qualified performing artist in connection with 
                the performances by him of services in the 
                performing arts as an employee.
                  (C) Certain expenses of officials.--The 
                deductions allowed by section 162 which consist 
                of expenses paid or incurred with respect to 
                services performed by an official as an 
                employee of a State or a political subdivision 
                thereof in a position compensated in whole or 
                in part on a fee basis.
                  (D) Certain expenses of elementary and 
                secondary school teachers.--The deductions 
                allowed by section 162 which consist of 
                expenses, not in excess of $250, paid or 
                incurred by an eligible educator--
                          (i) by reason of the participation of 
                        the educator in professional 
                        development courses related to the 
                        curriculum in which the educator 
                        provides instruction or to the students 
                        for which the educator provides 
                        instruction, and
                          (ii) in connection with books, 
                        supplies (other than nonathletic 
                        supplies for courses of instruction in 
                        health or physical education), computer 
                        equipment (including related software 
                        and services) and other equipment, and 
                        supplementary materials used by the 
                        eligible educator in the classroom.
                  (E) Certain expenses of members of reserve 
                components of the Armed Forces of the United 
                States.--The deductions allowed by section 162 
                which consist of expenses, determined at a rate 
                not in excess of the rates for travel expenses 
                (including per diem in lieu of subsistence) 
                authorized for employees of agencies under 
                subchapter I of chapter 57 of title 5, United 
                States Code, paid or incurred by the taxpayer 
                in connection with the performance of services 
                by such taxpayer as a member of a reserve 
                component of the Armed Forces of the United 
                States for any period during which such 
                individual is more than 100 miles away from 
                home in connection with such services.
          (3) Losses from sale or exchange of property.--The 
        deductions allowed by part VI (sec. 161 and following) 
        as losses from the sale or exchange of property.
          (4) Deductions attributable to rents and royalties.--
        The deductions allowed by part VI (sec. 161 and 
        following), by section 212 (relating to expenses for 
        production of income), and by section 611 (relating to 
        depletion) which are attributable to property held for 
        the production of rents or royalties.
          (5) Certain deductions of life tenants and income 
        beneficiaries of property.--In the case of a life 
        tenant of property, or an income beneficiary of 
        property held in trust, or an heir, legatee, or devisee 
        of an estate, the deduction for depreciation allowed by 
        section 167 and the deduction allowed by section 611.
          (6) Pension, profit-sharing, and annuity plans of 
        self-employed individuals.--In the case of an 
        individual who is an employee within the meaning of 
        section 401(c)(1), the deduction allowed by section 
        404.
          (7) Retirement savings.--The deduction allowed by 
        section 219 (relating to deduction of certain 
        retirement savings).
          (9) Penalties forfeited because of premature 
        withdrawal of funds from time savings accounts or 
        deposits.--The deductions allowed by section 165 for 
        losses incurred in any transaction entered into for 
        profit, though not connected with a trade or business, 
        to the extent that such losses include amounts 
        forfeited to a bank, mutual savings bank, savings and 
        loan association, building and loan association, 
        cooperative bank or homestead association as a penalty 
        for premature withdrawal of funds from a time savings 
        account, certificate of deposit, or similar class of 
        deposit.
          (11) Reforestation expenses.--The deduction allowed 
        by section 194.
          (12) Certain required repayments of supplemental 
        unemployment compensation benefits.--The deduction 
        allowed by section 165 for the repayment to a trust 
        described in paragraph (9) or (17) of section 501(c) of 
        supplemental unemployment compensation benefits 
        received from such trust if such repayment is required 
        because of the receipt of trade readjustment allowances 
        under section 231 or 232 of the Trade Act of 1974 (19 
        U.S.C. 2291 and 2292).
          (13) Jury duty pay remitted to employer.--Any 
        deduction allowable under this chapter by reason of an 
        individual remitting any portion of any jury pay to 
        such individual's employer in exchange for payment by 
        the employer of compensation for the period such 
        individual was performing jury duty. For purposes of 
        the preceding sentence, the term ``jury pay'' means any 
        payment received by the individual for the discharge of 
        jury duty.
          (15) Moving expenses.--The deduction allowed by 
        section 217.
          (16) Archer MSAs.--The deduction allowed by section 
        220.
          (17) Interest on education loans.--The deduction 
        allowed by section 221.
          (18) Higher education expenses.--The deduction 
        allowed by section 222.
          (19) Health savings accounts.--The deduction allowed 
        by section 223.
          (20) Costs involving discrimination suits, etc..--Any 
        deduction allowable under this chapter for attorney 
        fees and court costs paid by, or on behalf of, the 
        taxpayer in connection with any action involving a 
        claim of unlawful discrimination (as defined in 
        subsection (e)) or a claim of a violation of subchapter 
        III of chapter 37 of title 31, United States Code, or a 
        claim made under section 1862(b)(3)(A) of the Social 
        Security Act (42 U.S.C. 1395y(b)(3)(A)). The preceding 
        sentence shall not apply to any deduction in excess of 
        the amount includible in the taxpayer's gross income 
        for the taxable year on account of a judgment or 
        settlement (whether by suit or agreement and whether as 
        lump sum or periodic payments) resulting from such 
        claim.
          (21) Attorneys' fees relating to awards to 
        whistleblowers.--
                  (A) In general.--Any deduction allowable 
                under this chapter for attorney fees and court 
                costs paid by, or on behalf of, the taxpayer in 
                connection with any award under--
                          (i) section 7623(b), or
                          (ii) in the case of taxable years 
                        beginning after December 31, 2017, any 
                        action brought under--
                                  (I) section 21F of the 
                                Securities Exchange Act of 1934 
                                (15 U.S.C. 78u-6),
                                  (II) a State false claims 
                                act, including a State false 
                                claims act with qui tam 
                                provisions, or
                                  (III) section 23 of the 
                                Commodity Exchange Act (7 
                                U.S.C. 26).
                  (B) May not exceed award.--Subparagraph (A) 
                shall not apply to any deduction in excess of 
                the amount includible in the taxpayer's gross 
                income for the taxable year on account of such 
                award.
Nothing in this section shall permit the same item to be 
deducted more than once. Any deduction allowed by section 199A 
shall not be treated as a deduction described in any of the 
preceding paragraphs of this subsection.
  (b) Qualified performing artist.--
          (1) In general.--For purposes of subsection 
        (a)(2)(B), the term ``qualified performing artist'' 
        means, with respect to any taxable year, any individual 
        if--
                  (A) such individual performed services in the 
                performing arts as an employee during the 
                taxable year for at least 2 employers,
                  (B) the aggregate amount allowable as a 
                deduction under section 162 in connection with 
                the performance of such services exceeds 10 
                percent of such individual's gross income 
                attributable to the performance of such 
                services, and
                  (C) the adjusted gross income of such 
                individual for the taxable year (determined 
                without regard to subsection (a)(2)(B)) does 
                not exceed $16,000.
          (2) Nominal employer not taken into account.--An 
        individual shall not be treated as performing services 
        in the performing arts as an employee for any employer 
        during any taxable year unless the amount received by 
        such individual from such employer for the performance 
        of such services during the taxable year equals or 
        exceeds $200.
          (3) Special rules for married couples.--
                  (A) In general.--Except in the case of a 
                [husband and wife who lived apart] married 
                couple who lived apart at all times during the 
                taxable year, if the taxpayer is married at the 
                close of the taxable year, subsection (a)(2)(B) 
                shall apply only if [the taxpayer and his 
                spouse] the taxpayer and the spouse of the 
                taxpayer file a joint return for the taxable 
                year.
                  (B) Application of paragraph (1).--In the 
                case of a joint return--
                          (i) paragraph (1) (other than 
                        subparagraph (C) thereof) shall be 
                        applied separately with respect to each 
                        spouse, but
                          (ii) paragraph (1)(C) shall be 
                        applied with respect to their combined 
                        adjusted gross income.
                  (C) Determination of marital status.--For 
                purposes of this subsection, marital status 
                shall be determined under section 7703(a).
                  (D) Joint return.--For purposes of this 
                subsection, the term ``joint return'' means the 
                joint return of a [husband and wife] married 
                couple made under section 6013.
  (c) Certain arrangements not treated as reimbursement 
arrangements.--For purposes of subsection (a)(2)(A), an 
arrangement shall in no event be treated as a reimbursement or 
other expense allowance arrangement if--
          (1) such arrangement does not require the employee to 
        substantiate the expenses covered by the arrangement to 
        the person providing the reimbursement, or
          (2) such arrangement provides the employee the right 
        to retain any amount in excess of the substantiated 
        expenses covered under the arrangement.
The substantiation requirements of the preceding sentence shall 
not apply to any expense to the extent that substantiation is 
not required under section 274(d) for such expense by reason of 
the regulations prescribed under the 2nd sentence thereof.
  (d) Definition; special rules.--
          (1) Eligible educator.--
                  (A) In general.--For purposes of subsection 
                (a)(2)(D), the term ``eligible educator'' 
                means, with respect to any taxable year, an 
                individual who is a kindergarten through grade 
                12 teacher, instructor, counselor, principal, 
                or aide in a school for at least 900 hours 
                during a school year.
                  (B) School.--The term ``school'' means any 
                school which provides elementary education or 
                secondary education (kindergarten through grade 
                12), as determined under State law.
          (2) Coordination with exclusions.--A deduction shall 
        be allowed under subsection (a)(2)(D) for expenses only 
        to the extent the amount of such expenses exceeds the 
        amount excludable under section 135, 529(c)(1), or 
        530(d)(2) for the taxable year.
          (3) Inflation adjustment.--In the case of any taxable 
        year beginning after 2015, the $250 amount in 
        subsection (a)(2)(D) shall be increased by an amount 
        equal to--
                  (A) such dollar amount, multiplied by
                  (B) the cost-of-living adjustment determined 
                under section 1(f)(3) for the calendar year in 
                which the taxable year begins, determined by 
                substituting ``calendar year 2014'' for 
                ``calendar year 2016'' in subparagraph (A)(ii) 
                thereof.
        Any increase determined under the preceding sentence 
        shall be rounded to the nearest multiple of $50.
  (e) Unlawful discrimination defined.--For purposes of 
subsection (a)(20), the term ``unlawful discrimination'' means 
an act that is unlawful under any of the following:
          (1) Section 302 of the Civil Rights Act of 1991 (42 
        U.S.C. 2000e-16b).
          (2) Section 201, 202, 203, 204, 205, 206, or 207 of 
        the Congressional Accountability Act of 1995 (2 U.S.C. 
        1311, 1312, 1313, 1314, 1315, 1316, or 1317).
          (3) The National Labor Relations Act (29 U.S.C. 151 
        et seq.).
          (4) The Fair Labor Standards Act of 1938 (29 U.S.C. 
        201 et seq.).
          (5) Section 4 or 15 of the Age Discrimination in 
        Employment Act of 1967 (29 U.S.C. 623 or 633a).
          (6) Section 501 or 504 of the Rehabilitation Act of 
        1973 (29 U.S.C. 791 or 794).
          (7) Section 510 of the Employee Retirement Income 
        Security Act of 1974 (29 U.S.C. 1140).
          (8) Title IX of the Education Amendments of 1972 (20 
        U.S.C. 1681 et seq.).
          (9) The Employee Polygraph Protection Act of 1988 (29 
        U.S.C. 2001 et seq.).
          (10) The Worker Adjustment and Retraining 
        Notification Act (29 U.S.C. 2102 et seq.).
          (11) Section 105 of the Family and Medical Leave Act 
        of 1993 (29 U.S.C. 2615).
          (12) Chapter 43 of title 38, United States Code 
        (relating to employment and reemployment rights of 
        members of the uniformed services).
          (13) Section 1977, 1979, or 1980 of the Revised 
        Statutes (42 U.S.C. 1981, 1983, or 1985).
          (14) Section 703, 704, or 717 of the Civil Rights Act 
        of 1964 (42 U.S.C. 2000e-2, 2000e-3, or 2000e-16).
          (15) Section 804, 805, 806, 808, or 818 of the Fair 
        Housing Act (42 U.S.C. 3604, 3605, 3606, 3608, or 
        3617).
          (16) Section 102, 202, 302, or 503 of the Americans 
        with Disabilities Act of 1990 (42 U.S.C. 12112, 12132, 
        12182, or 12203).
          (17) Any provision of Federal law (popularly known as 
        whistleblower protection provisions) prohibiting the 
        discharge of an employee, the discrimination against an 
        employee, or any other form of retaliation or reprisal 
        against an employee for asserting rights or taking 
        other actions permitted under Federal law.
          (18) Any provision of Federal, State, or local law, 
        or common law claims permitted under Federal, State, or 
        local law--
                  
                  (i) providing for the enforcement of civil 
                rights, or
                  
                  (ii) regulating any aspect of the employment 
                relationship, including claims for wages, 
                compensation, or benefits, or prohibiting the 
                discharge of an employee, the discrimination 
                against an employee, or any other form of 
                retaliation or reprisal against an employee for 
                asserting rights or taking other actions 
                permitted by law.

SEC. 63. TAXABLE INCOME DEFINED.

  (a) In general.--Except as provided in subsection (b), for 
purposes of this subtitle, the term ``taxable income'' means 
gross income minus the deductions allowed by this chapter 
(other than the standard deduction).
  (b) Individuals who do not itemize their deductions.--In the 
case of an individual who does not elect to itemize his 
deductions for the taxable year, for purposes of this subtitle, 
the term ``taxable income'' means adjusted gross income, 
minus--
          (1) the standard deduction,
          (2) the deduction for personal exemptions provided in 
        section 151, and
          (3) any deduction provided in section 199A.
  (c) Standard deduction.--For purposes of this subtitle--
          (1) In general.--Except as otherwise provided in this 
        subsection, the term ``standard deduction'' means the 
        sum of--
                  (A) the basic standard deduction, and
                  (B) the additional standard deduction.
          (2) Basic standard deduction.--For purposes of 
        paragraph (1), the basic standard deduction is--
                  (A) 200 percent of the dollar amount in 
                effect under subparagraph (C) for the taxable 
                year in the case of--
                          (i) a joint return, or
                          (ii) a surviving spouse (as defined 
                        in section 2(a)),
                  (B) $4,400 in the case of a head of household 
                (as defined in section 2(b)), or
                  (C) $3,000 in any other case.
          (3) Additional standard deduction for aged and 
        blind.--For purposes of paragraph (1), the additional 
        standard deduction is the sum of each additional amount 
        to which the taxpayer is entitled under subsection (f).
          (4) Adjustments for inflation.--In the case of any 
        taxable year beginning in a calendar year after 1988, 
        each dollar amount contained in paragraph (2)(B), 
        (2)(C), or (5) or subsection (f) shall be increased by 
        an amount equal to--
                  (A) such dollar amount, multiplied by
                  (B) the cost-of-living adjustment determined 
                under section 1(f)(3) for the calendar year in 
                which the taxable year begins, by substituting 
                for ``calendar year 2016'' in subparagraph 
                (A)(ii) thereof--
                          (i) ``calendar year 1987'' in the 
                        case of the dollar amounts contained in 
                        paragraph (2)(B), (2)(C), or (5)(A) or 
                        subsection (f), and
                          (ii) ``calendar year 1997'' in the 
                        case of the dollar amount contained in 
                        paragraph (5)(B).
          (5) Limitation on basic standard deduction in the 
        case of certain dependents.--In the case of an 
        individual with respect to whom a deduction under 
        section 151 is allowable to another taxpayer for a 
        taxable year beginning in the calendar year in which 
        the individual's taxable year begins, the basic 
        standard deduction applicable to such individual for 
        such individual's taxable year shall not exceed the 
        greater of--
                  (A) $500, or
                  (B) the sum of $250 and such individual's 
                earned income.
          (6) Certain individuals, etc., not eligible for 
        standard deduction.--In the case of--
                  (A) a married individual filing a separate 
                return where either spouse itemizes deductions,
                  (B) a nonresident alien individual,
                  (C) an individual making a return under 
                section 443(a)(1) for a period of less than 12 
                months on account of a change in his annual 
                accounting period, or
                  (D) an estate or trust, common trust fund, or 
                partnership,
        the standard deduction shall be zero.
          (7) Special rules for taxable years 2018 through 
        2025.--In the case of a taxable year beginning after 
        December 31, 2017, and before January 1, 2026--
                  (A) Increase in standard deduction.--
                Paragraph (2) shall be applied--
                          (i) by substituting ``$18,000'' for 
                        ``$4,400'' in subparagraph (B), and
                          (ii) by substituting ``$12,000'' for 
                        ``$3,000'' in subparagraph (C).
                  (B) Adjustment for inflation.--
                          (i) In general.--Paragraph (4) shall 
                        not apply to the dollar amounts 
                        contained in paragraphs (2)(B) and 
                        (2)(C).
                          (ii) Adjustment of increased 
                        amounts.--In the case of a taxable year 
                        beginning after 2018, the $18,000 and 
                        $12,000 amounts in subparagraph (A) 
                        shall each be increased by an amount 
                        equal to--
                                  (I) such dollar amount, 
                                multiplied by
                                  (II) the cost-of-living 
                                adjustment determined under 
                                section 1(f)(3) for the 
                                calendar year in which the 
                                taxable year begins, determined 
                                by substituting ``2017'' for 
                                ``2016'' in subparagraph 
                                (A)(ii) thereof.
                 If any increase under this clause is not a 
                multiple of $50, such increase shall be rounded 
                to the next lowest multiple of $50.
  (d) Itemized deductions.--For purposes of this subtitle, the 
term ``itemized deductions'' means the deductions allowable 
under this chapter other than--
          (1) the deductions allowable in arriving at adjusted 
        gross income,
          (2) the deduction for personal exemptions provided by 
        section 151, and
          (3) any deduction provided in section 199A.
  (e) Election to itemize.--
          (1) In general.--Unless an individual makes an 
        election under this subsection for the taxable year, no 
        itemized deduction shall be allowed for the taxable 
        year. For purposes of this subtitle, the determination 
        of whether a deduction is allowable under this chapter 
        shall be made without regard to the preceding sentence.
          (2) Time and manner of election.--Any election under 
        this subsection shall be made on the taxpayer's return, 
        and the Secretary shall prescribe the manner of 
        signifying such election on the return.
          (3) Change of election.--Under regulations prescribed 
        by the Secretary, a change of election with respect to 
        itemized deductions for any taxable year may be made 
        after the filing of the return for such year. If the 
        spouse of the taxpayer filed a separate return for any 
        taxable year corresponding to the taxable year of the 
        taxpayer, the change shall not be allowed unless, in 
        accordance with such regulations--
                  (A) the spouse makes a change of election 
                with respect to itemized deductions, for the 
                taxable year covered in such separate return, 
                consistent with the change of treatment sought 
                by the taxpayer, and
                  (B) the taxpayer and [his spouse] the 
                taxpayer's spouse consent in writing to the 
                assessment (within such period as may be agreed 
                on with the Secretary) of any deficiency, to 
                the extent attributable to such change of 
                election, even though at the time of the filing 
                of such consent the assessment of such 
                deficiency would otherwise be prevented by the 
                operation of any law or rule of law.
        This paragraph shall not apply if the tax liability of 
        the taxpayer's spouse for the taxable year 
        corresponding to the taxable year of the taxpayer has 
        been compromised under section 7122.
  (f) Aged or blind additional amounts.--
          (1) Additional amounts for the aged.--The taxpayer 
        shall be entitled to an additional amount of $600--
                  (A) [for himself if he] for the taxpayer if 
                the taxpayer has attained age 65 before the 
                close of [his taxable year] the taxpayer's 
                taxable year , and
                  (B) for the spouse of the taxpayer if the 
                spouse has attained age 65 before the close of 
                the taxable year and an additional exemption is 
                allowable to the taxpayer for such spouse under 
                section 151(b).
          (2) Additional amount for blind.--The taxpayer shall 
        be entitled to an additional amount of $600--
                  (A) [for himself if he] for the taxpayer if 
                the taxpayer is blind at the close of the 
                taxable year, and
                  (B) for the spouse of the taxpayer if the 
                spouse is blind as of the close of the taxable 
                year and an additional exemption is allowable 
                to the taxpayer for such spouse under section 
                151(b).
        For purposes of subparagraph (B), if the spouse dies 
        during the taxable year the determination of whether 
        such spouse is blind shall be made as of the time of 
        such death.
          (3) Higher amount for certain unmarried 
        individuals.--In the case of an individual who is not 
        married and is not a surviving spouse, paragraphs (1) 
        and (2) shall be applied by substituting ``$750'' for 
        ``$600''.
          (4) Blindness defined.--For purposes of this 
        subsection, an individual is blind only if [his] the 
        individual's central visual acuity does not exceed 20/
        200 in the better eye with correcting lenses, or if 
        [his] the individual's visual acuity is greater than 
        20/200 but is accompanied by a limitation in the fields 
        of vision such that the widest diameter of the visual 
        field subtends an angle no greater than 20 degrees.
  (g) Marital status.--For purposes of this section, marital 
status shall be determined under section 7703.

           *       *       *       *       *       *       *

PART II--ITEMS SPECIFICALLY INCLUDED IN GROSS INCOME

           *       *       *       *       *       *       *

SEC. 86. SOCIAL SECURITY AND TIER 1 RAILROAD RETIREMENT BENEFITS.

  (a) In general.--
          (1) In general.--Except as provided in paragraph (2), 
        gross income for the taxable year of any taxpayer 
        described in subsection (b) (notwithstanding section 
        207 of the Social Security Act) includes social 
        security benefits in an amount equal to the lesser of--
                  (A) one-half of the social security benefits 
                received during the taxable year, or
                  (B) one-half of the excess described in 
                subsection (b)(1).
          (2) Additional amount.--In the case of a taxpayer 
        with respect to whom the amount determined under 
        subsection (b)(1)(A) exceeds the adjusted base amount, 
        the amount included in gross income under this section 
        shall be equal to the lesser of--
                  (A) the sum of--
                          (i) 85 percent of such excess, plus
                          (ii) the lesser of the amount 
                        determined under paragraph (1) or an 
                        amount equal to one-half of the 
                        difference between the adjusted base 
                        amount and the base amount of the 
                        taxpayer, or
                  (B) 85 percent of the social security 
                benefits received during the taxable year.
  (b) Taxpayers to whom subsection (a) applies.--
          (1) In general.--A taxpayer is described in this 
        subsection if--
                  (A) the sum of--
                          (i) the modified adjusted gross 
                        income of the taxpayer for the taxable 
                        year, plus
                          (ii) one-half of the social security 
                        benefits received during the taxable 
                        year, exceeds
                  (B) the base amount.
          (2) Modified adjusted gross income.--For purposes of 
        this subsection, the term ``modified adjusted gross 
        income'' means adjusted gross income--
                  (A) determined without regard to this section 
                and sections 135, 137, 221, 222, 911, 931, and 
                933, and
                  (B) increased by the amount of interest 
                received or accrued by the taxpayer during the 
                taxable year which is exempt from tax.
  (c) Base amount and adjusted base amount.--For purposes of 
this section--
          (1) Base amount.--The term ``base amount'' means--
                  (A) except as otherwise provided in this 
                paragraph, $25,000,
                  (B) $32,000 in the case of a joint return, 
                and
                  (C) zero in the case of a taxpayer who--
                          (i) is married as of the close of the 
                        taxable year (within the meaning of 
                        section 7703) but does not file a joint 
                        return for such year, and
                          (ii) does not live apart from [his 
                        spouse] the taxpayer's spouse at all 
                        times during the taxable year.
          (2) Adjusted base amount.--The term ``adjusted base 
        amount'' means--
                  (A) except as otherwise provided in this 
                paragraph, $34,000,
                  (B) $44,000 in the case of a joint return, 
                and
                  (C) zero in the case of a taxpayer described 
                in paragraph (1)(C).
  (d) Social security benefit.--
          (1) In general.--For purposes of this section, the 
        term ``social security benefit'' means any amount 
        received by the taxpayer by reason of entitlement to--
                  (A) a monthly benefit under title II of the 
                Social Security Act, or
                  (B) a tier 1 railroad retirement benefit.
          (2) Adjustment for repayments during year.--
                  (A) In general.--For purposes of this 
                section, the amount of social security benefits 
                received during any taxable year shall be 
                reduced by any repayment made by the taxpayer 
                during the taxable year of a social security 
                benefit previously received by the taxpayer 
                (whether or not such benefit was received 
                during the taxable year).
                  (B) Denial of deduction.--If (but for this 
                subparagraph) any portion of the repayments 
                referred to in subparagraph (A) would have been 
                allowable as a deduction for the taxable year 
                under section 165, such portion shall be 
                allowable as a deduction only to the extent it 
                exceeds the social security benefits received 
                by the taxpayer during the taxable year (and 
                not repaid during such taxable year).
          (3) Workmen's compensation benefits substituted for 
        social security benefits.--For purposes of this 
        section, if, by reason of section 224 of the Social 
        Security Act (or by reason of section 3(a)(1) of the 
        Railroad Retirement Act of 1974), any social security 
        benefit is reduced by reason of the receipt of a 
        benefit under a workmen's compensation act, the term 
        ``social security benefit'' includes that portion of 
        such benefit received under the workmen's compensation 
        act which equals such reduction.
          (4) Tier 1 railroad retirement benefit.--For purposes 
        of paragraph (1), the term ``tier 1 railroad retirement 
        benefit'' means--
                  (A) the amount of the annuity under the 
                Railroad Retirement Act of 1974 equal to the 
                amount of the benefit to which the taxpayer 
                would have been entitled under the Social 
                Security Act if all of the service after 
                December 31, 1936, of the employee (on whose 
                employment record the annuity is being paid) 
                had been included in the term ``employment'' as 
                defined in the Social Security Act, and
                  (B) a monthly annuity amount under section 
                3(f)(3) of the Railroad Retirement Act of 1974.
          (5) Effect of early delivery of benefit checks.--For 
        purposes of subsection (a), in any case where section 
        708 of the Social Security Act causes social security 
        benefit checks to be delivered before the end of the 
        calendar month for which they are issued, the benefits 
        involved shall be deemed to have been received in the 
        succeeding calendar month.
  (e) Limitation on amount included where taxpayer receives 
lump-sum payment.--
          (1) Limitation.--If--
                  (A) any portion of a lump-sum payment of 
                social security benefits received during the 
                taxable year is attributable to prior taxable 
                years, and
                  (B) the taxpayer makes an election under this 
                subsection for the taxable year,
        then the amount included in gross income under this 
        section for the taxable year by reason of the receipt 
        of such portion shall not exceed the sum of the 
        increases in gross income under this chapter for prior 
        taxable years which would result solely from taking 
        into account such portion in the taxable years to which 
        it is attributable.
          (2) Special rules.--
                  (A) Year to which benefit attributable.--For 
                purposes of this subsection, a social security 
                benefit is attributable to a taxable year if 
                the generally applicable payment date for such 
                benefit occurred during such taxable year.
                  (B) Election.--An election under this 
                subsection shall be made at such time and in 
                such manner as the Secretary shall by 
                regulations prescribe. Such election, once 
                made, may be revoked only with the consent of 
                the Secretary.
  (f) Treatment as pension or annuity for certain purposes.--
For purposes of--
          (1) section 22(c)(3)(A) (relating to reduction for 
        amounts received as pension or annuity),
          (2) section 32(c)(2) (defining earned income),
          (3) section 219(f)(1) (defining compensation), and
          (4) section 911(b)(1) (defining foreign earned 
        income),
any social security benefit shall be treated as an amount 
received as a pension or annuity.

           *       *       *       *       *       *       *

PART III--ITEMS SPECIFICALLY EXCLUDED FROM GROSS INCOME

           *       *       *       *       *       *       *

SEC. 105. AMOUNTS RECEIVED UNDER ACCIDENT AND HEALTH PLANS.

  (a) Amounts attributable to employer contributions.--Except 
as otherwise provided in this section, amounts received by an 
employee through accident or health insurance for personal 
injuries or sickness shall be included in gross income to the 
extent such amounts (1) are attributable to contributions by 
the employer which were not includible in the gross income of 
the employee, or (2) are paid by the employer.
  (b) Amounts expended for medical care.--Except in the case of 
amounts attributable to (and not in excess of) deductions 
allowed under section 213 (relating to medical, etc., expenses) 
for any prior taxable year, gross income does not include 
amounts referred to in subsection (a) if such amounts are paid, 
directly or indirectly, to the taxpayer to reimburse the 
taxpayer for expenses incurred [by him] for the medical care 
(as defined in section 213(d)) of the taxpayer, [his spouse, 
his dependents] the taxpayer's spouse, the taxpayer's 
dependents (as defined in section 152, determined without 
regard to subsections (b)(1), (b)(2), and (d)(1)(B) thereof), 
and any child (as defined in section 152(f)(1)) of the taxpayer 
who as of the end of the taxable year has not attained age 27. 
Any child to whom section 152(e) applies shall be treated as a 
dependent of both parents for purposes of this subsection.
  (c) Payments unrelated to absence from work.--Gross income 
does not include amounts referred to in subsection (a) to the 
extent such amounts--
          (1) constitute payment for the permanent loss or loss 
        of use of a member or function of the body, or the 
        permanent disfigurement, of the taxpayer, [his spouse] 
        the taxpayer's spouse , or a dependent (as defined in 
        section 152, determined without regard to subsections 
        (b)(1), (b)(2), and (d)(1)(B) thereof), and
          (2) are computed with reference to the nature of the 
        injury without regard to the period the employee is 
        absent from work.
  (e) Accident and health plans.--For purposes of this section 
and section 104--
          (1) amounts received under an accident or health plan 
        for employees, and
          (2) amounts received from a sickness and disability 
        fund for employees maintained under the law of a State 
        or the District of Columbia,
shall be treated as amounts received through accident or health 
insurance.
  (f) Rules for application of section 213.--For purposes of 
section 213(a) (relating to medical, dental, etc., expenses) 
amounts excluded from gross income under subsection (c) shall 
not be considered as compensation (by insurance or otherwise) 
for expenses paid for medical care.
  (g) Self-employed individual not considered an employee.--For 
purposes of this section, the term ``employee'' does not 
include an individual who is an employee within the meaning of 
section 401(c)(1) (relating to self-employed individuals).
  (h) Amount paid to highly compensated individuals under a 
discriminatory self-insured medical expense reimbursement 
plan.--
          (1) In general.--In the case of amounts paid to a 
        highly compensated individual under a self-insured 
        medical reimbursement plan which does not satisfy the 
        requirements of paragraph (2) for a plan year, 
        subsection (b) shall not apply to such amounts to the 
        extent they constitute an excess reimbursement of such 
        highly compensated individual.
          (2) Prohibition of discrimination.--A self-insured 
        medical reimbursement plan satisfies the requirements 
        of this paragraph only if--
                  (A) the plan does not discriminate in favor 
                of highly compensated individuals as to 
                eligibility to participate; and
                  (B) the benefits provided under the plan do 
                not discriminate in favor of participants who 
                are highly compensated individuals.
          (3) Nondiscriminatory eligibility classifications.--
                  (A) In general.--A self-insured medical 
                reimbursement plan does not satisfy the 
                requirements of subparagraph (A) of paragraph 
                (2) unless such plan benefits--
                          (i) 70 percent or more of all 
                        employees, or 80 percent or more of all 
                        the employees who are eligible to 
                        benefit under the plan if 70 percent or 
                        more of all employees are eligible to 
                        benefit under the plan; or
                          (ii) such employees as qualify under 
                        a classification set up by the employer 
                        and found by the Secretary not to be 
                        discriminatory in favor of highly 
                        compensated individuals.
                  (B) Exclusion of certain employees.--For 
                purposes of subparagraph (A), there may be 
                excluded from consideration--
                          (i) employees who have not completed 
                        3 years of service;
                          (ii) employees who have not attained 
                        age 25;
                          (iii) part-time or seasonal 
                        employees;
                          (iv) employees not included in the 
                        plan who are included in a unit of 
                        employees covered by an agreement 
                        between employee representatives and 
                        one or more employers which the 
                        Secretary finds to be a collective 
                        bargaining agreement, if accident and 
                        health benefits were the subject of 
                        good faith bargaining between such 
                        employee representatives and such 
                        employer or employers; and
                          (v) employees who are nonresident 
                        aliens and who receive no earned income 
                        (within the meaning of section 
                        911(d)(2)) from the employer which 
                        constitutes income from sources within 
                        the United States (within the meaning 
                        of section 861(a)(3)).
          (4) Nondiscriminatory benefits.--A self-insured 
        medical reimbursement plan does not meet the 
        requirements of subparagraph (B) of paragraph (2) 
        unless all benefits provided for participants who are 
        highly compensated individuals are provided for all 
        other participants.
          (5) Highly compensated individual defined.--For 
        purposes of this subsection, the term ``highly 
        compensated individual'' means an individual who is--
                  (A) one of the 5 highest paid officers,
                  (B) a shareholder who owns (with the 
                application of section 318) more than 10 
                percent in value of the stock of the employer, 
                or
                  (C) among the highest paid 25 percent of all 
                employees (other than employees described in 
                paragraph (3)(B) who are not participants).
          (6) Self-insured medical reimbursement plan.--The 
        term ``self-insured medical reimbursement plan'' means 
        a plan of an employer to reimburse employees for 
        expenses referred to in subsection (b) for which 
        reimbursement is not provided under a policy of 
        accident and health insurance.
          (7) Excess reimbursement of highly compensated 
        individual.--For purposes of this section, the excess 
        reimbursement of a highly compensated individual which 
        is attributable to a self-insured medical reimbursement 
        plan is--
                  (A) in the case of a benefit available to 
                highly compensated individuals but not to all 
                other participants (or which otherwise fails to 
                satisfy the requirements of paragraph (2)(B)), 
                the amount reimbursed under the plan to the 
                employee with respect to such benefit, and
                  (B) in the case of benefits (other than 
                benefits described in subparagraph (A)) paid to 
                a highly compensated individual by a plan which 
                fails to satisfy the requirements of paragraph 
                (2), the total amount reimbursed to the highly 
                compensated individual for the plan year 
                multiplied by a fraction--
                          (i) the numerator of which is the 
                        total amount reimbursed to all 
                        participants who are highly compensated 
                        individuals under the plan for the plan 
                        year, and
                          (ii) the denominator of which is the 
                        total amount reimbursed to all 
                        employees under the plan for such plan 
                        year.
        In determining the fraction under subparagraph (B), 
        there shall not be taken into account any reimbursement 
        which is attributable to a benefit described in 
        subparagraph (A).
          (8) Certain controlled groups, etc..--All employees 
        who are treated as employed by a single employer under 
        subsection (b), (c), or (m) of section 414 shall be 
        treated as employed by a single employer for purposes 
        of this section.
          (9) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary to carry out the 
        provisions of this section.
          (10) Time of inclusion.--Any amount paid for a plan 
        year that is included in income by reason of this 
        subsection shall be treated as received or accrued in 
        the taxable year of the participant in which the plan 
        year ends.
  (i) Sick pay under Railroad Unemployment Insurance Act.--
Notwithstanding any other provision of law, gross income 
includes benefits paid under section 2(a) of the Railroad 
Unemployment Insurance Act for days of sickness; except to the 
extent such sickness (as determined in accordance with 
standards prescribed by the Railroad Retirement Board) is the 
result of on-the-job injury.
  (j) Special rule for certain governmental plans.--
          (1) In general.--For purposes of subsection (b), 
        amounts paid (directly or indirectly) to a qualified 
        taxpayer from an accident or health plan described in 
        paragraph (2) shall not fail to be excluded from gross 
        income solely because such plan, on or before January 
        1, 2008, provides for reimbursements of health care 
        expenses of a deceased employee's beneficiary (other 
        than an individual described in paragraph (3)(B)).
          (2) Plan described.--An accident or health plan is 
        described in this paragraph if such plan is funded by a 
        medical trust that is established in connection with a 
        public retirement system or established by or on behalf 
        of a State or political subdivision thereof and that--
                  (A) has been authorized by a State 
                legislature, or
                  (B) has received a favorable ruling from the 
                Internal Revenue Service that the trust's 
                income is not includible in gross income under 
                section 115 or 501(c)(9).
          (3) Qualified taxpayer.--For purposes of paragraph 
        (1), with respect to an accident or health plan 
        described in paragraph (2), the term ``qualified 
        taxpayer'' means a taxpayer who is--
                  (A) an employee, or
                  (B) the spouse, dependent (as defined for 
                purposes of subsection (b)), or child (as 
                defined for purposes of such subsection) of an 
                employee.

           *       *       *       *       *       *       *

SEC. 119. MEALS OR LODGING FURNISHED FOR THE CONVENIENCE OF THE 
                    EMPLOYER.

  (a) Meals and Lodging Furnished to Employee[, His Spouse, and 
His Dependents] and the Employee's Spouse and Dependents, 
Pursuant to Employment.--There shall be excluded from gross 
income of an employee the value of any meals or lodging 
furnished to [him, his spouse, or any of his dependents by or 
on behalf of his employer] the employee or the employee's 
spouse or dependents by or on behalf of the employer of the 
employee for the convenience of the employer, but only if--
          (1) in the case of meals, the meals are furnished on 
        the business premises of the employer, or
          (2) in the case of lodging, the employee is required 
        to accept such lodging on the business premises of 
        [his] the employee's employer as a condition of [his] 
        the employee's employment.
  (b) Special rules.--For purposes of subsection (a)--
          (1) Provisions of employment contract or State 
        statute not to be determinative.--In determining 
        whether meals or lodging are furnished for the 
        convenience of the employer, the provisions of an 
        employment contract or of a State statute fixing terms 
        of employment shall not be determinative of whether the 
        meals or lodging are intended as compensation.
          (2) Certain factors not taken into account with 
        respect to meals.--In determining whether meals are 
        furnished for the convenience of the employer, the fact 
        that a charge is made for such meals, and the fact that 
        the employee may accept or decline such meals, shall 
        not be taken into account.
          (3) Certain fixed charges for meals.--
                  (A) In general.--If--
                          (i) an employee is required to pay on 
                        a periodic basis a fixed charge for his 
                        meals, and
                          (ii) such meals are furnished by the 
                        employer for the convenience of the 
                        employer,
                there shall be excluded from the employee's 
                gross income an amount equal to such fixed 
                charge.
                  (B) Application of subparagraph (A).--
                Subparagraph (A) shall apply--
                          (i) whether the employee pays the 
                        fixed charge out of his stated 
                        compensation or out of his own funds, 
                        and
                          (ii) only if the employee is required 
                        to make the payment whether he accepts 
                        or declines the meals.
          (4) Meals furnished to employees on business premises 
        where meals of most employees are otherwise 
        excludable.--All meals furnished on the business 
        premises of an employer to such employer's employees 
        shall be treated as furnished for the convenience of 
        the employer if, without regard to this paragraph, more 
        than half of the employees to whom such meals are 
        furnished on such premises are furnished such meals for 
        the convenience of the employer.
  (c) Employees living in certain camps.--
          (1) In general.--In the case of an individual who is 
        furnished lodging in a camp located in a foreign 
        country by or on behalf of his employer, such camp 
        shall be considered to be part of the business premises 
        of the employer.
          (2) Camp.--For purposes of this section, a camp 
        constitutes lodging which is--
                  (A) provided by or on behalf of the employer 
                for the convenience of the employer because the 
                place at which such individual renders services 
                is in a remote area where satisfactory housing 
                is not available on the open market,
                  (B) located, as near as practicable, in the 
                vicinity of the place at which such individual 
                renders services, and
                  (C) furnished in a common area (or enclave) 
                which is not available to the public and which 
                normally accommodates 10 or more employees.
  (d) Lodging furnished by certain educational institutions to 
employees.--
          (1) In general.--In the case of an employee of an 
        educational institution, gross income shall not include 
        the value of qualified campus lodging furnished to such 
        employee during the taxable year.
          (2) Exception in cases of inadequate rent.--Paragraph 
        (1) shall not apply to the extent of the excess of--
                  (A) the lesser of--
                          (i) 5 percent of the appraised value 
                        of the qualified campus lodging, or
                          (ii) the average of the rentals paid 
                        by individuals (other than employees or 
                        students of the educational 
                        institution) during such calendar year 
                        for lodging provided by the educational 
                        institution which is comparable to the 
                        qualified campus lodging provided to 
                        the employee, over
                  (B) the rent paid by the employee for the 
                qualified campus lodging during such calendar 
                year.
        The appraised value under subparagraph (A)(i) shall be 
        determined as of the close of the calendar year in 
        which the taxable year begins, or, in the case of a 
        rental period not greater than 1 year, at any time 
        during the calendar year in which such period begins.
          (3) Qualified campus lodging.--For purposes of this 
        subsection, the term ``qualified campus lodging'' means 
        lodging to which subsection (a) does not apply and 
        which is--
                  (A) located on, or in the proximity of, a 
                campus of the educational institution, and
                  (B) furnished to the employee, [his spouse, 
                and any of his dependents] the employee's 
                spouse, and any of the employee's dependents by 
                or on behalf of such institution for use as a 
                residence.
          (4) Educational institution, etc..--For purposes of 
        this subsection--
                  (A) In general.--The term ``educational 
                institution'' means--
                          (i) an institution described in 
                        section 170(b)(1)(A)(ii) (or an entity 
                        organized under State law and composed 
                        of public institutions so described), 
                        or
                          (ii) an academic health center.
                  (B) Academic health center.--For purposes of 
                subparagraph (A), the term ``academic health 
                center'' means an entity--
                          (i) which is described in section 
                        170(b)(1)(A)(iii),
                          (ii) which receives (during the 
                        calendar year in which the taxable year 
                        of the taxpayer begins) payments under 
                        subsection (d)(5)(B) or (h) of section 
                        1886 of the Social Security Act 
                        (relating to graduate medical 
                        education), and
                          (iii) which has as one of its 
                        principal purposes or functions the 
                        providing and teaching of basic and 
                        clinical medical science and research 
                        with the entity's own faculty.

           *       *       *       *       *       *       *

SEC. 121. EXCLUSION OF GAIN FROM SALE OF PRINCIPAL RESIDENCE.

  (a) Exclusion.--Gross income shall not include gain from the 
sale or exchange of property if, during the 5-year period 
ending on the date of the sale or exchange, such property has 
been owned and used by the taxpayer as the taxpayer's principal 
residence for periods aggregating 2 years or more.
  (b) Limitations.--
          (1) In general.--The amount of gain excluded from 
        gross income under subsection (a) with respect to any 
        sale or exchange shall not exceed $250,000.
          (2) Special rules for joint returns.--In the case of 
        a [husband and wife who make] married couple who makes 
        a joint return for the taxable year of the sale or 
        exchange of the property--
                  (A) $500,000 Limitation for certain joint 
                returns.--Paragraph (1) shall be applied by 
                substituting ``$500,000'' for ``$250,000'' if--
                          (i) either spouse meets the ownership 
                        requirements of subsection (a) with 
                        respect to such property;
                          (ii) both spouses meet the use 
                        requirements of subsection (a) with 
                        respect to such property; and
                          (iii) neither spouse is ineligible 
                        for the benefits of subsection (a) with 
                        respect to such property by reason of 
                        paragraph (3).
                  (B) Other joint returns.--If such spouses do 
                not meet the requirements of subparagraph (A), 
                the limitation under paragraph (1) shall be the 
                sum of the limitations under paragraph (1) to 
                which each spouse would be entitled if such 
                spouses had not been married. For purposes of 
                the preceding sentence, each spouse shall be 
                treated as owning the property during the 
                period that either spouse owned the property.
          (3) Application to only 1 sale or exchange every 2 
        years.--Subsection (a) shall not apply to any sale or 
        exchange by the taxpayer if, during the 2-year period 
        ending on the date of such sale or exchange, there was 
        any other sale or exchange by the taxpayer to which 
        subsection (a) applied.
          (4) Special rule for certain sales by surviving 
        spouses.--In the case of a sale or exchange of property 
        by an unmarried individual whose spouse is deceased on 
        the date of such sale, paragraph (1) shall be applied 
        by substituting ``$500,000'' for ``$250,000'' if such 
        sale occurs not later than 2 years after the date of 
        death of such spouse and the requirements of paragraph 
        (2)(A) were met immediately before such date of death.
          (5) Exclusion of gain allocated to nonqualified 
        use.--
                  (A) In general.--Subsection (a) shall not 
                apply to so much of the gain from the sale or 
                exchange of property as is allocated to periods 
                of nonqualified use.
                  (B) Gain allocated to periods of nonqualified 
                use.--For purposes of subparagraph (A), gain 
                shall be allocated to periods of nonqualified 
                use based on the ratio which--
                          (i) the aggregate periods of 
                        nonqualified use during the period such 
                        property was owned by the taxpayer, 
                        bears to
                          (ii) the period such property was 
                        owned by the taxpayer.
                  (C) Period of nonqualified use.--For purposes 
                of this paragraph--
                          (i) In general.--The term ``period of 
                        nonqualified use'' means any period 
                        (other than the portion of any period 
                        preceding January 1, 2009) during which 
                        the property is not used as the 
                        principal residence of the taxpayer or 
                        the taxpayer's spouse or former spouse.
                          (ii) Exceptions.--The term ``period 
                        of nonqualified use'' does not 
                        include--
                                  (I) any portion of the 5-year 
                                period described in subsection 
                                (a) which is after the last 
                                date that such property is used 
                                as the principal residence of 
                                the taxpayer or the taxpayer's 
                                spouse,
                                  (II) any period (not to 
                                exceed an aggregate period of 
                                10 years) during which the 
                                taxpayer or the taxpayer's 
                                spouse is serving on qualified 
                                official extended duty (as 
                                defined in subsection 
                                (d)(9)(C)) described in clause 
                                (i), (ii), or (iii) of 
                                subsection (d)(9)(A), and
                                  (III) any other period of 
                                temporary absence (not to 
                                exceed an aggregate period of 2 
                                years) due to change of 
                                employment, health conditions, 
                                or such other unforeseen 
                                circumstances as may be 
                                specified by the Secretary.
                  (D) Coordination with recognition of gain 
                attributable to depreciation.--For purposes of 
                this paragraph--
                          (i) subparagraph (A) shall be applied 
                        after the application of subsection 
                        (d)(6), and
                          (ii) subparagraph (B) shall be 
                        applied without regard to any gain to 
                        which subsection (d)(6) applies.
  (c) Exclusion for taxpayers failing to meet certain 
requirements.--
          (1) In general.--In the case of a sale or exchange to 
        which this subsection applies, the ownership and use 
        requirements of subsection (a), and subsection (b)(3), 
        shall not apply; but the dollar limitation under 
        paragraph (1) or (2) of subsection (b), whichever is 
        applicable, shall be equal to--
                  (A) the amount which bears the same ratio to 
                such limitation (determined without regard to 
                this paragraph) as
                  (B)(i) the shorter of--
                          (I) the aggregate periods, during the 
                        5-year period ending on the date of 
                        such sale or exchange, such property 
                        has been owned and used by the taxpayer 
                        as the taxpayer's principal residence; 
                        or
                          (II) the period after the date of the 
                        most recent prior sale or exchange by 
                        the taxpayer to which subsection (a) 
                        applied and before the date of such 
                        sale or exchange, bears to
                  (ii) 2 years.
          (2) Sales and exchanges to which subsection 
        applies.--This subsection shall apply to any sale or 
        exchange if--
                  (A) subsection (a) would not (but for this 
                subsection) apply to such sale or exchange by 
                reason of--
                          (i) a failure to meet the ownership 
                        and use requirements of subsection (a), 
                        or
                          (ii) subsection (b)(3), and
                  (B) such sale or exchange is by reason of a 
                change in place of employment, health, or, to 
                the extent provided in regulations, unforeseen 
                circumstances.
  (d) Special rules.--
          (1) Joint returns.--If a [husband and wife make] 
        married couple makes a joint return for the taxable 
        year of the sale or exchange of the property, 
        subsections (a) and (c) shall apply if either spouse 
        meets the ownership and use requirements of subsection 
        (a) with respect to such property.
          (2) Property of deceased spouse.--For purposes of 
        this section, in the case of an unmarried individual 
        whose spouse is deceased on the date of the sale or 
        exchange of property, the period such unmarried 
        individual owned and used such property shall include 
        the period such deceased spouse owned and used such 
        property before death.
          (3) Property owned by spouse or former spouse.--For 
        purposes of this section--
                  (A) Property transferred to individual from 
                spouse or former spouse.--In the case of an 
                individual holding property transferred to such 
                individual in a transaction described in 
                section 1041(a), the period such individual 
                owns such property shall include the period the 
                transferor owned the property.
                  (B) Property used by former spouse pursuant 
                to divorce decree, etc..--Solely for purposes 
                of this section, an individual shall be treated 
                as using property as such individual's 
                principal residence during any period of 
                ownership while such individual's spouse or 
                former spouse is granted use of the property 
                under a divorce or separation instrument.
                  (C) Divorce or separation instrument.--For 
                purposes of this paragraph, the term ``divorce 
                or separation instrument'' means--
                          (i) a decree of divorce or separate 
                        maintenance or a written instrument 
                        incident to such a decree,
                          (ii) a written separation agreement, 
                        or
                          (iii) a decree (not described in 
                        clause (i)) requiring a spouse to make 
                        payments for the support or maintenance 
                        of the other spouse.
          (4) Tenant-stockholder in cooperative housing 
        corporation.--For purposes of this section, if the 
        taxpayer holds stock as a tenant-stockholder (as 
        defined in section 216) in a cooperative housing 
        corporation (as defined in such section), then--
                  (A) the holding requirements of subsection 
                (a) shall be applied to the holding of such 
                stock, and
                  (B) the use requirements of subsection (a) 
                shall be applied to the house or apartment 
                which the taxpayer was entitled to occupy as 
                such stockholder.
          (5) Involuntary conversions.--
                  (A) In general.--For purposes of this 
                section, the destruction, theft, seizure, 
                requisition, or condemnation of property shall 
                be treated as the sale of such property.
                  (B) Application of section 1033.--In applying 
                section 1033 (relating to involuntary 
                conversions), the amount realized from the sale 
                or exchange of property shall be treated as 
                being the amount determined without regard to 
                this section, reduced by the amount of gain not 
                included in gross income pursuant to this 
                section.
                  (C) Property acquired after involuntary 
                conversion.--If the basis of the property sold 
                or exchanged is determined (in whole or in 
                part) under section 1033(b) (relating to basis 
                of property acquired through involuntary 
                conversion), then the holding and use by the 
                taxpayer of the converted property shall be 
                treated as holding and use by the taxpayer of 
                the property sold or exchanged.
          (6) Recognition of gain attributable to 
        depreciation.--Subsection (a) shall not apply to so 
        much of the gain from the sale of any property as does 
        not exceed the portion of the depreciation adjustments 
        (as defined in section 1250(b)(3)) attributable to 
        periods after May 6, 1997, in respect of such property.
          (7) Determination of use during periods of out-of-
        residence care.--In the case of a taxpayer who--
                  (A) becomes physically or mentally incapable 
                of self-care, and
                  (B) owns property and uses such property as 
                the taxpayer's principal residence during the 
                5-year period described in subsection (a) for 
                periods aggregating at least 1 year,
        then the taxpayer shall be treated as using such 
        property as the taxpayer's principal residence during 
        any time during such 5-year period in which the 
        taxpayer owns the property and resides in any facility 
        (including a nursing home) licensed by a State or 
        political subdivision to care for an individual in the 
        taxpayer's condition.
          (8) Sales of remainder interests.--For purposes of 
        this section--
                  (A) In general.--At the election of the 
                taxpayer, this section shall not fail to apply 
                to the sale or exchange of an interest in a 
                principal residence by reason of such interest 
                being a remainder interest in such residence, 
                but this section shall not apply to any other 
                interest in such residence which is sold or 
                exchanged separately.
                  (B) Exception for sales to related parties.--
                Subparagraph (A) shall not apply to any sale 
                to, or exchange with, any person who bears a 
                relationship to the taxpayer which is described 
                in section 267(b) or 707(b).
          (9) Uniformed services, Foreign Service, and 
        intelligence community.--
                  (A) In general.--At the election of an 
                individual with respect to a property, the 
                running of the 5-year period described in 
                subsections (a) and (c)(1)(B) and paragraph (7) 
                of this subsection with respect to such 
                property shall be suspended during any period 
                that such individual or such individual's 
                spouse is serving on qualified official 
                extended duty--
                          (i) as a member of the uniformed 
                        services,
                          (ii) as a member of the Foreign 
                        Service of the United States, or
                          (iii) as an employee of the 
                        intelligence community.
                  (B) Maximum period of suspension.--The 5-year 
                period described in subsection (a) shall not be 
                extended more than 10 years by reason of 
                subparagraph (A).
                  (C) Qualified official extended duty.--For 
                purposes of this paragraph--
                          (i) In general.--The term ``qualified 
                        official extended duty'' means any 
                        extended duty while serving at a duty 
                        station which is at least 50 miles from 
                        such property or while residing under 
                        Government orders in Government 
                        quarters.
                          (ii) Uniformed services.--The term 
                        ``uniformed services'' has the meaning 
                        given such term by section 101(a)(5) of 
                        title 10, United States Code, as in 
                        effect on the date of the enactment of 
                        this paragraph.
                          (iii) Foreign Service of the United 
                        States.--The term ``member of the 
                        Foreign Service of the United States'' 
                        has the meaning given the term ``member 
                        of the Service'' by paragraph (1), (2), 
                        (3), (4), or (5) of section 103 of the 
                        Foreign Service Act of 1980, as in 
                        effect on the date of the enactment of 
                        this paragraph.
                          (iv) Employee of intelligence 
                        community.--The term ``employee of the 
                        intelligence community'' means an 
                        employee (as defined by section 2105 of 
                        title 5, United States Code) of--
                                  (I) the Office of the 
                                Director of National 
                                Intelligence,
                                  (II) the Central Intelligence 
                                Agency,
                                  (III) the National Security 
                                Agency,
                                  (IV) the Defense Intelligence 
                                Agency,
                                  (V) the National Geospatial-
                                Intelligence Agency,
                                  (VI) the National 
                                Reconnaissance Office,
                                  (VII) any other office within 
                                the Department of Defense for 
                                the collection of specialized 
                                national intelligence through 
                                reconnaissance programs,
                                  (VIII) any of the 
                                intelligence elements of the 
                                Army, the Navy, the Air Force, 
                                the Marine Corps, the Federal 
                                Bureau of Investigation, the 
                                Department of Treasury, the 
                                Department of Energy, and the 
                                Coast Guard,
                                  (IX) the Bureau of 
                                Intelligence and Research of 
                                the Department of State, or
                                  (X) any of the elements of 
                                the Department of Homeland 
                                Security concerned with the 
                                analyses of foreign 
                                intelligence information.
                          (v) Extended duty.--The term 
                        ``extended duty'' means any period of 
                        active duty pursuant to a call or order 
                        to such duty for a period in excess of 
                        90 days or for an indefinite period.
                  (D) Special rules relating to election.--
                          (i) Election limited to 1 property at 
                        a time.--An election under subparagraph 
                        (A) with respect to any property may 
                        not be made if such an election is in 
                        effect with respect to any other 
                        property.
                          (ii) Revocation of election.--An 
                        election under subparagraph (A) may be 
                        revoked at any time.
          (10) Property acquired in like-kind exchange.--If a 
        taxpayer acquires property in an exchange with respect 
        to which gain is not recognized (in whole or in part) 
        to the taxpayer under subsection (a) or (b) of section 
        1031, subsection (a) shall not apply to the sale or 
        exchange of such property by such taxpayer (or by any 
        person whose basis in such property is determined, in 
        whole or in part, by reference to the basis in the 
        hands of such taxpayer) during the 5-year period 
        beginning with the date of such acquisition.
          (12) Peace Corps.--
                  (A) In general.--At the election of an 
                individual with respect to a property, the 
                running of the 5-year period described in 
                subsections (a) and (c)(1)(B) and paragraph (7) 
                of this subsection with respect to such 
                property shall be suspended during any period 
                that such individual or such individual's 
                spouse is serving outside the United States--
                          (i) on qualified official extended 
                        duty (as defined in paragraph (9)(C)) 
                        as an employee of the Peace Corps, or
                          (ii) as an enrolled volunteer or 
                        volunteer leader under section 5 or 6 
                        (as the case may be) of the Peace Corps 
                        Act (22 U.S.C. 2504, 2505).
                  (B) Applicable rules.--For purposes of 
                subparagraph (A), rules similar to the rules of 
                subparagraphs (B) and (D) of paragraph (9) 
                shall apply.
  (e) Denial of exclusion for expatriates.--This section shall 
not apply to any sale or exchange by an individual if the 
treatment provided by section 877(a)(1) applies to such 
individual.
  (f) Election to have section not apply.--This section shall 
not apply to any sale or exchange with respect to which the 
taxpayer elects not to have this section apply.
  (g) Residences acquired in rollovers under section 1034.--For 
purposes of this section, in the case of property the 
acquisition of which by the taxpayer resulted under section 
1034 (as in effect on the day before the date of the enactment 
of this section) in the nonrecognition of any part of the gain 
realized on the sale or exchange of another residence, in 
determining the period for which the taxpayer has owned and 
used such property as the taxpayer's principal residence, there 
shall be included the aggregate periods for which such other 
residence (and each prior residence taken into account under 
section 1223(6) in determining the holding period of such 
property) had been so owned and used.

           *       *       *       *       *       *       *

SEC. 129. DEPENDENT CARE ASSISTANCE PROGRAMS.

  (a) Exclusion.--
          (1) In general.--Gross income of an employee does not 
        include amounts paid or incurred by the employer for 
        dependent care assistance provided to such employee if 
        the assistance is furnished pursuant to a program which 
        is described in subsection (d).
          (2) Limitation of exclusion.--
                  (A) In general.--The amount which may be 
                excluded under paragraph (1) for dependent care 
                assistance with respect to dependent care 
                services provided during a taxable year shall 
                not exceed $5,000 ($2,500 in the case of a 
                separate return by a married individual).
                  (B) Year of inclusion.--The amount of any 
                excess under subparagraph (A) shall be included 
                in gross income in the taxable year in which 
                the dependent care services were provided (even 
                if payment of dependent care assistance for 
                such services occurs in a subsequent taxable 
                year).
                  (C) Marital status.--For purposes of this 
                paragraph, marital status shall be determined 
                under the rules of paragraphs (3) and (4) of 
                section 21(e).
  (b) Earned income limitation.--
          (1) In general.--The amount excluded from the income 
        of an employee under subsection (a) for any taxable 
        year shall not exceed--
                  (A) in the case of an employee who is not 
                married at the close of such taxable year, the 
                earned income of such employee for such taxable 
                year, or
                  (B) in the case of an employee who is married 
                at the close of such taxable year, the lesser 
                of--
                          (i) the earned income of such 
                        employee for such taxable year, or
                          (ii) the earned income of the spouse 
                        of such employee for such taxable year.
          (2) Special rule for certain spouses.--For purposes 
        of paragraph (1), the provisions of section 21(d)(2) 
        shall apply in determining the earned income of a 
        spouse who is a student or incapable of caring for 
        [himself] the spouse's self .
  (c) Payments to related individuals.--No amount paid or 
incurred during the taxable year of an employee by an employer 
in providing dependent care assistance to such employee shall 
be excluded under subsection (a) if such amount was paid or 
incurred to an individual--
          (1) with respect to whom, for such taxable year, a 
        deduction is allowable under section 151(c) (relating 
        to personal exemptions for dependents) to such employee 
        or the spouse of such employee, or
          (2) who is a child of such employee (within the 
        meaning of section 152(f)(1)) under the age of 19 at 
        the close of such taxable year.
  (d) Dependent care assistance program.--
          (1) In general.--For purposes of this section a 
        dependent care assistance program is a separate written 
        plan of an employer for the exclusive benefit of his 
        employees to provide such employees with dependent care 
        assistance which meets the requirements of paragraphs 
        (2) through (8) of this subsection. If any plan would 
        qualify as a dependent care assistance program but for 
        a failure to meet the requirements of this subsection, 
        then, notwithstanding such failure, such plan shall be 
        treated as a dependent care assistance program in the 
        case of employees who are not highly compensated 
        employees.
          (2) Discrimination.--The contributions or benefits 
        provided under the plan shall not discriminate in favor 
        of employees who are highly compensated employees 
        (within the meaning of section 414(q)) or their 
        dependents.
          (3) Eligibility.--The program shall benefit employees 
        who qualify under a classification set up by the 
        employer and found by the Secretary not to be 
        discriminatory in favor of employees described in 
        paragraph (2), or their dependents.
          (4) Principal shareholders or owners.--Not more than 
        25 percent of the amounts paid or incurred by the 
        employer for dependent care assistance during the year 
        may be provided for the class of individuals who are 
        shareholders or owners (or their spouses or 
        dependents), each of whom (on any day of the year) owns 
        more than 5 percent of the stock or of the capital or 
        profits interest in the employer.
          (5) No funding required.--A program referred to in 
        paragraph (1) is not required to be funded.
          (6) Notification of eligible employees.--Reasonable 
        notification of the availability and terms of the 
        program shall be provided to eligible employees.
          (7) Statement of expenses.--The plan shall furnish to 
        an employee, on or before January 31, a written 
        statement showing the amounts paid or expenses incurred 
        by the employer in providing dependent care assistance 
        to such employee during the previous calendar year.
          (8) Benefits.--
                  (A) In general.--A plan meets the 
                requirements of this paragraph if the average 
                benefits provided to employees who are not 
                highly compensated employees under all plans of 
                the employer is at least 55 percent of the 
                average benefits provided to highly compensated 
                employees under all plans of the employer.
                  (B) Salary reduction agreements.--For 
                purposes of subparagraph (A), in the case of 
                any benefits provided through a salary 
                reduction agreement, a plan may disregard any 
                employees whose compensation is less than 
                $25,000. For purposes of this subparagraph, the 
                term ``compensation'' has the meaning given 
                such term by section 414(q)(4), except that, 
                under rules prescribed by the Secretary, an 
                employer may elect to determine compensation on 
                any other basis which does not discriminate in 
                favor of highly compensated employees.
          (9) Excluded employees.--For purposes of paragraphs 
        (3) and (8), there shall be excluded from 
        consideration--
                  (A) subject to rules similar to the rules of 
                section 410(b)(4), employees who have not 
                attained the age of 21 and completed 1 year of 
                service (as defined in section 410(a)(3)), and
                  (B) employees not included in a dependent 
                care assistance program who are included in a 
                unit of employees covered by an agreement which 
                the Secretary finds to be a collective 
                bargaining agreement between employee 
                representatives and 1 or more employees, if 
                there is evidence that dependent care benefits 
                were the subject of good faith bargaining 
                between such employee representatives and such 
                employer or employers.
  (e) Definitions and special rules.--For purposes of this 
section--
          (1) Dependent care assistance.--The term ``dependent 
        care assistance'' means the payment of, or provision 
        of, those services which if paid for by the employee 
        would be considered employment-related expenses under 
        section 21(b)(2) (relating to expenses for household 
        and dependent care services necessary for gainful 
        employment).
          (2) Earned income.--The term ``earned income'' shall 
        have the meaning given such term in section 32(c)(2), 
        but such term shall not include any amounts paid or 
        incurred by an employer for dependent care assistance 
        to an employee.
          (3) Employee.--The term ``employee'' includes, for 
        any year, an individual who is an employee within the 
        meaning of section 401(c)(1) (relating to self-employed 
        individuals).
          (4) Employer.--An individual who owns the entire 
        interest in an unincorporated trade or business shall 
        be treated as his own employer. A partnership shall be 
        treated as the employer of each partner who is an 
        employee within the meaning of paragraph (3).
          (5) Attribution rules.--
                  (A) Ownership of stock.--Ownership of stock 
                in a corporation shall be determined in 
                accordance with the rules provided under 
                subsections (d) and (e) of section 1563 
                (without regard to section 1563(e)(3)(C)).
                  (B) Interest in unincorporated trade or 
                business.--The interest of an employee in a 
                trade or business which is not incorporated 
                shall be determined in accordance with 
                regulations prescribed by the Secretary, which 
                shall be based on principles similar to the 
                principles which apply in the case of 
                subparagraph (A).
          (6) Utilization test not applicable.--A dependent 
        care assistance program shall not be held or considered 
        to fail to meet any requirements of subsection (d) 
        (other than paragraphs (4) and (8) thereof) merely 
        because of utilization rates for the different types of 
        assistance made available under the program.
          (7) Disallowance of excluded amounts as credit or 
        deduction.--No deduction or credit shall be allowed to 
        the employee under any other section of this chapter 
        for any amount excluded from the gross income of the 
        employee by reason of this section.
          (8) Treatment of onsite facilities.--In the case of 
        an onsite facility maintained by an employer, except to 
        the extent provided in regulations, the amount of 
        dependent care assistance provided to an employee 
        excluded with respect to any dependent shall be based 
        on--
                  (A) utilization of the facility by a 
                dependent of the employee, and
                  (B) the value of the services provided with 
                respect to such dependent.
          (9) Identifying information required with respect to 
        service provider.--No amount paid or incurred by an 
        employer for dependent care assistance provided to an 
        employee shall be excluded from the gross income of 
        such employee unless--
                  (A) the name, address, and taxpayer 
                identification number of the person performing 
                the services are included on the return to 
                which the exclusion relates, or
                  (B) if such person is an organization 
                described in section 501(c)(3) and exempt from 
                tax under section 501(a), the name and address 
                of such person are included on the return to 
                which the exclusion relates.
        In the case of a failure to provide the information 
        required under the preceding sentence, the preceding 
        sentence shall not apply if it is shown that the 
        taxpayer exercised due diligence in attempting to 
        provide the information so required.

           *       *       *       *       *       *       *

SEC. 132. CERTAIN FRINGE BENEFITS.

  (a) Exclusion from gross income.--Gross income shall not 
include any fringe benefit which qualifies as a--
          (1) no-additional-cost service,
          (2) qualified employee discount,
          (3) working condition fringe,
          (4) de minimis fringe,
          (5) qualified transportation fringe,
          (6) qualified moving expense reimbursement,
          (7) qualified retirement planning services, or
          (8) qualified military base realignment and closure 
        fringe.
  (b) No-additional-cost service defined.--For purposes of this 
section, the term ``no-additional-cost service'' means any 
service provided by an employer to an employee for use by such 
employee if--
          (1) such service is offered for sale to customers in 
        the ordinary course of the line of business of the 
        employer in which the employee is performing services, 
        and
          (2) the employer incurs no substantial additional 
        cost (including forgone revenue) in providing such 
        service to the employee (determined without regard to 
        any amount paid by the employee for such service).
  (c) Qualified employee discount defined.--For purposes of 
this section--
          (1) Qualified employee discount.--The term 
        ``qualified employee discount'' means any employee 
        discount with respect to qualified property or services 
        to the extent such discount does not exceed--
                  (A) in the case of property, the gross profit 
                percentage of the price at which the property 
                is being offered by the employer to customers, 
                or
                  (B) in the case of services, 20 percent of 
                the price at which the services are being 
                offered by the employer to customers.
          (2) Gross profit percentage.--
                  (A) In general.--The term ``gross profit 
                percentage'' means the percent which--
                          (i) the excess of the aggregate sales 
                        price of property sold by the employer 
                        to customers over the aggregate cost of 
                        such property to the employer, is of
                          (ii) the aggregate sale price of such 
                        property.
                  (B) Determination of gross profit 
                percentage.--Gross profit percentage shall be 
                determined on the basis of--
                          (i) all property offered to customers 
                        in the ordinary course of the line of 
                        business of the employer in which the 
                        employee is performing services (or a 
                        reasonable classification of property 
                        selected by the employer), and
                          (ii) the employer's experience during 
                        a representative period.
          (3) Employee discount defined.--The term ``employee 
        discount'' means the amount by which--
                  (A) the price at which the property or 
                services are provided by the employer to an 
                employee for use by such employee, is less than
                  (B) the price at which such property or 
                services are being offered by the employer to 
                customers.
          (4) Qualified property or services.--The term 
        ``qualified property or services'' means any property 
        (other than real property and other than personal 
        property of a kind held for investment) or services 
        which are offered for sale to customers in the ordinary 
        course of the line of business of the employer in which 
        the employee is performing services.
  (d) Working condition fringe defined.--For purposes of this 
section, the term ``working condition fringe'' means any 
property or services provided to an employee of the employer to 
the extent that, if the employee paid for such property or 
services, such payment would be allowable as a deduction under 
section 162 or 167.
  (e) De minimis fringe defined.--For purposes of this 
section--
          (1) In general.--The term ``de minimis fringe'' means 
        any property or service the value of which is (after 
        taking into account the frequency with which similar 
        fringes are provided by the employer to the employer's 
        employees) so small as to make accounting for it 
        unreasonable or administratively impracticable.
          (2) Treatment of certain eating facilities.--The 
        operation by an employer of any eating facility for 
        employees shall be treated as a de minimis fringe if--
                  (A) such facility is located on or near the 
                business premises of the employer, and
                  (B) revenue derived from such facility 
                normally equals or exceeds the direct operating 
                costs of such facility.
        The preceding sentence shall apply with respect to any 
        highly compensated employee only if access to the 
        facility is available on substantially the same terms 
        to each member of a group of employees which is defined 
        under a reasonable classification set up by the 
        employer which does not discriminate in favor of highly 
        compensated employees. For purposes of subparagraph 
        (B), an employee entitled under section 119 to exclude 
        the value of a meal provided at such facility shall be 
        treated as having paid an amount for such meal equal to 
        the direct operating costs of the facility attributable 
        to such meal.
  (f) Qualified transportation fringe.--
          (1) In general.--For purposes of this section, the 
        term ``qualified transportation fringe'' means any of 
        the following provided by an employer to an employee:
                  (A) Transportation in a commuter highway 
                vehicle if such transportation is in connection 
                with travel between the employee's residence 
                and place of employment.
                  (B) Any transit pass.
                  (C) Qualified parking.
                  (D) Any qualified bicycle commuting 
                reimbursement.
          (2) Limitation on exclusion.--The amount of the 
        fringe benefits which are provided by an employer to 
        any employee and which may be excluded from gross 
        income under subsection (a)(5) shall not exceed--
                  (A) $175 per month in the case of the 
                aggregate of the benefits described in 
                subparagraphs (A) and (B) of paragraph (1),
                  (B) $175 per month in the case of qualified 
                parking, and
                  (C) the applicable annual limitation in the 
                case of any qualified bicycle commuting 
                reimbursement.
          (3) Cash reimbursements.--For purposes of this 
        subsection, the term ``qualified transportation 
        fringe'' includes a cash reimbursement by an employer 
        to an employee for a benefit described in paragraph 
        (1). The preceding sentence shall apply to a cash 
        reimbursement for any transit pass only if a voucher or 
        similar item which may be exchanged only for a transit 
        pass is not readily available for direct distribution 
        by the employer to the employee.
          (4) No constructive receipt.--No amount shall be 
        included in the gross income of an employee solely 
        because the employee may choose between any qualified 
        transportation fringe (other than a qualified bicycle 
        commuting reimbursement) and compensation which would 
        otherwise be includible in gross income of such 
        employee.
          (5) Definitions.--For purposes of this subsection--
                  (A) Transit pass.--The term ``transit pass'' 
                means any pass, token, farecard, voucher, or 
                similar item entitling a person to 
                transportation (or transportation at a reduced 
                price) if such transportation is--
                          (i) on mass transit facilities 
                        (whether or not publicly owned), or
                          (ii) provided by any person in the 
                        business of transporting persons for 
                        compensation or hire if such 
                        transportation is provided in a vehicle 
                        meeting the requirements of 
                        subparagraph (B)(i).
                  (B) Commuter highway vehicle.--The term 
                ``commuter highway vehicle'' means any highway 
                vehicle--
                          (i) the seating capacity of which is 
                        at least 6 adults (not including the 
                        driver), and
                          (ii) at least 80 percent of the 
                        mileage use of which can reasonably be 
                        expected to be--
                                  (I) for purposes of 
                                transporting employees in 
                                connection with travel between 
                                their residences and their 
                                place of employment, and
                                  (II) on trips during which 
                                the number of employees 
                                transported for such purposes 
                                is at least 1/2 of the adult 
                                seating capacity of such 
                                vehicle (not including the 
                                driver).
                  (C) Qualified parking.--The term ``qualified 
                parking'' means parking provided to an employee 
                on or near the business premises of the 
                employer or on or near a location from which 
                the employee commutes to work by transportation 
                described in subparagraph (A), in a commuter 
                highway vehicle, or by carpool. Such term shall 
                not include any parking on or near property 
                used by the employee for residential purposes.
                  (D) Transportation provided by employer.--
                Transportation referred to in paragraph (1)(A) 
                shall be considered to be provided by an 
                employer if such transportation is furnished in 
                a commuter highway vehicle operated by or for 
                the employer.
                  (E) Employee.--For purposes of this 
                subsection, the term ``employee'' does not 
                include an individual who is an employee within 
                the meaning of section 401(c)(1).
                  (F) Definitions related to bicycle commuting 
                reimbursement.--
                          (i) Qualified bicycle commuting 
                        reimbursement.--The term ``qualified 
                        bicycle commuting reimbursement'' 
                        means, with respect to any calendar 
                        year, any employer reimbursement during 
                        the 15-month period beginning with the 
                        first day of such calendar year for 
                        reasonable expenses incurred by the 
                        employee during such calendar year for 
                        the purchase of a bicycle and bicycle 
                        improvements, repair, and storage, if 
                        such bicycle is regularly used for 
                        travel between the employee's residence 
                        and place of employment.
                          (ii) Applicable annual limitation.--
                        The term ``applicable annual 
                        limitation'' means, with respect to any 
                        employee for any calendar year, the 
                        product of $20 multiplied by the number 
                        of qualified bicycle commuting months 
                        during such year.
                          (iii) Qualified bicycle commuting 
                        month.--The term ``qualified bicycle 
                        commuting month'' means, with respect 
                        to any employee, any month during which 
                        such employee--
                                  (I) regularly uses the 
                                bicycle for a substantial 
                                portion of the travel between 
                                the employee's residence and 
                                place of employment, and
                                  (II) does not receive any 
                                benefit described in 
                                subparagraph (A), (B), or (C) 
                                of paragraph (1).
          (6) Inflation adjustment.--
                  (A) In general.--In the case of any taxable 
                year beginning in a calendar year after 1999, 
                the dollar amounts contained in subparagraphs 
                (A) and (B) of paragraph (2) shall be increased 
                by an amount equal to--
                          (i) such dollar amount, multiplied by
                          (ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for 
                        the calendar year in which the taxable 
                        year begins, by substituting ``calendar 
                        year 1998'' for ``calendar year 2016'' 
                        in subparagraph (A)(ii) thereof.
                  (B) Rounding.--If any increase determined 
                under subparagraph (A) is not a multiple of $5, 
                such increase shall be rounded to the next 
                lowest multiple of $5.
          (7) Coordination with other provisions.--For purposes 
        of this section, the terms ``working condition fringe'' 
        and ``de minimis fringe'' shall not include any 
        qualified transportation fringe (determined without 
        regard to paragraph (2)).
          (8) Suspension of qualified bicycle commuting 
        reimbursement exclusion.--Paragraph (1)(D) shall not 
        apply to any taxable year beginning after December 31, 
        2017, and before January 1, 2026.
  (g) Qualified moving expense reimbursement.--For purposes of 
this section--
          (1) In general.--The term ``qualified moving expense 
        reimbursement'' means any amount received (directly or 
        indirectly) by an individual from an employer as a 
        payment for (or a reimbursement of) expenses which 
        would be deductible as moving expenses under section 
        217 if directly paid or incurred by the individual. 
        Such term shall not include any payment for (or 
        reimbursement of) an expense actually deducted by the 
        individual in a prior taxable year.
          (2) Suspension for taxable years 2018 through 2025.--
        Except in the case of a member of the Armed Forces of 
        the United States on active duty who moves pursuant to 
        a military order and incident to a permanent change of 
        station, subsection (a)(6) shall not apply to any 
        taxable year beginning after December 31, 2017, and 
        before January 1, 2026.
  (h) Certain individuals treated as employees for purposes of 
subsections (a)(1) and (2).--For purposes of paragraphs (1) and 
(2) of subsection (a)--
          (1) Retired and disabled employees and surviving 
        spouse of employee treated as employee.--With respect 
        to a line of business of an employer, the term 
        ``employee'' includes--
                  (A) any individual who was formerly employed 
                by such employer in such line of business and 
                who separated from service with such employer 
                in such line of business by reason of 
                retirement or disability, and
                  (B) any widow or widower of any individual 
                who died while employed by such employer in 
                such line of business or while an employee 
                within the meaning of subparagraph (A).
          (2) Spouse and dependent children.--
                  (A) In general.--Any use by the spouse or a 
                dependent child of the employee shall be 
                treated as use by the employee.
                  (B) Dependent child.--For purposes of 
                subparagraph (A), the term ``dependent child'' 
                means any child (as defined in section 
                152(f)(1)) of the employee--
                          (i) who is a dependent of the 
                        employee, or
                          (ii) both of whose parents are 
                        deceased and who has not attained age 
                        25.
                For purposes of the preceding sentence, any 
                child to whom section 152(e) applies shall be 
                treated as the dependent of both parents.
          (3) Special rule for parents in the case of air 
        transportation.--Any use of air transportation by a 
        parent of an employee (determined without regard to 
        paragraph (1)(B)) shall be treated as use by the 
        employee.
  (i) Reciprocal agreements.--For purposes of paragraph (1) of 
subsection (a), any service provided by an employer to an 
employee of another employer shall be treated as provided by 
the employer of such employee if--
          (1) such service is provided pursuant to a written 
        agreement between such employers, and
          (2) neither of such employers incurs any substantial 
        additional costs (including foregone revenue) in 
        providing such service or pursuant to such agreement.
  (j) Special rules.--
          (1) Exclusions under subsection (a)(1) and (2) apply 
        to highly compensated employees only if no 
        discrimination.--Paragraphs (1) and (2) of subsection 
        (a) shall apply with respect to any fringe benefit 
        described therein provided with respect to any highly 
        compensated employee only if such fringe benefit is 
        available on substantially the same terms to each 
        member of a group of employees which is defined under a 
        reasonable classification set up by the employer which 
        does not discriminate in favor of highly compensated 
        employees.
          (2) Special rule for leased sections of department 
        stores.--
                  (A) In general.--For purposes of paragraph 
                (2) of subsection (a), in the case of a leased 
                section of a department store--
                          (i) such section shall be treated as 
                        part of the line of business of the 
                        person operating the department store, 
                        and
                          (ii) employees in the leased section 
                        shall be treated as employees of the 
                        person operating the department store.
                  (B) Leased section of department store.--For 
                purposes of subparagraph (A), a leased section 
                of a department store is any part of a 
                department store where over-the-counter sales 
                of property are made under a lease or similar 
                arrangement where it appears to the general 
                public that individuals making such sales are 
                employed by the person operating the department 
                store.
          (3) Auto salesmen.--
                  (A) In general.--For purposes of subsection 
                (a)(3), qualified automobile demonstration use 
                shall be treated as a working condition fringe.
                  (B) Qualified automobile demonstration use.--
                For purposes of subparagraph (A), the term 
                ``qualified automobile demonstration use'' 
                means any use of an automobile by a full-time 
                automobile salesman in the sales area in which 
                the automobile dealer's sales office is located 
                if--
                          (i) such use is provided primarily to 
                        facilitate the salesman's performance 
                        of services for the employer, and
                          (ii) there are substantial 
                        restrictions on the personal use of 
                        such automobile by such salesman.
          (4) On-premises gyms and other athletic facilities.--
                  (A) In general.--Gross income shall not 
                include the value of any on-premises athletic 
                facility provided by an employer to his 
                employees.
                  (B) On-premises athletic facility.--For 
                purposes of this paragraph, the term ``on-
                premises athletic facility'' means any gym or 
                other athletic facility--
                          (i) which is located on the premises 
                        of the employer,
                          (ii) which is operated by the 
                        employer, and
                          (iii) substantially all the use of 
                        which is by employees of the employer, 
                        their spouses, and their dependent 
                        children (within the meaning of 
                        subsection (h)).
          (5) Special rule for affiliates of airlines.--
                  (A) In general.--If--
                          (i) a qualified affiliate is a member 
                        of an affiliated group another member 
                        of which operates an airline, and
                          (ii) employees of the qualified 
                        affiliate who are directly engaged in 
                        providing airline-related services are 
                        entitled to no-additional-cost service 
                        with respect to air transportation 
                        provided by such other member,
                then, for purposes of applying paragraph (1) of 
                subsection (a) to such no-additional-cost 
                service provided to such employees, such 
                qualified affiliate shall be treated as engaged 
                in the same line of business as such other 
                member.
                  (B) Qualified affiliate.--For purposes of 
                this paragraph, the term ``qualified 
                affiliate'' means any corporation which is 
                predominantly engaged in airline-related 
                services.
                  (C) Airline-related services.--For purposes 
                of this paragraph, the term ``airline-related 
                services'' means any of the following services 
                provided in connection with air transportation:
                          (i) Catering.
                          (ii) Baggage handling.
                          (iii) Ticketing and reservations.
                          (iv) Flight planning and weather 
                        analysis.
                          (v) Restaurants and gift shops 
                        located at an airport.
                          (vi) Such other similar services 
                        provided to the airline as the 
                        Secretary may prescribe.
                  (D) Affiliated group.--For purposes of this 
                paragraph, the term ``affiliated group'' has 
                the meaning given such term by section 1504(a).
          (6) Highly compensated employee.--For purposes of 
        this section, the term ``highly compensated employee'' 
        has the meaning given such term by section 414(q).
          (7) Air cargo.--For purposes of subsection (b), the 
        transportation of cargo by air and the transportation 
        of passengers by air shall be treated as the same 
        service.
          (8) Application of section to otherwise taxable 
        educational or training benefits.--Amounts paid or 
        expenses incurred by the employer for education or 
        training provided to the employee which are not 
        excludable from gross income under section 127 shall be 
        excluded from gross income under this section if (and 
        only if) such amounts or expenses are a working 
        condition fringe.
  (k) Customers not to include employees.--For purposes of this 
section (other than subsection (c)(2)), the term ``customers'' 
shall only include customers who are not employees.
  (l) Section not to apply to fringe benefits expressly 
provided for elsewhere.--This section (other than subsections 
(e) and (g)) shall not apply to any fringe benefits of a type 
the tax treatment of which is expressly provided for in any 
other section of this chapter.
  (m) Qualified retirement planning services.--
          (1) In general.--For purposes of this section, the 
        term ``qualified retirement planning services'' means 
        any retirement planning advice or information provided 
        to an employee and [his spouse] the employee's spouse 
        by an employer maintaining a qualified employer plan.
          (2) Nondiscrimination rule.--Subsection (a)(7) shall 
        apply in the case of highly compensated employees only 
        if such services are available on substantially the 
        same terms to each member of the group of employees 
        normally provided education and information regarding 
        the employer's qualified employer plan.
          (3) Qualified employer plan.--For purposes of this 
        subsection, the term ``qualified employer plan'' means 
        a plan, contract, pension, or account described in 
        section 219(g)(5).
  (n) Qualified military base realignment and closure fringe.--
For purposes of this section--
          (1) In general.--The term ``qualified military base 
        realignment and closure fringe'' means 1 or more 
        payments under the authority of section 1013 of the 
        Demonstration Cities and Metropolitan Development Act 
        of 1966 (42 U.S.C. 3374) (as in effect on the date of 
        the enactment of the American Recovery and Reinvestment 
        Tax Act of 2009).
          (2) Limitation.--With respect to any property, such 
        term shall not include any payment referred to in 
        paragraph (1) to the extent that the sum of all of such 
        payments related to such property exceeds the maximum 
        amount described in subsection (c) of such section (as 
        in effect on such date).
  (o) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary or appropriate to carry out the 
purposes of this section.

           *       *       *       *       *       *       *

SEC. 135. INCOME FROM UNITED STATES SAVINGS BONDS USED TO PAY HIGHER 
                    EDUCATION TUITION AND FEES.

  (a) General rule.--In the case of an individual who pays 
qualified higher education expenses during the taxable year, no 
amount shall be includible in gross income by reason of the 
redemption during such year of any qualified United States 
savings bond.
  (b) Limitations.--
          (1) Limitation where redemption proceeds exceed 
        higher education expenses.--
                  (A) In general.--If--
                          (i) the aggregate proceeds of 
                        qualified United States savings bonds 
                        redeemed by the taxpayer during the 
                        taxable year exceed
                          (ii) the qualified higher education 
                        expenses paid by the taxpayer during 
                        such taxable year,
                the amount excludable from gross income under 
                subsection (a) shall not exceed the applicable 
                fraction of the amount excludable from gross 
                income under subsection (a) without regard to 
                this subsection.
                  (B) Applicable fraction.--For purposes of 
                subparagraph (A), the term ``applicable 
                fraction'' means the fraction the numerator of 
                which is the amount described in subparagraph 
                (A)(ii) and the denominator of which is the 
                amount described in subparagraph (A)(i).
          (2) Limitation based on modified adjusted gross 
        income.--
                  (A) In general.--If the modified adjusted 
                gross income of the taxpayer for the taxable 
                year exceeds $40,000 ($60,000 in the case of a 
                joint return), the amount which would (but for 
                this paragraph) be excludable from gross income 
                under subsection (a) shall be reduced (but not 
                below zero) by the amount which bears the same 
                ratio to the amount which would be so 
                excludable as such excess bears to $15,000 
                ($30,000 in the case of a joint return).
                  (B) Inflation adjustment.--In the case of any 
                taxable year beginning in a calendar year after 
                1990, the $40,000 and $60,000 amounts contained 
                in subparagraph (A) shall be increased by an 
                amount equal to--
                          (i) such dollar amount, multiplied by
                          (ii) the cost-of-living adjustment 
                        under section 1(f)(3) for the calendar 
                        year in which the taxable year begins, 
                        determined by substituting ``calendar 
                        year 1989'' for ``calendar year 2016'' 
                        in subparagraph (A)(ii) thereof.
                  (C) Rounding.--If any amount as adjusted 
                under subparagraph (B) is not a multiple of 
                $50, such amount shall be rounded to the 
                nearest multiple of $50 (or if such amount is a 
                multiple of $25, such amount shall be rounded 
                to the next highest multiple of $50).
  (c) Definitions.--For purposes of this section--
          (1) Qualified United States savings bond.--The term 
        ``qualified United States savings bond'' means any 
        United States savings bond issued--
                  (A) after December 31, 1989,
                  (B) to an individual who has attained age 24 
                before the date of issuance, and
                  (C) at discount under section 3105 of title 
                31, United States Code.
          (2) Qualified higher education expenses.--
                  (A) In general.--The term ``qualified higher 
                education expenses'' means tuition and fees 
                required for the enrollment or attendance of--
                          (i) the taxpayer,
                          (ii) the taxpayer's spouse, or
                          (iii) any dependent of the taxpayer 
                        with respect to whom the taxpayer is 
                        allowed a deduction under section 151,
                at an eligible educational institution.
                  (B) Exception for education involving sports, 
                etc..--Such term shall not include expenses 
                with respect to any course or other education 
                involving sports, games, or hobbies other than 
                as part of a degree program.
                  (C) Contributions to qualified tuition 
                program and Coverdell education savings 
                accounts.--Such term shall include any 
                contribution to a qualified tuition program (as 
                defined in section 529) on behalf of a 
                designated beneficiary (as defined in such 
                section), or to a Coverdell education savings 
                account (as defined in section 530) on behalf 
                of an account beneficiary, who is an individual 
                described in subparagraph (A); but there shall 
                be no increase in the investment in the 
                contract for purposes of applying section 72 by 
                reason of any portion of such contribution 
                which is not includible in gross income by 
                reason of this subparagraph.
          (3) Eligible educational institution.--The term 
        ``eligible educational institution'' has the meaning 
        given such term by section 529(e)(5).
          (4) Modified adjusted gross income.--The term 
        ``modified adjusted gross income'' means the adjusted 
        gross income of the taxpayer for the taxable year 
        determined--
                  (A) without regard to this section and 
                sections 137, 221, 222, 911, 931, and 933, and
                  (B) after the application of sections 86, 
                469, and 219.
  (d) Special rules.--
          (1) Adjustment for certain scholarships and veterans 
        benefits.--The amount of qualified higher education 
        expenses otherwise taken into account under subsection 
        (a) with respect to the education of an individual 
        shall be reduced (before the application of subsection 
        (b)) by the sum of the amounts received with respect to 
        such individual for the taxable year as--
                  (A) a qualified scholarship which under 
                section 117 is not includable in gross income,
                  (B) an educational assistance allowance under 
                chapter 30, 31, 32, 34, or 35 of title 38, 
                United States Code,
                  (C) a payment (other than a gift, bequest, 
                devise, or inheritance within the meaning of 
                section 102(a)) for educational expenses, or 
                attributable to attendance at an eligible 
                educational institution, which is exempt from 
                income taxation by any law of the United 
                States, or
                  (D) a payment, waiver, or reimbursement of 
                qualified higher education expenses under a 
                qualified tuition program (within the meaning 
                of section 529(b)).
          (2) Coordination with other higher education 
        benefits.--The amount of the qualified higher education 
        expenses otherwise taken into account under subsection 
        (a) with respect to the education of an individual 
        shall be reduced (before the application of subsection 
        (b)) by--
                  (A) the amount of such expenses which are 
                taken into account in determining the credit 
                allowed to the taxpayer or any other person 
                under section 25A with respect to such 
                expenses; and
                  (B) the amount of such expenses which are 
                taken into account in determining the 
                exclusions under sections 529(c)(3)(B) and 
                530(d)(2).
          (3) No exclusion for married individuals filing 
        separate returns.--If the taxpayer is a married 
        individual (within the meaning of section 7703), this 
        section shall apply only if the taxpayer and [his 
        spouse] the taxpayer's spouse file a joint return for 
        the taxable year.
          (4) Regulations.--The Secretary may prescribe such 
        regulations as may be necessary or appropriate to carry 
        out this section, including regulations requiring 
        record keeping and information reporting.

           *       *       *       *       *       *       *

PART V--DEDUCTIONS FOR PERSONAL EXEMPTIONS

           *       *       *       *       *       *       *

SEC. 151. ALLOWANCE OF DEDUCTIONS FOR PERSONAL EXEMPTIONS.

  (a) Allowance of deductions.--In the case of an individual, 
the exemptions provided by this section shall be allowed as 
deductions in computing taxable income.
  (b) Taxpayer and spouse.--An exemption of the exemption 
amount for the taxpayer; and an additional exemption of the 
exemption amount for the spouse of the taxpayer if a joint 
return is not made by the taxpayer and [his spouse] the 
taxpayer's spouse , and if the spouse, for the calendar year in 
which the taxable year of the taxpayer begins, has no gross 
income and is not the dependent of another taxpayer.
  (c) Additional exemption for dependents.--An exemption of the 
exemption amount for each individual who is a dependent (as 
defined in section 152) of the taxpayer for the taxable year.
  (d) Exemption amount.--For purposes of this section--
          (1) In general.--Except as otherwise provided in this 
        subsection, the term ``exemption amount'' means $2,000.
          (2) Exemption amount disallowed in case of certain 
        dependents.--In the case of an individual with respect 
        to whom a deduction under this section is allowable to 
        another taxpayer for a taxable year beginning in the 
        calendar year in which the individual's taxable year 
        begins, the exemption amount applicable to such 
        individual for such individual's taxable year shall be 
        zero.
          (3) Phaseout.--
                  (A) In general.--In the case of any taxpayer 
                whose adjusted gross income for the taxable 
                year exceeds the applicable amount in effect 
                under section 68(b), the exemption amount shall 
                be reduced by the applicable percentage.
                  (B) Applicable percentage.--For purposes of 
                subparagraph (A), the term ``applicable 
                percentage'' means 2 percentage points for each 
                $2,500 (or fraction thereof) by which the 
                taxpayer's adjusted gross income for the 
                taxable year exceeds the applicable amount in 
                effect under section 68(b). In the case of a 
                married individual filing a separate return, 
                the preceding sentence shall be applied by 
                substituting ``$1,250'' for ``$2,500''. In no 
                event shall the applicable percentage exceed 
                100 percent.
                  (C) Coordination with other provisions.--The 
                provisions of this paragraph shall not apply 
                for purposes of determining whether a deduction 
                under this section with respect to any 
                individual is allowable to another taxpayer for 
                any taxable year.
          (4) Inflation adjustment.--Except as provided in 
        paragraph (5), in the case of any taxable year 
        beginning in a calendar year after 1989, the dollar 
        amount contained in paragraph (1) shall be increased by 
        an amount equal to--
                  (A) such dollar amount, multiplied by
                  (B) the cost-of-living adjustment determined 
                under section 1(f)(3) for the calendar year in 
                which the taxable year begins, by substituting 
                ``calendar year 1988'' for ``calendar year 
                2016'' in subparagraph (A)(ii) thereof.
          (5) Special rules for taxable years 2018 through 
        2025.--In the case of a taxable year beginning after 
        December 31, 2017, and before January 1, 2026--
                  (A) Exemption amount.--The term ``exemption 
                amount'' means zero.
                  (B) References.--For purposes of any other 
                provision of this title, the reduction of the 
                exemption amount to zero under subparagraph (A) 
                shall not be taken into account in determining 
                whether a deduction is allowed or allowable, or 
                whether a taxpayer is entitled to a deduction, 
                under this section.
  (e) Identifying information required.--No exemption shall be 
allowed under this section with respect to any individual 
unless the TIN of such individual is included on the return 
claiming the exemption.

           *       *       *       *       *       *       *

PART VI--ITEMIZED DEDUCTIONS FOR INDIVIDUALS AND CORPORATIONS

           *       *       *       *       *       *       *

SEC. 165. LOSSES.

  (a) General rule.--There shall be allowed as a deduction any 
loss sustained during the taxable year and not compensated for 
by insurance or otherwise.
  (b) Amount of deduction.--For purposes of subsection (a), the 
basis for determining the amount of the deduction for any loss 
shall be the adjusted basis provided in section 1011 for 
determining the loss from the sale or other disposition of 
property.
  (c) Limitation on losses of individuals.--In the case of an 
individual, the deduction under subsection (a) shall be limited 
to--
          (1) losses incurred in a trade or business;
          (2) losses incurred in any transaction entered into 
        for profit, though not connected with a trade or 
        business; and
          (3) except as provided in subsection (h), losses of 
        property not connected with a trade or business or a 
        transaction entered into for profit, if such losses 
        arise from fire, storm, shipwreck, or other casualty, 
        or from theft.
  (d) Wagering losses.--Losses from wagering transactions shall 
be allowed only to the extent of the gains from such 
transactions. For purposes of the preceding sentence, in the 
case of taxable years beginning after December 31, 2017, and 
before January 1, 2026, the term ``losses from wagering 
transactions'' includes any deduction otherwise allowable under 
this chapter incurred in carrying on any wagering transaction.
  (e) Theft losses.--For purposes of subsection (a), any loss 
arising from theft shall be treated as sustained during the 
taxable year in which the taxpayer discovers such loss.
  (f) Capital losses.--Losses from sales or exchanges of 
capital assets shall be allowed only to the extent allowed in 
sections 1211 and 1212.
  (g) Worthless securities.--
          (1) General rule.--If any security which is a capital 
        asset becomes worthless during the taxable year, the 
        loss resulting therefrom shall, for purposes of this 
        subtitle, be treated as a loss from the sale or 
        exchange, on the last day of the taxable year, of a 
        capital asset.
          (2) Security defined.--For purposes of this 
        subsection, the term ``security'' means--
                  (A) a share of stock in a corporation;
                  (B) a right to subscribe for, or to receive, 
                a share of stock in a corporation; or
                  (C) a bond, debenture, note, or certificate, 
                or other evidence of indebtedness, issued by a 
                corporation or by a government or political 
                subdivision thereof, with interest coupons or 
                in registered form.
          (3) Securities in affiliated corporation.--For 
        purposes of paragraph (1), any security in a 
        corporation affiliated with a taxpayer which is a 
        domestic corporation shall not be treated as a capital 
        asset. For purposes of the preceding sentence, a 
        corporation shall be treated as affiliated with the 
        taxpayer only if--
                  (A) the taxpayer owns directly stock in such 
                corporation meeting the requirements of section 
                1504(a)(2), and
                  (B) more than 90 percent of the aggregate of 
                its gross receipts for all taxable years has 
                been from sources other than royalties, rents 
                (except rents derived from rental of properties 
                to employees of the corporation in the ordinary 
                course of its operating business), dividends, 
                interest (except interest received on deferred 
                purchase price of operating assets sold), 
                annuities, and gains from sales or exchanges of 
                stocks and securities.
        In computing gross receipts for purposes of the 
        preceding sentence, gross receipts from sales or 
        exchanges of stocks and securities shall be taken into 
        account only to the extent of gains therefrom.
  (h) Treatment of casualty gains and losses.--
          (1) Dollar limitation per casualty.--Any loss of an 
        individual described in subsection (c)(3) shall be 
        allowed only to the extent that the amount of the loss 
        to such individual arising from each casualty, or from 
        each theft, exceeds $500 ($100 for taxable years 
        beginning after December 31, 2009).
          (2) Net casualty loss allowed only to the extent it 
        exceeds 10 percent of adjusted gross income.--
                  (A) In general.--If the personal casualty 
                losses for any taxable year exceed the personal 
                casualty gains for such taxable year, such 
                losses shall be allowed for the taxable year 
                only to the extent of the sum of--
                          (i) the amount of the personal 
                        casualty gains for the taxable year, 
                        plus
                          (ii) so much of such excess as 
                        exceeds 10 percent of the adjusted 
                        gross income of the individual.
                  (B) Special rule where personal casualty 
                gains exceed personal casualty losses.--If the 
                personal casualty gains for any taxable year 
                exceed the personal casualty losses for such 
                taxable year--
                          (i) all such gains shall be treated 
                        as gains from sales or exchanges of 
                        capital assets, and
                          (ii) all such losses shall be treated 
                        as losses from sales or exchanges of 
                        capital assets.
          (3) Definitions of personal casualty gain and 
        personal casualty loss.--For purposes of this 
        subsection--
                  (A) Personal casualty gain.--The term 
                ``personal casualty gain'' means the recognized 
                gain from any involuntary conversion of 
                property which is described in subsection 
                (c)(3) arising from fire, storm, shipwreck, or 
                other casualty, or from theft.
                  (B) Personal casualty loss.--The term 
                ``personal casualty loss'' means any loss 
                described in subsection (c)(3). For purposes of 
                paragraph (2), the amount of any personal 
                casualty loss shall be determined after the 
                application of paragraph (1).
          (4) Special rules.--
                  (A) Personal casualty losses allowable in 
                computing adjusted gross income to the extent 
                of personal casualty gains.--In any case to 
                which paragraph (2)(A) applies, the deduction 
                for personal casualty losses for any taxable 
                year shall be treated as a deduction allowable 
                in computing adjusted gross income to the 
                extent such losses do not exceed the personal 
                casualty gains for the taxable year.
                  (B) Joint returns.--For purposes of this 
                subsection, a [husband and wife] married couple 
                making a joint return for the taxable year 
                shall be treated as 1 individual.
                  (C) Determination of adjusted gross income in 
                case of estates and trusts.--For purposes of 
                paragraph (2), the adjusted gross income of an 
                estate or trust shall be computed in the same 
                manner as in the case of an individual, except 
                that the deductions for costs paid or incurred 
                in connection with the administration of the 
                estate or trust shall be treated as allowable 
                in arriving at adjusted gross income.
                  (D) Coordination with estate tax.--No loss 
                described in subsection (c)(3) shall be allowed 
                if, at the time of filing the return, such loss 
                has been claimed for estate tax purposes in the 
                estate tax return.
                  (E) Claim required to be filed in certain 
                cases.--Any loss of an individual described in 
                subsection (c)(3) to the extent covered by 
                insurance shall be taken into account under 
                this section only if the individual files a 
                timely insurance claim with respect to such 
                loss.
          (5) Limitation for taxable years 2018 through 2025.--
                  (A) In general.--In the case of an 
                individual, except as provided in subparagraph 
                (B), any personal casualty loss which (but for 
                this paragraph) would be deductible in a 
                taxable year beginning after December 31, 2017, 
                and before January 1, 2026, shall be allowed as 
                a deduction under subsection (a) only to the 
                extent it is attributable to a Federally 
                declared disaster (as defined in subsection 
                (i)(5)).
                  (B) Exception related to personal casualty 
                gains.--If a taxpayer has personal casualty 
                gains for any taxable year to which 
                subparagraph (A) applies--
                          (i) subparagraph (A) shall not apply 
                        to the portion of the personal casualty 
                        loss not attributable to a Federally 
                        declared disaster (as so defined) to 
                        the extent such loss does not exceed 
                        such gains, and
                          (ii) in applying paragraph (2) for 
                        purposes of subparagraph (A) to the 
                        portion of personal casualty loss which 
                        is so attributable to such a disaster, 
                        the amount of personal casualty gains 
                        taken into account under paragraph 
                        (2)(A) shall be reduced by the portion 
                        of such gains taken into account under 
                        clause (i).
  (i) Disaster losses.--
          (1) Election to take deduction for preceding year.--
        Notwithstanding the provisions of subsection (a), any 
        loss occurring in a disaster area and attributable to a 
        federally declared disaster may, at the election of the 
        taxpayer, be taken into account for the taxable year 
        immediately preceding the taxable year in which the 
        disaster occurred.
          (2) Year of loss.--If an election is made under this 
        subsection, the casualty resulting in the loss shall be 
        treated for purposes of this title as having occurred 
        in the taxable year for which the deduction is claimed.
          (3) Amount of loss.--The amount of the loss taken 
        into account in the preceding taxable year by reason of 
        paragraph (1) shall not exceed the uncompensated amount 
        determined on the basis of the facts existing at the 
        date the taxpayer claims the loss.
          (4) Use of disaster loan appraisals to establish 
        amount of loss.--Nothing in this title shall be 
        construed to prohibit the Secretary from prescribing 
        regulations or other guidance under which an appraisal 
        for the purpose of obtaining a loan of Federal funds or 
        a loan guarantee from the Federal Government as a 
        result of a federally declared disaster may be used to 
        establish the amount of any loss described in paragraph 
        (1) or (2).
          (5) Federally declared disasters.--For purposes of 
        this subsection--
                  (A) In general.--The term ``Federally 
                declared disaster'' means any disaster 
                subsequently determined by the President of the 
                United States to warrant assistance by the 
                Federal Government under the Robert T. Stafford 
                Disaster Relief and Emergency Assistance Act.
                  (B) Disaster area.--The term ``disaster 
                area'' means the area so determined to warrant 
                such assistance.
  (j) Denial of deduction for losses on certain obligations not 
in registered form.--
          (1) In general.--Nothing in subsection (a) or in any 
        other provision of law shall be construed to provide a 
        deduction for any loss sustained on any registration-
        required obligation unless such obligation is in 
        registered form (or the issuance of such obligation was 
        subject to tax under section 4701).
          (2) Definitions.--For purposes of this subsection--
                  (A) Registration-required obligation.--The 
                term ``registration-required obligation'' has 
                the meaning given to such term by section 
                163(f)(2).
                  (B) Registered form.--The term ``registered 
                form'' has the same meaning as when used in 
                section 163(f).
          (3) Exceptions.--The Secretary may, by regulations, 
        provide that this subsection and section 1287 shall not 
        apply with respect to obligations held by any person 
        if--
                  (A) such person holds such obligations in 
                connection with a trade or business outside the 
                United States,
                  (B) such person holds such obligations as a 
                broker dealer (registered under Federal or 
                State law) for sale to customers in the 
                ordinary course of his trade or business,
                  (C) such person complies with reporting 
                requirements with respect to ownership, 
                transfers, and payments as the Secretary may 
                require, or
                  (D) such person promptly surrenders the 
                obligation to the issuer for the issuance of a 
                new obligation in registered form,
        but only if such obligations are held under 
        arrangements provided in regulations or otherwise which 
        are designed to assure that such obligations are not 
        delivered to any United States person other than a 
        person described in subparagraph (A), (B), or (C).
  (k) Treatment as disaster loss where taxpayer ordered to 
demolish or relocate residence in disaster area because of 
disaster.--In the case of a taxpayer whose residence is located 
in an area which has been determined by the President of the 
United States to warrant assistance by the Federal Government 
under the Robert T. Stafford Disaster Relief and Emergency 
Assistance Act, if--
          (1) not later than the 120th day after the date of 
        such determination, the taxpayer is ordered, by the 
        government of the State or any political subdivision 
        thereof in which such residence is located, to demolish 
        or relocate such residence, and
          (2) the residence has been rendered unsafe for use as 
        a residence by reason of the disaster,
any loss attributable to such disaster shall be treated as a 
loss which arises from a casualty and which is described in 
subsection (i).
  (l) Treatment of certain losses in insolvent financial 
institutions.--
          (1) In general.--If--
                  (A) as of the close of the taxable year, it 
                can reasonably be estimated that there is a 
                loss on a qualified individual's deposit in a 
                qualified financial institution, and
                  (B) such loss is on account of the bankruptcy 
                or insolvency of such institution,
        then the taxpayer may elect to treat the amount so 
        estimated as a loss described in subsection (c)(3) 
        incurred during the taxable year.
          (2) Qualified individual defined.--For purposes of 
        this subsection, the term ``qualified individual'' 
        means any individual, except an individual--
                  (A) who owns at least 1 percent in value of 
                the outstanding stock of the qualified 
                financial institution,
                  (B) who is an officer of the qualified 
                financial institution,
                  (C) who is a sibling (whether by the whole or 
                half blood), spouse, aunt, uncle, nephew, 
                niece, ancestor, or lineal descendant of an 
                individual described in subparagraph (A) or 
                (B), or
                  (D) who otherwise is a related person (as 
                defined in section 267(b)) with respect to an 
                individual described in subparagraph (A) or 
                (B).
          (3) Qualified financial institution.--For purposes of 
        this subsection, the term ``qualified financial 
        institution'' means--
                  (A) any bank (as defined in section 581),
                  (B) any institution described in section 591,
                  (C) any credit union the deposits or accounts 
                in which are insured under Federal or State law 
                or are protected or guaranteed under State law, 
                or
                  (D) any similar institution chartered and 
                supervised under Federal or State law.
          (4) Deposit.--For purposes of this subsection, the 
        term ``deposit'' means any deposit, withdrawable 
        account, or withdrawable or repurchasable share.
          (5) Election to treat as ordinary loss.--
                  (A) In general.--In lieu of any election 
                under paragraph (1), the taxpayer may elect to 
                treat the amount referred to in paragraph (1) 
                for the taxable year as an ordinary loss 
                described in subsection (c)(2) incurred during 
                the taxable year.
                  (B) Limitations.--
                          (i) Deposit may not be federally 
                        insured.--No election may be made under 
                        subparagraph (A) with respect to any 
                        loss on a deposit in a qualified 
                        financial institution if part or all of 
                        such deposit is insured under Federal 
                        law.
                          (ii) Dollar limitation.--With respect 
                        to each financial institution, the 
                        aggregate amount of losses attributable 
                        to deposits in such financial 
                        institution to which an election under 
                        subparagraph (A) may be made by the 
                        taxpayer for any taxable year shall not 
                        exceed $20,000 ($10,000 in the case of 
                        a separate return by a married 
                        individual). The limitation of the 
                        preceding sentence shall be reduced by 
                        the amount of any insurance proceeds 
                        under any State law which can 
                        reasonably be expected to be received 
                        with respect to losses on deposits in 
                        such institution.
          (6) Election.--Any election by the taxpayer under 
        this subsection for any taxable year--
                  (A) shall apply to all losses for such 
                taxable year of the taxpayer on deposits in the 
                institution with respect to which such election 
                was made, and
                  (B) may be revoked only with the consent of 
                the Secretary.
          (7) Coordination with section 166.--Section 166 shall 
        not apply to any loss to which an election under this 
        subsection applies.
  (m) Cross references.--
                  (1) For special rule for banks with respect 
                to worthless securities, see section 582.
                  (2) For disallowance of deduction for 
                worthlessness of securities to which subsection 
                (g)(2)(C) applies, if issued by a political 
                party or similar organization, see section 271.
                  (3) For special rule for losses on stock in a 
                small business investment company, see section 
                1242.
                  (4) For special rule for losses of a small 
                business investment company, see section 1243.
                  (5) For special rule for losses on small 
                business stock, see section 1244.

           *       *       *       *       *       *       *

SEC. 170. CHARITABLE, ETC., CONTRIBUTIONS AND GIFTS.

  (a) Allowance of deduction.--
          (1) General rule.--There shall be allowed as a 
        deduction any charitable contribution (as defined in 
        subsection (c)) payment of which is made within the 
        taxable year. A charitable contribution shall be 
        allowable as a deduction only if verified under 
        regulations prescribed by the Secretary.
          (2) Corporations on accrual basis.--In the case of a 
        corporation reporting its taxable income on the accrual 
        basis, if--
                  (A) the board of directors authorizes a 
                charitable contribution during any taxable 
                year, and
                  (B) payment of such contribution is made 
                after the close of such taxable year and on or 
                before the 15th day of the fourth month 
                following the close of such taxable year,
        then the taxpayer may elect to treat such contribution 
        as paid during such taxable year. The election may be 
        made only at the time of the filing of the return for 
        such taxable year, and shall be signified in such 
        manner as the Secretary shall by regulations prescribe.
          (3) Future interests in tangible personal property.--
        For purposes of this section, payment of a charitable 
        contribution which consists of a future interest in 
        tangible personal property shall be treated as made 
        only when all intervening interests in, and rights to 
        the actual possession or enjoyment of, the property 
        have expired or are held by persons other than the 
        taxpayer or those standing in a relationship to the 
        taxpayer described in section 267(b) or 707(b). For 
        purposes of the preceding sentence, a fixture which is 
        intended to be severed from the real property shall be 
        treated as tangible personal property.
  (b) Percentage limitations.--
          (1) Individuals.--In the case of an individual, the 
        deduction provided in subsection (a) shall be limited 
        as provided in the succeeding subparagraphs.
                  (A) General rule.--Any charitable 
                contribution to--
                          (i) a church or a convention or 
                        association of churches,
                          (ii) an educational organization 
                        which normally maintains a regular 
                        faculty and curriculum and normally has 
                        a regularly enrolled body of pupils or 
                        students in attendance at the place 
                        where its educational activities are 
                        regularly carried on,
                          (iii) an organization the principal 
                        purpose or functions of which are the 
                        providing of medical or hospital care 
                        or medical education or medical 
                        research, if the organization is a 
                        hospital, or if the organization is a 
                        medical research organization directly 
                        engaged in the continuous active 
                        conduct of medical research in 
                        conjunction with a hospital, and during 
                        the calendar year in which the 
                        contribution is made such organization 
                        is committed to spend such 
                        contributions for such research before 
                        January 1 of the fifth calendar year 
                        which begins after the date such 
                        contribution is made,
                          (iv) an organization which normally 
                        receives a substantial part of its 
                        support (exclusive of income received 
                        in the exercise or performance by such 
                        organization of its charitable, 
                        educational, or other purpose or 
                        function constituting the basis for its 
                        exemption under section 501(a)) from 
                        the United States or any State or 
                        political subdivision thereof or from 
                        direct or indirect contributions from 
                        the general public, and which is 
                        organized and operated exclusively to 
                        receive, hold, invest, and administer 
                        property and to make expenditures to or 
                        for the benefit of a college or 
                        university which is an organization 
                        referred to in clause (ii) of this 
                        subparagraph and which is an agency or 
                        instrumentality of a State or political 
                        subdivision thereof, or which is owned 
                        or operated by a State or political 
                        subdivision thereof or by an agency or 
                        instrumentality of one or more States 
                        or political subdivisions,
                          (v) a governmental unit referred to 
                        in subsection (c)(1),
                          (vi) an organization referred to in 
                        subsection (c)(2) which normally 
                        receives a substantial part of its 
                        support (exclusive of income received 
                        in the exercise or performance by such 
                        organization of its charitable, 
                        educational, or other purpose or 
                        function constituting the basis for its 
                        exemption under section 501(a)) from a 
                        governmental unit referred to in 
                        subsection (c)(1) or from direct or 
                        indirect contributions from the general 
                        public,
                          (vii) a private foundation described 
                        in subparagraph (F),
                          (viii) an organization described in 
                        section 509(a)(2) or (3), or
                          (ix) an agricultural research 
                        organization directly engaged in the 
                        continuous active conduct of 
                        agricultural research (as defined in 
                        section 1404 of the National 
                        Agricultural Research, Extension, and 
                        Teaching Policy Act of 1977) in 
                        conjunction with a land-grant college 
                        or university (as defined in such 
                        section) or a non-land grant college of 
                        agriculture (as defined in such 
                        section), and during the calendar year 
                        in which the contribution is made such 
                        organization is committed to spend such 
                        contribution for such research before 
                        January 1 of the fifth calendar year 
                        which begins after the date such 
                        contribution is made,
                shall be allowed to the extent that the 
                aggregate of such contributions does not exceed 
                50 percent of the taxpayer's contribution base 
                for the taxable year.
                  (B) Other contributions.--Any charitable 
                contribution other than a charitable 
                contribution to which subparagraph (A) applies 
                shall be allowed to the extent that the 
                aggregate of such contributions does not exceed 
                the lesser of--
                          (i) 30 percent of the taxpayer's 
                        contribution base for the taxable year, 
                        or
                          (ii) the excess of 50 percent of the 
                        taxpayer's contribution base for the 
                        taxable year over the amount of 
                        charitable contributions allowable 
                        under subparagraph (A) (determined 
                        without regard to subparagraph (C)).
                If the aggregate of such contributions exceeds 
                the limitation of the preceding sentence, such 
                excess shall be treated (in a manner consistent 
                with the rules of subsection (d)(1)) as a 
                charitable contribution (to which subparagraph 
                (A) does not apply) in each of the 5 succeeding 
                taxable years in order of time.
                  (C) Special limitation with respect to 
                contributions described in subparagraph (A) of 
                certain capital gain property.--
                          (i) In the case of charitable 
                        contributions described in subparagraph 
                        (A) of capital gain property to which 
                        subsection (e)(1)(B) does not apply, 
                        the total amount of contributions of 
                        such property which may be taken into 
                        account under subsection (a) for any 
                        taxable year shall not exceed 30 
                        percent of the taxpayer's contribution 
                        base for such year. For purposes of 
                        this subsection, contributions of 
                        capital gain property to which this 
                        subparagraph applies shall be taken 
                        into account after all other charitable 
                        contributions (other than charitable 
                        contributions to which subparagraph (D) 
                        applies).
                          (ii) If charitable contributions 
                        described in subparagraph (A) of 
                        capital gain property to which clause 
                        (i) applies exceeds 30 percent of the 
                        taxpayer's contribution base for any 
                        taxable year, such excess shall be 
                        treated, in a manner consistent with 
                        the rules of subsection (d)(1), as a 
                        charitable contribution of capital gain 
                        property to which clause (i) applies in 
                        each of the 5 succeeding taxable years 
                        in order of time.
                          (iii) At the election of the taxpayer 
                        (made at such time and in such manner 
                        as the Secretary prescribes by 
                        regulations), subsection (e)(1) shall 
                        apply to all contributions of capital 
                        gain property (to which subsection 
                        (e)(1)(B) does not otherwise apply) 
                        made by the taxpayer during the taxable 
                        year. If such an election is made, 
                        clauses (i) and (ii) shall not apply to 
                        contributions of capital gain property 
                        made during the taxable year, and, in 
                        applying subsection (d)(1) for such 
                        taxable year with respect to 
                        contributions of capital gain property 
                        made in any prior contribution year for 
                        which an election was not made under 
                        this clause, such contributions shall 
                        be reduced as if subsection (e)(1) had 
                        applied to such contributions in the 
                        year in which made.
                          (iv) For purposes of this paragraph, 
                        the term ``capital gain property'' 
                        means, with respect to any 
                        contribution, any capital asset the 
                        sale of which at its fair market value 
                        at the time of the contribution would 
                        have resulted in gain which would have 
                        been long-term capital gain. For 
                        purposes of the preceding sentence, any 
                        property which is property used in the 
                        trade or business (as defined in 
                        section 1231(b)) shall be treated as a 
                        capital asset.
                  (D) Special limitation with respect to 
                contributions of capital gain property to 
                organizations not described in subparagraph 
                (A).--
                          (i) In general.--In the case of 
                        charitable contributions (other than 
                        charitable contributions to which 
                        subparagraph (A) applies) of capital 
                        gain property, the total amount of such 
                        contributions of such property taken 
                        into account under subsection (a) for 
                        any taxable year shall not exceed the 
                        lesser of--
                                  (I) 20 percent of the 
                                taxpayer's contribution base 
                                for the taxable year, or
                                  (II) the excess of 30 percent 
                                of the taxpayer's contribution 
                                base for the taxable year over 
                                the amount of the contributions 
                                of capital gain property to 
                                which subparagraph (C) applies.
                 For purposes of this subsection, contributions 
                of capital gain property to which this 
                subparagraph applies shall be taken into 
                account after all other charitable 
                contributions.
                          (ii) Carryover.--If the aggregate 
                        amount of contributions described in 
                        clause (i) exceeds the limitation of 
                        clause (i), such excess shall be 
                        treated (in a manner consistent with 
                        the rules of subsection (d)(1)) as a 
                        charitable contribution of capital gain 
                        property to which clause (i) applies in 
                        each of the 5 succeeding taxable years 
                        in order of time.
                  (E) Contributions of qualified conservation 
                contributions.--
                          (i) In general.--Any qualified 
                        conservation contribution (as defined 
                        in subsection (h)(1)) shall be allowed 
                        to the extent the aggregate of such 
                        contributions does not exceed the 
                        excess of 50 percent of the taxpayer's 
                        contribution base over the amount of 
                        all other charitable contributions 
                        allowable under this paragraph.
                          (ii) Carryover.--If the aggregate 
                        amount of contributions described in 
                        clause (i) exceeds the limitation of 
                        clause (i), such excess shall be 
                        treated (in a manner consistent with 
                        the rules of subsection (d)(1)) as a 
                        charitable contribution to which clause 
                        (i) applies in each of the 15 
                        succeeding years in order of time.
                          (iii) Coordination with other 
                        subparagraphs.--For purposes of 
                        applying this subsection and subsection 
                        (d)(1), contributions described in 
                        clause (i) shall not be treated as 
                        described in subparagraph (A), (B), 
                        (C), or (D) and such subparagraphs 
                        shall apply without regard to such 
                        contributions.
                          (iv) Special rule for contribution of 
                        property used in agriculture or 
                        livestock production.--
                                  (I) In general.--If the 
                                individual is a qualified 
                                farmer or rancher for the 
                                taxable year for which the 
                                contribution is made, clause 
                                (i) shall be applied by 
                                substituting ``100 percent'' 
                                for ``50 percent''.
                                  (II) Exception.--Subclause 
                                (I) shall not apply to any 
                                contribution of property made 
                                after the date of the enactment 
                                of this subparagraph which is 
                                used in agriculture or 
                                livestock production (or 
                                available for such production) 
                                unless such contribution is 
                                subject to a restriction that 
                                such property remain available 
                                for such production. This 
                                subparagraph shall be applied 
                                separately with respect to 
                                property to which subclause (I) 
                                does not apply by reason of the 
                                preceding sentence prior to its 
                                application to property to 
                                which subclause (I) does apply.
                          (v) Definition.--For purposes of 
                        clause (iv), the term ``qualified 
                        farmer or rancher'' means a taxpayer 
                        whose gross income from the trade or 
                        business of farming (within the meaning 
                        of section 2032A(e)(5)) is greater than 
                        50 percent of the taxpayer's gross 
                        income for the taxable year.
                  (F) Certain private foundations.--The private 
                foundations referred to in subparagraph 
                (A)(vii) and subsection (e)(1)(B) are--
                          (i) a private operating foundation 
                        (as defined in section 4942(j)(3)),
                          (ii) any other private foundation (as 
                        defined in section 509(a)) which, not 
                        later than the 15th day of the third 
                        month after the close of the 
                        foundation's taxable year in which 
                        contributions are received, makes 
                        qualifying distributions (as defined in 
                        section 4942(g), without regard to 
                        paragraph (3) thereof), which are 
                        treated, after the application of 
                        section 4942(g)(3), as distributions 
                        out of corpus (in accordance with 
                        section 4942(h)) in an amount equal to 
                        100 percent of such contributions, and 
                        with respect to which the taxpayer 
                        obtains adequate records or other 
                        sufficient evidence from the foundation 
                        showing that the foundation made such 
                        qualifying distributions, and
                          (iii) a private foundation all of the 
                        contributions to which are pooled in a 
                        common fund and which would be 
                        described in section 509(a)(3) but for 
                        the right of any substantial 
                        contributor (hereafter in this clause 
                        called ``donor'') or [his spouse] the 
                        spouse of such donor to designate 
                        annually the recipients, from among 
                        organizations described in paragraph 
                        (1) of section 509(a), of the income 
                        attributable to the donor's 
                        contribution to the fund and to direct 
                        (by deed or by will) the payment, to an 
                        organization described in such 
                        paragraph (1), of the corpus in the 
                        common fund attributable to the donor's 
                        contribution; but this clause shall 
                        apply only if all of the income of the 
                        common fund is required to be (and is) 
                        distributed to one or more 
                        organizations described in such 
                        paragraph (1) not later than the 15th 
                        day of the third month after the close 
                        of the taxable year in which the income 
                        is realized by the fund and only if all 
                        of the corpus attributable to any 
                        donor's contribution to the fund is 
                        required to be (and is) distributed to 
                        one or more of such organizations not 
                        later than one year after [his death or 
                        after the death of his surviving spouse 
                        if she] the death of the donor or after 
                        the death of the donor's surviving 
                        spouse if such surviving spouse has the 
                        right to designate the recipients of 
                        such corpus.
                  (G) Increased limitation for cash 
                contributions.--
                          (i) In general.--In the case of any 
                        contribution of cash to an organization 
                        described in subparagraph (A), the 
                        total amount of such contributions 
                        which may be taken into account under 
                        subsection (a) for any taxable year 
                        beginning after December 31, 2017, and 
                        before January 1, 2026, shall not 
                        exceed 60 percent of the taxpayer's 
                        contribution base for such year.
                          (ii) Carryover.--If the aggregate 
                        amount of contributions described in 
                        clause (i) exceeds the applicable 
                        limitation under clause (i) for any 
                        taxable year described in such clause, 
                        such excess shall be treated (in a 
                        manner consistent with the rules of 
                        subsection (d)(1)) as a charitable 
                        contribution to which clause (i) 
                        applies in each of the 5 succeeding 
                        years in order of time.
                          (iii) Coordination with subparagraphs 
                        (A) and (B).--
                                  (I) In general.--
                                Contributions taken into 
                                account under this subparagraph 
                                shall not be taken into account 
                                under subparagraph (A).
                                  (II) Limitation reduction.--
                                For each taxable year described 
                                in clause (i), and each taxable 
                                year to which any contribution 
                                under this subparagraph is 
                                carried over under clause (ii), 
                                subparagraph (A) shall be 
                                applied by reducing (but not 
                                below zero) the contribution 
                                limitation allowed for the 
                                taxable year under such 
                                subparagraph by the aggregate 
                                contributions allowed under 
                                this subparagraph for such 
                                taxable year, and subparagraph 
                                (B) shall be applied by 
                                treating any reference to 
                                subparagraph (A) as a reference 
                                to both subparagraph (A) and 
                                this subparagraph.
                  (H) Contribution base defined.--For purposes 
                of this section, the term ``contribution base'' 
                means adjusted gross income (computed without 
                regard to any net operating loss carryback to 
                the taxable year under section 172).
          (2) Corporations.--In the case of a corporation--
                  (A) In general.--The total deductions under 
                subsection (a) for any taxable year (other than 
                for contributions to which subparagraph (B) or 
                (C) applies) shall not exceed 10 percent of the 
                taxpayer's taxable income.
                  (B) Qualified conservation contributions by 
                certain corporate farmers and ranchers.--
                          (i) In general.--Any qualified 
                        conservation contribution (as defined 
                        in subsection (h)(1))--
                                  (I) which is made by a 
                                corporation which, for the 
                                taxable year during which the 
                                contribution is made, is a 
                                qualified farmer or rancher (as 
                                defined in paragraph (1)(E)(v)) 
                                and the stock of which is not 
                                readily tradable on an 
                                established securities market 
                                at any time during such year, 
                                and
                                  (II) which, in the case of 
                                contributions made after the 
                                date of the enactment of this 
                                subparagraph, is a contribution 
                                of property which is used in 
                                agriculture or livestock 
                                production (or available for 
                                such production) and which is 
                                subject to a restriction that 
                                such property remain available 
                                for such production,
                 shall be allowed to the extent the aggregate 
                of such contributions does not exceed the 
                excess of the taxpayer's taxable income over 
                the amount of charitable contributions 
                allowable under subparagraph (A).
                          (ii) Carryover.--If the aggregate 
                        amount of contributions described in 
                        clause (i) exceeds the limitation of 
                        clause (i), such excess shall be 
                        treated (in a manner consistent with 
                        the rules of subsection (d)(2)) as a 
                        charitable contribution to which clause 
                        (i) applies in each of the 15 
                        succeeding taxable years in order of 
                        time.
                  (C) Qualified conservation contributions by 
                certain Native Corporations.--
                          (i) In general.--Any qualified 
                        conservation contribution (as defined 
                        in subsection (h)(1)) which--
                                  (I) is made by a Native 
                                Corporation, and
                                  (II) is a contribution of 
                                property which was land 
                                conveyed under the Alaska 
                                Native Claims Settlement Act,
                 shall be allowed to the extent that the 
                aggregate amount of such contributions does not 
                exceed the excess of the taxpayer's taxable 
                income over the amount of charitable 
                contributions allowable under subparagraph (A).
                          (ii) Carryover.--If the aggregate 
                        amount of contributions described in 
                        clause (i) exceeds the limitation of 
                        clause (i), such excess shall be 
                        treated (in a manner consistent with 
                        the rules of subsection (d)(2)) as a 
                        charitable contribution to which clause 
                        (i) applies in each of the 15 
                        succeeding taxable years in order of 
                        time.
                          (iii) Native Corporation.--For 
                        purposes of this subparagraph, the term 
                        ``Native Corporation'' has the meaning 
                        given such term by section 3(m) of the 
                        Alaska Native Claims Settlement Act.
                  (D) Taxable income.--For purposes of this 
                paragraph, taxable income shall be computed 
                without regard to--
                          (i) this section,
                          (ii) part VIII (except section 248),
                          (iii) any net operating loss 
                        carryback to the taxable year under 
                        section 172,
                          (iv) any capital loss carryback to 
                        the taxable year under section 
                        1212(a)(1)
                          (v) section 199A(g).
  (c) Charitable contribution defined.--For purposes of this 
section, the term ``charitable contribution'' means a 
contribution or gift to or for the use of--
          (1) A State, a possession of the United States, or 
        any political subdivision of any of the foregoing, or 
        the United States or the District of Columbia, but only 
        if the contribution or gift is made for exclusively 
        public purposes.
          (2) A corporation, trust, or community chest, fund, 
        or foundation--
                  (A) created or organized in the United States 
                or in any possession thereof, or under the law 
                of the United States, any State, the District 
                of Columbia, or any possession of the United 
                States;
                  (B) organized and operated exclusively for 
                religious, charitable, scientific, literary, or 
                educational purposes, or to foster national or 
                international amateur sports competition (but 
                only if no part of its activities involve the 
                provision of athletic facilities or equipment), 
                or for the prevention of cruelty to children or 
                animals;
                  (C) no part of the net earnings of which 
                inures to the benefit of any private 
                shareholder or individual; and
                  (D) which is not disqualified for tax 
                exemption under section 501(c)(3) by reason of 
                attempting to influence legislation, and which 
                does not participate in, or intervene in 
                (including the publishing or distributing of 
                statements), any political campaign on behalf 
                of (or in opposition to) any candidate for 
                public office.
        A contribution or gift by a corporation to a trust, 
        chest, fund, or foundation shall be deductible by 
        reason of this paragraph only if it is to be used 
        within the United States or any of its possessions 
        exclusively for purposes specified in subparagraph (B). 
        Rules similar to the rules of section 501(j) shall 
        apply for purposes of this paragraph.
          (3) A post or organization of war veterans, or an 
        auxiliary unit or society of, or trust or foundation 
        for, any such post or organization--
                  (A) organized in the United States or any of 
                its possessions, and
                  (B) no part of the net earnings of which 
                inures to the benefit of any private 
                shareholder or individual.
          (4) In the case of a contribution or gift by an 
        individual, a domestic fraternal society, order, or 
        association, operating under the lodge system, but only 
        if such contribution or gift is to be used exclusively 
        for religious, charitable, scientific, literary, or 
        educational purposes, or for the prevention of cruelty 
        to children or animals.
          (5) A cemetery company owned and operated exclusively 
        for the benefit of its members, or any corporation 
        chartered solely for burial purposes as a cemetery 
        corporation and not permitted by its charter to engage 
        in any business not necessarily incident to that 
        purpose, if such company or corporation is not operated 
        for profit and no part of the net earnings of such 
        company or corporation inures to the benefit of any 
        private shareholder or individual.
For purposes of this section, the term ``charitable 
contribution'' also means an amount treated under subsection 
(g) as paid for the use of an organization described in 
paragraph (2), (3), or (4).
  (d) Carryovers of excess contributions.--
          (1) Individuals.--
                  (A) In general.--In the case of an 
                individual, if the amount of charitable 
                contributions described in subsection (b)(1)(A) 
                payment of which is made within a taxable year 
                (hereinafter in this paragraph referred to as 
                the ``contribution year'') exceeds 50 percent 
                of the taxpayer's contribution base for such 
                year, such excess shall be treated as a 
                charitable contribution described in subsection 
                (b)(1)(A) paid in each of the 5 succeeding 
                taxable years in order of time, but, with 
                respect to any such succeeding taxable year, 
                only to the extent of the lesser of the two 
                following amounts:
                          (i) the amount by which 50 percent of 
                        the taxpayer's contribution base for 
                        such succeeding taxable year exceeds 
                        the sum of the charitable contributions 
                        described in subsection (b)(1)(A) 
                        payment of which is made by the 
                        taxpayer within such succeeding taxable 
                        year (determined without regard to this 
                        subparagraph) and the charitable 
                        contributions described in subsection 
                        (b)(1)(A) payment of which was made in 
                        taxable years before the contribution 
                        year which are treated under this 
                        subparagraph as having been paid in 
                        such succeeding taxable year; or
                          (ii) in the case of the first 
                        succeeding taxable year, the amount of 
                        such excess, and in the case of the 
                        second, third, fourth, or fifth 
                        succeeding taxable year, the portion of 
                        such excess not treated under this 
                        subparagraph as a charitable 
                        contribution described in subsection 
                        (b)(1)(A) paid in any taxable year 
                        intervening between the contribution 
                        year and such succeeding taxable year.
                  (B) Special rule for net operating loss 
                carryovers.--In applying subparagraph (A), the 
                excess determined under subparagraph (A) for 
                the contribution year shall be reduced to the 
                extent that such excess reduces taxable income 
                (as computed for purposes of the second 
                sentence of section 172(b)(2)) and increases 
                the net operating loss deduction for a taxable 
                year succeeding the contribution year.
          (2) Corporations.--
                  (A) In general.--Any contribution made by a 
                corporation in a taxable year (hereinafter in 
                this paragraph referred to as the 
                ``contribution year'') in excess of the amount 
                deductible for such year under subsection 
                (b)(2)(A) shall be deductible for each of the 5 
                succeeding taxable years in order of time, but 
                only to the extent of the lesser of the two 
                following amounts: (i) the excess of the 
                maximum amount deductible for such succeeding 
                taxable year under subsection (b)(2)(A) over 
                the sum of the contributions made in such year 
                plus the aggregate of the excess contributions 
                which were made in taxable years before the 
                contribution year and which are deductible 
                under this subparagraph for such succeeding 
                taxable year; or (ii) in the case of the first 
                succeeding taxable year, the amount of such 
                excess contribution, and in the case of the 
                second, third, fourth, or fifth succeeding 
                taxable year, the portion of such excess 
                contribution not deductible under this 
                subparagraph for any taxable year intervening 
                between the contribution year and such 
                succeeding taxable year.
                  (B) Special rule for net operating loss 
                carryovers.--For purposes of subparagraph (A), 
                the excess of--
                          (i) the contributions made by a 
                        corporation in a taxable year to which 
                        this section applies, over
                          (ii) the amount deductible in such 
                        year under the limitation in subsection 
                        (b)(2)(A),
                shall be reduced to the extent that such excess 
                reduces taxable income (as computed for 
                purposes of the second sentence of section 
                172(b)(2)) and increases a net operating loss 
                carryover under section 172 to a succeeding 
                taxable year.
  (e) Certain contributions of ordinary income and capital gain 
property.--
          (1) General rule.--The amount of any charitable 
        contribution of property otherwise taken into account 
        under this section shall be reduced by the sum of--
                  (A) the amount of gain which would not have 
                been long-term capital gain (determined without 
                regard to section 1221(b)(3)) if the property 
                contributed had been sold by the taxpayer at 
                its fair market value (determined at the time 
                of such contribution), and
                  (B) in the case of a charitable 
                contribution--
                          (i) of tangible personal property--
                                  (I) if the use by the donee 
                                is unrelated to the purpose or 
                                function constituting the basis 
                                for its exemption under section 
                                501 (or, in the case of a 
                                governmental unit, to any 
                                purpose or function described 
                                in subsection (c)), or
                                  (II) which is applicable 
                                property (as defined in 
                                paragraph (7)(C), but without 
                                regard to clause (ii) thereof) 
                                which is sold, exchanged, or 
                                otherwise disposed of by the 
                                donee before the last day of 
                                the taxable year in which the 
                                contribution was made and with 
                                respect to which the donee has 
                                not made a certification in 
                                accordance with paragraph 
                                (7)(D),
                          (ii) to or for the use of a private 
                        foundation (as defined in section 
                        509(a)), other than a private 
                        foundation described in subsection 
                        (b)(1)(F),
                          (iii) of any patent, copyright (other 
                        than a copyright described in section 
                        1221(a)(3) or 1231(b)(1)(C)), 
                        trademark, trade name, trade secret, 
                        know-how, software (other than software 
                        described in section 197(e)(3)(A)(i)), 
                        or similar property, or applications or 
                        registrations of such property, or
                          (iv) of any taxidermy property which 
                        is contributed by the person who 
                        prepared, stuffed, or mounted the 
                        property or by any person who paid or 
                        incurred the cost of such preparation, 
                        stuffing, or mounting,
                the amount of gain which would have been long-
                term capital gain if the property contributed 
                had been sold by the taxpayer at its fair 
                market value (determined at the time of such 
                contribution).
        For purposes of applying this paragraph (other than in 
        the case of gain to which section 617(d)(1), 1245(a), 
        1250(a), 1252(a), or 1254(a) applies), property which 
        is property used in the trade or business (as defined 
        in section 1231(b)) shall be treated as a capital 
        asset. For purposes of applying this paragraph in the 
        case of a charitable contribution of stock in an S 
        corporation, rules similar to the rules of section 751 
        shall apply in determining whether gain on such stock 
        would have been long-term capital gain if such stock 
        were sold by the taxpayer.
          (2) Allocation of basis.--For purposes of paragraph 
        (1), in the case of a charitable contribution of less 
        than the taxpayer's entire interest in the property 
        contributed, the taxpayer's adjusted basis in such 
        property shall be allocated between the interest 
        contributed and any interest not contributed in 
        accordance with regulations prescribed by the 
        Secretary.
          (3) Special rule for certain contributions of 
        inventory and other property.--
                  (A) Qualified contributions.--For purposes of 
                this paragraph, a qualified contribution shall 
                mean a charitable contribution of property 
                described in paragraph (1) or (2) of section 
                1221(a), by a corporation (other than a 
                corporation which is an S corporation) to an 
                organization which is described in section 
                501(c)(3) and is exempt under section 501(a) 
                (other than a private foundation, as defined in 
                section 509(a), which is not an operating 
                foundation, as defined in section 4942(j)(3)), 
                but only if--
                          (i) the use of the property by the 
                        donee is related to the purpose or 
                        function constituting the basis for its 
                        exemption under section 501 and the 
                        property is to be used by the donee 
                        solely for the care of the ill, the 
                        needy, or infants;
                          (ii) the property is not transferred 
                        by the donee in exchange for money, 
                        other property, or services;
                          (iii) the taxpayer receives from the 
                        donee a written statement representing 
                        that its use and disposition of the 
                        property will be in accordance with the 
                        provisions of clauses (i) and (ii); and
                          (iv) in the case where the property 
                        is subject to regulation under the 
                        Federal Food, Drug, and Cosmetic Act, 
                        as amended, such property must fully 
                        satisfy the applicable requirements of 
                        such Act and regulations promulgated 
                        thereunder on the date of transfer and 
                        for one hundred and eighty days prior 
                        thereto.
                  (B) Amount of reduction.--The reduction under 
                paragraph (1)(A) for any qualified contribution 
                (as defined in subparagraph (A)) shall be no 
                greater than the sum of--
                          (i) one-half of the amount computed 
                        under paragraph (1)(A) (computed 
                        without regard to this paragraph), and
                          (ii) the amount (if any) by which the 
                        charitable contribution deduction under 
                        this section for any qualified 
                        contribution (computed by taking into 
                        account the amount determined in clause 
                        (i), but without regard to this clause) 
                        exceeds twice the basis of such 
                        property.
                  (C) Special rule for contributions of food 
                inventory.--
                          (i) General rule.--In the case of a 
                        charitable contribution of food from 
                        any trade or business of the taxpayer, 
                        this paragraph shall be applied--
                                  (I) without regard to whether 
                                the contribution is made by a C 
                                corporation, and
                                  (II) only to food that is 
                                apparently wholesome food.
                          (ii) Limitation.--The aggregate 
                        amount of such contributions for any 
                        taxable year which may be taken into 
                        account under this section shall not 
                        exceed--
                                  (I) in the case of any 
                                taxpayer other than a C 
                                corporation, 15 percent of the 
                                taxpayer's aggregate net income 
                                for such taxable year from all 
                                trades or businesses from which 
                                such contributions were made 
                                for such year, computed without 
                                regard to this section, and
                                  (II) in the case of a C 
                                corporation, 15 percent of 
                                taxable income (as defined in 
                                subsection (b)(2)(D)).
                          (iii) Rules related to limitation.--
                                  (I) Carryover.--If such 
                                aggregate amount exceeds the 
                                limitation imposed under clause 
                                (ii), such excess shall be 
                                treated (in a manner consistent 
                                with the rules of subsection 
                                (d)) as a charitable 
                                contribution described in 
                                clause (i) in each of the 5 
                                succeeding taxable years in 
                                order of time.
                                  (II) Coordination with 
                                overall corporate limitation.--
                                In the case of any charitable 
                                contribution which is allowable 
                                after the application of clause 
                                (ii)(II), subsection (b)(2)(A) 
                                shall not apply to such 
                                contribution, but the 
                                limitation imposed by such 
                                subsection shall be reduced 
                                (but not below zero) by the 
                                aggregate amount of such 
                                contributions. For purposes of 
                                subsection (b)(2)(B), such 
                                contributions shall be treated 
                                as allowable under subsection 
                                (b)(2)(A).
                          (iv) Determination of basis for 
                        certain taxpayers.--If a taxpayer--
                                  (I) does not account for 
                                inventories under section 471, 
                                and
                                  (II) is not required to 
                                capitalize indirect costs under 
                                section 263A,
                 the taxpayer may elect, solely for purposes of 
                subparagraph (B), to treat the basis of any 
                apparently wholesome food as being equal to 25 
                percent of the fair market value of such food.
                          (v) Determination of fair market 
                        value.--In the case of any such 
                        contribution of apparently wholesome 
                        food which cannot or will not be sold 
                        solely by reason of internal standards 
                        of the taxpayer, lack of market, or 
                        similar circumstances, or by reason of 
                        being produced by the taxpayer 
                        exclusively for the purposes of 
                        transferring the food to an 
                        organization described in subparagraph 
                        (A), the fair market value of such 
                        contribution shall be determined--
                                  (I) without regard to such 
                                internal standards, such lack 
                                of market, such circumstances, 
                                or such exclusive purpose, and
                                  (II) by taking into account 
                                the price at which the same or 
                                substantially the same food 
                                items (as to both type and 
                                quality) are sold by the 
                                taxpayer at the time of the 
                                contribution (or, if not so 
                                sold at such time, in the 
                                recent past).
                          (vi) Apparently wholesome food.--For 
                        purposes of this subparagraph, the term 
                        ``apparently wholesome food'' has the 
                        meaning given to such term by section 
                        22(b)(2) of the Bill Emerson Good 
                        Samaritan Food Donation Act (42 U.S.C. 
                        1791(b)(2)), as in effect on the date 
                        of the enactment of this subparagraph.
                  (D) This paragraph shall not apply to so much 
                of the amount of the gain described in 
                paragraph (1)(A) which would be long-term 
                capital gain but for the application of 
                sections 617, 1245, 1250, or 1252.
          (4) Special rule for contributions of scientific 
        property used for research.--
                  (A) Limit on reduction.--In the case of a 
                qualified research contribution, the reduction 
                under paragraph (1)(A) shall be no greater than 
                the amount determined under paragraph (3)(B).
                  (B) Qualified research contributions.--For 
                purposes of this paragraph, the term 
                ``qualified research contribution'' means a 
                charitable contribution by a corporation of 
                tangible personal property described in 
                paragraph (1) of section 1221(a), but only if--
                          (i) the contribution is to an 
                        organization described in subparagraph 
                        (A) or subparagraph (B) of section 
                        41(e)(6),
                          (ii) the property is constructed or 
                        assembled by the taxpayer,
                          (iii) the contribution is made not 
                        later than 2 years after the date the 
                        construction or assembly of the 
                        property is substantially completed,
                          (iv) the original use of the property 
                        is by the donee,
                          (v) the property is scientific 
                        equipment or apparatus substantially 
                        all of the use of which by the donee is 
                        for research or experimentation (within 
                        the meaning of section 174), or for 
                        research training, in the United States 
                        in physical or biological sciences,
                          (vi) the property is not transferred 
                        by the donee in exchange for money, 
                        other property, or services, and
                          (vii) the taxpayer receives from the 
                        donee a written statement representing 
                        that its use and disposition of the 
                        property will be in accordance with the 
                        provisions of clauses (v) and (vi).
                  (C) Construction of property by taxpayer.--
                For purposes of this paragraph, property shall 
                be treated as constructed by the taxpayer only 
                if the cost of the parts used in the 
                construction of such property (other than parts 
                manufactured by the taxpayer or a related 
                person) do not exceed 50 percent of the 
                taxpayer's basis in such property.
                  (D) Corporation.--For purposes of this 
                paragraph, the term ``corporation'' shall not 
                include--
                          (i) an S corporation,
                          (ii) a personal holding company (as 
                        defined in section 542), and
                          (iii) a service organization (as 
                        defined in section 414(m)(3)).
          (5) Special rule for contributions of stock for which 
        market quotations are readily available.--
                  (A) In general.--Subparagraph (B)(ii) of 
                paragraph (1) shall not apply to any 
                contribution of qualified appreciated stock.
                  (B) Qualified appreciated stock.--Except as 
                provided in subparagraph (C), for purposes of 
                this paragraph, the term ``qualified 
                appreciated stock'' means any stock of a 
                corporation--
                          (i) for which (as of the date of the 
                        contribution) market quotations are 
                        readily available on an established 
                        securities market, and
                          (ii) which is capital gain property 
                        (as defined in subsection 
                        (b)(1)(C)(iv)).
                  (C) Donor may not contribute more than 10 
                percent of stock of corporation.--
                          (i) In general.--In the case of any 
                        donor, the term ``qualified appreciated 
                        stock'' shall not include any stock of 
                        a corporation contributed by the donor 
                        in a contribution to which paragraph 
                        (1)(B)(ii) applies (determined without 
                        regard to this paragraph) to the extent 
                        that the amount of the stock so 
                        contributed (when increased by the 
                        aggregate amount of all prior such 
                        contributions by the donor of stock in 
                        such corporation) exceeds 10 percent 
                        (in value) of all of the outstanding 
                        stock of such corporation.
                          (ii) Special rule.--For purposes of 
                        clause (i), an individual shall be 
                        treated as making all contributions 
                        made by any member of his family (as 
                        defined in section 267(c)(4)).
          (7) Recapture of deduction on certain dispositions of 
        exempt use property.--
                  (A) In general.--In the case of an applicable 
                disposition of applicable property, there shall 
                be included in the income of the donor of such 
                property for the taxable year of such donor in 
                which the applicable disposition occurs an 
                amount equal to the excess (if any) of--
                          (i) the amount of the deduction 
                        allowed to the donor under this section 
                        with respect to such property, over
                          (ii) the donor's basis in such 
                        property at the time such property was 
                        contributed.
                  (B) Applicable disposition.--For purposes of 
                this paragraph, the term ``applicable 
                disposition'' means any sale, exchange, or 
                other disposition by the donee of applicable 
                property--
                          (i) after the last day of the taxable 
                        year of the donor in which such 
                        property was contributed, and
                          (ii) before the last day of the 3-
                        year period beginning on the date of 
                        the contribution of such property,
                unless the donee makes a certification in 
                accordance with subparagraph (D).
                  (C) Applicable property.--For purposes of 
                this paragraph, the term ``applicable 
                property'' means charitable deduction property 
                (as defined in section 6050L(a)(2)(A))--
                          (i) which is tangible personal 
                        property the use of which is identified 
                        by the donee as related to the purpose 
                        or function constituting the basis of 
                        the donee's exemption under section 
                        501, and
                          (ii) for which a deduction in excess 
                        of the donor's basis is allowed.
                  (D) Certification.--A certification meets the 
                requirements of this subparagraph if it is a 
                written statement which is signed under penalty 
                of perjury by an officer of the donee 
                organization and--
                          (i) which--
                                  (I) certifies that the use of 
                                the property by the donee was 
                                substantial and related to the 
                                purpose or function 
                                constituting the basis for the 
                                donee's exemption under section 
                                501, and
                                  (II) describes how the 
                                property was used and how such 
                                use furthered such purpose or 
                                function, or
                          (ii) which--
                                  (I) states the intended use 
                                of the property by the donee at 
                                the time of the contribution, 
                                and
                                  (II) certifies that such 
                                intended use has become 
                                impossible or infeasible to 
                                implement.
  (f) Disallowance of deduction in certain cases and special 
rules.--
          (1) In general.--No deduction shall be allowed under 
        this section for a contribution to or for the use of an 
        organization or trust described in section 508(d) or 
        4948(c)(4) subject to the conditions specified in such 
        sections.
          (2) Contributions of property placed in trust.--
                  (A) Remainder interest.--In the case of 
                property transferred in trust, no deduction 
                shall be allowed under this section for the 
                value of a contribution of a remainder interest 
                unless the trust is a charitable remainder 
                annuity trust or a charitable remainder 
                unitrust (described in section 664), or a 
                pooled income fund (described in section 
                642(c)(5)).
                  (B) Income interests, etc..--No deduction 
                shall be allowed under this section for the 
                value of any interest in property (other than a 
                remainder interest) transferred in trust unless 
                the interest is in the form of a guaranteed 
                annuity or the trust instrument specifies that 
                the interest is a fixed percentage distributed 
                yearly of the fair market value of the trust 
                property (to be determined yearly) and the 
                grantor is treated as the owner of such 
                interest for purposes of applying section 671. 
                If the donor ceases to be treated as the owner 
                of such an interest for purposes of applying 
                section 671, at the time the donor ceases to be 
                so treated, the donor shall for purposes of 
                this chapter be considered as having received 
                an amount of income equal to the amount of any 
                deduction he received under this section for 
                the contribution reduced by the discounted 
                value of all amounts of income earned by the 
                trust and taxable to him before the time at 
                which he ceases to be treated as the owner of 
                the interest. Such amounts of income shall be 
                discounted to the date of the contribution. The 
                Secretary shall prescribe such regulations as 
                may be necessary to carry out the purposes of 
                this subparagraph.
                  (C) Denial of deduction in case of payments 
                by certain trusts.--In any case in which a 
                deduction is allowed under this section for the 
                value of an interest in property described in 
                subparagraph (B), transferred in trust, no 
                deduction shall be allowed under this section 
                to the grantor or any other person for the 
                amount of any contribution made by the trust 
                with respect to such interest.
                  (D) Exception.--This paragraph shall not 
                apply in a case in which the value of all 
                interests in property transferred in trust are 
                deductible under subsection (a).
          (3) Denial of deduction in case of certain 
        contributions of partial interests in property.--
                  (A) In general.--In the case of a 
                contribution (not made by a transfer in trust) 
                of an interest in property which consists of 
                less than the taxpayer's entire interest in 
                such property, a deduction shall be allowed 
                under this section only to the extent that the 
                value of the interest contributed would be 
                allowable as a deduction under this section if 
                such interest had been transferred in trust. 
                For purposes of this subparagraph, a 
                contribution by a taxpayer of the right to use 
                property shall be treated as a contribution of 
                less than the taxpayer's entire interest in 
                such property.
                  (B) Exceptions.--Subparagraph (A) shall not 
                apply to--
                          (i) a contribution of a remainder 
                        interest in a personal residence or 
                        farm,
                          (ii) a contribution of an undivided 
                        portion of the taxpayer's entire 
                        interest in property, and
                          (iii) a qualified conservation 
                        contribution.
          (4) Valuation of remainder interest in real 
        property.--For purposes of this section, in determining 
        the value of a remainder interest in real property, 
        depreciation (computed on the straight line method) and 
        depletion of such property shall be taken into account, 
        and such value shall be discounted at a rate of 6 
        percent per annum, except that the Secretary may 
        prescribe a different rate.
          (5) Reduction for certain interest.--If, in 
        connection with any charitable contribution, a 
        liability is assumed by the recipient or by any other 
        person, or if a charitable contribution is of property 
        which is subject to a liability, then, to the extent 
        necessary to avoid the duplication of amounts, the 
        amount taken into account for purposes of this section 
        as the amount of the charitable contribution--
                  (A) shall be reduced for interest (i) which 
                has been paid (or is to be paid) by the 
                taxpayer, (ii) which is attributable to the 
                liability, and (iii) which is attributable to 
                any period after the making of the 
                contribution, and
                  (B) in the case of a bond, shall be further 
                reduced for interest (i) which has been paid 
                (or is to be paid) by the taxpayer on 
                indebtedness incurred or continued to purchase 
                or carry such bond, and (ii) which is 
                attributable to any period before the making of 
                the contribution.
        The reduction pursuant to subparagraph (B) shall not 
        exceed the interest (including interest equivalent) on 
        the bond which is attributable to any period before the 
        making of the contribution and which is not (under the 
        taxpayer's method of accounting) includible in the 
        gross income of the taxpayer for any taxable year. For 
        purposes of this paragraph, the term ``bond'' means any 
        bond, debenture, note, or certificate or other evidence 
        of indebtedness.
          (6) Deductions for out-of-pocket expenditures.--No 
        deduction shall be allowed under this section for an 
        out-of-pocket expenditure made by any person on behalf 
        of an organization described in subsection (c) (other 
        than an organization described in section 501(h)(5) 
        (relating to churches, etc.)) if the expenditure is 
        made for the purpose of influencing legislation (within 
        the meaning of section 501(c)(3)).
          (7) Reformations to comply with paragraph (2).--
                  (A) In general.--A deduction shall be allowed 
                under subsection (a) in respect of any 
                qualified reformation (within the meaning of 
                section 2055(e)(3)(B)).
                  (B) Rules similar to section 2055(e)(3) to 
                apply.--For purposes of this paragraph, rules 
                similar to the rules of section 2055(e)(3) 
                shall apply.
          (8) Substantiation requirement for certain 
        contributions.--
                  (A) General rule.--No deduction shall be 
                allowed under subsection (a) for any 
                contribution of $250 or more unless the 
                taxpayer substantiates the contribution by a 
                contemporaneous written acknowledgment of the 
                contribution by the donee organization that 
                meets the requirements of subparagraph (B).
                  (B) Content of acknowledgement.--An 
                acknowledgement meets the requirements of this 
                subparagraph if it includes the following 
                information:
                          (i) The amount of cash and a 
                        description (but not value) of any 
                        property other than cash contributed.
                          (ii) Whether the donee organization 
                        provided any goods or services in 
                        consideration, in whole or in part, for 
                        any property described in clause (i).
                          (iii) A description and good faith 
                        estimate of the value of any goods or 
                        services referred to in clause (ii) or, 
                        if such goods or services consist 
                        solely of intangible religious 
                        benefits, a statement to that effect.
                For purposes of this subparagraph, the term 
                ``intangible religious benefit'' means any 
                intangible religious benefit which is provided 
                by an organization organized exclusively for 
                religious purposes and which generally is not 
                sold in a commercial transaction outside the 
                donative context.
                  (C) Contemporaneous.--For purposes of 
                subparagraph (A), an acknowledgment shall be 
                considered to be contemporaneous if the 
                taxpayer obtains the acknowledgment on or 
                before the earlier of--
                          (i) the date on which the taxpayer 
                        files a return for the taxable year in 
                        which the contribution was made, or
                          (ii) the due date (including 
                        extensions) for filing such return.
                  (D) Regulations.--The Secretary shall 
                prescribe such regulations as may be necessary 
                or appropriate to carry out the purposes of 
                this paragraph, including regulations that may 
                provide that some or all of the requirements of 
                this paragraph do not apply in appropriate 
                cases.
          (9) Denial of deduction where contribution for 
        lobbying activities.--No deduction shall be allowed 
        under this section for a contribution to an 
        organization which conducts activities to which section 
        162(e)(1) applies on matters of direct financial 
        interest to the donor's trade or business, if a 
        principal purpose of the contribution was to avoid 
        Federal income tax by securing a deduction for such 
        activities under this section which would be disallowed 
        by reason of section 162(e) if the donor had conducted 
        such activities directly. No deduction shall be allowed 
        under section 162(a) for any amount for which a 
        deduction is disallowed under the preceding sentence.
          (10) Split-dollar life insurance, annuity, and 
        endowment contracts.--
                  (A) In general.--Nothing in this section or 
                in section 545(b)(2), 642(c), 2055, 2106(a)(2), 
                or 2522 shall be construed to allow a 
                deduction, and no deduction shall be allowed, 
                for any transfer to or for the use of an 
                organization described in subsection (c) if in 
                connection with such transfer--
                          (i) the organization directly or 
                        indirectly pays, or has previously 
                        paid, any premium on any personal 
                        benefit contract with respect to the 
                        transferor, or
                          (ii) there is an understanding or 
                        expectation that any person will 
                        directly or indirectly pay any premium 
                        on any personal benefit contract with 
                        respect to the transferor.
                  (B) Personal benefit contract.--For purposes 
                of subparagraph (A), the term ``personal 
                benefit contract'' means, with respect to the 
                transferor, any life insurance, annuity, or 
                endowment contract if any direct or indirect 
                beneficiary under such contract is the 
                transferor, any member of the transferor's 
                family, or any other person (other than an 
                organization described in subsection (c)) 
                designated by the transferor.
                  (C) Application to charitable remainder 
                trusts.--In the case of a transfer to a trust 
                referred to in subparagraph (E), references in 
                subparagraphs (A) and (F) to an organization 
                described in subsection (c) shall be treated as 
                a reference to such trust.
                  (D) Exception for certain annuity 
                contracts.--If, in connection with a transfer 
                to or for the use of an organization described 
                in subsection (c), such organization incurs an 
                obligation to pay a charitable gift annuity (as 
                defined in section 501(m)) and such 
                organization purchases any annuity contract to 
                fund such obligation, persons receiving 
                payments under the charitable gift annuity 
                shall not be treated for purposes of 
                subparagraph (B) as indirect beneficiaries 
                under such contract if--
                          (i) such organization possesses all 
                        of the incidents of ownership under 
                        such contract,
                          (ii) such organization is entitled to 
                        all the payments under such contract, 
                        and
                          (iii) the timing and amount of 
                        payments under such contract are 
                        substantially the same as the timing 
                        and amount of payments to each such 
                        person under such obligation (as such 
                        obligation is in effect at the time of 
                        such transfer).
                  (E) Exception for certain contracts held by 
                charitable remainder trusts.--A person shall 
                not be treated for purposes of subparagraph (B) 
                as an indirect beneficiary under any life 
                insurance, annuity, or endowment contract held 
                by a charitable remainder annuity trust or a 
                charitable remainder unitrust (as defined in 
                section 664(d)) solely by reason of being 
                entitled to any payment referred to in 
                paragraph (1)(A) or (2)(A) of section 664(d) 
                if--
                          (i) such trust possesses all of the 
                        incidents of ownership under such 
                        contract, and
                          (ii) such trust is entitled to all 
                        the payments under such contract.
                  (F) Excise tax on premiums paid.--
                          (i) In general.--There is hereby 
                        imposed on any organization described 
                        in subsection (c) an excise tax equal 
                        to the premiums paid by such 
                        organization on any life insurance, 
                        annuity, or endowment contract if the 
                        payment of premiums on such contract is 
                        in connection with a transfer for which 
                        a deduction is not allowable under 
                        subparagraph (A), determined without 
                        regard to when such transfer is made.
                          (ii) Payments by other persons.--For 
                        purposes of clause (i), payments made 
                        by any other person pursuant to an 
                        understanding or expectation referred 
                        to in subparagraph (A) shall be treated 
                        as made by the organization.
                          (iii) Reporting.--Any organization on 
                        which tax is imposed by clause (i) with 
                        respect to any premium shall file an 
                        annual return which includes--
                                  (I) the amount of such 
                                premiums paid during the year 
                                and the name and TIN of each 
                                beneficiary under the contract 
                                to which the premium relates, 
                                and
                                  (II) such other information 
                                as the Secretary may require.
                 The penalties applicable to returns required 
                under section 6033 shall apply to returns 
                required under this clause. Returns required 
                under this clause shall be furnished at such 
                time and in such manner as the Secretary shall 
                by forms or regulations require.
                          (iv) Certain rules to apply.--The tax 
                        imposed by this subparagraph shall be 
                        treated as imposed by chapter 42 for 
                        purposes of this title other than 
                        subchapter B of chapter 42.
                  (G) Special rule where State requires 
                specification of charitable gift annuitant in 
                contract.--In the case of an obligation to pay 
                a charitable gift annuity referred to in 
                subparagraph (D) which is entered into under 
                the laws of a State which requires, in order 
                for the charitable gift annuity to be exempt 
                from insurance regulation by such State, that 
                each beneficiary under the charitable gift 
                annuity be named as a beneficiary under an 
                annuity contract issued by an insurance company 
                authorized to transact business in such State, 
                the requirements of clauses (i) and (ii) of 
                subparagraph (D) shall be treated as met if--
                          (i) such State law requirement was in 
                        effect on February 8, 1999,
                          (ii) each such beneficiary under the 
                        charitable gift annuity is a bona fide 
                        resident of such State at the time the 
                        obligation to pay a charitable gift 
                        annuity is entered into, and
                          (iii) the only persons entitled to 
                        payments under such contract are 
                        persons entitled to payments as 
                        beneficiaries under such obligation on 
                        the date such obligation is entered 
                        into.
                  (H) Member of family.--For purposes of this 
                paragraph, an individual's family consists of 
                the individual's grandparents, the grandparents 
                of such individual's spouse, the lineal 
                descendants of such grandparents, and any 
                spouse of such a lineal descendant.
                  (I) Regulations.--The Secretary shall 
                prescribe such regulations as may be necessary 
                or appropriate to carry out the purposes of 
                this paragraph, including regulations to 
                prevent the avoidance of such purposes.
          (11) Qualified appraisal and other documentation for 
        certain contributions.--
                  (A) In general.--
                          (i) Denial of deduction.--In the case 
                        of an individual, partnership, or 
                        corporation, no deduction shall be 
                        allowed under subsection (a) for any 
                        contribution of property for which a 
                        deduction of more than $500 is claimed 
                        unless such person meets the 
                        requirements of subparagraphs (B), (C), 
                        and (D), as the case may be, with 
                        respect to such contribution.
                          (ii) Exceptions.--
                                  (I) Readily valued 
                                property.--Subparagraphs (C) 
                                and (D) shall not apply to 
                                cash, property described in 
                                subsection (e)(1)(B)(iii) or 
                                section 1221(a)(1), publicly 
                                traded securities (as defined 
                                in section 6050L(a)(2)(B)), and 
                                any qualified vehicle described 
                                in paragraph (12)(A)(ii) for 
                                which an acknowledgement under 
                                paragraph (12)(B)(iii) is 
                                provided.
                                  (II) Reasonable cause.--
                                Clause (i) shall not apply if 
                                it is shown that the failure to 
                                meet such requirements is due 
                                to reasonable cause and not to 
                                willful neglect.
                  (B) Property description for contributions of 
                more than $500.--In the case of contributions 
                of property for which a deduction of more than 
                $500 is claimed, the requirements of this 
                subparagraph are met if the individual, 
                partnership or corporation includes with the 
                return for the taxable year in which the 
                contribution is made a description of such 
                property and such other information as the 
                Secretary may require. The requirements of this 
                subparagraph shall not apply to a C corporation 
                which is not a personal service corporation or 
                a closely held C corporation.
                  (C) Qualified appraisal for contributions of 
                more than $5,000.--In the case of contributions 
                of property for which a deduction of more than 
                $5,000 is claimed, the requirements of this 
                subparagraph are met if the individual, 
                partnership, or corporation obtains a qualified 
                appraisal of such property and attaches to the 
                return for the taxable year in which such 
                contribution is made such information regarding 
                such property and such appraisal as the 
                Secretary may require.
                  (D) Substantiation for contributions of more 
                than $500,000.--In the case of contributions of 
                property for which a deduction of more than 
                $500,000 is claimed, the requirements of this 
                subparagraph are met if the individual, 
                partnership, or corporation attaches to the 
                return for the taxable year a qualified 
                appraisal of such property.
                  (E) Qualified appraisal and appraiser.--For 
                purposes of this paragraph--
                          (i) Qualified appraisal.--The term 
                        ``qualified appraisal'' means, with 
                        respect to any property, an appraisal 
                        of such property which--
                                  (I) is treated for purposes 
                                of this paragraph as a 
                                qualified appraisal under 
                                regulations or other guidance 
                                prescribed by the Secretary, 
                                and
                                  (II) is conducted by a 
                                qualified appraiser in 
                                accordance with generally 
                                accepted appraisal standards 
                                and any regulations or other 
                                guidance prescribed under 
                                subclause (I).
                          (ii) Qualified appraiser.--Except as 
                        provided in clause (iii), the term 
                        ``qualified appraiser'' means an 
                        individual who--
                                  (I) has earned an appraisal 
                                designation from a recognized 
                                professional appraiser 
                                organization or has otherwise 
                                met minimum education and 
                                experience requirements set 
                                forth in regulations prescribed 
                                by the Secretary,
                                  (II) regularly performs 
                                appraisals for which the 
                                individual receives 
                                compensation, and
                                  (III) meets such other 
                                requirements as may be 
                                prescribed by the Secretary in 
                                regulations or other guidance.
                          (iii) Specific appraisals.--An 
                        individual shall not be treated as a 
                        qualified appraiser with respect to any 
                        specific appraisal unless--
                                  (I) the individual 
                                demonstrates verifiable 
                                education and experience in 
                                valuing the type of property 
                                subject to the appraisal, and
                                  (II) the individual has not 
                                been prohibited from practicing 
                                before the Internal Revenue 
                                Service by the Secretary under 
                                section 330(c) of title 31, 
                                United States Code, at any time 
                                during the 3-year period ending 
                                on the date of the appraisal.
                  (F) Aggregation of similar items of 
                property.--For purposes of determining 
                thresholds under this paragraph, property and 
                all similar items of property donated to 1 or 
                more donees shall be treated as 1 property.
                  (G) Special rule for pass-thru entities.--In 
                the case of a partnership or S corporation, 
                this paragraph shall be applied at the entity 
                level, except that the deduction shall be 
                denied at the partner or shareholder level.
                  (H) Regulations.--The Secretary may prescribe 
                such regulations as may be necessary or 
                appropriate to carry out the purposes of this 
                paragraph, including regulations that may 
                provide that some or all of the requirements of 
                this paragraph do not apply in appropriate 
                cases.
          (12) Contributions of used motor vehicles, boats, and 
        airplanes.--
                  (A) In general.--In the case of a 
                contribution of a qualified vehicle the claimed 
                value of which exceeds $500--
                          (i) paragraph (8) shall not apply and 
                        no deduction shall be allowed under 
                        subsection (a) for such contribution 
                        unless the taxpayer substantiates the 
                        contribution by a contemporaneous 
                        written acknowledgement of the 
                        contribution by the donee organization 
                        that meets the requirements of 
                        subparagraph (B) and includes the 
                        acknowledgement with the taxpayer's 
                        return of tax which includes the 
                        deduction, and
                          (ii) if the organization sells the 
                        vehicle without any significant 
                        intervening use or material improvement 
                        of such vehicle by the organization, 
                        the amount of the deduction allowed 
                        under subsection (a) shall not exceed 
                        the gross proceeds received from such 
                        sale.
                  (B) Content of acknowledgement.--An 
                acknowledgement meets the requirements of this 
                subparagraph if it includes the following 
                information:
                          (i) The name and taxpayer 
                        identification number of the donor.
                          (ii) The vehicle identification 
                        number or similar number.
                          (iii) In the case of a qualified 
                        vehicle to which subparagraph (A)(ii) 
                        applies--
                                  (I) a certification that the 
                                vehicle was sold in an arm's 
                                length transaction between 
                                unrelated parties,
                                  (II) the gross proceeds from 
                                the sale, and
                                  (III) a statement that the 
                                deductible amount may not 
                                exceed the amount of such gross 
                                proceeds.
                          (iv) In the case of a qualified 
                        vehicle to which subparagraph (A)(ii) 
                        does not apply--
                                  (I) a certification of the 
                                intended use or material 
                                improvement of the vehicle and 
                                the intended duration of such 
                                use, and
                                  (II) a certification that the 
                                vehicle would not be 
                                transferred in exchange for 
                                money, other property, or 
                                services before completion of 
                                such use or improvement.
                          (v) Whether the donee organization 
                        provided any goods or services in 
                        consideration, in whole or in part, for 
                        the qualified vehicle.
                          (vi) A description and good faith 
                        estimate of the value of any goods or 
                        services referred to in clause (v) or, 
                        if such goods or services consist 
                        solely of intangible religious benefits 
                        (as defined in paragraph (8)(B)), a 
                        statement to that effect.
                  (C) Contemporaneous.--For purposes of 
                subparagraph (A), an acknowledgement shall be 
                considered to be contemporaneous if the donee 
                organization provides it within 30 days of--
                          (i) the sale of the qualified 
                        vehicle, or
                          (ii) in the case of an 
                        acknowledgement including a 
                        certification described in subparagraph 
                        (B)(iv), the contribution of the 
                        qualified vehicle.
                  (D) Information to Secretary.--A donee 
                organization required to provide an 
                acknowledgement under this paragraph shall 
                provide to the Secretary the information 
                contained in the acknowledgement. Such 
                information shall be provided at such time and 
                in such manner as the Secretary may prescribe.
                  (E) Qualified vehicle.--For purposes of this 
                paragraph, the term ``qualified vehicle'' means 
                any--
                          (i) motor vehicle manufactured 
                        primarily for use on public streets, 
                        roads, and highways,
                          (ii) boat, or
                          (iii) airplane.
                Such term shall not include any property which 
                is described in section 1221(a)(1).
                  (F) Regulations or other guidance.--The 
                Secretary shall prescribe such regulations or 
                other guidance as may be necessary to carry out 
                the purposes of this paragraph. The Secretary 
                may prescribe regulations or other guidance 
                which exempts sales by the donee organization 
                which are in direct furtherance of such 
                organization's charitable purpose from the 
                requirements of subparagraphs (A)(ii) and 
                (B)(iv)(II).
          (13) Contributions of certain interests in buildings 
        located in registered historic districts.--
                  (A) In general.--No deduction shall be 
                allowed with respect to any contribution 
                described in subparagraph (B) unless the 
                taxpayer includes with the return for the 
                taxable year of the contribution a $500 filing 
                fee.
                  (B) Contribution described.--A contribution 
                is described in this subparagraph if such 
                contribution is a qualified conservation 
                contribution (as defined in subsection (h)) 
                which is a restriction with respect to the 
                exterior of a building described in subsection 
                (h)(4)(C)(ii) and for which a deduction is 
                claimed in excess of $10,000.
                  (C) Dedication of fee.--Any fee collected 
                under this paragraph shall be used for the 
                enforcement of the provisions of subsection 
                (h).
          (14) Reduction for amounts attributable to 
        rehabilitation credit.--In the case of any qualified 
        conservation contribution (as defined in subsection 
        (h)), the amount of the deduction allowed under this 
        section shall be reduced by an amount which bears the 
        same ratio to the fair market value of the contribution 
        as--
                  (A) the sum of the credits allowed to the 
                taxpayer under section 47 for the 5 preceding 
                taxable years with respect to any building 
                which is a part of such contribution, bears to
                  (B) the fair market value of the building on 
                the date of the contribution.
          (15) Special rule for taxidermy property.--
                  (A) Basis.--For purposes of this section and 
                notwithstanding section 1012, in the case of a 
                charitable contribution of taxidermy property 
                which is made by the person who prepared, 
                stuffed, or mounted the property or by any 
                person who paid or incurred the cost of such 
                preparation, stuffing, or mounting, only the 
                cost of the preparing, stuffing, or mounting 
                shall be included in the basis of such 
                property.
                  (B) Taxidermy property.--For purposes of this 
                section, the term ``taxidermy property'' means 
                any work of art which--
                          (i) is the reproduction or 
                        preservation of an animal, in whole or 
                        in part,
                          (ii) is prepared, stuffed, or mounted 
                        for purposes of recreating one or more 
                        characteristics of such animal, and
                          (iii) contains a part of the body of 
                        the dead animal.
          (16) Contributions of clothing and household items.--
                  (A) In general.--In the case of an 
                individual, partnership, or corporation, no 
                deduction shall be allowed under subsection (a) 
                for any contribution of clothing or a household 
                item unless such clothing or household item is 
                in good used condition or better.
                  (B) Items of minimal value.--Notwithstanding 
                subparagraph (A), the Secretary may by 
                regulation deny a deduction under subsection 
                (a) for any contribution of clothing or a 
                household item which has minimal monetary 
                value.
                  (C) Exception for certain property.--
                Subparagraphs (A) and (B) shall not apply to 
                any contribution of a single item of clothing 
                or a household item for which a deduction of 
                more than $500 is claimed if the taxpayer 
                includes with the taxpayer's return a qualified 
                appraisal with respect to the property.
                  (D) Household items.--For purposes of this 
                paragraph--
                          (i) In general.--The term ``household 
                        items'' includes furniture, 
                        furnishings, electronics, appliances, 
                        linens, and other similar items.
                          (ii) Excluded items.--Such term does 
                        not include--
                                  (I) food,
                                  (II) paintings, antiques, and 
                                other objects of art,
                                  (III) jewelry and gems, and
                                  (IV) collections.
                  (E) Special rule for pass-thru entities.--In 
                the case of a partnership or S corporation, 
                this paragraph shall be applied at the entity 
                level, except that the deduction shall be 
                denied at the partner or shareholder level.
          (17) Recordkeeping.--No deduction shall be allowed 
        under subsection (a) for any contribution of a cash, 
        check, or other monetary gift unless the donor 
        maintains as a record of such contribution a bank 
        record or a written communication from the donee 
        showing the name of the donee organization, the date of 
        the contribution, and the amount of the contribution.
          (18) Contributions to donor advised funds.--A 
        deduction otherwise allowed under subsection (a) for 
        any contribution to a donor advised fund (as defined in 
        section 4966(d)(2)) shall only be allowed if--
                  (A) the sponsoring organization (as defined 
                in section 4966(d)(1)) with respect to such 
                donor advised fund is not--
                          (i) described in paragraph (3), (4), 
                        or (5) of subsection (c), or
                          (ii) a type III supporting 
                        organization (as defined in section 
                        4943(f)(5)(A)) which is not a 
                        functionally integrated type III 
                        supporting organization (as defined in 
                        section 4943(f)(5)(B)), and
                  (B) the taxpayer obtains a contemporaneous 
                written acknowledgment (determined under rules 
                similar to the rules of paragraph (8)(C)) from 
                the sponsoring organization (as so defined) of 
                such donor advised fund that such organization 
                has exclusive legal control over the assets 
                contributed.
  (g) Amounts paid to maintain certain students as members of 
taxpayer's household.--
          (1) In general.--Subject to the limitations provided 
        by paragraph (2), amounts paid by the taxpayer to 
        maintain an individual (other than a dependent, as 
        defined in section 152 (determined without regard to 
        subsections (b)(1), (b)(2), and (d)(1)(B) thereof), or 
        a relative of the taxpayer) as a member of his 
        household during the period that such individual is--
                  (A) a member of the taxpayer's household 
                under a written agreement between the taxpayer 
                and an organization described in paragraph (2), 
                (3), or (4) of subsection (c) to implement a 
                program of the organization to provide 
                educational opportunities for pupils or 
                students in private homes, and
                  (B) a full-time pupil or student in the 
                twelfth or any lower grade at an educational 
                organization described in section 
                170(b)(1)(A)(ii) located in the United States,
        shall be treated as amounts paid for the use of the 
        organization.
          (2) Limitations.--
                  (A) Amount.--Paragraph (1) shall apply to 
                amounts paid within the taxable year only to 
                the extent that such amounts do not exceed $50 
                multiplied by the number of full calendar 
                months during the taxable year which fall 
                within the period described in paragraph (1). 
                For purposes of the preceding sentence, if 15 
                or more days of a calendar month fall within 
                such period such month shall be considered as a 
                full calendar month.
                  (B) Compensation or reimbursement.--Paragraph 
                (1) shall not apply to any amount paid by the 
                taxpayer within the taxable year if the 
                taxpayer receives any money or other property 
                as compensation or reimbursement for 
                maintaining the individual in his household 
                during the period described in paragraph (1).
          (3) Relative defined.--For purposes of paragraph (1), 
        the term ``relative of the taxpayer'' means an 
        individual who, with respect to the taxpayer, bears any 
        of the relationships described in subparagraphs (A) 
        through (G) of section 152(d)(2).
          (4) No other amount allowed as deduction.--No 
        deduction shall be allowed under subsection (a) for any 
        amount paid by a taxpayer to maintain an individual as 
        a member of his household under a program described in 
        paragraph (1)(A) except as provided in this subsection.
  (h) Qualified conservation contribution.--
          (1) In general.--For purposes of subsection 
        (f)(3)(B)(iii), the term ``qualified conservation 
        contribution'' means a contribution--
                  (A) of a qualified real property interest,
                  (B) to a qualified organization,
                  (C) exclusively for conservation purposes.
          (2) Qualified real property interest.--For purposes 
        of this subsection, the term ``qualified real property 
        interest'' means any of the following interests in real 
        property:
                  (A) the entire interest of the donor other 
                than a qualified mineral interest,
                  (B) a remainder interest, and
                  (C) a restriction (granted in perpetuity) on 
                the use which may be made of the real property.
          (3) Qualified organization.--For purposes of 
        paragraph (1), the term ``qualified organization'' 
        means an organization which--
                  (A) is described in clause (v) or (vi) of 
                subsection (b)(1)(A), or
                  (B) is described in section 501(c)(3) and--
                          (i) meets the requirements of section 
                        509(a)(2), or
                          (ii) meets the requirements of 
                        section 509(a)(3) and is controlled by 
                        an organization described in 
                        subparagraph (A) or in clause (i) of 
                        this subparagraph.
          (4) Conservation purpose defined.--
                  (A) In general.--For purposes of this 
                subsection, the term ``conservation purpose'' 
                means--
                          (i) the preservation of land areas 
                        for outdoor recreation by, or the 
                        education of, the general public,
                          (ii) the protection of a relatively 
                        natural habitat of fish, wildlife, or 
                        plants, or similar ecosystem,
                          (iii) the preservation of open space 
                        (including farmland and forest land) 
                        where such preservation is--
                                  (I) for the scenic enjoyment 
                                of the general public, or
                                  (II) pursuant to a clearly 
                                delineated Federal, State, or 
                                local governmental conservation 
                                policy,
                 and will yield a significant public benefit, 
                or
                          (iv) the preservation of an 
                        historically important land area or a 
                        certified historic structure.
                  (B) Special rules with respect to buildings 
                in registered historic districts.--In the case 
                of any contribution of a qualified real 
                property interest which is a restriction with 
                respect to the exterior of a building described 
                in subparagraph (C)(ii), such contribution 
                shall not be considered to be exclusively for 
                conservation purposes unless--
                          (i) such interest--
                                  (I) includes a restriction 
                                which preserves the entire 
                                exterior of the building 
                                (including the front, sides, 
                                rear, and height of the 
                                building), and
                                  (II) prohibits any change in 
                                the exterior of the building 
                                which is inconsistent with the 
                                historical character of such 
                                exterior,
                          (ii) the donor and donee enter into a 
                        written agreement certifying, under 
                        penalty of perjury, that the donee--
                                  (I) is a qualified 
                                organization (as defined in 
                                paragraph (3)) with a purpose 
                                of environmental protection, 
                                land conservation, open space 
                                preservation, or historic 
                                preservation, and
                                  (II) has the resources to 
                                manage and enforce the 
                                restriction and a commitment to 
                                do so, and
                          (iii) in the case of any contribution 
                        made in a taxable year beginning after 
                        the date of the enactment of this 
                        subparagraph, the taxpayer includes 
                        with the taxpayer's return for the 
                        taxable year of the contribution--
                                  (I) a qualified appraisal 
                                (within the meaning of 
                                subsection (f)(11)(E)) of the 
                                qualified property interest,
                                  (II) photographs of the 
                                entire exterior of the 
                                building, and
                                  (III) a description of all 
                                restrictions on the development 
                                of the building.
                  (C) Certified historic structure.--For 
                purposes of subparagraph (A)(iv), the term 
                ``certified historic structure'' means--
                          (i) any building, structure, or land 
                        area which is listed in the National 
                        Register, or
                          (ii) any building which is located in 
                        a registered historic district (as 
                        defined in section 47(c)(3)(B)) and is 
                        certified by the Secretary of the 
                        Interior to the Secretary as being of 
                        historic significance to the district.
        A building, structure, or land area satisfies the 
        preceding sentence if it satisfies such sentence either 
        at the time of the transfer or on the due date 
        (including extensions) for filing the transferor's 
        return under this chapter for the taxable year in which 
        the transfer is made.
          (5) Exclusively for conservation purposes.--For 
        purposes of this subsection--
                  (A) Conservation purpose must be protected.--
                A contribution shall not be treated as 
                exclusively for conservation purposes unless 
                the conservation purpose is protected in 
                perpetuity.
                  (B) No surface mining permitted.--
                          (i) In general.--Except as provided 
                        in clause (ii), in the case of a 
                        contribution of any interest where 
                        there is a retention of a qualified 
                        mineral interest, subparagraph (A) 
                        shall not be treated as met if at any 
                        time there may be extraction or removal 
                        of minerals by any surface mining 
                        method.
                          (ii) Special rule.--With respect to 
                        any contribution of property in which 
                        the ownership of the surface estate and 
                        mineral interests has been and remains 
                        separated, subparagraph (A) shall be 
                        treated as met if the probability of 
                        surface mining occurring on such 
                        property is so remote as to be 
                        negligible.
          (6) Qualified mineral interest.--For purposes of this 
        subsection, the term ``qualified mineral interest'' 
        means--
                  (A) subsurface oil, gas, or other minerals, 
                and
                  (B) the right to access to such minerals.
  (i) Standard mileage rate for use of passenger automobile.--
For purposes of computing the deduction under this section for 
use of a passenger automobile, the standard mileage rate shall 
be 14 cents per mile.
  (j) Denial of deduction for certain travel expenses.--No 
deduction shall be allowed under this section for traveling 
expenses (including amounts expended for meals and lodging) 
while away from home, whether paid directly or by 
reimbursement, unless there is no significant element of 
personal pleasure, recreation, or vacation in such travel.
  (l) Treatment of certain amounts paid to or for the benefit 
of institutions of higher education.--
          (1) In general.--No deduction shall be allowed under 
        this section for any amount described in paragraph (2).
          (2) Amount described.--For purposes of paragraph (1), 
        an amount is described in this paragraph if--
                  (A) the amount is paid by the taxpayer to or 
                for the benefit of an educational 
                organization--
                          (i) which is described in subsection 
                        (b)(1)(A)(ii), and
                          (ii) which is an institution of 
                        higher education (as defined in section 
                        3304(f)), and
                  (B) the taxpayer receives (directly or 
                indirectly) as a result of paying such amount 
                the right to purchase tickets for seating at an 
                athletic event in an athletic stadium of such 
                institution.
        If any portion of a payment is for the purchase of such 
        tickets, such portion and the remaining portion (if 
        any) of such payment shall be treated as separate 
        amounts for purposes of this subsection.
  (m) Certain donee income from intellectual property treated 
as an additional charitable contribution.--
          (1) Treatment as additional contribution.--In the 
        case of a taxpayer who makes a qualified intellectual 
        property contribution, the deduction allowed under 
        subsection (a) for each taxable year of the taxpayer 
        ending on or after the date of such contribution shall 
        be increased (subject to the limitations under 
        subsection (b)) by the applicable percentage of 
        qualified donee income with respect to such 
        contribution which is properly allocable to such year 
        under this subsection.
          (2) Reduction in additional deductions to extent of 
        initial deduction.--With respect to any qualified 
        intellectual property contribution, the deduction 
        allowed under subsection (a) shall be increased under 
        paragraph (1) only to the extent that the aggregate 
        amount of such increases with respect to such 
        contribution exceed the amount allowed as a deduction 
        under subsection (a) with respect to such contribution 
        determined without regard to this subsection.
          (3) Qualified donee income.--For purposes of this 
        subsection, the term ``qualified donee income'' means 
        any net income received by or accrued to the donee 
        which is properly allocable to the qualified 
        intellectual property.
          (4) Allocation of qualified donee income to taxable 
        years of donor.--For purposes of this subsection, 
        qualified donee income shall be treated as properly 
        allocable to a taxable year of the donor if such income 
        is received by or accrued to the donee for the taxable 
        year of the donee which ends within or with such 
        taxable year of the donor.
          (5) 10-year limitation.--Income shall not be treated 
        as properly allocable to qualified intellectual 
        property for purposes of this subsection if such income 
        is received by or accrued to the donee after the 10-
        year period beginning on the date of the contribution 
        of such property.
          (6) Benefit limited to life of intellectual 
        property.--Income shall not be treated as properly 
        allocable to qualified intellectual property for 
        purposes of this subsection if such income is received 
        by or accrued to the donee after the expiration of the 
        legal life of such property.
          (7) Applicable percentage.--For purposes of this 
        subsection, the term ``applicable percentage'' means 
        the percentage determined under the following table 
        which corresponds to a taxable year of the donor ending 
        on or after the date of the qualified intellectual 
        property contribution:
          (8) Qualified intellectual property contribution.--
        For purposes of this subsection, the term ``qualified 
        intellectual property contribution'' means any 
        charitable contribution of qualified intellectual 
        property--
                  (A) the amount of which taken into account 
                under this section is reduced by reason of 
                subsection (e)(1), and
                  (B) with respect to which the donor informs 
                the donee at the time of such contribution that 
                the donor intends to treat such contribution as 
                a qualified intellectual property contribution 
                for purposes of this subsection and section 
                6050L.
          (9) Qualified intellectual property.--For purposes of 
        this subsection, the term ``qualified intellectual 
        property'' means property described in subsection 
        (e)(1)(B)(iii) (other than property contributed to or 
        for the use of an organization described in subsection 
        (e)(1)(B)(ii)).
          (10) Other special rules.--
                  (A) Application of limitations on charitable 
                contributions.--Any increase under this 
                subsection of the deduction provided under 
                subsection (a) shall be treated for purposes of 
                subsection (b) as a deduction which is 
                attributable to a charitable contribution to 
                the donee to which such increase relates.
                  (B) Net income determined by donee.--The net 
                income taken into account under paragraph (3) 
                shall not exceed the amount of such income 
                reported under section 6050L(b)(1).
                  (C) Deduction limited to 12 taxable years.--
                Except as may be provided under subparagraph 
                (D)(i), this subsection shall not apply with 
                respect to any qualified intellectual property 
                contribution for any taxable year of the donor 
                after the 12th taxable year of the donor which 
                ends on or after the date of such contribution.
                  (D) Regulations.--The Secretary may issue 
                regulations or other guidance to carry out the 
                purposes of this subsection, including 
                regulations or guidance--
                          (i) modifying the application of this 
                        subsection in the case of a donor or 
                        donee with a short taxable year, and
                          (ii) providing for the determination 
                        of an amount to be treated as net 
                        income of the donee which is properly 
                        allocable to qualified intellectual 
                        property in the case of a donee who 
                        uses such property to further a purpose 
                        or function constituting the basis of 
                        the donee's exemption under section 501 
                        (or, in the case of a governmental 
                        unit, any purpose described in section 
                        170(c)) and does not possess a right to 
                        receive any payment from a third party 
                        with respect to such property.
  (n) Expenses paid by certain whaling captains in support of 
Native Alaskan subsistence whaling.--
          (1) In general.--In the case of an individual who is 
        recognized by the Alaska Eskimo Whaling Commission as a 
        whaling captain charged with the responsibility of 
        maintaining and carrying out sanctioned whaling 
        activities and who engages in such activities during 
        the taxable year, the amount described in paragraph (2) 
        (to the extent such amount does not exceed $10,000 for 
        the taxable year) shall be treated for purposes of this 
        section as a charitable contribution.
          (2) Amount described.--
                  (A) In general.--The amount described in this 
                paragraph is the aggregate of the reasonable 
                and necessary whaling expenses paid by the 
                taxpayer during the taxable year in carrying 
                out sanctioned whaling activities.
                  (B) Whaling expenses.--For purposes of 
                subparagraph (A), the term ``whaling expenses'' 
                includes expenses for--
                          (i) the acquisition and maintenance 
                        of whaling boats, weapons, and gear 
                        used in sanctioned whaling activities,
                          (ii) the supplying of food for the 
                        crew and other provisions for carrying 
                        out such activities, and
                          (iii) storage and distribution of the 
                        catch from such activities.
          (3) Sanctioned whaling activities.--For purposes of 
        this subsection, the term ``sanctioned whaling 
        activities'' means subsistence bowhead whale hunting 
        activities conducted pursuant to the management plan of 
        the Alaska Eskimo Whaling Commission.
          (4) Substantiation of expenses.--The Secretary shall 
        issue guidance requiring that the taxpayer substantiate 
        the whaling expenses for which a deduction is claimed 
        under this subsection, including by maintaining 
        appropriate written records with respect to the time, 
        place, date, amount, and nature of the expense, as well 
        as the taxpayer's eligibility for such deduction, and 
        that (to the extent provided by the Secretary) such 
        substantiation be provided as part of the taxpayer's 
        return of tax.
  (o) Special rules for fractional gifts.--
          (1) Denial of deduction in certain cases.--
                  (A) In general.--No deduction shall be 
                allowed for a contribution of an undivided 
                portion of a taxpayer's entire interest in 
                tangible personal property unless all interests 
                in the property are held immediately before 
                such contribution by--
                          (i) the taxpayer, or
                          (ii) the taxpayer and the donee.
                  (B) Exceptions.--The Secretary may, by 
                regulation, provide for exceptions to 
                subparagraph (A) in cases where all persons who 
                hold an interest in the property make 
                proportional contributions of an undivided 
                portion of the entire interest held by such 
                persons.
          (2) Valuation of subsequent gifts.--In the case of 
        any additional contribution, the fair market value of 
        such contribution shall be determined by using the 
        lesser of--
                  (A) the fair market value of the property at 
                the time of the initial fractional 
                contribution, or
                  (B) the fair market value of the property at 
                the time of the additional contribution.
          (3) Recapture of deduction in certain cases; addition 
        to tax.--
                  (A) Recapture.--The Secretary shall provide 
                for the recapture of the amount of any 
                deduction allowed under this section (plus 
                interest) with respect to any contribution of 
                an undivided portion of a taxpayer's entire 
                interest in tangible personal property--
                          (i) in any case in which the donor 
                        does not contribute all of the 
                        remaining interests in such property to 
                        the donee (or, if such donee is no 
                        longer in existence, to any person 
                        described in section 170(c)) on or 
                        before the earlier of--
                                  (I) the date that is 10 years 
                                after the date of the initial 
                                fractional contribution, or
                                  (II) the date of the death of 
                                the donor, and
                          (ii) in any case in which the donee 
                        has not, during the period beginning on 
                        the date of the initial fractional 
                        contribution and ending on the date 
                        described in clause (i)--
                                  (I) had substantial physical 
                                possession of the property, and
                                  (II) used the property in a 
                                use which is related to a 
                                purpose or function 
                                constituting the basis for the 
                                organizations' exemption under 
                                section 501.
                  (B) Addition to tax.--The tax imposed under 
                this chapter for any taxable year for which 
                there is a recapture under subparagraph (A) 
                shall be increased by 10 percent of the amount 
                so recaptured.
          (4) Definitions.--For purposes of this subsection--
                  (A) Additional contribution.--The term 
                ``additional contribution'' means any 
                charitable contribution by the taxpayer of any 
                interest in property with respect to which the 
                taxpayer has previously made an initial 
                fractional contribution.
                  (B) Initial fractional contribution.--The 
                term ``initial fractional contribution'' means, 
                with respect to any taxpayer, the first 
                charitable contribution of an undivided portion 
                of the taxpayer's entire interest in any 
                tangible personal property.
  (p) Other cross references.--
                  (1) For treatment of certain organizations 
                providing child care, see section 501(k).
                  (2) For charitable contributions of estates 
                and trusts, see section 642(c).
                  (3) For nondeductibility of contributions by 
                common trust funds, see section 584.
                  (4) For charitable contributions of partners, 
                see section 702.
                  (5) For charitable contributions of 
                nonresident aliens, see section 873.
                  (6) For treatment of gifts for benefit of or 
                use in connection with the Naval Academy as 
                gifts to or for use of the United States, see 
                section 8473 of title 10, United States Code.
                  (7) For treatment of gifts accepted by the 
                Secretary of State, the Director of the 
                International Communication Agency, or the 
                Director of the United States International 
                Development Cooperation Agency, as gifts to or 
                for the use of the United States, see section 
                25 of the State Department Basic Authorities 
                Act of 1956.
                  (8) For treatment of gifts of money accepted 
                by the Attorney General for credit to the 
                ``Commissary Funds Federal Prisons'' as gifts 
                to or for the use of the United States, see 
                section 4043 of title 18, United States Code.
                  (9) For charitable contributions to or for 
                the use of Indian tribal governments (or their 
                subdivisions), see section 7871.

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SEC. 179. ELECTION TO EXPENSE CERTAIN DEPRECIABLE BUSINESS ASSETS.

  (a) Treatment as expenses.--A taxpayer may elect to treat the 
cost of any section 179 property as an expense which is not 
chargeable to capital account. Any cost so treated shall be 
allowed as a deduction for the taxable year in which the 
section 179 property is placed in service.
  (b) Limitations.--
          (1) Dollar limitation.--The aggregate cost which may 
        be taken into account under subsection (a) for any 
        taxable year shall not exceed $1,000,000.
          (2) Reduction in limitation.--The limitation under 
        paragraph (1) for any taxable year shall be reduced 
        (but not below zero) by the amount by which the cost of 
        section 179 property placed in service during such 
        taxable year exceeds $2,500,000.
          (3) Limitation based on income from trade or 
        business.--
                  (A) In general.--The amount allowed as a 
                deduction under subsection (a) for any taxable 
                year (determined after the application of 
                paragraphs (1) and (2)) shall not exceed the 
                aggregate amount of taxable income of the 
                taxpayer for such taxable year which is derived 
                from the active conduct by the taxpayer of any 
                trade or business during such taxable year.
                  (B) Carryover of disallowed deduction.--The 
                amount allowable as a deduction under 
                subsection (a) for any taxable year shall be 
                increased by the lesser of--
                          (i) the aggregate amount disallowed 
                        under subparagraph (A) for all prior 
                        taxable years (to the extent not 
                        previously allowed as a deduction by 
                        reason of this subparagraph), or
                          (ii) the excess (if any) of--
                                  (I) the limitation of 
                                paragraphs (1) and (2) (or if 
                                lesser, the aggregate amount of 
                                taxable income referred to in 
                                subparagraph (A)), over
                                  (II) the amount allowable as 
                                a deduction under subsection 
                                (a) for such taxable year 
                                without regard to this 
                                subparagraph.
                  (C) Computation of taxable income.--For 
                purposes of this paragraph, taxable income 
                derived from the conduct of a trade or business 
                shall be computed without regard to the 
                deduction allowable under this section.
          (4) Married individuals filing separately.--In the 
        case of [a husband and wife filing] individuals married 
        to one another who file separate returns for the 
        taxable year--
                  (A) such individuals shall be treated as 1 
                taxpayer for purposes of paragraphs (1) and 
                (2), and
                  (B) unless such individuals elect otherwise, 
                50 percent of the cost which may be taken into 
                account under subsection (a) for such taxable 
                year (before application of paragraph (3)) 
                shall be allocated to each such individual.
          (5) Limitation on cost taken into account for certain 
        passenger vehicles.--
                  (A) In general.--The cost of any sport 
                utility vehicle for any taxable year which may 
                be taken into account under this section shall 
                not exceed $25,000.
                  (B) Sport utility vehicle.--For purposes of 
                subparagraph (A)--
                          (i) In general.--The term ``sport 
                        utility vehicle'' means any 4-wheeled 
                        vehicle--
                                  (I) which is primarily 
                                designed or which can be used 
                                to carry passengers over public 
                                streets, roads, or highways 
                                (except any vehicle operated 
                                exclusively on a rail or 
                                rails),
                                  (II) which is not subject to 
                                section 280F, and
                                  (III) which is rated at not 
                                more than 14,000 pounds gross 
                                vehicle weight.
                          (ii) Certain vehicles excluded.--Such 
                        term does not include any vehicle 
                        which--
                                  (I) is designed to have a 
                                seating capacity of more than 9 
                                persons behind the driver's 
                                seat,
                                  (II) is equipped with a cargo 
                                area of at least 6 feet in 
                                interior length which is an 
                                open area or is designed for 
                                use as an open area but is 
                                enclosed by a cap and is not 
                                readily accessible directly 
                                from the passenger compartment, 
                                or
                                  (III) has an integral 
                                enclosure, fully enclosing the 
                                driver compartment and load 
                                carrying device, does not have 
                                seating rearward of the 
                                driver's seat, and has no body 
                                section protruding more than 30 
                                inches ahead of the leading 
                                edge of the windshield.
          (6) Inflation adjustment.--
                  (A) In general.--In the case of any taxable 
                year beginning after 2018, the dollar amounts 
                in paragraphs (1), (2), and (5)(A) shall each 
                be increased by an amount equal to--
                          (i) such dollar amount, multiplied by
                          (ii) the cost-of-living adjustment 
                        determined under section 1(f)(3) for 
                        the calendar year in which the taxable 
                        year begins, determined by substituting 
                        ``calendar year 2017'' for ``calendar 
                        year 2016'' in subparagraph (A)(ii) 
                        thereof.
                  (B) Rounding.--The amount of any increase 
                under subparagraph (A) shall be rounded to the 
                nearest multiple of $10,000 ($100 in the case 
                of any increase in the amount under paragraph 
                (5)(A)).
  (c) Election.--
          (1) In general.--An election under this section for 
        any taxable year shall--
                  (A) specify the items of section 179 property 
                to which the election applies and the portion 
                of the cost of each of such items which is to 
                be taken into account under subsection (a), and
                  (B) be made on the taxpayer's return of the 
                tax imposed by this chapter for the taxable 
                year.
        Such election shall be made in such manner as the 
        Secretary may by regulations prescribe.
          (2) Election.--Any election made under this section, 
        and any specification contained in any such election, 
        may be revoked by the taxpayer with respect to any 
        property, and such revocation, once made, shall be 
        irrevocable.
  (d) Definitions and special rules.--
          (1) Section 179 property.--For purposes of this 
        section, the term ``section 179 property'' means 
        property--
                  (A) which is--
                          (i) tangible property (to which 
                        section 168 applies), or
                          (ii) computer software (as defined in 
                        section 197(e)(3)(B)) which is 
                        described in section 197(e)(3)(A)(i) 
                        and to which section 167 applies,
                  (B) which is--
                          (i) section 1245 property (as defined 
                        in section 1245(a)(3)), or
                          (ii) at the election of the taxpayer, 
                        qualified real property (as defined in 
                        subsection (e)), and
                  (C) which is acquired by purchase for use in 
                the active conduct of a trade or business.
        Such term shall not include any property described in 
        section 50(b) (other than paragraph (2) thereof).
          (2) Purchase defined.--For purposes of paragraph (1), 
        the term ``purchase'' means any acquisition of 
        property, but only if--
                  (A) the property is not acquired from a 
                person whose relationship to the person 
                acquiring it would result in the disallowance 
                of losses under section 267 or 707(b) (but, in 
                applying section 267(b) and (c) for purposes of 
                this section, paragraph (4) of section 267(c) 
                shall be treated as providing that the family 
                of an individual shall include only [his 
                spouse] the individual's spouse, ancestors, and 
                lineal descendants),
                  (B) the property is not acquired by one 
                component member of a controlled group from 
                another component member of the same controlled 
                group, and
                  (C) the basis of the property in the hands of 
                the person acquiring it is not determined--
                          (i) in whole or in part by reference 
                        to the adjusted basis of such property 
                        in the hands of the person from whom 
                        acquired, or
                          (ii) under section 1014(a) (relating 
                        to property acquired from a decedent).
          (3) Cost.--For purposes of this section, the cost of 
        property does not include so much of the basis of such 
        property as is determined by reference to the basis of 
        other property held at any time by the person acquiring 
        such property.
          (4) Section not to apply to estates and trusts.--This 
        section shall not apply to estates and trusts.
          (5) Section not to apply to certain noncorporate 
        lessors.--This section shall not apply to any section 
        179 property which is purchased by a person who is not 
        a corporation and with respect to which such person is 
        the lessor unless--
                  (A) the property subject to the lease has 
                been manufactured or produced by the lessor, or
                  (B) the term of the lease (taking into 
                account options to renew) is less than 50 
                percent of the class life of the property (as 
                defined in section 168(i)(1)), and for the 
                period consisting of the first 12 months after 
                the date on which the property is transferred 
                to the lessee the sum of the deductions with 
                respect to such property which are allowable to 
                the lessor solely by reason of section 162 
                (other than rents and reimbursed amounts with 
                respect to such property) exceeds 15 percent of 
                the rental income produced by such property.
          (6) Dollar limitation of controlled group.--For 
        purposes of subsection (b) of this section--
                  (A) all component members of a controlled 
                group shall be treated as one taxpayer, and
                  (B) the Secretary shall apportion the dollar 
                limitation contained in subsection (b)(1) among 
                the component members of such controlled group 
                in such manner as he shall by regulations 
                prescribe.
          (7) Controlled group defined.--For purposes of 
        paragraphs (2) and (6), the term ``controlled group'' 
        has the meaning assigned to it by section 1563(a), 
        except that, for such purposes, the phrase ``more than 
        50 percent'' shall be substituted for the phrase ``at 
        least 80 percent'' each place it appears in section 
        1563(a)(1).
          (8) Treatment of partnerships and S corporations.--In 
        the case of a partnership, the limitations of 
        subsection (b) shall apply with respect to the 
        partnership and with respect to each partner. A similar 
        rule shall apply in the case of an S corporation and 
        its shareholders.
          (9) Coordination with section 38.--No credit shall be 
        allowed under section 38 with respect to any amount for 
        which a deduction is allowed under subsection (a).
          (10) Recapture in certain cases.--The Secretary 
        shall, by regulations, provide for recapturing the 
        benefit under any deduction allowable under subsection 
        (a) with respect to any property which is not used 
        predominantly in a trade or business at any time.
  (e) Qualified real property.--For purposes of this section, 
the term ``qualified real property'' means--
          (1) any qualified improvement property described in 
        section 168(e)(6), and
          (2) any of the following improvements to 
        nonresidential real property placed in service after 
        the date such property was first placed in service:
                  (A) Roofs.
                  (B) Heating, ventilation, and air-
                conditioning property.
                  (C) Fire protection and alarm systems.
                  (D) Security systems.

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PART VII--ADDITIONAL ITEMIZED DEDUCTIONS FOR INDIVIDUALS

           *       *       *       *       *       *       *

SEC. 213. MEDICAL, DENTAL, ETC., EXPENSES.

  (a) Allowance of deduction.--There shall be allowed as a 
deduction the expenses paid during the taxable year, not 
compensated for by insurance or otherwise, for medical care of 
the taxpayer, [his spouse] the taxpayer's spouse, or a 
dependent (as defined in section 152, determined without regard 
to subsections (b)(1), (b)(2), and (d)(1)(B) thereof), to the 
extent that such expenses exceed 10 percent of adjusted gross 
income.
  (b) Limitation with respect to medicine and drugs.--An amount 
paid during the taxable year for medicine or a drug shall be 
taken into account under subsection (a) only if such medicine 
or drug is a prescribed drug or is insulin.
  (c) Special rule for decedents.--
          (1) Treatment of expenses paid after death.--For 
        purposes of subsection (a), expenses for the medical 
        care of the taxpayer which are paid out of [his estate] 
        the estate of the taxpayer during the 1-year period 
        beginning with the day after the date of [his death] 
        the death of the taxpayer shall be treated as paid by 
        the taxpayer at the time incurred.
          (2) Limitation.--Paragraph (1) shall not apply if the 
        amount paid is allowable under section 2053 as a 
        deduction in computing the taxable estate of the 
        decedent, but this paragraph shall not apply if (within 
        the time and in the manner and form prescribed by the 
        Secretary) there is filed--
                  (A) a statement that such amount has not been 
                allowed as a deduction under section 2053, and
                  (B) a waiver of the right to have such amount 
                allowed at any time as a deduction under 
                section 2053.
  (d) Definitions.--For purposes of this section--
          (1) The term ``medical care'' means amounts paid--
                  (A) for the diagnosis, cure, mitigation, 
                treatment, or prevention of disease, or for the 
                purpose of affecting any structure or function 
                of the body,
                  (B) for transportation primarily for and 
                essential to medical care referred to in 
                subparagraph (A),
                  (C) for qualified long-term care services (as 
                defined in section 7702B(c)), or
                  (D) for insurance (including amounts paid as 
                premiums under part B of title XVIII of the 
                Social Security Act, relating to supplementary 
                medical insurance for the aged) covering 
                medical care referred to in subparagraphs (A) 
                and (B) or for any qualified long-term care 
                insurance contract (as defined in section 
                7702B(b)).
        In the case of a qualified long-term care insurance 
        contract (as defined in section 7702B(b)), only 
        eligible long-term care premiums (as defined in 
        paragraph (10)) shall be taken into account under 
        subparagraph (D).
          (2) Amounts paid for certain lodging away from home 
        treated as paid for medical care.--Amounts paid for 
        lodging (not lavish or extravagant under the 
        circumstances) while away from home primarily for and 
        essential to medical care referred to in paragraph 
        (1)(A) shall be treated as amounts paid for medical 
        care if--
                  (A) the medical care referred to in paragraph 
                (1)(A) is provided by a physician in a licensed 
                hospital (or in a medical care facility which 
                is related to, or the equivalent of, a licensed 
                hospital), and
                  (B) there is no significant element of 
                personal pleasure, recreation, or vacation in 
                the travel away from home.
        The amount taken into account under the preceding 
        sentence shall not exceed $50 for each night for each 
        individual.
          (3) Prescribed drug.--The term ``prescribed drug'' 
        means a drug or biological which requires a 
        prescription of a physician for its use by an 
        individual.
          (4) Physician.--The term ``physician'' has the 
        meaning given to such term by section 1861(r) of the 
        Social Security Act (42 U.S.C. 1395x(r)).
          (5) Special rule in the case of child of divorced 
        parents, etc.--Any child to whom section 152(e) applies 
        shall be treated as a dependent of both parents for 
        purposes of this section.
          (6) In the case of an insurance contract under which 
        amounts are payable for other than medical care 
        referred to in subparagraphs (A), (B), and (C) of 
        paragraph (1)--
                  (A) no amount shall be treated as paid for 
                insurance to which paragraph (1)(D) applies 
                unless the charge for such insurance is either 
                separately stated in the contract, or furnished 
                to the policyholder by the insurance company in 
                a separate statement,
                  (B) the amount taken into account as the 
                amount paid for such insurance shall not exceed 
                such charge, and
                  (C) no amount shall be treated as paid for 
                such insurance if the amount specified in the 
                contract (or furnished to the policyholder by 
                the insurance company in a separate statement) 
                as the charge for such insurance is 
                unreasonably large in relation to the total 
                charges under the contract.
          (7) Subject to the limitations of paragraph (6), 
        premiums paid during the taxable year by a taxpayer 
        before [he] the taxpayer attains the age of 65 for 
        insurance covering medical care (within the meaning of 
        subparagraphs (A), (B), and (C) of paragraph (1)) for 
        the taxpayer, [his spouse] the taxpayer's spouse, or a 
        dependent after the taxpayer attains the age of 65 
        shall be treated as expenses paid during the taxable 
        year for insurance which constitutes medical care if 
        premiums for such insurance are payable (on a level 
        payment basis) under the contract for a period of 10 
        years or more or until the year in which the taxpayer 
        attains the age of 65 (but in no case for a period of 
        less than 5 years).
          (8) The determination of whether an individual is 
        married at any time during the taxable year shall be 
        made in accordance with the provisions of section 
        6013(d) (relating to determination of [status as 
        husband and wife] marital status).
          (9) Cosmetic surgery.--
                  (A) In general.--The term ``medical care'' 
                does not include cosmetic surgery or other 
                similar procedures, unless the surgery or 
                procedure is necessary to ameliorate a 
                deformity arising from, or directly related to, 
                a congenital abnormality, a personal injury 
                resulting from an accident or trauma, or 
                disfiguring disease.
                  (B) Cosmetic surgery defined.--For purposes 
                of this paragraph, the term ``cosmetic 
                surgery'' means any procedure which is directed 
                at improving the patient's appearance and does 
                not meaningfully promote the proper function of 
                the body or prevent or treat illness or 
                disease.
          (10) Eligible long-term care premiums.--
                  (A) In general.--For purposes of this 
                section, the term ``eligible long-term care 
                premiums'' means the amount paid during a 
                taxable year for any qualified long-term care 
                insurance contract (as defined in section 
                7702B(b)) covering an individual, to the extent 
                such amount does not exceed the limitation 
                determined under the following table:
                  (B) Indexing.--
                          (i) In general.--In the case of any 
                        taxable year beginning in a calendar 
                        year after 1997, each dollar amount 
                        contained in subparagraph (A) shall be 
                        increased by the medical care cost 
                        adjustment of such amount for such 
                        calendar year. If any increase 
                        determined under the preceding sentence 
                        is not a multiple of $10, such increase 
                        shall be rounded to the nearest 
                        multiple of $10.
                          (ii) Medical care cost adjustment.--
                        For purposes of clause (i), the medical 
                        care cost adjustment for any calendar 
                        year is the percentage (if any) by 
                        which--
                                  (I) the medical care 
                                component of the C-CPI-U (as 
                                defined in section 1(f)(6)) for 
                                August of the preceding 
                                calendar year, exceeds
                                  (II) such component of the 
                                CPI (as defined in section 
                                1(f)(4)) for August of 1996, 
                                multiplied by the amount 
                                determined under section 
                                1(f)(3)(B).
                 The Secretary shall, in consultation with the 
                Secretary of Health and Human Services, 
                prescribe an adjustment which the Secretary 
                determines is more appropriate for purposes of 
                this paragraph than the adjustment described in 
                the preceding sentence, and the adjustment so 
                prescribed shall apply in lieu of the 
                adjustment described in the preceding sentence.
          (11) Certain payments to relatives treated as not 
        paid for medical care.--An amount paid for a qualified 
        long-term care service (as defined in section 7702B(c)) 
        provided to an individual shall be treated as not paid 
        for medical care if such service is provided--
                  (A) by the spouse of the individual or by a 
                relative (directly or through a partnership, 
                corporation, or other entity) unless the 
                service is provided by a licensed professional 
                with respect to such service, or
                  (B) by a corporation or partnership which is 
                related (within the meaning of section 267(b) 
                or 707(b)) to the individual.
        For purposes of this paragraph, the term ``relative'' 
        means an individual bearing a relationship to the 
        individual which is described in any of subparagraphs 
        (A) through (G) of section 152(d)(2). This paragraph 
        shall not apply for purposes of section 105(b) with 
        respect to reimbursements through insurance.
  (e) Exclusion of amounts allowed for care of certain 
dependents.--Any expense allowed as a credit under section 21 
shall not be treated as an expense paid for medical care.
  (f) Special rules for 2013 through 2018.--In the case of any 
taxable year--
          (1) beginning after December 31, 2012, and ending 
        before January 1, 2017, in the case of a taxpayer if 
        such taxpayer or such taxpayer's spouse has attained 
        age 65 before the close of such taxable year, and
          (2) beginning after December 31, 2016, and ending 
        before January 1, 2019, in the case of any taxpayer,
subsection (a) shall be applied with respect to a taxpayer by 
substituting ``7.5 percent'' for ``10 percent''.

           *       *       *       *       *       *       *

SEC. 217. MOVING EXPENSES.

  (a) Deduction allowed.--There shall be allowed as a deduction 
moving expenses paid or incurred during the taxable year in 
connection with the commencement of work by the taxpayer as an 
employee or as a self-employed individual at a new principal 
place of work.
  (b) Definition of moving expenses.--
          (1) In general.--For purposes of this section, the 
        term ``moving expenses'' means only the reasonable 
        expenses--
                  (A) of moving household goods and personal 
                effects from the former residence to the new 
                residence, and
                  (B) of traveling (including lodging) from the 
                former residence to the new place of residence.
        Such term shall not include any expenses for meals.
          (2) Individuals other than taxpayer.--In the case of 
        any individual other than the taxpayer, expenses 
        referred to in paragraph (1) shall be taken into 
        account only if such individual has both the former 
        residence and the new residence as his principal place 
        of abode and is a member of the taxpayer's household.
  (c) Conditions for allowance.--No deduction shall be allowed 
under this section unless--
          (1) the taxpayer's new principal place of work--
                  (A) is at least 50 miles farther from his 
                former residence than was his former principal 
                place of work, or
                  (B) if he had no former principal place of 
                work, is at least 50 miles from his former 
                residence, and
          (2) either--
                  (A) during the 12-month period immediately 
                following his arrival in the general location 
                of his new principal place of work, the 
                taxpayer is a full-time employee, in such 
                general location, during at least 39 weeks, or
                  (B) during the 24-month period immediately 
                following his arrival in the general location 
                of his new principal place of work, the 
                taxpayer is a full-time employee or performs 
                services as a self-employed individual on a 
                full-time basis, in such general location, 
                during at least 78 weeks, of which not less 
                than 39 weeks are during the 12-month period 
                referred to in subparagraph (A).
        For purposes of paragraph (1), the distance between two 
        points shall be the shortest of the more commonly 
        traveled routes between such two points.
  (d) Rules for application of subsection (c)(2).--
          (1) The condition of subsection (c)(2) shall not 
        apply if the taxpayer is unable to satisfy such 
        condition by reason of--
                  (A) death or disability, or
                  (B) involuntary separation (other than for 
                willful misconduct) from the service of, or 
                transfer for the benefit of, an employer after 
                obtaining full-time employment in which the 
                taxpayer could reasonably have been expected to 
                satisfy such condition.
          (2) If a taxpayer has not satisfied the condition of 
        subsection (c)(2) before the time prescribed by law 
        (including extensions thereof) for filing the return 
        for the taxable year during which he paid or incurred 
        moving expenses which would otherwise be deductible 
        under this section, but may still satisfy such 
        condition, then such expenses may (at the election of 
        the taxpayer) be deducted for such taxable year 
        notwithstanding subsection (c)(2).
          (3) If--
                  (A) for any taxable year moving expenses have 
                been deducted in accordance with the rule 
                provided in paragraph (2), and
                  (B) the condition of subsection (c)(2) cannot 
                be satisfied at the close of a subsequent 
                taxable year,
        then an amount equal to the expenses which were so 
        deducted shall be included in gross income for the 
        first such subsequent taxable year.
  (f) Self-employed individual.--For purposes of this section, 
the term ``self-employed individual'' means an individual who 
performs personal services--
          (1) as the owner of the entire interest in an 
        unincorporated trade or business, or
          (2) as a partner in a partnership carrying on a trade 
        or business.
  (g) Rules for members of the Armed Forces of the United 
States.--In the case of a member of the Armed Forces of the 
United States on active duty who moves pursuant to a military 
order and incident to a permanent change of station--
          (1) the limitations under subsection (c) shall not 
        apply;
          (2) any moving and storage expenses which are 
        furnished in kind (or for which reimbursement or an 
        allowance is provided, but only to the extent of the 
        expenses paid or incurred) to such member[, his spouse, 
        or his dependents] or the spouse or dependents of such 
        member, shall not be includible in gross income, and no 
        reporting with respect to such expenses shall be 
        required by the Secretary of Defense or the Secretary 
        of Transportation, as the case may be; and
          (3) if moving and storage expenses are furnished in 
        kind (or if reimbursement or an allowance for such 
        expenses is provided) to such member's spouse and [his 
        dependents] dependents with regard to moving to a 
        location other than the one to which such member moves 
        (or from a location other than the one from which such 
        member moves), this section shall apply with respect to 
        the moving expenses of [his spouse] the member's spouse 
        and dependents--
                  (A) as if [his spouse] the member's spouse 
                commenced work as an employee at a new 
                principal place of work at such location; and
                  (B) without regard to the limitations under 
                subsection (c).
  (h) Special rules for foreign moves.--
          (1) Allowance of certain storage fees.--In the case 
        of a foreign move, for purposes of this section, the 
        moving expenses described in subsection (b)(1)(A) 
        include the reasonable expenses--
                  (A) of moving household goods and personal 
                effects to and from storage, and
                  (B) of storing such goods and effects for 
                part or all of the period during which the new 
                place of work continues to be the taxpayer's 
                principal place of work.
          (2) Foreign move.--For purposes of this subsection, 
        the term ``foreign move'' means the commencement of 
        work by the taxpayer at a new principal place of work 
        located outside the United States.
          (3) United States defined.--For purposes of this 
        subsection and subsection (i), the term ``United 
        States'' includes the possessions of the United States.
  (i) Allowance of deductions in case of retirees or decedents 
who were working abroad.--
          (1) In general.--In the case of any qualified retiree 
        moving expenses or qualified survivor moving expenses--
                  (A) this section (other than subsection (h)) 
                shall be applied with respect to such expenses 
                as if they were incurred in connection with the 
                commencement of work by the taxpayer as an 
                employee at a new principal place of work 
                located within the United States, and
                  (B) the limitations of subsection (c)(2) 
                shall not apply.
          (2) Qualified retiree moving expenses.--For purposes 
        of paragraph (1), the term ``qualified retiree moving 
        expenses'' means any moving expenses--
                  (A) which are incurred by an individual whose 
                former principal place of work and former 
                residence were outside the United States, and
                  (B) which are incurred for a move to a new 
                residence in the United States in connection 
                with the bona fide retirement of the 
                individual.
          (3) Qualified survivor moving expenses.--For purposes 
        of paragraph (1), the term ``qualified survivor moving 
        expenses'' means moving expenses--
                  (A) which are paid or incurred by the spouse 
                or any dependent of any decedent who (as of the 
                time of [his] death) had a principal place of 
                work outside the United States, and
                  (B) which are incurred for a move which 
                begins within 6 months after the death of such 
                decedent and which is to a residence in the 
                United States from a former residence outside 
                the United States which (as of the time of the 
                decedent's death) was the residence of such 
                decedent and the individual paying or incurring 
                the expense.
  (j) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary to carry out the purposes of 
this section.
  (k) Suspension of deduction for taxable years 2018 through 
2025.--Except in the case of an individual to whom subsection 
(g) applies, this section shall not apply to any taxable year 
beginning after December 31, 2017, and before January 1, 2026.

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SEC. 219. RETIREMENT SAVINGS.

  (a) Allowance of deduction.--In the case of an individual, 
there shall be allowed as a deduction an amount equal to the 
qualified retirement contributions of the individual for the 
taxable year.
  (b) Maximum amount of deduction.--
          (1) In general.--The amount allowable as a deduction 
        under subsection (a) to any individual for any taxable 
        year shall not exceed the lesser of--
                  (A) the deductible amount, or
                  (B) an amount equal to the compensation 
                includible in the individual's gross income for 
                such taxable year.
          (2) Special rule for employer contributions under 
        simplified employee pensions.--This section shall not 
        apply with respect to an employer contribution to a 
        simplified employee pension.
          (3) Plans under section 501(c)(18).--Notwithstanding 
        paragraph (1), the amount allowable as a deduction 
        under subsection (a) with respect to any contributions 
        on behalf of an employee to a plan described in section 
        501(c)(18) shall not exceed the lesser of--
                  (A) $7,000, or
                  (B) an amount equal to 25 percent of the 
                compensation (as defined in section 415(c)(3)) 
                includible in the individual's gross income for 
                such taxable year.
          (4) Special rule for simple retirement accounts.--
        This section shall not apply with respect to any amount 
        contributed to a simple retirement account established 
        under section 408(p).
          (5) Deductible amount.--For purposes of paragraph 
        (1)(A)--
                  (A) In general.--The deductible amount is 
                $5,000.
                  (B) Catch-up contributions for individuals 50 
                or older.--
                          (i) In general.--In the case of an 
                        individual who has attained the age of 
                        50 before the close of the taxable 
                        year, the deductible amount for such 
                        taxable year shall be increased by the 
                        applicable amount.
                          (ii) Applicable amount.--For purposes 
                        of clause (i), the applicable amount is 
                        $1,000.
                  (C) Cost-of-living adjustment.--
                          (i) In general.--In the case of any 
                        taxable year beginning in a calendar 
                        year after 2008, the $5,000 amount 
                        under subparagraph (A) shall be 
                        increased by an amount equal to--
                                  (I) such dollar amount, 
                                multiplied by
                                  (II) the cost-of-living 
                                adjustment determined under 
                                section 1(f)(3) for the 
                                calendar year in which the 
                                taxable year begins, determined 
                                by substituting ``calendar year 
                                2007'' for ``calendar year 
                                2016'' in subparagraph (A)(ii) 
                                thereof.
                          (ii) Rounding rules.--If any amount 
                        after adjustment under clause (i) is 
                        not a multiple of $500, such amount 
                        shall be rounded to the next lower 
                        multiple of $500.
  (c) Kay Bailey Hutchison Spousal IRA.--
          (1) In general.--In the case of an individual to whom 
        this paragraph applies for the taxable year, the 
        limitation of paragraph (1) of subsection (b) shall be 
        equal to the lesser of--
                  (A) the dollar amount in effect under 
                subsection (b)(1)(A) for the taxable year, or
                  (B) the sum of--
                          (i) the compensation includible in 
                        such individual's gross income for the 
                        taxable year, plus
                          (ii) the compensation includible in 
                        the gross income of such individual's 
                        spouse for the taxable year reduced 
                        by--
                                  (I) the amount allowed as a 
                                deduction under subsection (a) 
                                to such spouse for such taxable 
                                year,
                                  (II) the amount of any 
                                designated nondeductible 
                                contribution (as defined in 
                                section 408(o)) on behalf of 
                                such spouse for such taxable 
                                year, and
                                  (III) the amount of any 
                                contribution on behalf of such 
                                spouse to a Roth IRA under 
                                section 408A for such taxable 
                                year.
          (2) Individuals to whom paragraph (1) applies.--
        Paragraph (1) shall apply to any individual if--
                  (A) such individual files a joint return for 
                the taxable year, and
                  (B) the amount of compensation (if any) 
                includible in such individual's gross income 
                for the taxable year is less than the 
                compensation includible in the gross income of 
                such individual's spouse for the taxable year.
  (d) Other limitations and restrictions.--
          (1) Beneficiary must be under age 701/2.--No 
        deduction shall be allowed under this section with 
        respect to any qualified retirement contribution for 
        the benefit of an individual if such individual has 
        attained age 701/2 before the close of such 
        individual's taxable year for which the contribution 
        was made.
          (2) Recontributed amounts.--No deduction shall be 
        allowed under this section with respect to a rollover 
        contribution described in section 402(c), 403(a)(4), 
        403(b)(8), 408(d)(3), or 457(e)(16).
          (3) Amounts contributed under endowment contract.--In 
        the case of an endowment contract described in section 
        408(b), no deduction shall be allowed under this 
        section for that portion of the amounts paid under the 
        contract for the taxable year which is properly 
        allocable, under regulations prescribed by the 
        Secretary, to the cost of life insurance.
          (4) Denial of deduction for amount contributed to 
        inherited annuities or accounts.--No deduction shall be 
        allowed under this section with respect to any amount 
        paid to an inherited individual retirement account or 
        individual retirement annuity (within the meaning of 
        section 408(d)(3)(C)(ii)).
  (e) Qualified retirement contribution.--For purposes of this 
section, the term ``qualified retirement contribution'' means--
          (1) any amount paid in cash for the taxable year by 
        or on behalf of an individual to an individual 
        retirement plan for such individual's benefit, and
          (2) any amount contributed on behalf of any 
        individual to a plan described in section 501(c)(18).
  (f) Other definitions and special rules.--
          (1) Compensation.--For purposes of this section, the 
        term ``compensation'' includes earned income (as 
        defined in section 401(c)(2)). The term 
        ``compensation'' does not include any amount received 
        as a pension or annuity and does not include any amount 
        received as deferred compensation. For purposes of this 
        paragraph, section 401(c)(2) shall be applied as if the 
        term trade or business for purposes of section 1402 
        included service described in subsection (c)(6). The 
        term ``compensation'' includes any differential wage 
        payment (as defined in section 3401(h)(2)).
          (2) Married individuals.--The maximum deduction under 
        subsection (b) shall be computed separately for each 
        individual, and this section shall be applied without 
        regard to any community property laws.
          (3) Time when contributions deemed made.--For 
        purposes of this section, a taxpayer shall be deemed to 
        have made a contribution to an individual retirement 
        plan on the last day of the preceding taxable year if 
        the contribution is made on account of such taxable 
        year and is made not later than the time prescribed by 
        law for filing the return for such taxable year (not 
        including extensions thereof).
          (5) Employer payments.--For purposes of this title, 
        any amount paid by an employer to an individual 
        retirement plan shall be treated as payment of 
        compensation to the employee (other than a self-
        employed individual who is an employee within the 
        meaning of section 401(c)(1)) includible in his gross 
        income in the taxable year for which the amount was 
        contributed, whether or not a deduction for such 
        payment is allowable under this section to the 
        employee.
          (6) Excess contributions treated as contribution made 
        during subsequent year for which there is an unused 
        limitation.--
                  (A) In general.--If for the taxable year the 
                maximum amount allowable as a deduction under 
                this section for contributions to an individual 
                retirement plan exceeds the amount contributed, 
                then the taxpayer shall be treated as having 
                made an additional contribution for the taxable 
                year in an amount equal to the lesser of--
                          (i) the amount of such excess, or
                          (ii) the amount of the excess 
                        contributions for such taxable year 
                        (determined under section 4973(b)(2) 
                        without regard to subparagraph (C) 
                        thereof).
                  (B) Amount contributed.--For purposes of this 
                paragraph, the amount contributed--
                          (i) shall be determined without 
                        regard to this paragraph, and
                          (ii) shall not include any rollover 
                        contribution.
                  (C) Special rule where excess deduction was 
                allowed for closed year.--Proper reduction 
                shall be made in the amount allowable as a 
                deduction by reason of this paragraph for any 
                amount allowed as a deduction under this 
                section for a prior taxable year for which the 
                period for assessing deficiency has expired if 
                the amount so allowed exceeds the amount which 
                should have been allowed for such prior taxable 
                year.
          (7) Special rule for compensation earned by members 
        of the Armed Forces for service in a combat zone..--For 
        purposes of subsections (b)(1)(B) and (c), the amount 
        of compensation includible in an individual's gross 
        income shall be determined without regard to section 
        112.
          (8) Election not to deduct contributions.--For 
        election not to deduct contributions to individual 
        retirement plans, see section 408(o)(2)(B)(ii).
  (g) Limitation on deduction for active participants in 
certain pension plans.--
          (1) In general.--If (for any part of any plan year 
        ending with or within a taxable year) an individual or 
        the individual's spouse is an active participant, each 
        of the dollar limitations contained in subsections 
        (b)(1)(A) and (c)(1)(A) for such taxable year shall be 
        reduced (but not below zero) by the amount determined 
        under paragraph (2).
          (2) Amount of reduction.--
                  (A) In general.--The amount determined under 
                this paragraph with respect to any dollar 
                limitation shall be the amount which bears the 
                same ratio to such limitation as--
                          (i) the excess of--
                                  (I) the taxpayer's adjusted 
                                gross income for such taxable 
                                year, over
                                  (II) the applicable dollar 
                                amount, bears to
                          (ii) $10,000 ($20,000 in the case of 
                        a joint return).
                  (B) No reduction below $200 until complete 
                phase-out.--No dollar limitation shall be 
                reduced below $200 under paragraph (1) unless 
                (without regard to this subparagraph) such 
                limitation is reduced to zero.
                  (C) Rounding.--Any amount determined under 
                this paragraph which is not a multiple of $10 
                shall be rounded to the next lowest $10.
          (3) Adjusted gross income; applicable dollar 
        amount.--For purposes of this subsection--
                  (A) Adjusted gross income.--Adjusted gross 
                income of any taxpayer shall be determined--
                          (i) after application of sections 86 
                        and 469, and
                          (ii) without regard to sections 135, 
                        137, 221, 222, and 911 or the deduction 
                        allowable under this section.
                  (B) Applicable dollar amount.--The term 
                ``applicable dollar amount'' means the 
                following:
                          (i) In the case of a taxpayer filing 
                        a joint return, $80,000.
                          (ii) In the case of any other 
                        taxpayer (other than a married 
                        individual filing a separate return), 
                        $50,000.
                          (iii) In the case of a married 
                        individual filing a separate return, 
                        zero.
          (4) Special rule for married individuals filing 
        separately and living apart.-- [A husband and wife] 
        Married individuals who--
                  (A) file separate returns for any taxable 
                year, and
                  (B) live apart at all times during such 
                taxable year,
        shall not be treated as married individuals for 
        purposes of this subsection.
          (5) Active participant.--For purposes of this 
        subsection, the term ``active participant'' means, with 
        respect to any plan year, an individual--
                  (A) who is an active participant in--
                          (i) a plan described in section 
                        401(a) which includes a trust exempt 
                        from tax under section 501(a),
                          (ii) an annuity plan described in 
                        section 403(a),
                          (iii) a plan established for its 
                        employees by the United States, by a 
                        State or political subdivision thereof, 
                        or by an agency or instrumentality of 
                        any of the foregoing,
                          (iv) an annuity contract described in 
                        section 403(b),
                          (v) a simplified employee pension 
                        (within the meaning of section 408(k)), 
                        or
                          (vi) any simple retirement account 
                        (within the meaning of section 408(p)), 
                        or
                  (B) who makes deductible contributions to a 
                trust described in section 501(c)(18).
        The determination of whether an individual is an active 
        participant shall be made without regard to whether or 
        not such individual's rights under a plan, trust, or 
        contract are nonforfeitable. An eligible deferred 
        compensation plan (within the meaning of section 
        457(b)) shall not be treated as a plan described in 
        subparagraph (A)(iii).
          (6) Certain individuals not treated as active 
        participants.--For purposes of this subsection, any 
        individual described in any of the following 
        subparagraphs shall not be treated as an active 
        participant for any taxable year solely because of any 
        participation so described:
                  (A) Members of reserve components.--
                Participation in a plan described in 
                subparagraph (A)(iii) of paragraph (5) by 
                reason of service as a member of a reserve 
                component of the Armed Forces (as defined in 
                section 10101 of title 10), unless such 
                individual has served in excess of 90 days on 
                active duty (other than active duty for 
                training) during the year.
                  (B) Volunteer firefighters.--A volunteer 
                firefighter--
                          (i) who is a participant in a plan 
                        described in subparagraph (A)(iii) of 
                        paragraph (5) based on his activity as 
                        a volunteer firefighter, and
                          (ii) whose accrued benefit as of the 
                        beginning of the taxable year is not 
                        more than an annual benefit of $1,800 
                        (when expressed as a single life 
                        annuity commencing at age 65).
          (7) Special rule for spouses who are not active 
        participants.--If this subsection applies to an 
        individual for any taxable year solely because their 
        spouse is an active participant, then, in applying this 
        subsection to the individual (but not their spouse)--
                  (A) the applicable dollar amount under 
                paragraph (3)(B)(i) shall be $150,000; and
                  (B) the amount applicable under paragraph 
                (2)(A)(ii) shall be $10,000.
          (8) Inflation adjustment.--In the case of any taxable 
        year beginning in a calendar year after 2006, each of 
        the dollar amounts in paragraphs (3)(B)(i), (3)(B)(ii), 
        and (7)(A) shall be be increased by an amount equal 
        to--
                  (A) such dollar amount, multiplied by
                  (B) the cost-of-living adjustment determined 
                under section 1(f)(3) for the calendar year in 
                which the taxable year begins, determined by 
                substituting ``calendar year 2005'' for 
                ``calendar year 2016'' in subparagraph (A)(ii) 
                thereof.
        Any increase determined under the preceding sentence 
        shall be rounded to the nearest multiple of $1,000.

           *       *       *       *       *       *       *

PART IX--ITEMS NOT DEDUCTIBLE

           *       *       *       *       *       *       *

SEC. 267. LOSSES, EXPENSES, AND INTEREST WITH RESPECT TO TRANSACTIONS 
                    BETWEEN RELATED TAXPAYERS.

  (a) In general.--
          (1) Deduction for losses disallowed.--No deduction 
        shall be allowed in respect of any loss from the sale 
        or exchange of property, directly or indirectly, 
        between persons specified in any of the paragraphs of 
        subsection (b). The preceding sentence shall not apply 
        to any loss of the distributing corporation (or the 
        distributee) in the case of a distribution in complete 
        liquidation.
          (2) Matching of deduction and payee income item in 
        the case of expenses and interest.--If--
                  (A) by reason of the method of accounting of 
                the person to whom the payment is to be made, 
                the amount thereof is not (unless paid) 
                includible in the gross income of such person, 
                and
                  (B) at the close of the taxable year of the 
                taxpayer for which (but for this paragraph) the 
                amount would be deductible under this chapter, 
                both the taxpayer and the person to whom the 
                payment is to be made are persons specified in 
                any of the paragraphs of subsection (b),
        then any deduction allowable under this chapter in 
        respect of such amount shall be allowable as of the day 
        as of which such amount is includible in the gross 
        income of the person to whom the payment is made (or, 
        if later, as of the day on which it would be so 
        allowable but for this paragraph). For purposes of this 
        paragraph, in the case of a personal service 
        corporation (within the meaning of section 441(i)(2)), 
        such corporation and any employee-owner (within the 
        meaning of section 269A(b)(2), as modified by section 
        441(i)(2)) shall be treated as persons specified in 
        subsection (b).
          (3) Payments to foreign persons.--
                  (A) In general.--The Secretary shall by 
                regulations apply the matching principle of 
                paragraph (2) in cases in which the person to 
                whom the payment is to be made is not a United 
                States person.
                  (B) Special rule for certain foreign 
                entities.--
                          (i) In general.--Notwithstanding 
                        subparagraph (A), in the case of any 
                        item payable to a controlled foreign 
                        corporation (as defined in section 957) 
                        or a passive foreign investment company 
                        (as defined in section 1297), a 
                        deduction shall be allowable to the 
                        payor with respect to such amount for 
                        any taxable year before the taxable 
                        year in which paid only to the extent 
                        that an amount attributable to such 
                        item is includible (determined without 
                        regard to properly allocable deductions 
                        and qualified deficits under section 
                        952(c)(1)(B)) during such prior taxable 
                        year in the gross income of a United 
                        States person who owns (within the 
                        meaning of section 958(a)) stock in 
                        such corporation.
                          (ii) Secretarial authority.--The 
                        Secretary may by regulation exempt 
                        transactions from the application of 
                        clause (i), including any transaction 
                        which is entered into by a payor in the 
                        ordinary course of a trade or business 
                        in which the payor is predominantly 
                        engaged and in which the payment of the 
                        accrued amounts occurs within 81/2 
                        months after accrual or within such 
                        other period as the Secretary may 
                        prescribe.
  (b) Relationships.--The persons referred to in subsection (a) 
are:
          (1) Members of a family, as defined in subsection 
        (c)(4);
          (2) An individual and a corporation more than 50 
        percent in value of the outstanding stock of which is 
        owned, directly or indirectly, by or for such 
        individual;
          (3) Two corporations which are members of the same 
        controlled group (as defined in subsection (f));
          (4) A grantor and a fiduciary of any trust;
          (5) A fiduciary of a trust and a fiduciary of another 
        trust, if the same person is a grantor of both trusts;
          (6) A fiduciary of a trust and a beneficiary of such 
        trust;
          (7) A fiduciary of a trust and a beneficiary of 
        another trust, if the same person is a grantor of both 
        trusts;
          (8) A fiduciary of a trust and a corporation more 
        than 50 percent in value of the outstanding stock of 
        which is owned, directly or indirectly, by or for the 
        trust or by or for a person who is a grantor of the 
        trust;
          (9) A person and an organization to which section 501 
        (relating to certain educational and charitable 
        organizations which are exempt from tax) applies and 
        which is controlled directly or indirectly by such 
        person or (if such person is an individual) by members 
        of the family of such individual;
          (10) A corporation and a partnership if the same 
        persons own--
                  (A) more than 50 percent in value of the 
                outstanding stock of the corporation, and
                  (B) more than 50 percent of the capital 
                interest, or the profits interest, in the 
                partnership;
          (11) An S corporation and another S corporation if 
        the same persons own more than 50 percent in value of 
        the outstanding stock of each corporation;
          (12) An S corporation and a C corporation, if the 
        same persons own more than 50 percent in value of the 
        outstanding stock of each corporation; or
          (13) Except in the case of a sale or exchange in 
        satisfaction of a pecuniary bequest, an executor of an 
        estate and a beneficiary of such estate.
  (c) Constructive ownership of stock.--For purposes of 
determining, in applying subsection (b), the ownership of 
stock--
          (1) Stock owned, directly or indirectly, by or for a 
        corporation, partnership, estate, or trust shall be 
        considered as being owned proportionately by or for its 
        shareholders, partners, or beneficiaries;
          (2) An individual shall be considered as owning the 
        stock owned, directly or indirectly, by or for [his] 
        the individual's family;
          (3) An individual owning (otherwise than by the 
        application of paragraph (2)) any stock in a 
        corporation shall be considered as owning the stock 
        owned, directly or indirectly, by or for [his] the 
        individual's partner;
          (4) The family of an individual shall include only 
        [his] the individual's brothers and sisters (whether by 
        the whole or half blood), spouse, ancestors, and lineal 
        descendants; and
          (5) Stock constructively owned by a person by reason 
        of the application of paragraph (1) shall, for the 
        purpose of applying paragraph (1), (2), or (3), be 
        treated as actually owned by such person, but stock 
        constructively owned by an individual by reason of the 
        application of paragraph (2) or (3) shall not be 
        treated as owned by him for the purpose of again 
        applying either of such paragraphs in order to make 
        another the constructive owner of such stock.
  (d) Amount of gain where loss previously disallowed.--
          (1) In general.--If--
                  (A) in the case of a sale or exchange of 
                property to the taxpayer a loss sustained by 
                the transferor is not allowable to the 
                transferor as a deduction by reason of 
                subsection (a)(1), and
                  (B) the taxpayer sells or otherwise disposes 
                of such property (or of other property the 
                basis of which in the taxpayer's hands is 
                determined directly or indirectly by reference 
                to such property) at a gain,
        then such gain shall be recognized only to the extent 
        that it exceeds so much of such loss as is properly 
        allocable to the property sold or otherwise disposed of 
        by the taxpayer.
          (2) Exception for wash sales.--Paragraph (1) shall 
        not apply if the loss sustained by the transferor is 
        not allowable to the transferor as a deduction by 
        reason of section 1091 (relating to wash sales).
          (3) Exception for transfers from tax indifferent 
        parties.--Paragraph (1) shall not apply to the extent 
        any loss sustained by the transferor (if allowed) would 
        not be taken into account in determining a tax imposed 
        under section 1 or 11 or a tax computed as provided by 
        either of such sections.
  (e) Special rules for pass-thru entities.--
          (1) In general.--In the case of any amount paid or 
        incurred by, to, or on behalf of, a pass-thru entity, 
        for purposes of applying subsection (a)(2)--
                  (A) such entity,
                  (B) in the case of--
                          (i) a partnership, any person who 
                        owns (directly or indirectly) any 
                        capital interest or profits interest of 
                        such partnership, or
                          (ii) an S corporation, any person who 
                        owns (directly or indirectly) any of 
                        the stock of such corporation,
                  (C) any person who owns (directly or 
                indirectly) any capital interest or profits 
                interest of a partnership in which such entity 
                owns (directly or indirectly) any capital 
                interest or profits interest, and
                  (D) any person related (within the meaning of 
                subsection (b) of this section or section 
                707(b)(1)) to a person described in 
                subparagraph (B) or (C),
        shall be treated as persons specified in a paragraph of 
        subsection (b). Subparagraph (C) shall apply to a 
        transaction only if such transaction is related either 
        to the operations of the partnership described in such 
        subparagraph or to an interest in such partnership.
          (2) Pass-thru entity.--For purposes of this section, 
        the term ``pass-thru entity'' means--
                  (A) a partnership, and
                  (B) an S corporation.
          (3) Constructive ownership in the case of 
        partnerships.--For purposes of determining ownership of 
        a capital interest or profits interest of a 
        partnership, the principles of subsection (c) shall 
        apply, except that--
                  (A) paragraph (3) of subsection (c) shall not 
                apply, and
                  (B) interests owned (directly or indirectly) 
                by or for a C corporation shall be considered 
                as owned by or for any shareholder only if such 
                shareholder owns (directly or indirectly) 5 
                percent or more in value of the stock of such 
                corporation.
          (4) Subsection (a)(2) not to apply to certain 
        guaranteed payments of partnerships.--In the case of 
        any amount paid or incurred by a partnership, 
        subsection (a)(2) shall not apply to the extent that 
        section 707(c) applies to such amount.
          (5) Exception for certain expenses and interest of 
        partnerships owning low-income housing.--
                  (A) In general.--This subsection shall not 
                apply with respect to qualified expenses and 
                interest paid or incurred by a partnership 
                owning low-income housing to--
                          (i) any qualified 5-percent or less 
                        partner of such partnership, or
                          (ii) any person related (within the 
                        meaning of subsection (b) of this 
                        section or section 707(b)(1)) to any 
                        qualified 5-percent or less partner of 
                        such partnership.
                  (B) Qualified 5-percent or less partner.--For 
                purposes of this paragraph, the term 
                ``qualified 5-percent or less partner'' means 
                any partner who has (directly or indirectly) an 
                interest of 5 percent or less in the aggregate 
                capital and profits interests of the 
                partnership but only if--
                          (i) such partner owned the low-income 
                        housing at all times during the 2-year 
                        period ending on the date such housing 
                        was transferred to the partnership, or
                          (ii) such partnership acquired the 
                        low-income housing pursuant to a 
                        purchase, assignment, or other transfer 
                        from the Department of Housing and 
                        Urban Development or any State or local 
                        housing authority.
                For purposes of the preceding sentence, a 
                partner shall be treated as holding any 
                interest in the partnership which is held 
                (directly or indirectly) by any person related 
                (within the meaning of subsection (b) of this 
                section or section 707(b)(1)) to such partner.
                  (C) Qualified expenses and interest.--For 
                purpose of this paragraph, the term ``qualified 
                expenses and interest'' means any expense or 
                interest incurred by the partnership with 
                respect to low-income housing held by the 
                partnership but--
                          (i) only if the amount of such 
                        expense or interest (as the case may 
                        be) is unconditionally required to be 
                        paid by the partnership not later than 
                        10 years after the date such amount was 
                        incurred, and
                          (ii) in the case of such interest, 
                        only if such interest is incurred at an 
                        annual rate not in excess of 12 
                        percent.
                  (D) Low-income housing.--For purposes of this 
                paragraph, the term ``low-income housing'' 
                means--
                          (i) any interest in property 
                        described in clause (i), (ii), (iii), 
                        or (iv) of section 1250(a)(1)(B), and
                          (ii) any interest in a partnership 
                        owning such property.
          (6) Cross reference.--For additional rules relating 
        to partnerships, see section 707(b).
  (f) Controlled group defined; special rules applicable to 
controlled groups.--
          (1) Controlled group defined.--For purposes of this 
        section, the term ``controlled group'' has the meaning 
        given to such term by section 1563(a), except that--
                  (A) ``more than 50 percent'' shall be 
                substituted for ``at least 80 percent'' each 
                place it appears in section 1563(a), and
                  (B) the determination shall be made without 
                regard to subsections (a)(4) and (e)(3)(C) of 
                section 1563.
          (2) Deferral (rather than denial) of loss from sale 
        or exchange between members.--In the case of any loss 
        from the sale or exchange of property which is between 
        members of the same controlled group and to which 
        subsection (a)(1) applies (determined without regard to 
        this paragraph but with regard to paragraph (3))--
                  (A) subsections (a)(1) and (d) shall not 
                apply to such loss, but
                  (B) such loss shall be deferred until the 
                property is transferred outside such controlled 
                group and there would be recognition of loss 
                under consolidated return principles or until 
                such other time as may be prescribed in 
                regulations.
          (3) Loss deferral rules not to apply in certain 
        cases.--
                  (A) Transfer to DISC.--For purposes of 
                applying subsection (a)(1), the term 
                ``controlled group'' shall not include a DISC.
                  (B) Certain sales of inventory.--Except to 
                the extent provided in regulations prescribed 
                by the Secretary, subsection (a)(1) shall not 
                apply to the sale or exchange of property 
                between members of the same controlled group 
                (or persons described in subsection (b)(10)) 
                if--
                          (i) such property in the hands of the 
                        transferor is property described in 
                        section 1221(a)(1),
                          (ii) such sale or exchange is in the 
                        ordinary course of the transferor's 
                        trade or business,
                          (iii) such property in the hands of 
                        the transferee is property described in 
                        section 1221(a)(1), and
                          (iv) the transferee or the transferor 
                        is a foreign corporation.
                  (C) Certain foreign currency losses.--To the 
                extent provided in regulations, subsection 
                (a)(1) shall not apply to any loss sustained by 
                a member of a controlled group on the repayment 
                of a loan made to another member of such group 
                if such loan is payable in a foreign currency 
                or is denominated in such a currency and such 
                loss is attributable to a reduction in value of 
                such foreign currency.
                  (D) Redemptions by fund-of-funds regulated 
                investment companies.--Except to the extent 
                provided in regulations prescribed by the 
                Secretary, subsection (a)(1) shall not apply to 
                any distribution in redemption of stock of a 
                regulated investment company if--
                          (i) such company issues only stock 
                        which is redeemable upon the demand of 
                        the stockholder, and
                          (ii) such redemption is upon the 
                        demand of another regulated investment 
                        company.
          (4) Determination of relationship resulting in 
        disallowance of loss, for purposes of other 
        provisions.--For purposes of any other section of this 
        title which refers to a relationship which would result 
        in a disallowance of losses under this section, 
        deferral under paragraph (2) shall be treated as 
        disallowance.
  (g) Coordination with section 1041.--Subsection (a)(1) shall 
not apply to any transfer described in section 1041(a) 
(relating to transfers of property between spouses or incident 
to divorce).

           *       *       *       *       *       *       *

SEC. 274. DISALLOWANCE OF CERTAIN ENTERTAINMENT, ETC., EXPENSES.

  (a) Entertainment, amusement, recreation, or qualified 
transportation fringes.--
          (1) In general.--No deduction otherwise allowable 
        under this chapter shall be allowed for any item--
                  (A) Activity.--With respect to an activity 
                which is of a type generally considered to 
                constitute entertainment, amusement, or 
                recreation, or
                  (B) Facility.--With respect to a facility 
                used in connection with an activity referred to 
                in subparagraph (A).
          (2) Special rules.--For purposes of applying 
        paragraph (1)--
                  (A) Dues or fees to any social, athletic, or 
                sporting club or organization shall be treated 
                as items with respect to facilities.
                  (B) An activity described in section 212 
                shall be treated as a trade or business.
          (3) Denial of deduction for club dues.--
        Notwithstanding the preceding provisions of this 
        subsection, no deduction shall be allowed under this 
        chapter for amounts paid or incurred for membership in 
        any club organized for business, pleasure, recreation, 
        or other social purpose.
          (4) Qualified transportation fringes.--No deduction 
        shall be allowed under this chapter for the expense of 
        any qualified transportation fringe (as defined in 
        section 132(f)) provided to an employee of the 
        taxpayer.
  (b) Gifts.--
          (1) Limitation.--No deduction shall be allowed under 
        section 162 or section 212 for any expense for gifts 
        made directly or indirectly to any individual to the 
        extent that such expense, when added to prior expenses 
        of the taxpayer for gifts made to such individual 
        during the same taxable year, exceeds $25. For purposes 
        of this section, the term ``gift'' means any item 
        excludable from gross income of the recipient under 
        section 102 which is not excludable from his gross 
        income under any other provision of this chapter, but 
        such term does not include--
                  (A) an item having a cost to the taxpayer not 
                in excess of $4.00 on which the name of the 
                taxpayer is clearly and permanently imprinted 
                and which is one of a number of identical items 
                distributed generally by the taxpayer, or
                  (B) a sign, display rack, or other 
                promotional material to be used on the business 
                premises of the recipient.
          (2) Special rules.--
                  (A) In the case of a gift by a partnership, 
                the limitation contained in paragraph (1) shall 
                apply to the partnership as well as to each 
                member thereof.
                  (B) For purposes of paragraph (1), a [husband 
                and wife] married couple shall be treated as 
                one taxpayer.
  (c) Certain foreign travel.--
          (1) In general.--In the case of any individual who 
        travels outside the United States away from home in 
        pursuit of a trade or business or in pursuit of an 
        activity described in section 212, no deduction shall 
        be allowed under section 162 or section 212 for that 
        portion of the expenses of such travel otherwise 
        allowable under such section which, under regulations 
        prescribed by the Secretary, is not allocable to such 
        trade or business or to such activity.
          (2) Exception.--Paragraph (1) shall not apply to the 
        expenses of any travel outside the United States away 
        from home if--
                  (A) such travel does not exceed one week, or
                  (B) the portion of the time of travel outside 
                the United States away from home which is not 
                attributable to the pursuit of the taxpayer's 
                trade or business or an activity described in 
                section 212 is less than 25 percent of the 
                total time on such travel.
          (3) Domestic travel excluded.--For purposes of this 
        subsection, travel outside the United States does not 
        include any travel from one point in the United States 
        to another point in the United States.
  (d) Substantiation required.--No deduction or credit shall be 
allowed--
          (1) under section 162 or 212 for any traveling 
        expense (including meals and lodging while away from 
        home),
          (2) for any expense for gifts, or
          (3) with respect to any listed property (as defined 
        in section 280F(d)(4)),
unless the taxpayer substantiates by adequate records or by 
sufficient evidence corroborating the taxpayer's own statement 
(A) the amount of such expense or other item, (B) the time and 
place of the travel or the date and description of the gift, 
(C) the business purpose of the expense or other item, and (D) 
the business relationship to the taxpayer of the person 
receiving the benefit. The Secretary may by regulations provide 
that some or all of the requirements of the preceding sentence 
shall not apply in the case of an expense which does not exceed 
an amount prescribed pursuant to such regulations. This 
subsection shall not apply to any qualified nonpersonal use 
vehicle (as defined in subsection (i)).
  (e) Specific exceptions to application of subsection (a).--
Subsection (a) shall not apply to--
          (1) Food and beverages for employees.--Expenses for 
        food and beverages (and facilities used in connection 
        therewith) furnished on the business premises of the 
        taxpayer primarily for his employees.
          (2) Expenses treated as compensation.--
                  (A) In general.--Except as provided in 
                subparagraph (B), expenses for goods, services, 
                and facilities, to the extent that the expenses 
                are treated by the taxpayer, with respect to 
                the recipient of the entertainment, amusement, 
                or recreation, as compensation to an employee 
                on the taxpayer's return of tax under this 
                chapter and as wages to such employee for 
                purposes of chapter 24 (relating to withholding 
                of income tax at source on wages).
                  (B) Specified individuals.--
                          (i) In general.--In the case of a 
                        recipient who is a specified 
                        individual, subparagraph (A) and 
                        paragraph (9) shall each be applied by 
                        substituting ``to the extent that the 
                        expenses do not exceed the amount of 
                        the expenses which'' for ``to the 
                        extent that the expenses''.
                          (ii) Specified individual.--For 
                        purposes of clause (i), the term 
                        ``specified individual'' means any 
                        individual who--
                                  (I) is subject to the 
                                requirements of section 16(a) 
                                of the Securities Exchange Act 
                                of 1934 with respect to the 
                                taxpayer or a related party to 
                                the taxpayer, or
                                  (II) would be subject to such 
                                requirements if the taxpayer 
                                (or such related party) were an 
                                issuer of equity securities 
                                referred to in such section.
                 For purposes of this clause, a person is a 
                related party with respect to another person if 
                such person bears a relationship to such other 
                person described in section 267(b) or 707(b).
          (3) Reimbursed expenses.--Expenses paid or incurred 
        by the taxpayer, in connection with the performance by 
        him of services for another person (whether or not such 
        other person is his employer), under a reimbursement or 
        other expense allowance arrangement with such other 
        person, but this paragraph shall apply--
                  (A) where the services are performed for an 
                employer, only if the employer has not treated 
                such expenses in the manner provided in 
                paragraph (2), or
                  (B) where the services are performed for a 
                person other than an employer, only if the 
                taxpayer accounts (to the extent provided by 
                subsection (d)) to such person.
          (4) Recreational, etc., expenses for employees.--
        Expenses for recreational, social, or similar 
        activities (including facilities therefor) primarily 
        for the benefit of employees (other than employees who 
        are highly compensated employees (within the meaning of 
        section 414(q))). For purposes of this paragraph, an 
        individual owning less than a 10-percent interest in 
        the taxpayer's trade or business shall not be 
        considered a shareholder or other owner, and for such 
        purposes an individual shall be treated as owning any 
        interest owned by a member of his family (within the 
        meaning of section 267(c)(4)). This paragraph shall not 
        apply for purposes of subsection (a)(3).
          (5) Employees, stockholder, etc., business 
        meetings.--Expenses incurred by a taxpayer which are 
        directly related to business meetings of his employees, 
        stockholders, agents, or directors.
          (6) Meetings of business leagues, etc..--Expenses 
        directly related and necessary to attendance at a 
        business meeting or convention of any organization 
        described in section 501(c)(6) (relating to business 
        leagues, chambers of commerce, real estate boards, and 
        boards of trade) and exempt from taxation under section 
        501(a).
          (7) Items available to public.--Expenses for goods, 
        services, and facilities made available by the taxpayer 
        to the general public.
          (8) Entertainment sold to customers.--Expenses for 
        goods or services (including the use of facilities) 
        which are sold by the taxpayer in a bona fide 
        transaction for an adequate and full consideration in 
        money or money's worth.
          (9) Expenses includible in income of persons who are 
        not employees.--Expenses paid or incurred by the 
        taxpayer for goods, services, and facilities to the 
        extent that the expenses are includible in the gross 
        income of a recipient of the entertainment, amusement, 
        or recreation who is not an employee of the taxpayer as 
        compensation for services rendered or as a prize or 
        award under section 74. The preceding sentence shall 
        not apply to any amount paid or incurred by the 
        taxpayer if such amount is required to be included (or 
        would be so required except that the amount is less 
        than $600) in any information return filed by such 
        taxpayer under part III of subchapter A of chapter 61 
        and is not so included.
For purposes of this subsection, any item referred to in 
subsection (a) shall be treated as an expense.
  (f) Interest, taxes, casualty losses, etc..--This section 
shall not apply to any deduction allowable to the taxpayer 
without regard to its connection with his trade or business (or 
with his income-producing activity). In the case of a taxpayer 
which is not an individual, the preceding sentence shall be 
applied as if it were an individual.
  (g) Treatment of entertainment, etc., type facility.--For 
purposes of this chapter, if deductions are disallowed under 
subsection (a) with respect to any portion of a facility, such 
portion shall be treated as an asset which is used for 
personal, living, and family purposes (and not as an asset used 
in the trade or business).
  (h) Attendance at conventions, etc..--
          (1) In general.--In the case of any individual who 
        attends a convention, seminar, or similar meeting which 
        is held outside the North American area, no deduction 
        shall be allowed under section 162 for expenses 
        allocable to such meeting unless the taxpayer 
        establishes that the meeting is directly related to the 
        active conduct of his trade or business and that, after 
        taking into account in the manner provided by 
        regulations prescribed by the Secretary--
                  (A) the purpose of such meeting and the 
                activities taking place at such meeting,
                  (B) the purposes and activities of the 
                sponsoring organizations or groups,
                  (C) the residences of the active members of 
                the sponsoring organization and the places at 
                which other meetings of the sponsoring 
                organization or groups have been held or will 
                be held, and
                  (D) such other relevant factors as the 
                taxpayer may present,
        it is as reasonable for the meeting to be held outside 
        the North American area as within the North American 
        area.
          (2) Conventions on cruise ships.--In the case of any 
        individual who attends a convention, seminar, or other 
        meeting which is held on any cruise ship, no deduction 
        shall be allowed under section 162 for expenses 
        allocable to such meeting, unless the taxpayer meets 
        the requirements of paragraph (5) and establishes that 
        the meeting is directly related to the active conduct 
        of his trade or business and that--
                  (A) the cruise ship is a vessel registered in 
                the United States; and
                  (B) all ports of call of such cruise ship are 
                located in the United States or in possessions 
                of the United States.
        With respect to cruises beginning in any calendar year, 
        not more than $2,000 of the expenses attributable to an 
        individual attending one or more meetings may be taken 
        into account under section 162 by reason of the 
        preceding sentence.
          (3) Definitions.--For purposes of this subsection--
                  (A) North American area.--The term ``North 
                American area'' means the United States, its 
                possessions, and the Trust Territory of the 
                Pacific Islands, and Canada and Mexico.
                  (B) Cruise ship.--The term ``cruise ship'' 
                means any vessel sailing within or without the 
                territorial waters of the United States.
          (4) Subsection to apply to employer as well as to 
        traveler.--
                  (A) Except as provided in subparagraph (B), 
                this subsection shall apply to deductions 
                otherwise allowable under section 162 to any 
                person, whether or not such person is the 
                individual attending the convention, seminar, 
                or similar meeting.
                  (B) This subsection shall not deny a 
                deduction to any person other than the 
                individual attending the convention, seminar, 
                or similar meeting with respect to any amount 
                paid by such person to or on behalf of such 
                individual if includible in the gross income of 
                such individual. The preceding sentence shall 
                not apply if the amount is required to be 
                included in any information return filed by 
                such person under part III of subchapter A of 
                chapter 61 and is not so included.
          (5) Reporting requirements.--No deduction shall be 
        allowed under section 162 for expenses allocable to 
        attendance at a convention, seminar, or similar meeting 
        on any cruise ship unless the taxpayer claiming the 
        deduction attaches to the return of tax on which the 
        deduction is claimed--
                  (A) a written statement signed by the 
                individual attending the meeting which 
                includes--
                          (i) information with respect to the 
                        total days of the trip, excluding the 
                        days of transportation to and from the 
                        cruise ship port, and the number of 
                        hours of each day of the trip which 
                        such individual devoted to scheduled 
                        business activities,
                          (ii) a program of the scheduled 
                        business activities of the meeting, and
                          (iii) such other information as may 
                        be required in regulations prescribed 
                        by the Secretary; and
                  (B) a written statement signed by an officer 
                of the organization or group sponsoring the 
                meeting which includes--
                          (i) a schedule of the business 
                        activities of each day of the meeting,
                          (ii) the number of hours which the 
                        individual attending the meeting 
                        attended such scheduled business 
                        activities, and
                          (iii) such other information as may 
                        be required in regulations prescribed 
                        by the Secretary.
          (6) Treatment of conventions in certain Caribbean 
        countries.--
                  (A) In general.--For purposes of this 
                subsection, the term ``North American area'' 
                includes, with respect to any convention, 
                seminar, or similar meeting, any beneficiary 
                country if (as of the time such meeting 
                begins)--
                          (i) there is in effect a bilateral or 
                        multilateral agreement described in 
                        subparagraph (C) between such country 
                        and the United States providing for the 
                        exchange of information between the 
                        United States and such country, and
                          (ii) there is not in effect a finding 
                        by the Secretary that the tax laws of 
                        such country discriminate against 
                        conventions held in the United States.
                  (B) Beneficiary country.--For purposes of 
                this paragraph, the term ``beneficiary 
                country'' has the meaning given to such term by 
                section 212(a)(1)(A) of the Caribbean Basin 
                Economic Recovery Act; except that such term 
                shall include Bermuda.
                  (C) Authority to conclude exchange of 
                information agreements.--
                          (i) In general.--The Secretary is 
                        authorized to negotiate and conclude an 
                        agreement for the exchange of 
                        information with any beneficiary 
                        country. Except as provided in clause 
                        (ii), an exchange of information 
                        agreement shall provide for the 
                        exchange of such information (not 
                        limited to information concerning 
                        nationals or residents of the United 
                        States or the beneficiary country) as 
                        may be necessary or appropriate to 
                        carry out and enforce the tax laws of 
                        the United States and the beneficiary 
                        country (whether criminal or civil 
                        proceedings), including information 
                        which may otherwise be subject to 
                        nondisclosure provisions of the local 
                        law of the beneficiary country such as 
                        provisions respecting bank secrecy and 
                        bearer shares. The exchange of 
                        information agreement shall be 
                        terminable by either country on 
                        reasonable notice and shall provide 
                        that information received by either 
                        country will be disclosed only to 
                        persons or authorities (including 
                        courts and administrative bodies) 
                        involved in the administration or 
                        oversight of, or in the determination 
                        of appeals in respect of, taxes of the 
                        United States or the beneficiary 
                        country and will be used by such 
                        persons or authorities only for such 
                        purposes.
                          (ii) Nondisclosure of qualified 
                        confidential information sought for 
                        civil tax purposes.--An exchange of 
                        information agreement need not provide 
                        for the exchange of qualified 
                        confidential information which is 
                        sought only for civil tax purposes if--
                                  (I) the Secretary of the 
                                Treasury, after making all 
                                reasonable efforts to negotiate 
                                an agreement which includes the 
                                exchange of such information, 
                                determines that such an 
                                agreement cannot be negotiated 
                                but that the agreement which 
                                was negotiated will 
                                significantly assist in the 
                                administration and enforcement 
                                of the tax laws of the United 
                                States, and
                                  (II) the President determines 
                                that the agreement as 
                                negotiated is in the national 
                                security interest of the United 
                                States.
                          (iii) Qualified confidential 
                        information defined.--For purposes of 
                        this subparagraph, the term ``qualified 
                        confidential information'' means 
                        information which is subject to the 
                        nondisclosure provisions of any local 
                        law of the beneficiary country 
                        regarding bank secrecy or ownership of 
                        bearer shares.
                          (iv) Civil tax purposes.--For 
                        purposes of this subparagraph, the 
                        determination of whether information is 
                        sought only for civil tax purposes 
                        shall be made by the requesting party.
                  (D) Coordination with other provisions.--Any 
                exchange of information agreement negotiated 
                under subparagraph (C) shall be treated as an 
                income tax convention for purposes of section 
                6103(k)(4). The Secretary may exercise his 
                authority under subchapter A of chapter 78 to 
                carry out any obligation of the United States 
                under an agreement referred to in subparagraph 
                (C).
                  (E) Determinations published in the Federal 
                Register.--The following shall be published in 
                the Federal Register--
                          (i) any determination by the 
                        President under subparagraph (C)(ii) 
                        (including the reasons for such 
                        determination),
                          (ii) any determination by the 
                        Secretary under subparagraph (C)(ii) 
                        (including the reasons for such 
                        determination), and
                          (iii) any finding by the Secretary 
                        under subparagraph (A)(ii) (and any 
                        termination thereof).
          (7) Seminars, etc. for section 212 purposes.--No 
        deduction shall be allowed under section 212 for 
        expenses allocable to a convention, seminar, or similar 
        meeting.
  (i) Qualified nonpersonal use vehicle.--For purposes of 
subsection (d), the term ``qualified nonpersonal use vehicle'' 
means any vehicle which, by reason of its nature, is not likely 
to be used more than a de minimis amount for personal purposes.
  (j) Employee achievement awards.--
          (1) General rule.--No deduction shall be allowed 
        under section 162 or section 212 for the cost of an 
        employee achievement award except to the extent that 
        such cost does not exceed the deduction limitations of 
        paragraph (2).
          (2) Deduction limitations.--The deduction for the 
        cost of an employee achievement award made by an 
        employer to an employee--
                  (A) which is not a qualified plan award, when 
                added to the cost to the employer for all other 
                employee achievement awards made to such 
                employee during the taxable year which are not 
                qualified plan awards, shall not exceed $400, 
                and
                  (B) which is a qualified plan award, when 
                added to the cost to the employer for all other 
                employee achievement awards made to such 
                employee during the taxable year (including 
                employee achievement awards which are not 
                qualified plan awards), shall not exceed 
                $1,600.
          (3) Definitions.--For purposes of this subsection--
                  (A) Employee achievement award.--
                          (i) In general.--The term ``employee 
                        achievement award'' means an item of 
                        tangible personal property which is--
                                  (I) transferred by an 
                                employer to an employee for 
                                length of service achievement 
                                or safety achievement,
                                  (II) awarded as part of a 
                                meaningful presentation, and
                                  (III) awarded under 
                                conditions and circumstances 
                                that do not create a 
                                significant likelihood of the 
                                payment of disguised 
                                compensation.
                          (ii) Tangible personal property.--For 
                        purposes of clause (i), the term 
                        ``tangible personal property'' shall 
                        not include--
                                  (I) cash, cash equivalents, 
                                gift cards, gift coupons, or 
                                gift certificates (other than 
                                arrangements conferring only 
                                the right to select and receive 
                                tangible personal property from 
                                a limited array of such items 
                                pre-selected or pre-approved by 
                                the employer), or
                                  (II) vacations, meals, 
                                lodging, tickets to theater or 
                                sporting events, stocks, bonds, 
                                other securities, and other 
                                similar items.
                  (B) Qualified plan award.--
                          (i) In general.--The term ``qualified 
                        plan award'' means an employee 
                        achievement award awarded as part of an 
                        established written plan or program of 
                        the taxpayer which does not 
                        discriminate in favor of highly 
                        compensated employees (within the 
                        meaning of section 414(q)) as to 
                        eligibility or benefits.
                          (ii) Limitation.--An employee 
                        achievement award shall not be treated 
                        as a qualified plan award for any 
                        taxable year if the average cost of all 
                        employee achievement awards which are 
                        provided by the employer during the 
                        year, and which would be qualified plan 
                        awards but for this subparagraph, 
                        exceeds $400. For purposes of the 
                        preceding sentence, average cost shall 
                        be determined by including the entire 
                        cost of qualified plan awards, without 
                        taking into account employee 
                        achievement awards of nominal value.
          (4) Special rules.--For purposes of this subsection--
                  (A) Partnerships.--In the case of an employee 
                achievement award made by a partnership, the 
                deduction limitations contained in paragraph 
                (2) shall apply to the partnership as well as 
                to each member thereof.
                  (B) Length of service awards.--An item shall 
                not be treated as having been provided for 
                length of service achievement if the item is 
                received during the recipient's 1st 5 years of 
                employment or if the recipient received a 
                length of service achievement award (other than 
                an award excludable under section 132(e)(1)) 
                during that year or any of the prior 4 years.
                  (C) Safety achievement awards.--An item 
                provided by an employer to an employee shall 
                not be treated as having been provided for 
                safety achievement if--
                          (i) during the taxable year, employee 
                        achievement awards (other than awards 
                        excludable under section 132(e)(1)) for 
                        safety achievement have previously been 
                        awarded by the employer to more than 10 
                        percent of the employees of the 
                        employer (excluding employees described 
                        in clause (ii)), or
                          (ii) such item is awarded to a 
                        manager, administrator, clerical 
                        employee, or other professional 
                        employee.
  (k) Business meals.--
          (1) In general.--No deduction shall be allowed under 
        this chapter for the expense of any food or beverages 
        unless--
                  (A) such expense is not lavish or extravagant 
                under the circumstances, and
                  (B) the taxpayer (or an employee of the 
                taxpayer) is present at the furnishing of such 
                food or beverages.
          (2) Exceptions.--Paragraph (1) shall not apply to--
                  (A) any expense described in paragraph (2), 
                (3), (4), (7), (8), or (9) of subsection (e), 
                and
                  (B) any other expense to the extent provided 
                in regulations.
  (l) Transportation and commuting benefits.--
          (1) In general.--No deduction shall be allowed under 
        this chapter for any expense incurred for providing any 
        transportation, or any payment or reimbursement, to an 
        employee of the taxpayer in connection with travel 
        between the employee's residence and place of 
        employment, except as necessary for ensuring the safety 
        of the employee.
          (2) Exception.--In the case of any qualified bicycle 
        commuting reimbursement (as described in section 
        132(f)(5)(F)), this subsection shall not apply for any 
        amounts paid or incurred after December 31, 2017, and 
        before January 1, 2026.
  (m) Additional limitations on travel expenses.--
          (1) Luxury water transportation.--
                  (A) In general.--No deduction shall be 
                allowed under this chapter for expenses 
                incurred for transportation by water to the 
                extent such expenses exceed twice the aggregate 
                per diem amounts for days of such 
                transportation. For purposes of the preceding 
                sentence, the term ``per diem amounts'' means 
                the highest amount generally allowable with 
                respect to a day to employees of the executive 
                branch of the Federal Government for per diem 
                while away from home but serving in the United 
                States.
                  (B) Exceptions.--Subparagraph (A) shall not 
                apply to--
                          (i) any expense allocable to a 
                        convention, seminar, or other meeting 
                        which is held on any cruise ship, and
                          (ii) any expense described in 
                        paragraph (2), (3), (4), (7), (8), or 
                        (9) of subsection (e).
          (2) Travel as form of education.--No deduction shall 
        be allowed under this chapter for expenses for travel 
        as a form of education.
          (3) Travel expenses of spouse, dependent, or 
        others.--No deduction shall be allowed under this 
        chapter (other than section 217) for travel expenses 
        paid or incurred with respect to a spouse, dependent, 
        or other individual accompanying the taxpayer (or an 
        officer or employee of the taxpayer) on business 
        travel, unless--
                  (A) the spouse, dependent, or other 
                individual is an employee of the taxpayer,
                  (B) the travel of the spouse, dependent, or 
                other individual is for a bona fide business 
                purpose, and
                  (C) such expenses would otherwise be 
                deductible by the spouse, dependent, or other 
                individual.
  (n) Only 50 percent of meal expenses allowed as deduction.--
          (1) In general.--The amount allowable as a deduction 
        under this chapter for any expense for food or 
        beverages shall not exceed 50 percent of the amount of 
        such expense which would (but for this paragraph) be 
        allowable as a deduction under this chapter.
          (2) Exceptions.--Paragraph (1) shall not apply to any 
        expense if--
                  (A) such expense is described in paragraph 
                (2), (3), (4), (7), (8), or (9) of subsection 
                (e),
                  (B) in the case of an employer who pays or 
                reimburses moving expenses of an employee, such 
                expenses are includible in the income of the 
                employee under section 82, or
                  (C) such expense is for food or beverages--
                          (i) required by any Federal law to be 
                        provided to crew members of a 
                        commercial vessel,
                          (ii) provided to crew members of a 
                        commercial vessel--
                                  (I) which is operating on the 
                                Great Lakes, the Saint Lawrence 
                                Seaway, or any inland waterway 
                                of the United States, and
                                  (II) which is of a kind which 
                                would be required by Federal 
                                law to provide food and 
                                beverages to crew members if it 
                                were operated at sea,
                          (iii) provided on an oil or gas 
                        platform or drilling rig if the 
                        platform or rig is located offshore, or
                          (iv) provided on an oil or gas 
                        platform or drilling rig, or at a 
                        support camp which is in proximity and 
                        integral to such platform or rig, if 
                        the platform or rig is located in the 
                        United States north of 54 degrees north 
                        latitude.
        Clauses (i) and (ii) of subparagraph (C) shall not 
        apply to vessels primarily engaged in providing luxury 
        water transportation (determined under the principles 
        of subsection (m)). In the case of the employee, the 
        exception of subparagraph (A) shall not apply to 
        expenses described in subparagraph (B).
          (3) Special rule for individuals subject to Federal 
        hours of service.--In the case of any expenses for food 
        or beverages consumed while away from home (within the 
        meaning of section 162(a)(2)) by an individual during, 
        or incident to, the period of duty subject to the hours 
        of service limitations of the Department of 
        Transportation, paragraph (1) shall be applied by 
        substituting ``80 percent'' for ``50 percent''.
  (o)  Regulatory authority.--The Secretary shall prescribe 
such regulations as he may deem necessary to carry out the 
purposes of this section, including regulations prescribing 
whether subsection (a) or subsection (b) applies in cases where 
both such subsections would otherwise apply.

Subchapter C--CORPORATE DISTRIBUTIONS AND ADJUSTMENTS

           *       *       *       *       *       *       *

PART I--DISTRIBUTIONS BY CORPORATIONS

           *       *       *       *       *       *       *

Subpart C--DEFINITIONS; CONSTRUCTIVE OWNERSHIP OF STOCK

           *       *       *       *       *       *       *

SEC. 318. CONSTRUCTIVE OWNERSHIP OF STOCK.

  (a) General rule.--For purposes of those provisions of this 
subchapter to which the rules contained in this section are 
expressly made applicable--
          (1) Members of family.--
                  (A) In general.--An individual shall be 
                considered as owning the stock owned, directly 
                or indirectly, by or for--
                          (i) [his spouse] the individual's 
                        spouse (other than a spouse who is 
                        legally separated from the individual 
                        under a decree of divorce or separate 
                        maintenance), and
                          (ii) [his] the individual's children, 
                        grandchildren, and parents.
                  (B) Effect of adoption.--For purposes of 
                subparagraph (A)(ii), a legally adopted child 
                of an individual shall be treated as a child of 
                such individual by blood.
          (2) Attribution from partnerships, estates, trusts, 
        and corporations.--
                  (A) From partnerships and estates.--Stock 
                owned, directly or indirectly, by or for a 
                partnership or estate shall be considered as 
                owned proportionately by its partners or 
                beneficiaries.
                  (B) From trusts.--
                          (i) Stock owned, directly or 
                        indirectly, by or for a trust (other 
                        than an employees' trust described in 
                        section 401(a) which is exempt from tax 
                        under section 501(a)) shall be 
                        considered as owned by its 
                        beneficiaries in proportion to the 
                        actuarial interest of such 
                        beneficiaries in such trust.
                          (ii) Stock owned, directly or 
                        indirectly, by or for any portion of a 
                        trust of which a person is considered 
                        the owner under subpart E of part I of 
                        subchapter J (relating to grantors and 
                        others treated as substantial owners) 
                        shall be considered as owned by such 
                        person.
                  (C) From corporations.--If 50 percent or more 
                in value of the stock in a corporation is 
                owned, directly or indirectly, by or for any 
                person, such person shall be considered as 
                owning the stock owned, directly or indirectly, 
                by or for such corporation, in that proportion 
                which the value of the stock which such person 
                so owns bears to the value of all the stock in 
                such corporation.
          (3) Attribution to partnerships, estates, trusts, and 
        corporations.--
                  (A) To partnerships and estates.--Stock 
                owned, directly or indirectly, by or for a 
                partner or a beneficiary of an estate shall be 
                considered as owned by the partnership or 
                estate.
                  (B) To trusts.--
                          (i) Stock owned, directly or 
                        indirectly, by or for a beneficiary of 
                        a trust (other than an employees' trust 
                        described in section 401(a) which is 
                        exempt from tax under section 501(a)) 
                        shall be considered as owned by the 
                        trust, unless such beneficiary's 
                        interest in the trust is a remote 
                        contingent interest. For purposes of 
                        this clause, a contingent interest of a 
                        beneficiary in a trust shall be 
                        considered remote if, under the maximum 
                        exercise of discretion by the trustee 
                        in favor of such beneficiary, the value 
                        of such interest, computed actuarially, 
                        is 5 percent or less of the value of 
                        the trust property.
                          (ii) Stock owned, directly or 
                        indirectly, by or for a person who is 
                        considered the owner of any portion of 
                        a trust under subpart E of part I of 
                        subchapter J (relating to grantors and 
                        others treated as substantial owners) 
                        shall be considered as owned by the 
                        trust.
                  (C) To corporations.--If 50 percent or more 
                in value of the stock in a corporation is 
                owned, directly or indirectly, by or for any 
                person, such corporation shall be considered as 
                owning the stock owned, directly or indirectly, 
                by or for such person.
          (4) Options.--If any person has an option to acquire 
        stock, such stock shall be considered as owned by such 
        person. For purposes of this paragraph, an option to 
        acquire such an option, and each one of a series of 
        such options, shall be considered as an option to 
        acquire such stock.
          (5) Operating rules.--
                  (A) In general.--Except as provided in 
                subparagraphs (B) and (C), stock constructively 
                owned by a person by reason of the application 
                of paragraph (1), (2), (3), or (4), shall, for 
                purposes of applying paragraphs (1), (2), (3), 
                and (4), be considered as actually owned by 
                such person.
                  (B) Members of family.--Stock constructively 
                owned by an individual by reason of the 
                application of paragraph (1) shall not be 
                considered as owned by him for purposes of 
                again applying paragraph (1) in order to make 
                another the constructive owner of such stock.
                  (C) Partnerships, estates, trusts, and 
                corporations.--Stock constructively owned by a 
                partnership, estate, trust, or corporation by 
                reason of the application of paragraph (3) 
                shall not be considered as owned by it for 
                purposes of applying paragraph (2) in order to 
                make another the constructive owner of such 
                stock.
                  (D) Option rule in lieu of family rule.--For 
                purposes of this paragraph, if stock may be 
                considered as owned by an individual under 
                paragraph (1) or (4), it shall be considered as 
                owned by him under paragraph (4).
                  (E) S corporation treated as partnership.--
                For purposes of this subsection--
                          (i) an S corporation shall be treated 
                        as a partnership, and
                          (ii) any shareholder of the S 
                        corporation shall be treated as a 
                        partner of such partnership.
                The preceding sentence shall not apply for 
                purposes of determining whether stock in the S 
                corporation is constructively owned by any 
                person.
  (b) Cross references.--For provisions to which the rules 
contained in subsection (a) apply, see--
                  (1) section 302 (relating to redemption of 
                stock);
                  (2) section 304 (relating to redemption by 
                related corporations);
                  (3) section 306(b)(1)(A) (relating to 
                disposition of section 306 stock);
                  (4) section 338(h)(3) (defining purchase);
                  (5) section 382(l)(3) (relating to special 
                limitations on net operating loss carryovers);
                  (6) section 856(d) (relating to definition of 
                rents from real property in the case of real 
                estate investment trusts);
                  (7) section 958(b) (relating to constructive 
                ownership rules with respect to controlled 
                foreign corporations); and
                  (8) section 6038(e)(2) (relating to 
                information with respect to certain foreign 
                corporations).

Subchapter D--DEFERRED COMPENSATION, ETC.

           *       *       *       *       *       *       *

PART I--PENSION, PROFIT-SHARING, STOCK BONUS PLANS, ETC.

           *       *       *       *       *       *       *

Subpart A--GENERAL RULE

           *       *       *       *       *       *       *

SEC. 401. QUALIFIED PENSION, PROFIT-SHARING, AND STOCK BONUS PLANS.

  (a) Requirements for qualification.--A trust created or 
organized in the United States and forming part of a stock 
bonus, pension, or profit-sharing plan of an employer for the 
exclusive benefit of his employees or their beneficiaries shall 
constitute a qualified trust under this section--
          (1) if contributions are made to the trust by such 
        employer, or employees, or both, or by another employer 
        who is entitled to deduct his contributions under 
        section 404(a)(3)(B) (relating to deduction for 
        contributions to profit-sharing and stock bonus plans), 
        or by a charitable remainder trust pursuant to a 
        qualified gratuitous transfer (as defined in section 
        664(g)(1)), for the purpose of distributing to such 
        employees or their beneficiaries the corpus and income 
        of the fund accumulated by the trust in accordance with 
        such plan;
          (2) if under the trust instrument it is impossible, 
        at any time prior to the satisfaction of all 
        liabilities with respect to employees and their 
        beneficiaries under the trust, for any part of the 
        corpus or income to be (within the taxable year or 
        thereafter) used for, or diverted to, purposes other 
        than for the exclusive benefit of his employees or 
        their beneficiaries (but this paragraph shall not be 
        construed, in the case of a multiemployer plan, to 
        prohibit the return of a contribution within 6 months 
        after the plan administrator determines that the 
        contribution was made by a mistake of fact or law 
        (other than a mistake relating to whether the plan is 
        described in section 401(a) or the trust which is part 
        of such plan is exempt from taxation under section 
        501(a), or the return of any withdrawal liability 
        payment determined to be an overpayment within 6 months 
        of such determination));
          (3) if the plan of which such trust is a part 
        satisfies the requirements of section 410 (relating to 
        minimum participation standards); and
          (4) if the contributions or benefits provided under 
        the plan do not discriminate in favor of highly 
        compensated employees (within the meaning of section 
        414(q)). For purposes of this paragraph, there shall be 
        excluded from consideration employees described in 
        section 410(b)(3)(A) and (C).
          (5) Special rules relating to nondiscrimination 
        requirements.--
                  (A) Salaried or clerical employees.--A 
                classification shall not be considered 
                discriminatory within the meaning of paragraph 
                (4) or section 410(b)(2)(A)(i) merely because 
                it is limited to salaried or clerical 
                employees.
                  (B) Contributions and benefits may bear 
                uniform relationship to compensation.--A plan 
                shall not be considered discriminatory within 
                the meaning of paragraph (4) merely because the 
                contributions or benefits of, or on behalf of, 
                the employees under the plan bear a uniform 
                relationship to the compensation (within the 
                meaning of section 414(s)) of such employees.
                  (C) Certain disparity permitted.--A plan 
                shall not be considered discriminatory within 
                the meaning of paragraph (4) merely because the 
                contributions or benefits of, or on behalf of, 
                the employees under the plan favor highly 
                compensated employees (as defined in section 
                414(q)) in the manner permitted under 
                subsection (l).
                  (D) Integrated defined benefit plan.--
                          (i) In general.--A defined benefit 
                        plan shall not be considered 
                        discriminatory within the meaning of 
                        paragraph (4) merely because the plan 
                        provides that the employer-derived 
                        accrued retirement benefit for any 
                        participant under the plan may not 
                        exceed the excess (if any) of--
                                  (I) the participant's final 
                                pay with the employer, over
                                  (II) the employer-derived 
                                retirement benefit created 
                                under Federal law attributable 
                                to service by the participant 
                                with the employer.
                 For purposes of this clause, the employer-
                derived retirement benefit created under 
                Federal law shall be treated as accruing 
                ratably over 35 years.
                          (ii) Final pay.--For purposes of this 
                        subparagraph, the participant's final 
                        pay is the compensation (as defined in 
                        section 414(q)(4)) paid to the 
                        participant by the employer for any 
                        year--
                                  (I) which ends during the 5-
                                year period ending with the 
                                year in which the participant 
                                separated from service for the 
                                employer, and
                                  (II) for which the 
                                participant's total 
                                compensation from the employer 
                                was highest.
                  (E) 2 or more plans treated as single plan.--
                For purposes of determining whether 2 or more 
                plans of an employer satisfy the requirements 
                of paragraph (4) when considered as a single 
                plan--
                          (i) Contributions.--If the amount of 
                        contributions on behalf of the 
                        employees allowed as a deduction under 
                        section 404 for the taxable year with 
                        respect to such plans, taken together, 
                        bears a uniform relationship to the 
                        compensation (within the meaning of 
                        section 414(s)) of such employees, the 
                        plans shall not be considered 
                        discriminatory merely because the 
                        rights of employees to, or derived 
                        from, the employer contributions under 
                        the separate plans do not become 
                        nonforfeitable at the same rate.
                          (ii) Benefits.--If the employees' 
                        rights to benefits under the separate 
                        plans do not become nonforfeitable at 
                        the same rate, but the levels of 
                        benefits provided by the separate plans 
                        satisfy the requirements of regulations 
                        prescribed by the Secretary to take 
                        account of the differences in such 
                        rates, the plans shall not be 
                        considered discriminatory merely 
                        because of the difference in such 
                        rates.
                  (F) Social security retirement age.--For 
                purposes of testing for discrimination under 
                paragraph (4)--
                          (i) the social security retirement 
                        age (as defined in section 415(b)(8)) 
                        shall be treated as a uniform 
                        retirement age, and
                          (ii) subsidized early retirement 
                        benefits and joint and survivor 
                        annuities shall not be treated as being 
                        unavailable to employees on the same 
                        terms merely because such benefits or 
                        annuities are based in whole or in part 
                        on an employee's social security 
                        retirement age (as so defined).
                  (G) Governmental plans.--Paragraphs (3) and 
                (4) shall not apply to a governmental plan 
                (within the meaning of section 414(d)).
          (6) A plan shall be considered as meeting the 
        requirements of paragraph (3) during the whole of any 
        taxable year of the plan if on one day in each quarter 
        it satisfied such requirements.
          (7) A trust shall not constitute a qualified trust 
        under this section unless the plan of which such trust 
        is a part satisfies the requirements of section 411 
        (relating to minimum vesting standards).
          (8) A trust forming part of a defined benefit plan 
        shall not constitute a qualified trust under this 
        section unless the plan provides that forfeitures must 
        not be applied to increase the benefits any employee 
        would otherwise receive under the plan.
          (9) Required distributions.--
                  (A) In general.--A trust shall not constitute 
                a qualified trust under this subsection unless 
                the plan provides that the entire interest of 
                each employee--
                          (i) will be distributed to such 
                        employee not later than the required 
                        beginning date, or
                          (ii) will be distributed, beginning 
                        not later than the required beginning 
                        date, in accordance with regulations, 
                        over the life of such employee or over 
                        the lives of such employee and a 
                        designated beneficiary (or over a 
                        period not extending beyond the life 
                        expectancy of such employee or the life 
                        expectancy of such employee and a 
                        designated beneficiary).
                  (B) Required distribution where employee dies 
                before entire interest is distributed.--
                          (i) Where distributions have begun 
                        under subparagraph (A)(ii).--A trust 
                        shall not constitute a qualified trust 
                        under this section unless the plan 
                        provides that if--
                                  (I) the distribution of the 
                                employee's interest has begun 
                                in accordance with subparagraph 
                                (A)(ii), and
                                  (II) the employee dies before 
                                his entire interest has been 
                                distributed to him,
                 the remaining portion of such interest will be 
                distributed at least as rapidly as under the 
                method of distributions being used under 
                subparagraph (A)(ii) as of the date of his 
                death.
                          (ii) 5-year rule for other cases.--A 
                        trust shall not constitute a qualified 
                        trust under this section unless the 
                        plan provides that, if an employee dies 
                        before the distribution of the 
                        employee's interest has begun in 
                        accordance with subparagraph (A)(ii), 
                        the entire interest of the employee 
                        will be distributed within 5 years 
                        after the death of such employee.
                          (iii) Exception to 5-year rule for 
                        certain amounts payable over life of 
                        beneficiary.--If--
                                  (I) any portion of the 
                                employee's interest is payable 
                                to (or for the benefit of) a 
                                designated beneficiary,
                                  (II) such portion will be 
                                distributed (in accordance with 
                                regulations) over the life of 
                                such designated beneficiary (or 
                                over a period not extending 
                                beyond the life expectancy of 
                                such beneficiary), and
                                  (III) such distributions 
                                begin not later than 1 year 
                                after the date of the 
                                employee's death or such later 
                                date as the Secretary may by 
                                regulations prescribe,
                 for purposes of clause (ii), the portion 
                referred to in subclause (I) shall be treated 
                as distributed on the date on which such 
                distributions begin.
                          (iv) Special rule for surviving 
                        spouse of employee.--If the designated 
                        beneficiary referred to in clause 
                        (iii)(I) is the surviving spouse of the 
                        employee--
                                  (I) the date on which the 
                                distributions are required to 
                                begin under clause (iii)(III) 
                                shall not be earlier than the 
                                date on which the employee 
                                would have attained age 701/2, 
                                and
                                  (II) if the surviving spouse 
                                dies before the distributions 
                                to such spouse begin, this 
                                subparagraph shall be applied 
                                as if the surviving spouse were 
                                the employee.
                  (C) Required beginning date.--For purposes of 
                this paragraph--
                          (i) In general.--The term ``required 
                        beginning date'' means April 1 of the 
                        calendar year following the later of--
                                  (I) the calendar year in 
                                which the employee attains age 
                                701/2, or
                                  (II) the calendar year in 
                                which the employee retires.
                          (ii) Exception.--Subclause (II) of 
                        clause (i) shall not apply--
                                  (I) except as provided in 
                                section 409(d), in the case of 
                                an employee who is a 5-percent 
                                owner (as defined in section 
                                416) with respect to the plan 
                                year ending in the calendar 
                                year in which the employee 
                                attains age 701/2, or
                                  (II) for purposes of section 
                                408(a)(6) or (b)(3).
                          (iii) Actuarial adjustment.--In the 
                        case of an employee to whom clause 
                        (i)(II) applies who retires in a 
                        calendar year after the calendar year 
                        in which the employee attains age 701/
                        2, the employee's accrued benefit shall 
                        be actuarially increased to take into 
                        account the period after age 701/2 in 
                        which the employee was not receiving 
                        any benefits under the plan.
                          (iv) Exception for governmental and 
                        church plans.--Clauses (ii) and (iii) 
                        shall not apply in the case of a 
                        governmental plan or church plan. For 
                        purposes of this clause, the term 
                        ``church plan'' means a plan maintained 
                        by a church for church employees, and 
                        the term ``church'' means any church 
                        (as defined in section 3121(w)(3)(A)) 
                        or qualified church-controlled 
                        organization (as defined in section 
                        3121(w)(3)(B)).
                  (D) Life expectancy.--For purposes of this 
                paragraph, the life expectancy of an employee 
                and the employee's spouse (other than in the 
                case of a life annuity) may be redetermined but 
                not more frequently than annually.
                  (E) Designated beneficiary.--For purposes of 
                this paragraph, the term ``designated 
                beneficiary'' means any individual designated 
                as a beneficiary by the employee.
                  (F) Treatment of payments to children.--Under 
                regulations prescribed by the Secretary, for 
                purposes of this paragraph, any amount paid to 
                a child shall be treated as if it had been paid 
                to the surviving spouse if such amount will 
                become payable to the surviving spouse upon 
                such child reaching majority (or other 
                designated event permitted under regulations).
                  (G) Treatment of incidental death benefit 
                distributions.--For purposes of this title, any 
                distribution required under the incidental 
                death benefit requirements of this subsection 
                shall be treated as a distribution required 
                under this paragraph.
          (10) Other requirements.--
                  (A) Plans benefiting owner-employees.--In the 
                case of any plan which provides contributions 
                or benefits for employees some or all of whom 
                are owner-employees (as defined in subsection 
                (c)(3)), a trust forming part of such plan 
                shall constitute a qualified trust under this 
                section only if the requirements of subsection 
                (d) are also met.
                  (B) Top-heavy plans.--
                          (i) In general.--In the case of any 
                        top-heavy plan, a trust forming part of 
                        such plan shall constitute a qualified 
                        trust under this section only if the 
                        requirements of section 416 are met.
                          (ii) Plans which may become top-
                        heavy.--Except to the extent provided 
                        in regulations, a trust forming part of 
                        a plan (whether or not a top-heavy 
                        plan) shall constitute a qualified 
                        trust under this section only if such 
                        plan contains provisions--
                                  (I) which will take effect if 
                                such plan becomes a top-heavy 
                                plan, and
                                  (II) which meet the 
                                requirements of section 416.
                          (iii) Exemption for governmental 
                        plans.--This subparagraph shall not 
                        apply to any governmental plan.
          (11) Requirement of joint and survivor annuity and 
        preretirement survivor annuity.--
                  (A) In general.--In the case of any plan to 
                which this paragraph applies, except as 
                provided in section 417, a trust forming part 
                of such plan shall not constitute a qualified 
                trust under this section unless--
                          (i) in the case of a vested 
                        participant who does not die before the 
                        annuity starting date, the accrued 
                        benefit payable to such participant is 
                        provided in the form of a qualified 
                        joint and survivor annuity, and
                          (ii) in the case of a vested 
                        participant who dies before the annuity 
                        starting date and who has a surviving 
                        spouse, a qualified preretirement 
                        survivor annuity is provided to the 
                        surviving spouse of such participant.
                  (B) Plans to which paragraph applies.--This 
                paragraph shall apply to--
                          (i) any defined benefit plan,
                          (ii) any defined contribution plan 
                        which is subject to the funding 
                        standards of section 412, and
                          (iii) any participant under any other 
                        defined contribution plan unless--
                                  (I) such plan provides that 
                                the participant's 
                                nonforfeitable accrued benefit 
                                (reduced by any security 
                                interest held by the plan by 
                                reason of a loan outstanding to 
                                such participant) is payable in 
                                full, on the death of the 
                                participant, to the 
                                participant's surviving spouse 
                                (or, if there is no surviving 
                                spouse or the surviving spouse 
                                consents in the manner required 
                                under section 417(a)(2), to a 
                                designated beneficiary),
                                  (II) such participant does 
                                not elect a payment of benefits 
                                in the form of a life annuity, 
                                and
                                  (III) with respect to such 
                                participant, such plan is not a 
                                direct or indirect transferee 
                                (in a transfer after December 
                                31, 1984) of a plan which is 
                                described in clause (i) or (ii) 
                                or to which this clause applied 
                                with respect to the 
                                participant.
                Clause (iii)(III) shall apply only with respect 
                to the transferred assets (and income 
                therefrom) if the plan separately accounts for 
                such assets and any income therefrom.
                  (C) Exception for certain ESOP benefits.--
                          (i) In general.--In the case of--
                                  (I) a tax credit employee 
                                stock ownership plan (as 
                                defined in section 409(a)), or
                                  (II) an employee stock 
                                ownership plan (as defined in 
                                section 4975(e)(7)),
                 subparagraph (A) shall not apply to that 
                portion of the employee's accrued benefit to 
                which the requirements of section 409(h) apply.
                          (ii) Nonforfeitable benefit must be 
                        paid in full, etc.--In the case of any 
                        participant, clause (i) shall apply 
                        only if the requirements of subclauses 
                        (I), (II), and (III) of subparagraph 
                        (B)(iii) are met with respect to such 
                        participant.
                  (D) Special rule where participant and spouse 
                married less than 1 year.--A plan shall not be 
                treated as failing to meet the requirements of 
                subparagraphs (B)(iii) or (C) merely because 
                the plan provides that benefits will not be 
                payable to the surviving spouse of the 
                participant unless the participant and such 
                spouse had been married throughout the 1-year 
                period ending on the earlier of the 
                participant's annuity starting date or the date 
                of the participant's death.
                  (E) Exception for plans described in section 
                404(c).--This paragraph shall not apply to a 
                plan which the Secretary has determined is a 
                plan described in section 404(c) (or a 
                continuation thereof) in which participation is 
                substantially limited to individuals who, 
                before January 1, 1976, ceased employment 
                covered by the plan.
                  (F) Cross reference.--For--
                          (i) provisions under which 
                        participants may elect to waive the 
                        requirements of this paragraph, and
                          (ii) other definitions and special 
                        rules for purposes of this paragraph,
                see section 417.
          (12) A trust shall not constitute a qualified trust 
        under this section unless the plan of which such trust 
        is a part provides that in the case of any merger or 
        consolidation with, or transfer of assets or 
        liabilities to, any other plan after September 2, 1974, 
        each participant in the plan would (if the plan then 
        terminated) receive a benefit immediately after the 
        merger, consolidation, or transfer which is equal to or 
        greater than the benefit he would have been entitled to 
        receive immediately before the merger, consolidation, 
        or transfer (if the plan had then terminated). The 
        preceding sentence does not apply to any multiemployer 
        plan with respect to any transaction to the extent that 
        participants either before or after the transaction are 
        covered under a multiemployer plan to which title IV of 
        the Employee Retirement Income Security Act of 1974 
        applies.
          (13) Assignment and alienation.--
                  (A) In general.--A trust shall not constitute 
                a qualified trust under this section unless the 
                plan of which such trust is a part provides 
                that benefits provided under the plan may not 
                be assigned or alienated. For purposes of the 
                preceding sentence, there shall not be taken 
                into account any voluntary and revocable 
                assignment of not to exceed 10 percent of any 
                benefit payment made by any participant who is 
                receiving benefits under the plan unless the 
                assignment or alienation is made for purposes 
                of defraying plan administration costs. For 
                purposes of this paragraph a loan made to a 
                participant or beneficiary shall not be treated 
                as an assignment or alienation if such loan is 
                secured by the participant's accrued 
                nonforfeitable benefit and is exempt from the 
                tax imposed by section 4975 (relating to tax on 
                prohibited transactions) by reason of section 
                4975(d)(1). This paragraph shall take effect on 
                January 1, 1976 and shall not apply to 
                assignments which were irrevocable on September 
                2, 1974.
                  (B) Special rules for domestic relations 
                orders.--Subparagraph (A) shall apply to the 
                creation, assignment, or recognition of a right 
                to any benefit payable with respect to a 
                participant pursuant to a domestic relations 
                order, except that subparagraph (A) shall not 
                apply if the order is determined to be a 
                qualified domestic relations order.
                  (C) Special rule for certain judgments and 
                settlements.--Subparagraph (A) shall not apply 
                to any offset of a participant's benefits 
                provided under a plan against an amount that 
                the participant is ordered or required to pay 
                to the plan if--
                          (i) the order or requirement to pay 
                        arises--
                                  (I) under a judgment of 
                                conviction for a crime 
                                involving such plan,
                                  (II) under a civil judgment 
                                (including a consent order or 
                                decree) entered by a court in 
                                an action brought in connection 
                                with a violation (or alleged 
                                violation) of part 4 of 
                                subtitle B of title I of the 
                                Employee Retirement Income 
                                Security Act of 1974, or
                                  (III) pursuant to a 
                                settlement agreement between 
                                the Secretary of Labor and the 
                                participant, or a settlement 
                                agreement between the Pension 
                                Benefit Guaranty Corporation 
                                and the participant, in 
                                connection with a violation (or 
                                alleged violation) of part 4 of 
                                such subtitle by a fiduciary or 
                                any other person,
                          (ii) the judgment, order, decree, or 
                        settlement agreement expressly provides 
                        for the offset of all or part of the 
                        amount ordered or required to be paid 
                        to the plan against the participant's 
                        benefits provided under the plan, and
                          (iii) in a case in which the survivor 
                        annuity requirements of section 
                        401(a)(11) apply with respect to 
                        distributions from the plan to the 
                        participant, if the participant has a 
                        spouse at the time at which the offset 
                        is to be made--
                                  (I) either such spouse has 
                                consented in writing to such 
                                offset and such consent is 
                                witnessed by a notary public or 
                                representative of the plan (or 
                                it is established to the 
                                satisfaction of a plan 
                                representative that such 
                                consent may not be obtained by 
                                reason of circumstances 
                                described in section 
                                417(a)(2)(B)), or an election 
                                to waive the right of the 
                                spouse to either a qualified 
                                joint and survivor annuity or a 
                                qualified preretirement 
                                survivor annuity is in effect 
                                in accordance with the 
                                requirements of section 417(a),
                                  (II) such spouse is ordered 
                                or required in such judgment, 
                                order, decree, or settlement to 
                                pay an amount to the plan in 
                                connection with a violation of 
                                part 4 of such subtitle, or
                                  (III) in such judgment, 
                                order, decree, or settlement, 
                                such spouse retains the right 
                                to receive the survivor annuity 
                                under a qualified joint and 
                                survivor annuity provided 
                                pursuant to section 
                                401(a)(11)(A)(i) and under a 
                                qualified preretirement 
                                survivor annuity provided 
                                pursuant to section 
                                401(a)(11)(A)(ii), determined 
                                in accordance with subparagraph 
                                (D).
                A plan shall not be treated as failing to meet 
                the requirements of this subsection, subsection 
                (k), section 403(b), or section 409(d) solely 
                by reason of an offset described in this 
                subparagraph.
                  (D) Survivor annuity.--
                          (i) In general.--The survivor annuity 
                        described in subparagraph (C)(iii)(III) 
                        shall be determined as if--
                                  (I) the participant 
                                terminated employment on the 
                                date of the offset,
                                  (II) there was no offset,
                                  (III) the plan permitted 
                                commencement of benefits only 
                                on or after normal retirement 
                                age,
                                  (IV) the plan provided only 
                                the minimum-required qualified 
                                joint and survivor annuity, and
                                  (V) the amount of the 
                                qualified preretirement 
                                survivor annuity under the plan 
                                is equal to the amount of the 
                                survivor annuity payable under 
                                the minimum-required qualified 
                                joint and survivor annuity.
                          (ii) Definition.--For purposes of 
                        this subparagraph, the term ``minimum-
                        required qualified joint and survivor 
                        annuity'' means the qualified joint and 
                        survivor annuity which is the actuarial 
                        equivalent of the participant's accrued 
                        benefit (within the meaning of section 
                        411(a)(7)) and under which the survivor 
                        annuity is 50 percent of the amount of 
                        the annuity which is payable during the 
                        joint lives of the participant and the 
                        spouse.
          (14) A trust shall not constitute a qualified trust 
        under this section unless the plan of which such trust 
        is a part provides that, unless the participant 
        otherwise elects, the payment of benefits under the 
        plan to the participant will begin not later than the 
        60th day after the latest of the close of the plan year 
        in which--
                  (A) the date on which the participant attains 
                the earlier of age 65 or the normal retirement 
                age specified under the plan,
                  (B) occurs the 10th anniversary of the year 
                in which the participant commenced 
                participation in the plan, or
                  (C) the participant terminates his service 
                with the employer.
        In the case of a plan which provides for the payment of 
        an early retirement benefit, a trust forming a part of 
        such plan shall not constitute a qualified trust under 
        this section unless a participant who satisfied the 
        service requirements for such early retirement benefit, 
        but separated from the service (with any nonforfeitable 
        right to an accrued benefit) before satisfying the age 
        requirement for such early retirement benefit, is 
        entitled upon satisfaction of such age requirement to 
        receive a benefit not less than the benefit to which he 
        would be entitled at the normal retirement age, 
        actuarially, reduced under regulations prescribed by 
        the Secretary.
          (15) A trust shall not constitute a qualified trust 
        under this section unless under the plan of which such 
        trust is a part--
                  (A) in the case of a participant or 
                beneficiary who is receiving benefits under 
                such plan, or
                  (B) in the case of a participant who is 
                separated from the service and who has 
                nonforfeitable rights to benefits,
        such benefits are not decreased by reason of any 
        increase in the benefit levels payable under title II 
        of the Social Security Act or any increase in the wage 
        base under such title II, if such increase takes place 
        after September 2, 1974, or (if later) the earlier of 
        the date of first receipt of such benefits or the date 
        of such separation, as the case may be.
          (16) A trust shall not constitute a qualified trust 
        under this section if the plan of which such trust is a 
        part provides for benefits or contributions which 
        exceed the limitations of section 415.
          (17) Compensation limit.--
                  (A) In general.--A trust shall not constitute 
                a qualified trust under this section unless, 
                under the plan of which such trust is a part, 
                the annual compensation of each employee taken 
                into account under the plan for any year does 
                not exceed $200,000.
                  (B) Cost-of-living adjustment.--The Secretary 
                shall adjust annually the $200,000 amount in 
                subparagraph (A) for increases in the cost-of-
                living at the same time and in the same manner 
                as adjustments under section 415(d); except 
                that the base period shall be the calendar 
                quarter beginning July 1, 2001, and any 
                increase which is not a multiple of $5,000 
                shall be rounded to the next lowest multiple of 
                $5,000.
          (19) A trust shall not constitute a qualified trust 
        under this section if under the plan of which such 
        trust is a part any part of a participant's accrued 
        benefit derived from employer contributions (whether or 
        not otherwise nonforfeitable), is forfeitable solely 
        because of withdrawal by such participant of any amount 
        attributable to the benefit derived from contributions 
        made by such participant. The preceding sentence shall 
        not apply to the accrued benefit of any participant 
        unless, at the time of such withdrawal, such 
        participant has a nonforfeitable right to at least 50 
        percent of such accrued benefit (as determined under 
        section 411). The first sentence of this paragraph 
        shall not apply to the extent that an accrued benefit 
        is permitted to be forfeited in accordance with section 
        411(a)(3)(D)(iii) (relating to proportional forfeitures 
        of benefits accrued before September 2, 1974, in the 
        event of withdrawal of certain mandatory 
        contributions).
          (20) A trust forming part of a pension plan shall not 
        be treated as failing to constitute a qualified trust 
        under this section merely because the pension plan of 
        which such trust is a part makes 1 or more 
        distributions within 1 taxable year to a distributee on 
        account of a termination of the plan of which the trust 
        is a part, or in the case of a profit-sharing or stock 
        bonus plan, a complete discontinuance of contributions 
        under such plan. This paragraph shall not apply to a 
        defined benefit plan unless the employer maintaining 
        such plan files a notice with the Pension Benefit 
        Guaranty Corporation (at the time and in the manner 
        prescribed by the Pension Benefit Guaranty Corporation) 
        notifying the Corporation of such payment or 
        distribution and the Corporation has approved such 
        payment or distribution or, within 90 days after the 
        date on which such notice was filed, has failed to 
        disapprove such payment or distribution. For purposes 
        of this paragraph, rules similar to the rules of 
        section 402(a)(6)(B) (as in effect before its repeal by 
        section 521 of the Unemployment Compensation Amendments 
        of 1992) shall apply.
          (22) If a defined contribution plan (other than a 
        profit-sharing plan)--
                  (A) is established by an employer whose stock 
                is not readily tradable on an established 
                market, and
                  (B) after acquiring securities of the 
                employer, more than 10 percent of the total 
                assets of the plan are securities of the 
                employer,
        any trust forming part of such plan shall not 
        constitute a qualified trust under this section unless 
        the plan meets the requirements of subsection (e) of 
        section 409. The requirements of subsection (e) of 
        section 409 shall not apply to any employees of an 
        employer who are participants in any defined 
        contribution plan established and maintained by such 
        employer if the stock of such employer is not readily 
        tradable on an established market and the trade or 
        business of such employer consists of publishing on a 
        regular basis a newspaper for general circulation. For 
        purposes of the preceding sentence, subsections (b), 
        (c), (m), and (o) of section 414 shall not apply except 
        for determining whether stock of the employer is not 
        readily tradable on an established market.
          (23) A stock bonus plan shall not be treated as 
        meeting the requirements of this section unless such 
        plan meets the requirements of subsections (h) and (o) 
        of section 409, except that in applying section 409(h) 
        for purposes of this paragraph, the term ``employer 
        securities'' shall include any securities of the 
        employer held by the plan.
          (24) Any group trust which otherwise meets the 
        requirements of this section shall not be treated as 
        not meeting such requirements on account of the 
        participation or inclusion in such trust of the moneys 
        of any plan or governmental unit described in section 
        818(a)(6).
          (25) Requirement that actuarial assumptions be 
        specified.--A defined benefit plan shall not be treated 
        as providing definitely determinable benefits unless, 
        whenever the amount of any benefit is to be determined 
        on the basis of actuarial assumptions, such assumptions 
        are specified in the plan in a way which precludes 
        employer discretion.
          (26) Additional participation requirements.--
                  (A) In general.--In the case of a trust which 
                is a part of a defined benefit plan, such trust 
                shall not constitute a qualified trust under 
                this subsection unless on each day of the plan 
                year such trust benefits at least the lesser 
                of--
                          (i) 50 employees of the employer, or
                          (ii) the greater of--
                                  (I) 40 percent of all 
                                employees of the employer, or
                                  (II) 2 employees (or if there 
                                is only 1 employee, such 
                                employee).
                  (B) Treatment of excludable employees.--
                          (i) In general.--A plan may exclude 
                        from consideration under this paragraph 
                        employees described in paragraphs (3) 
                        and (4)(A) of section 410(b).
                          (ii) Separate application for certain 
                        excludable employees.--If employees 
                        described in section 410(b)(4)(B) are 
                        covered under a plan which meets the 
                        requirements of subparagraph (A) 
                        separately with respect to such 
                        employees, such employees may be 
                        excluded from consideration in 
                        determining whether any plan of the 
                        employer meets such requirements if--
                                  (I) the benefits for such 
                                employees are provided under 
                                the same plan as benefits for 
                                other employees,
                                  (II) the benefits provided to 
                                such employees are not greater 
                                than comparable benefits 
                                provided to other employees 
                                under the plan, and
                                  (III) no highly compensated 
                                employee (within the meaning of 
                                section 414(q)) is included in 
                                the group of such employees for 
                                more than 1 year.
                  (C) Special rule for collective bargaining 
                units.--Except to the extent provided in 
                regulations, a plan covering only employees 
                described in section 410(b)(3)(A) may exclude 
                from consideration any employees who are not 
                included in the unit or units in which the 
                covered employees are included.
                  (D) Paragraph not to apply to multiemployer 
                plans.--Except to the extent provided in 
                regulations, this paragraph shall not apply to 
                employees in a multiemployer plan (within the 
                meaning of section 414(f)) who are covered by 
                collective bargaining agreements.
                  (E) Special rule for certain dispositions or 
                acquisitions.--Rules similar to the rules of 
                section 410(b)(6)(C) shall apply for purposes 
                of this paragraph.
                  (F) Separate lines of business.--At the 
                election of the employer and with the consent 
                of the Secretary, this paragraph may be applied 
                separately with respect to each separate line 
                of business of the employer. For purposes of 
                this paragraph, the term ``separate line of 
                business'' has the meaning given such term by 
                section 414(r) (without regard to paragraph 
                (2)(A) or (7) thereof).
                  (G) Exception for governmental plans.--This 
                paragraph shall not apply to a governmental 
                plan (within the meaning of section 414(d)).
                  (H) Regulations.--The Secretary may by 
                regulation provide that any separate benefit 
                structure, any separate trust, or any other 
                separate arrangement is to be treated as a 
                separate plan for purposes of applying this 
                paragraph.
          (27) Determinations as to profit-sharing plans.--
                  (A) Contributions need not be based on 
                profits.--The determination of whether the plan 
                under which any contributions are made is a 
                profit-sharing plan shall be made without 
                regard to current or accumulated profits of the 
                employer and without regard to whether the 
                employer is a tax-exempt organization.
                  (B) Plan must designate type.--In the case of 
                a plan which is intended to be a money purchase 
                pension plan or a profit-sharing plan, a trust 
                forming part of such plan shall not constitute 
                a qualified trust under this subsection unless 
                the plan designates such intent at such time 
                and in such manner as the Secretary may 
                prescribe.
          (28) Additional requirements relating to employee 
        stock ownership plans.--
                  (A) In general.--In the case of a trust which 
                is part of an employee stock ownership plan 
                (within the meaning of section 4975(e)(7)) or a 
                plan which meets the requirements of section 
                409(a), such trust shall not constitute a 
                qualified trust under this section unless such 
                plan meets the requirements of subparagraphs 
                (B) and (C).
                  (B) Diversification of investments.--
                          (i) In general.--A plan meets the 
                        requirements of this subparagraph if 
                        each qualified participant in the plan 
                        may elect within 90 days after the 
                        close of each plan year in the 
                        qualified election period to direct the 
                        plan as to the investment of at least 
                        25 percent of the participant's account 
                        in the plan (to the extent such portion 
                        exceeds the amount to which a prior 
                        election under this subparagraph 
                        applies). In the case of the election 
                        year in which the participant can make 
                        his last election, the preceding 
                        sentence shall be applied by 
                        substituting ``50 percent'' for ``25 
                        percent''.
                          (ii) Method of meeting 
                        requirements.--A plan shall be treated 
                        as meeting the requirements of clause 
                        (i) if--
                                  (I) the portion of the 
                                participant's account covered 
                                by the election under clause 
                                (i) is distributed within 90 
                                days after the period during 
                                which the election may be made, 
                                or
                                  (II) the plan offers at least 
                                3 investment options (not 
                                inconsistent with regulations 
                                prescribed by the Secretary) to 
                                each participant making an 
                                election under clause (i) and 
                                within 90 days after the period 
                                during which the election may 
                                be made, the plan invests the 
                                portion of the participant's 
                                account covered by the election 
                                in accordance with such 
                                election.
                          (iii) Qualified participant.--For 
                        purposes of this subparagraph, the term 
                        ``qualified participant'' means any 
                        employee who has completed at least 10 
                        years of participation under the plan 
                        and has attained age 55.
                          (iv) Qualified election period.--For 
                        purposes of this subparagraph, the term 
                        ``qualified election period'' means the 
                        6-plan-year period beginning with the 
                        later of--
                                  (I) the 1st plan year in 
                                which the individual first 
                                became a qualified participant, 
                                or
                                  (II) the 1st plan year 
                                beginning after December 31, 
                                1986.
                 For purposes of the preceding sentence, an 
                employer may elect to treat an individual first 
                becoming a qualified participant in the 1st 
                plan year beginning in 1987 as having become a 
                participant in the 1st plan year beginning in 
                1988.
                          (v) Exception.--This subparagraph 
                        shall not apply to an applicable 
                        defined contribution plan (as defined 
                        in paragraph (35)(E)).
                  (C) Use of independent appraiser.--A plan 
                meets the requirements of this subparagraph if 
                all valuations of employer securities which are 
                not readily tradable on an established 
                securities market with respect to activities 
                carried on by the plan are by an independent 
                appraiser. For purposes of the preceding 
                sentence, the term ``independent appraiser'' 
                means any appraiser meeting requirements 
                similar to the requirements of the regulations 
                prescribed under section 170(a)(1).
          (29) Benefit limitations.--In the case of a defined 
        benefit plan (other than a multiemployer plan or a CSEC 
        plan) to which the requirements of section 412 apply, 
        the trust of which the plan is a part shall not 
        constitute a qualified trust under this subsection 
        unless the plan meets the requirements of section 436.
          (30) Limitations on elective deferrals.--In the case 
        of a trust which is part of a plan under which elective 
        deferrals (within the meaning of section 402(g)(3)) may 
        be made with respect to any individual during a 
        calendar year, such trust shall not constitute a 
        qualified trust under this subsection unless the plan 
        provides that the amount of such deferrals under such 
        plan and all other plans, contracts, or arrangements of 
        an employer maintaining such plan may not exceed the 
        amount of the limitation in effect under section 
        402(g)(1)(A) for taxable years beginning in such 
        calendar year.
          (31) Direct transfer of eligible rollover 
        distributions.--
                  (A) In general.--A trust shall not constitute 
                a qualified trust under this section unless the 
                plan of which such trust is a part provides 
                that if the distributee of any eligible 
                rollover distribution--
                          (i) elects to have such distribution 
                        paid directly to an eligible retirement 
                        plan, and
                          (ii) specifies the eligible 
                        retirement plan to which such 
                        distribution is to be paid (in such 
                        form and at such time as the plan 
                        administrator may prescribe),
                such distribution shall be made in the form of 
                a direct trustee-to-trustee transfer to the 
                eligible retirement plan so specified.
                  (B) Certain mandatory distributions.--
                          (i) In general.--In case of a trust 
                        which is part of an eligible plan, such 
                        trust shall not constitute a qualified 
                        trust under this section unless the 
                        plan of which such trust is a part 
                        provides that if--
                                  (I) a distribution described 
                                in clause (ii) in excess of 
                                $1,000 is made, and
                                  (II) the distributee does not 
                                make an election under 
                                subparagraph (A) and does not 
                                elect to receive the 
                                distribution directly,
                 the plan administrator shall make such 
                transfer to an individual retirement plan of a 
                designated trustee or issuer and shall notify 
                the distributee in writing (either separately 
                or as part of the notice under section 402(f)) 
                that the distribution may be transferred to 
                another individual retirement plan.
                          (ii) Eligible plan.--For purposes of 
                        clause (i), the term ``eligible plan'' 
                        means a plan which provides that any 
                        nonforfeitable accrued benefit for 
                        which the present value (as determined 
                        under section 411(a)(11)) does not 
                        exceed $5,000 shall be immediately 
                        distributed to the participant.
                  (C) Limitation.--Subparagraphs (A) and (B) 
                shall apply only to the extent that the 
                eligible rollover distribution would be 
                includible in gross income if not transferred 
                as provided in subparagraph (A) (determined 
                without regard to sections 402(c), 403(a)(4), 
                403(b)(8), and 457(e)(16)). The preceding 
                sentence shall not apply to such distribution 
                if the plan to which such distribution is 
                transferred--
                          (i) is a qualified trust which is 
                        part of a plan which is a defined 
                        contribution plan and agrees to 
                        separately account for amounts so 
                        transferred, including separately 
                        accounting for the portion of such 
                        distribution which is includible in 
                        gross income and the portion of such 
                        distribution which is not so 
                        includible, or
                          (ii) is an eligible retirement plan 
                        described in clause (i) or (ii) of 
                        section 402(c)(8)(B).
                  (D) Eligible rollover distribution.--For 
                purposes of this paragraph, the term ``eligible 
                rollover distribution'' has the meaning given 
                such term by section 402(f)(2)(A).
                  (E) Eligible retirement plan.--For purposes 
                of this paragraph, the term ``eligible 
                retirement plan'' has the meaning given such 
                term by section 402(c)(8)(B), except that a 
                qualified trust shall be considered an eligible 
                retirement plan only if it is a defined 
                contribution plan, the terms of which permit 
                the acceptance of rollover distributions.
          (32) Treatment of failure to make certain payments if 
        plan has liquidity shortfall.--
                  (A) In general.--A trust forming part of a 
                pension plan to which section 430(j)(4) or 
                433(f)(5) applies shall not be treated as 
                failing to constitute a qualified trust under 
                this section merely because such plan ceases to 
                make any payment described in subparagraph (B) 
                during any period that such plan has a 
                liquidity shortfall (as defined in section 
                430(j)(4) or 433(f)(5)).
                  (B) Payments described.--A payment is 
                described in this subparagraph if such payment 
                is--
                          (i) any payment, in excess of the 
                        monthly amount paid under a single life 
                        annuity (plus any social security 
                        supplements described in the last 
                        sentence of section 411(a)(9)), to a 
                        participant or beneficiary whose 
                        annuity starting date (as defined in 
                        section 417(f)(2)) occurs during the 
                        period referred to in subparagraph (A),
                          (ii) any payment for the purchase of 
                        an irrevocable commitment from an 
                        insurer to pay benefits, and
                          (iii) any other payment specified by 
                        the Secretary by regulations.
                  (C) Period of shortfall.--For purposes of 
                this paragraph, a plan has a liquidity 
                shortfall during the period that there is an 
                underpayment of an installment under section 
                430(j)(3) or 433(f) by reason of section 
                430(j)(4)(A) or 433(f)(5), respectively.
          (33) Prohibition on benefit increases while sponsor 
        is in bankruptcy.--
                  (A) In general.--A trust which is part of a 
                plan to which this paragraph applies shall not 
                constitute a qualified trust under this section 
                if an amendment to such plan is adopted while 
                the employer is a debtor in a case under title 
                11, United States Code, or similar Federal or 
                State law, if such amendment increases 
                liabilities of the plan by reason of--
                          (i) any increase in benefits,
                          (ii) any change in the accrual of 
                        benefits, or
                          (iii) any change in the rate at which 
                        benefits become nonforfeitable under 
                        the plan,
                with respect to employees of the debtor, and 
                such amendment is effective prior to the 
                effective date of such employer's plan of 
                reorganization.
                  (B) Exceptions.--This paragraph shall not 
                apply to any plan amendment if--
                          (i) the plan, were such amendment to 
                        take effect, would have a funding 
                        target attainment percentage (as 
                        defined in section 430(d)(2)) of 100 
                        percent or more,
                          (ii) the Secretary determines that 
                        such amendment is reasonable and 
                        provides for only de minimis increases 
                        in the liabilities of the plan with 
                        respect to employees of the debtor,
                          (iii) such amendment only repeals an 
                        amendment described in section 
                        412(d)(2), or
                          (iv) such amendment is required as a 
                        condition of qualification under this 
                        part.
                  (C) Plans to which this paragraph applies.--
                This paragraph shall apply only to plans (other 
                than multiemployer plans or CSEC plans) covered 
                under section 4021 of the Employee Retirement 
                Income Security Act of 1974.
                  (D) Employer.--For purposes of this 
                paragraph, the term ``employer'' means the 
                employer referred to in section 412(b)(1), 
                without regard to section 412(b)(2).
          (34) Benefits of missing participants on plan 
        termination.--In the case of a plan covered by title IV 
        of the Employee Retirement Income Security Act of 1974, 
        a trust forming part of such plan shall not be treated 
        as failing to constitute a qualified trust under this 
        section merely because the pension plan of which such 
        trust is a part, upon its termination, transfers 
        benefits of missing participants to the Pension Benefit 
        Guaranty Corporation in accordance with section 4050 of 
        such Act.
          (35) Diversification requirements for certain defined 
        contribution plans.--
                  (A) In general.--A trust which is part of an 
                applicable defined contribution plan shall not 
                be treated as a qualified trust unless the plan 
                meets the diversification requirements of 
                subparagraphs (B), (C), and (D).
                  (B) Employee contributions and elective 
                deferrals invested in employer securities.--In 
                the case of the portion of an applicable 
                individual's account attributable to employee 
                contributions and elective deferrals which is 
                invested in employer securities, a plan meets 
                the requirements of this subparagraph if the 
                applicable individual may elect to direct the 
                plan to divest any such securities and to 
                reinvest an equivalent amount in other 
                investment options meeting the requirements of 
                subparagraph (D).
                  (C) Employer contributions invested in 
                employer securities.--In the case of the 
                portion of the account attributable to employer 
                contributions other than elective deferrals 
                which is invested in employer securities, a 
                plan meets the requirements of this 
                subparagraph if each applicable individual 
                who--
                          (i) is a participant who has 
                        completed at least 3 years of service, 
                        or
                          (ii) is a beneficiary of a 
                        participant described in clause (i) or 
                        of a deceased participant,
                may elect to direct the plan to divest any such 
                securities and to reinvest an equivalent amount 
                in other investment options meeting the 
                requirements of subparagraph (D).
                  (D) Investment options.--
                          (i) In general.--The requirements of 
                        this subparagraph are met if the plan 
                        offers not less than 3 investment 
                        options, other than employer 
                        securities, to which an applicable 
                        individual may direct the proceeds from 
                        the divestment of employer securities 
                        pursuant to this paragraph, each of 
                        which is diversified and has materially 
                        different risk and return 
                        characteristics.
                          (ii) Treatment of certain 
                        restrictions and conditions.--
                                  (I) Time for making 
                                investment choices.--A plan 
                                shall not be treated as failing 
                                to meet the requirements of 
                                this subparagraph merely 
                                because the plan limits the 
                                time for divestment and 
                                reinvestment to periodic, 
                                reasonable opportunities 
                                occurring no less frequently 
                                than quarterly.
                                  (II) Certain restrictions and 
                                conditions not allowed.--Except 
                                as provided in regulations, a 
                                plan shall not meet the 
                                requirements of this 
                                subparagraph if the plan 
                                imposes restrictions or 
                                conditions with respect to the 
                                investment of employer 
                                securities which are not 
                                imposed on the investment of 
                                other assets of the plan. This 
                                subclause shall not apply to 
                                any restrictions or conditions 
                                imposed by reason of the 
                                application of securities laws.
                  (E) Applicable defined contribution plan.--
                For purposes of this paragraph--
                          (i) In general.--The term 
                        ``applicable defined contribution 
                        plan'' means any defined contribution 
                        plan which holds any publicly traded 
                        employer securities.
                          (ii) Exception for certain esops.--
                        Such term does not include an employee 
                        stock ownership plan if--
                                  (I) there are no 
                                contributions to such plan (or 
                                earnings thereunder) which are 
                                held within such plan and are 
                                subject to subsection (k) or 
                                (m), and
                                  (II) such plan is a separate 
                                plan for purposes of section 
                                414(l) with respect to any 
                                other defined benefit plan or 
                                defined contribution plan 
                                maintained by the same employer 
                                or employers.
                          (iii) Exception for one participant 
                        plans.--Such term does not include a 
                        one-participant retirement plan.
                          (iv) One-participant retirement 
                        plan.--For purposes of clause (iii), 
                        the term ``one-participant retirement 
                        plan'' means a retirement plan that on 
                        the first day of the plan year--
                                  (I) covered only one 
                                individual (or the individual 
                                and the individual's spouse) 
                                and the individual (or the 
                                individual and the individual's 
                                spouse) owned 100 percent of 
                                the plan sponsor (whether or 
                                not incorporated), or
                                  (II) covered only one or more 
                                partners (or partners and their 
                                spouses) in the plan sponsor.
                  (F) Certain plans treated as holding publicly 
                traded employer securities.--
                          (i) In general.--Except as provided 
                        in regulations or in clause (ii), a 
                        plan holding employer securities which 
                        are not publicly traded employer 
                        securities shall be treated as holding 
                        publicly traded employer securities if 
                        any employer corporation, or any member 
                        of a controlled group of corporations 
                        which includes such employer 
                        corporation, has issued a class of 
                        stock which is a publicly traded 
                        employer security.
                          (ii) Exception for certain controlled 
                        groups with publicly traded 
                        securities.--Clause (i) shall not apply 
                        to a plan if--
                                  (I) no employer corporation, 
                                or parent corporation of an 
                                employer corporation, has 
                                issued any publicly traded 
                                employer security, and
                                  (II) no employer corporation, 
                                or parent corporation of an 
                                employer corporation, has 
                                issued any special class of 
                                stock which grants particular 
                                rights to, or bears particular 
                                risks for, the holder or issuer 
                                with respect to any corporation 
                                described in clause (i) which 
                                has issued any publicly traded 
                                employer security.
                          (iii) Definitions.--For purposes of 
                        this subparagraph, the term--
                                  (I) ``controlled group of 
                                corporations'' has the meaning 
                                given such term by section 
                                1563(a), except that ``50 
                                percent'' shall be substituted 
                                for ``80 percent'' each place 
                                it appears,
                                  (II) ``employer corporation'' 
                                means a corporation which is an 
                                employer maintaining the plan, 
                                and
                                  (III) ``parent corporation'' 
                                has the meaning given such term 
                                by section 424(e).
                  (G) Other definitions.--For purposes of this 
                paragraph--
                          (i) Applicable individual.--The term 
                        ``applicable individual'' means--
                                  (I) any participant in the 
                                plan, and
                                  (II) any beneficiary who has 
                                an account under the plan with 
                                respect to which the 
                                beneficiary is entitled to 
                                exercise the rights of a 
                                participant.
                          (ii) Elective deferral.--The term 
                        ``elective deferral'' means an employer 
                        contribution described in section 
                        402(g)(3)(A).
                          (iii) Employer security.--The term 
                        ``employer security'' has the meaning 
                        given such term by section 407(d)(1) of 
                        the Employee Retirement Income Security 
                        Act of 1974.
                          (iv) Employee stock ownership plan.--
                        The term ``employee stock ownership 
                        plan'' has the meaning given such term 
                        by section 4975(e)(7).
                          (v) Publicly traded employer 
                        securities.--The term ``publicly traded 
                        employer securities'' means employer 
                        securities which are readily tradable 
                        on an established securities market.
                          (vi) Year of service.--The term 
                        ``year of service'' has the meaning 
                        given such term by section 411(a)(5).
                  (H) Transition rule for securities 
                attributable to employer contributions.--
                          (i) Rules phased in over 3 years.--
                                  (I) In general.--In the case 
                                of the portion of an account to 
                                which subparagraph (C) applies 
                                and which consists of employer 
                                securities acquired in a plan 
                                year beginning before January 
                                1, 2007, subparagraph (C) shall 
                                only apply to the applicable 
                                percentage of such securities. 
                                This subparagraph shall be 
                                applied separately with respect 
                                to each class of securities.
                                  (II) Exception for certain 
                                participants aged 55 or over.--
                                Subclause (I) shall not apply 
                                to an applicable individual who 
                                is a participant who has 
                                attained age 55 and completed 
                                at least 3 years of service 
                                before the first plan year 
                                beginning after December 31, 
                                2005.
                          (ii) Applicable percentage.--For 
                        purposes of clause (i), the applicable 
                        percentage shall be determined as 
                        follows:
          (36) Distributions during working retirement.--A 
        trust forming part of a pension plan shall not be 
        treated as failing to constitute a qualified trust 
        under this section solely because the plan provides 
        that a distribution may be made from such trust to an 
        employee who has attained age 62 and who is not 
        separated from employment at the time of such 
        distribution.
          (37) Death benefits under userra-qualified active 
        military service.--A trust shall not constitute a 
        qualified trust unless the plan provides that, in the 
        case of a participant who dies while performing 
        qualified military service (as defined in section 
        414(u)), the survivors of the participant are entitled 
        to any additional benefits (other than benefit accruals 
        relating to the period of qualified military service) 
        provided under the plan had the participant resumed and 
        then terminated employment on account of death.
Paragraphs (11), (12), (13), (14), (15), (19), and (20) shall 
apply only in the case of a plan to which section 411 (relating 
to minimum vesting standards) applies without regard to 
subsection (e)(2) of such section.
  (b) Certain retroactive changes in plan.--A stock bonus, 
pension, profit-sharing, or annuity plan shall be considered as 
satisfying the requirements of subsection (a) for the period 
beginning with the date on which it was put into effect, or for 
the period beginning with the earlier of the date on which 
there was adopted or put into effect any amendment which caused 
the plan to fail to satisfy such requirements, and ending with 
the time prescribed by law for filing the return of the 
employer for his taxable year in which such plan or amendment 
was adopted (including extensions thereof) or such later time 
as the Secretary may designate, if all provisions of the plan 
which are necessary to satisfy such requirements are in effect 
by the end of such period and have been made effective for all 
purposes for the whole of such period.
  (c) Definitions and rules relating to self-employed 
individuals and owner-employees.--For purposes of this 
section--
          (1) Self-employed individual treated as employee.--
                  (A) In general.--The term ``employee'' 
                includes, for any taxable year, an individual 
                who is a self-employed individual for such 
                taxable year.
                  (B) Self-employed individual.--The term 
                ``self-employed individual'' means, with 
                respect to any taxable year, an individual who 
                has earned income (as defined in paragraph (2)) 
                for such taxable year. To the extent provided 
                in regulations prescribed by the Secretary, 
                such term also includes, for any taxable year--
                          (i) an individual who would be a 
                        self-employed individual within the 
                        meaning of the preceding sentence but 
                        for the fact that the trade or business 
                        carried on by such individual did not 
                        have net profits for the taxable year, 
                        and
                          (ii) an individual who has been a 
                        self-employed individual within the 
                        meaning of the preceding sentence for 
                        any prior taxable year.
          (2) Earned income.--
                  (A) In general.--The term ``earned income'' 
                means the net earnings from self-employment (as 
                defined in section 1402(a)), but such net 
                earnings shall be determined--
                          (i) only with respect to a trade or 
                        business in which personal services of 
                        the taxpayer are a material income-
                        producing factor,
                          (ii) without regard to paragraphs (4) 
                        and (5) of section 1402(c),
                          (iii) in the case of any individual 
                        who is treated as an employee under 
                        subparagraph (A), (C), or (D) of 
                        section 3121(d)(3), without regard to 
                        section 1402(c)(2),
                          (iv) without regard to items which 
                        are not included in gross income for 
                        purposes of this chapter, and the 
                        deductions properly allocable to or 
                        chargeable against such items,
                          (v) with regard to the deductions 
                        allowed by section 404 to the taxpayer, 
                        and
                          (vi) with regard to the deduction 
                        allowed to the taxpayer by section 
                        164(f).
                For purposes of this subparagraph, section 
                1402, as in effect for a taxable year ending on 
                December 31, 1962, shall be treated as having 
                been in effect for all taxable years ending 
                before such date. For purposes of this part 
                only (other than sections 419 and 419A), this 
                subparagraph shall be applied as if the term 
                ``trade or business'' for purposes of section 
                1402 included service described in section 
                1402(c)(6).
                  (C) Income from disposition of certain 
                property.--For purposes of this section, the 
                term ``earned income'' includes gains (other 
                than any gain which is treated under any 
                provision of this chapter as gain from the sale 
                or exchange of a capital asset) and net 
                earnings derived from the sale or other 
                disposition of, the transfer of any interest 
                in, or the licensing of the use of property 
                (other than good will) by an individual whose 
                personal efforts created such property.
          (3) Owner-employee.--The term ``owner-employee'' 
        means an employee who--
                  (A) owns the entire interest in an 
                unincorporated trade or business, or
                  (B) in the case of a partnership, is a 
                partner who owns more than 10 percent of either 
                the capital interest or the profits interest in 
                such partnership.
        To the extent provided in regulations prescribed by the 
        Secretary, such term also means an individual who has 
        been an owner-employee within the meaning of the 
        preceding sentence.
          (4) Employer.--An individual who owns the entire 
        interest in an unincorporated trade or business shall 
        be treated as his own employer. A partnership shall be 
        treated as the employer of each partner who is an 
        employee within the meaning of paragraph (1).
          (5) Contributions on behalf of owner-employees.--The 
        term ``contribution on behalf of an owner-employee'' 
        includes, except as the context otherwise requires, a 
        contribution under a plan--
                  (A) by the employer for an owner-employee, 
                and
                  (B) by an owner-employee as an employee.
          (6) Special rule for certain fishermen.--For purposes 
        of this subsection, the term ``self-employed 
        individual'' includes an individual described in 
        section 3121(b)(20) (relating to certain fishermen).
  (d) Contribution limit on owner-employees.--A trust forming 
part of a pension or profit-sharing plan which provides 
contributions or benefits for employees some or all of whom are 
owner-employees shall constitute a qualified trust under this 
section only if, in addition to meeting the requirements of 
subsection (a), the plan provides that contributions on behalf 
of any owner-employee may be made only with respect to the 
earned income of such owner-employee which is derived from the 
trade or business with respect to which such plan is 
established.
  (f) Certain custodial accounts and contracts.--For purposes 
of this title, a custodial account, an annuity contract, or a 
contract (other than a life, health or accident, property, 
casualty, or liability insurance contract) issued by an 
insurance company qualified to do business in a State shall be 
treated as a qualified trust under this section if--
          (1) the custodial account or contract would, except 
        for the fact that it is not a trust, constitute a 
        qualified trust under this section, and
          (2) in the case of a custodial account the assets 
        thereof are held by a bank (as defined in section 
        408(n)) or another person who demonstrates, to the 
        satisfaction of the Secretary, that the manner in which 
        he will hold the assets will be consistent with the 
        requirements of this section.
For purposes of this title, in the case of a custodial account 
or contract treated as a qualified trust under this section by 
reason of this subsection, the person holding the assets of 
such account or holding such contract shall be treated as the 
trustee thereof.
  (g) Annuity defined.--For purposes of this section and 
sections 402, 403, and 404, the term ``annuity'' includes a 
face-amount certificate, as defined in section 2(a)(15) of the 
Investment Company Act of 1940 (15 U.S.C., sec. 80a-2); but 
does not include any contract or certificate issued after 
December 31, 1962, which is transferable, if any person other 
than the trustee of a trust described in section 401(a) which 
is exempt from tax under section 501(a) is the owner of such 
contract or certificate.
  (h) Medical, etc., benefits for retired employees and their 
spouses and dependents.--Under regulations prescribed by the 
Secretary, and subject to the provisions of section 420, a 
pension or annuity plan may provide for the payment of benefits 
for sickness, accident, hospitalization, and medical expenses 
of retired employees, their spouses and their dependents, but 
only if--
          (1) such benefits are subordinate to the retirement 
        benefits provided by the plan,
          (2) a separate account is established and maintained 
        for such benefits,
          (3) the employer's contributions to such separate 
        account are reasonable and ascertainable,
          (4) it is impossible, at any time prior to the 
        satisfaction of all liabilities under the plan to 
        provide such benefits, for any part of the corpus or 
        income of such separate account to be (within the 
        taxable year or thereafter) used for, or diverted to, 
        any purpose other than the providing of such benefits,
          (5) notwithstanding the provisions of subsection 
        (a)(2), upon the satisfaction of all liabilities under 
        the plan to provide such benefits, any amount remaining 
        in such separate account must, under the terms of the 
        plan, be returned to the employer, and
          (6) in the case of an employee who is a key employee, 
        a separate account is established and maintained for 
        such benefits payable to such employee (and [his 
        spouse] the employee's spouse and dependents) and such 
        benefits (to the extent attributable to plan years 
        beginning after March 31, 1984, for which the employee 
        is a key employee) are only payable to such employee 
        (and [his spouse] the employee's spouse and dependents) 
        from such separate account.
For purposes of paragraph (6), the term ``key employee'' means 
any employee, who at any time during the plan year or any 
preceding plan year during which contributions were made on 
behalf of such employee, is or was a key employee as defined in 
section 416(i). In no event shall the requirements of paragraph 
(1) be treated as met if the aggregate actual contributions for 
medical benefits, when added to actual contributions for life 
insurance protection under the plan, exceed 25 percent of the 
total actual contributions to the plan (other than 
contributions to fund past service credits) after the date on 
which the account is established. For purposes of this 
subsection, the term ``dependent'' shall include any individual 
who is a child (as defined in section 152(f)(1)) of a retired 
employee who as of the end of the calendar year has not 
attained age 27.
  (i) Certain union-negotiated pension plans.--In the case of a 
trust forming part of a pension plan which has been determined 
by the Secretary to constitute a qualified trust under 
subsection (a) and to be exempt from taxation under section 
501(a) for a period beginning after contributions were first 
made to or for such trust, if it is shown to the satisfaction 
of the Secretary that--
          (1) such trust was created pursuant to a collective 
        bargaining agreement between employee representatives 
        and one or more employers,
          (2) any disbursements of contributions, made to or 
        for such trust before the time as of which the 
        Secretary determined that the trust constituted a 
        qualified trust, substantially complied with the terms 
        of the trust, and the plan of which the trust is a 
        part, as subsequently qualified, and
          (3) before the time as of which the Secretary 
        determined that the trust constitutes a qualified 
        trust, the contributions to or for such trust were not 
        used in a manner which would jeopardize the interests 
        of its beneficiaries,
then such trust shall be considered as having constituted a 
qualified trust under subsection (a) and as having been exempt 
from taxation under section 501(a) for the period beginning on 
the date on which contributions were first made to or for such 
trust and ending on the date such trust first constituted 
(without regard to this subsection) a qualified trust under 
subsection (a).
  (k) Cash or deferred arrangements.--
          (1) General rule.--A profit-sharing or stock bonus 
        plan, a pre-ERISA money purchase plan, or a rural 
        cooperative plan shall not be considered as not 
        satisfying the requirements of subsection (a) merely 
        because the plan includes a qualified cash or deferred 
        arrangement.
          (2) Qualified cash or deferred arrangement.--A 
        qualified cash or deferred arrangement is any 
        arrangement which is part of a profit-sharing or stock 
        bonus plan, a pre-ERISA money purchase plan, or a rural 
        cooperative plan which meets the requirements of 
        subsection (a)--
                  (A) under which a covered employee may elect 
                to have the employer make payments as 
                contributions to a trust under the plan on 
                behalf of the employee, or to the employee 
                directly in cash;
                  (B) under which amounts held by the trust 
                which are attributable to employer 
                contributions made pursuant to the employee's 
                election--
                          (i) may not be distributable to 
                        participants or other beneficiaries 
                        earlier than--
                                  (I) severance from 
                                employment, death, or 
                                disability,
                                  (II) an event described in 
                                paragraph (10),
                                  (III) in the case of a 
                                profit-sharing or stock bonus 
                                plan, the attainment of age 
                                591/2,
                                  (IV) subject to the 
                                provisions of paragraph (14), 
                                upon hardship of the employee, 
                                or
                                  (V) in the case of a 
                                qualified reservist 
                                distribution (as defined in 
                                section 72(t)(2)(G)(iii)), the 
                                date on which a period referred 
                                to in subclause (III) of such 
                                section begins, and
                          (ii) will not be distributable merely 
                        by reason of the completion of a stated 
                        period of participation or the lapse of 
                        a fixed number of years;
                  (C) which provides that an employee's right 
                to his accrued benefit derived from employer 
                contributions made to the trust pursuant to his 
                election is nonforfeitable, and
                  (D) which does not require, as a condition of 
                participation in the arrangement, that an 
                employee complete a period of service with the 
                employer (or employers) maintaining the plan 
                extending beyond the period permitted under 
                section 410(a)(1) (determined without regard to 
                subparagraph (B)(i) thereof).
          (3) Application of participation and discrimination 
        standards.--
                  (A) A cash or deferred arrangement shall not 
                be treated as a qualified cash or deferred 
                arrangement unless--
                          (i) those employees eligible to 
                        benefit under the arrangement satisfy 
                        the provisions of section 410(b)(1), 
                        and
                          (ii) the actual deferral percentage 
                        for eligible highly compensated 
                        employees (as defined in paragraph (5)) 
                        for the plan year bears a relationship 
                        to the actual deferral percentage for 
                        all other eligible employees for the 
                        preceding plan year which meets either 
                        of the following tests:
                                  (I) The actual deferral 
                                percentage for the group of 
                                eligible highly compensated 
                                employees is not more than the 
                                actual deferral percentage of 
                                all other eligible employees 
                                multiplied by 1.25.
                                  (II) The excess of the actual 
                                deferral percentage for the 
                                group of eligible highly 
                                compensated employees over that 
                                of all other eligible employees 
                                is not more than 2 percentage 
                                points, and the actual deferral 
                                percentage for the group of 
                                eligible highly compensated 
                                employees is not more than the 
                                actual deferral percentage of 
                                all other eligible employees 
                                multiplied by 2.
                 If 2 or more plans which include cash or 
                deferred arrangements are considered as 1 plan 
                for purposes of section 401(a)(4) or 410(b), 
                the cash or deferred arrangements included in 
                such plans shall be treated as 1 arrangement 
                for purposes of this subparagraph.
                If any highly compensated employee is a 
                participant under 2 or more cash or deferred 
                arrangements of the employer, for purposes of 
                determining the deferral percentage with 
                respect to such employee, all such cash or 
                deferred arrangements shall be treated as 1 
                cash or deferred arrangement. An arrangement 
                may apply clause (ii) by using the plan year 
                rather than the preceding plan year if the 
                employer so elects, except that if such an 
                election is made, it may not be changed except 
                as provided by the Secretary.
                  (B) For purposes of subparagraph (A), the 
                actual deferral percentage for a specified 
                group of employees for a plan year shall be the 
                average of the ratios (calculated separately 
                for each employee in such group) of--
                          (i) the amount of employer 
                        contributions actually paid over to the 
                        trust on behalf of each such employee 
                        for such plan year, to
                          (ii) the employee's compensation for 
                        such plan year.
                  (C) A cash or deferred arrangement shall be 
                treated as meeting the requirements of 
                subsection (a)(4) with respect to contributions 
                if the requirements of subparagraph (A)(ii) are 
                met.
                  (D) For purposes of subparagraph (B), the 
                employer contributions on behalf of any 
                employee--
                          (i) shall include any employer 
                        contributions made pursuant to the 
                        employee's election under paragraph 
                        (2), and
                          (ii) under such rules as the 
                        Secretary may prescribe, may, at the 
                        election of the employer, include--
                                  (I) matching contributions 
                                (as defined in 401(m)(4)(A)) 
                                which meet the requirements of 
                                paragraph (2)(B) and (C), and
                                  (II) qualified nonelective 
                                contributions (within the 
                                meaning of section 
                                401(m)(4)(C)).
                  (E) For purposes of this paragraph, in the 
                case of the first plan year of any plan (other 
                than a successor plan), the amount taken into 
                account as the actual deferral percentage of 
                nonhighly compensated employees for the 
                preceding plan year shall be--
                          (i) 3 percent, or
                          (ii) if the employer makes an 
                        election under this subclause, the 
                        actual deferral percentage of nonhighly 
                        compensated employees determined for 
                        such first plan year.
                  (F) Special rule for early participation.--If 
                an employer elects to apply section 
                410(b)(4)(B) in determining whether a cash or 
                deferred arrangement meets the requirements of 
                subparagraph (A)(i), the employer may, in 
                determining whether the arrangement meets the 
                requirements of subparagraph (A)(ii), exclude 
                from consideration all eligible employees 
                (other than highly compensated employees) who 
                have not met the minimum age and service 
                requirements of section 410(a)(1)(A).
                  (G) Governmental plan.--A governmental plan 
                (within the meaning of section 414(d)) shall be 
                treated as meeting the requirements of this 
                paragraph.
          (4) Other requirements.--
                  (A) Benefits (other than matching 
                contributions) must not be contingent on 
                election to defer.--A cash or deferred 
                arrangement of any employer shall not be 
                treated as a qualified cash or deferred 
                arrangement if any other benefit is conditioned 
                (directly or indirectly) on the employee 
                electing to have the employer make or not make 
                contributions under the arrangement in lieu of 
                receiving cash. The preceding sentence shall 
                not apply to any matching contribution (as 
                defined in section 401(m)) made by reason of 
                such an election.
                  (B) Eligibility of State and local 
                governments and tax-exempt organizations.--
                          (i) Tax-exempts eligible.--Except as 
                        provided in clause (ii), any 
                        organization exempt from tax under this 
                        subtitle may include a qualified cash 
                        or deferred arrangement as part of a 
                        plan maintained by it.
                          (ii) Governments ineligible.--A cash 
                        or deferred arrangement shall not be 
                        treated as a qualified cash or deferred 
                        arrangement if it is part of a plan 
                        maintained by a State or local 
                        government or political subdivision 
                        thereof, or any agency or 
                        instrumentality thereof. This clause 
                        shall not apply to a rural cooperative 
                        plan or to a plan of an employer 
                        described in clause (iii).
                          (iii) Treatment of Indian tribal 
                        governments.--An employer which is an 
                        Indian tribal government (as defined in 
                        section 7701(a)(40)), a subdivision of 
                        an Indian tribal government (determined 
                        in accordance with section 7871(d)), an 
                        agency or instrumentality of an Indian 
                        tribal government or subdivision 
                        thereof, or a corporation chartered 
                        under Federal, State, or tribal law 
                        which is owned in whole or in part by 
                        any of the foregoing may include a 
                        qualified cash or deferred arrangement 
                        as part of a plan maintained by the 
                        employer.
                  (C) Coordination with other plans.--Except as 
                provided in section 401(m), any employer 
                contribution made pursuant to an employee's 
                election under a qualified cash or deferred 
                arrangement shall not be taken into account for 
                purposes of determining whether any other plan 
                meets the requirements of section 401(a) or 
                410(b). This subparagraph shall not apply for 
                purposes of determining whether a plan meets 
                the average benefit requirement of section 
                410(b)(2)(A)(ii).
          (5) Highly compensated employee.--For purposes of 
        this subsection, the term ``highly compensated 
        employee'' has the meaning given such term by section 
        414(q).
          (6) Pre-ERISA money purchase plan.--For purposes of 
        this subsection, the term ``pre-ERISA money purchase 
        plan'' means a pension plan--
                  (A) which is a defined contribution plan (as 
                defined in section 414(i)),
                  (B) which was in existence on June 27, 1974, 
                and which, on such date, included a salary 
                reduction arrangement, and
                  (C) under which neither the employee 
                contributions nor the employer contributions 
                may exceed the levels provided for by the 
                contribution formula in effect under the plan 
                on such date.
          (7) Rural cooperative plan.--For purposes of this 
        subsection--
                  (A) In general.--The term ``rural cooperative 
                plan'' means any pension plan--
                          (i) which is a defined contribution 
                        plan (as defined in section 414(i)), 
                        and
                          (ii) which is established and 
                        maintained by a rural cooperative.
                  (B) Rural cooperative defined.--For purposes 
                of subparagraph (A), the term ``rural 
                cooperative'' means--
                          (i) any organization which--
                                  (I) is engaged primarily in 
                                providing electric service on a 
                                mutual or cooperative basis, or
                                  (II) is engaged primarily in 
                                providing electric service to 
                                the public in its area of 
                                service and which is exempt 
                                from tax under this subtitle or 
                                which is a State or local 
                                government (or an agency or 
                                instrumentality thereof), other 
                                than a municipality (or an 
                                agency or instrumentality 
                                thereof),
                          (ii) any organization described in 
                        paragraph (4) or (6) of section 501(c) 
                        and at least 80 percent of the members 
                        of which are organizations described in 
                        clause (i),
                          (iii) a cooperative telephone company 
                        described in section 501(c)(12),
                          (iv) any organization which--
                                  (I) is a mutual irrigation or 
                                ditch company described in 
                                section 501(c)(12) (without 
                                regard to the 85 percent 
                                requirement thereof), or
                                  (II) is a district organized 
                                under the laws of a State as a 
                                municipal corporation for the 
                                purpose of irrigation, water 
                                conservation, or drainage, and
                          (v) an organization which is a 
                        national association of organizations 
                        described in clause (i), (ii),, (iii), 
                        or (iv).
                  (C) Special rule for certain distributions.--
                A rural cooperative plan which includes a 
                qualified cash or deferred arrangement shall 
                not be treated as violating the requirements of 
                section 401(a) or of paragraph (2) merely by 
                reason of a hardship distribution or a 
                distribution to a participant after attainment 
                of age 591/2. For purposes of this section, the 
                term ``hardship distribution'' means a 
                distribution described in paragraph 
                (2)(B)(i)(IV) (without regard to the limitation 
                of its application to profit-sharing or stock 
                bonus plans).
          (8) Arrangement not disqualified if excess 
        contributions distributed.--
                  (A) In general.--A cash or deferred 
                arrangement shall not be treated as failing to 
                meet the requirements of clause (ii) of 
                paragraph (3)(A) for any plan year if, before 
                the close of the following plan year--
                          (i) the amount of the excess 
                        contributions for such plan year (and 
                        any income allocable to such 
                        contributions through the end of such 
                        year) is distributed, or
                          (ii) to the extent provided in 
                        regulations, the employee elects to 
                        treat the amount of the excess 
                        contributions as an amount distributed 
                        to the employee and then contributed by 
                        the employee to the plan.
                Any distribution of excess contributions (and 
                income) may be made without regard to any other 
                provision of law.
                  (B) Excess contributions.--For purposes of 
                subparagraph (A), the term ``excess 
                contributions'' means, with respect to any plan 
                year, the excess of--
                          (i) the aggregate amount of employer 
                        contributions actually paid over to the 
                        trust on behalf of highly compensated 
                        employees for such plan year, over
                          (ii) the maximum amount of such 
                        contributions permitted under the 
                        limitations of clause (ii) of paragraph 
                        (3)(A) (determined by reducing 
                        contributions made on behalf of highly 
                        compensated employees in order of the 
                        actual deferral percentages beginning 
                        with the highest of such percentages).
                  (C) Method of distributing excess 
                contributions.--Any distribution of the excess 
                contributions for any plan year shall be made 
                to highly compensated employees on the basis of 
                the amount of contributions by, or on behalf 
                of, each of such employees.
                  (D) Additional tax under section 72(t) not to 
                apply.--No tax shall be imposed under section 
                72(t) on any amount required to be distributed 
                under this paragraph.
                  (E) Treatment of matching contributions 
                forfeited by reason of excess deferral or 
                contribution or permissible withdrawal.--For 
                purposes of paragraph (2)(C), a matching 
                contribution (within the meaning of subsection 
                (m)) shall not be treated as forfeitable merely 
                because such contribution is forfeitable if the 
                contribution to which the matching contribution 
                relates is treated as an excess contribution 
                under subparagraph (B), an excess deferral 
                under section 402(g)(2)(A), a permissible 
                withdrawal under section 414(w), or an excess 
                aggregate contribution under section 
                401(m)(6)(B).
                  (F) Cross reference.--For excise tax on 
                certain excess contributions, see section 4979.
          (9) Compensation.--For purposes of this subsection, 
        the term ``compensation'' has the meaning given such 
        term by section 414(s).
          (10) Distributions upon termination of plan.--
                  (A) In general.--An event described in this 
                subparagraph is the termination of the plan 
                without establishment or maintenance of another 
                defined contribution plan (other than an 
                employee stock ownership plan as defined in 
                section 4975(e)(7)).
                  (B) Distributions must be lump sum 
                distributions.--
                          (i) In general.--A termination shall 
                        not be treated as described in 
                        subparagraph (A) with respect to any 
                        employee unless the employee receives a 
                        lump sum distribution by reason of the 
                        termination.
                          (ii) Lump-sum distribution.--For 
                        purposes of this subparagraph, the term 
                        ``lump-sum distribution'' has the 
                        meaning given such term by section 
                        402(e)(4)(D) (without regard to 
                        subclauses (I), (II), (III), and (IV) 
                        of clause (i) thereof). Such term 
                        includes a distribution of an annuity 
                        contract from--
                                  (I) a trust which forms a 
                                part of a plan described in 
                                section 401(a) and which is 
                                exempt from tax under section 
                                501(a), or
                                  (II) an annuity plan 
                                described in section 403(a).
          (11) Adoption of simple plan to meet 
        nondiscrimination tests.--
                  (A) In general.--A cash or deferred 
                arrangement maintained by an eligible employer 
                shall be treated as meeting the requirements of 
                paragraph (3)(A)(ii) if such arrangement 
                meets--
                          (i) the contribution requirements of 
                        subparagraph (B),
                          (ii) the exclusive plan requirements 
                        of subparagraph (C), and
                          (iii) the vesting requirements of 
                        section 408(p)(3).
                  (B) Contribution requirements.--
                          (i) In general.--The requirements of 
                        this subparagraph are met if, under the 
                        arrangement--
                                  (I) an employee may elect to 
                                have the employer make elective 
                                contributions for the year on 
                                behalf of the employee to a 
                                trust under the plan in an 
                                amount which is expressed as a 
                                percentage of compensation of 
                                the employee but which in no 
                                event exceeds the amount in 
                                effect under section 
                                408(p)(2)(A)(ii),
                                  (II) the employer is required 
                                to make a matching contribution 
                                to the trust for the year in an 
                                amount equal to so much of the 
                                amount the employee elects 
                                under subclause (I) as does not 
                                exceed 3 percent of 
                                compensation for the year, and
                                  (III) no other contributions 
                                may be made other than 
                                contributions described in 
                                subclause (I) or (II).
                          (ii) Employer may elect 2-percent 
                        nonelective contribution.--An employer 
                        shall be treated as meeting the 
                        requirements of clause (i)(II) for any 
                        year if, in lieu of the contributions 
                        described in such clause, the employer 
                        elects (pursuant to the terms of the 
                        arrangement) to make nonelective 
                        contributions of 2 percent of 
                        compensation for each employee who is 
                        eligible to participate in the 
                        arrangement and who has at least $5,000 
                        of compensation from the employer for 
                        the year. If an employer makes an 
                        election under this subparagraph for 
                        any year, the employer shall notify 
                        employees of such election within a 
                        reasonable period of time before the 
                        60th day before the beginning of such 
                        year.
                          (iii) Administrative requirements.--
                                  (I) In general.--Rules 
                                similar to the rules of 
                                subparagraphs (B) and (C) of 
                                section 408(p)(5) shall apply 
                                for purposes of this 
                                subparagraph.
                                  (II) Notice of election 
                                period.--The requirements of 
                                this subparagraph shall not be 
                                treated as met with respect to 
                                any year unless the employer 
                                notifies each employee eligible 
                                to participate, within a 
                                reasonable period of time 
                                before the 60th day before the 
                                beginning of such year (and, 
                                for the first year the employee 
                                is so eligible, the 60th day 
                                before the first day such 
                                employee is so eligible), of 
                                the rules similar to the rules 
                                of section 408(p)(5)(C) which 
                                apply by reason of subclause 
                                (I).
                  (C) Exclusive plan requirement.--The 
                requirements of this subparagraph are met for 
                any year to which this paragraph applies if no 
                contributions were made, or benefits were 
                accrued, for services during such year under 
                any qualified plan of the employer on behalf of 
                any employee eligible to participate in the 
                cash or deferred arrangement, other than 
                contributions described in subparagraph (B).
                  (D) Definitions and special rule.--
                          (i) Definitions.--For purposes of 
                        this paragraph, any term used in this 
                        paragraph which is also used in section 
                        408(p) shall have the meaning given 
                        such term by such section.
                          (ii) Coordination with top-heavy 
                        rules.--A plan meeting the requirements 
                        of this paragraph for any year shall 
                        not be treated as a top-heavy plan 
                        under section 416 for such year if such 
                        plan allows only contributions required 
                        under this paragraph.
          (12) Alternative methods of meeting nondiscrimination 
        requirements.--
                  (A) In general.--A cash or deferred 
                arrangement shall be treated as meeting the 
                requirements of paragraph (3)(A)(ii) if such 
                arrangement--
                          (i) meets the contribution 
                        requirements of subparagraph (B) or 
                        (C), and
                          (ii) meets the notice requirements of 
                        subparagraph (D).
                  (B) Matching contributions.--
                          (i) In general.--The requirements of 
                        this subparagraph are met if, under the 
                        arrangement, the employer makes 
                        matching contributions on behalf of 
                        each employee who is not a highly 
                        compensated employee in an amount equal 
                        to--
                                  (I) 100 percent of the 
                                elective contributions of the 
                                employee to the extent such 
                                elective contributions do not 
                                exceed 3 percent of the 
                                employee's compensation, and
                                  (II) 50 percent of the 
                                elective contributions of the 
                                employee to the extent that 
                                such elective contributions 
                                exceed 3 percent but do not 
                                exceed 5 percent of the 
                                employee's compensation.
                          (ii) Rate for highly compensated 
                        employees.--The requirements of this 
                        subparagraph are not met if, under the 
                        arrangement, the rate of matching 
                        contribution with respect to any 
                        elective contribution of a highly 
                        compensated employee at any rate of 
                        elective contribution is greater than 
                        that with respect to an employee who is 
                        not a highly compensated employee.
                          (iii) Alternative plan designs.--If 
                        the rate of any matching contribution 
                        with respect to any rate of elective 
                        contribution is not equal to the 
                        percentage required under clause (i), 
                        an arrangement shall not be treated as 
                        failing to meet the requirements of 
                        clause (i) if--
                                  (I) the rate of an employer's 
                                matching contribution does not 
                                increase as an employee's rate 
                                of elective contributions 
                                increase, and
                                  (II) the aggregate amount of 
                                matching contributions at such 
                                rate of elective contribution 
                                is at least equal to the 
                                aggregate amount of matching 
                                contributions which would be 
                                made if matching contributions 
                                were made on the basis of the 
                                percentages described in clause 
                                (i).
                  (C) Nonelective contributions.--The 
                requirements of this subparagraph are met if, 
                under the arrangement, the employer is 
                required, without regard to whether the 
                employee makes an elective contribution or 
                employee contribution, to make a contribution 
                to a defined contribution plan on behalf of 
                each employee who is not a highly compensated 
                employee and who is eligible to participate in 
                the arrangement in an amount equal to at least 
                3 percent of the employee's compensation.
                  (D) Notice requirement.--An arrangement meets 
                the requirements of this paragraph if, under 
                the arrangement, each employee eligible to 
                participate is, within a reasonable period 
                before any year, given written notice of the 
                employee's rights and obligations under the 
                arrangement which--
                          (i) is sufficiently accurate and 
                        comprehensive to apprise the employee 
                        of such rights and obligations, and
                          (ii) is written in a manner 
                        calculated to be understood by the 
                        average employee eligible to 
                        participate.
                  (E) Other requirements.--
                          (i) Withdrawal and vesting 
                        restrictions.--An arrangement shall not 
                        be treated as meeting the requirements 
                        of subparagraph (B) or (C) of this 
                        paragraph unless the requirements of 
                        subparagraphs (B) and (C) of paragraph 
                        (2) are met with respect to all 
                        employer contributions (including 
                        matching contributions) taken into 
                        account in determining whether the 
                        requirements of subparagraphs (B) and 
                        (C) of this paragraph are met.
                          (ii) Social security and similar 
                        contributions not taken into account.--
                        An arrangement shall not be treated as 
                        meeting the requirements of 
                        subparagraph (B) or (C) unless such 
                        requirements are met without regard to 
                        subsection (l), and, for purposes of 
                        subsection (l), employer contributions 
                        under subparagraph (B) or (C) shall not 
                        be taken into account.
                  (F) Other plans.--An arrangement shall be 
                treated as meeting the requirements under 
                subparagraph (A)(i) if any other plan 
                maintained by the employer meets such 
                requirements with respect to employees eligible 
                under the arrangement.
          (13) Alternative method for automatic contribution 
        arrangements to meet nondiscrimination requirements.--
                  (A) In general.--A qualified automatic 
                contribution arrangement shall be treated as 
                meeting the requirements of paragraph 
                (3)(A)(ii).
                  (B) Qualified automatic contribution 
                arrangement.--For purposes of this paragraph, 
                the term ``qualified automatic contribution 
                arrangement'' means any cash or deferred 
                arrangement which meets the requirements of 
                subparagraphs (C) through (E).
                  (C) Automatic deferral.--
                          (i) In general.--The requirements of 
                        this subparagraph are met if, under the 
                        arrangement, each employee eligible to 
                        participate in the arrangement is 
                        treated as having elected to have the 
                        employer make elective contributions in 
                        an amount equal to a qualified 
                        percentage of compensation.
                          (ii) Election out.--The election 
                        treated as having been made under 
                        clause (i) shall cease to apply with 
                        respect to any employee if such 
                        employee makes an affirmative 
                        election--
                                  (I) to not have such 
                                contributions made, or
                                  (II) to make elective 
                                contributions at a level 
                                specified in such affirmative 
                                election.
                          (iii) Qualified percentage.--For 
                        purposes of this subparagraph, the term 
                        ``qualified percentage'' means, with 
                        respect to any employee, any percentage 
                        determined under the arrangement if 
                        such percentage is applied uniformly, 
                        does not exceed 10 percent, and is at 
                        least--
                                  (I) 3 percent during the 
                                period ending on the last day 
                                of the first plan year which 
                                begins after the date on which 
                                the first elective contribution 
                                described in clause (i) is made 
                                with respect to such employee,
                                  (II) 4 percent during the 
                                first plan year following the 
                                plan year described in 
                                subclause (I),
                                  (III) 5 percent during the 
                                second plan year following the 
                                plan year described in 
                                subclause (I), and
                                  (IV) 6 percent during any 
                                subsequent plan year.
                          (iv) Automatic deferral for current 
                        employees not required.--Clause (i) may 
                        be applied without taking into account 
                        any employee who--
                                  (I) was eligible to 
                                participate in the arrangement 
                                (or a predecessor arrangement) 
                                immediately before the date on 
                                which such arrangement becomes 
                                a qualified automatic 
                                contribution arrangement 
                                (determined after application 
                                of this clause), and
                                  (II) had an election in 
                                effect on such date either to 
                                participate in the arrangement 
                                or to not participate in the 
                                arrangement.
                  (D) Matching or nonelective contributions.--
                          (i) In general.--The requirements of 
                        this subparagraph are met if, under the 
                        arrangement, the employer--
                                  (I) makes matching 
                                contributions on behalf of each 
                                employee who is not a highly 
                                compensated employee in an 
                                amount equal to the sum of 100 
                                percent of the elective 
                                contributions of the employee 
                                to the extent that such 
                                contributions do not exceed 1 
                                percent of compensation plus 50 
                                percent of so much of such 
                                contributions as exceed 1 
                                percent but do not exceed 6 
                                percent of compensation, or
                                  (II) is required, without 
                                regard to whether the employee 
                                makes an elective contribution 
                                or employee contribution, to 
                                make a contribution to a 
                                defined contribution plan on 
                                behalf of each employee who is 
                                not a highly compensated 
                                employee and who is eligible to 
                                participate in the arrangement 
                                in an amount equal to at least 
                                3 percent of the employee's 
                                compensation.
                          (ii) Application of rules for 
                        matching contributions.--The rules of 
                        clauses (ii) and (iii) of paragraph 
                        (12)(B) shall apply for purposes of 
                        clause (i)(I).
                          (iii) Withdrawal and vesting 
                        restrictions.--An arrangement shall not 
                        be treated as meeting the requirements 
                        of clause (i) unless, with respect to 
                        employer contributions (including 
                        matching contributions) taken into 
                        account in determining whether the 
                        requirements of clause (i) are met--
                                  (I) any employee who has 
                                completed at least 2 years of 
                                service (within the meaning of 
                                section 411(a)) has a 
                                nonforfeitable right to 100 
                                percent of the employee's 
                                accrued benefit derived from 
                                such employer contributions, 
                                and
                                  (II) the requirements of 
                                subparagraph (B) of paragraph 
                                (2) are met with respect to all 
                                such employer contributions.
                          (iv) Application of certain other 
                        rules.--The rules of subparagraphs 
                        (E)(ii) and (F) of paragraph (12) shall 
                        apply for purposes of subclauses (I) 
                        and (II) of clause (i).
                  (E) Notice requirements.--
                          (i) In general.--The requirements of 
                        this subparagraph are met if, within a 
                        reasonable period before each plan 
                        year, each employee eligible to 
                        participate in the arrangement for such 
                        year receives written notice of the 
                        employee's rights and obligations under 
                        the arrangement which--
                                  (I) is sufficiently accurate 
                                and comprehensive to apprise 
                                the employee of such rights and 
                                obligations, and
                                  (II) is written in a manner 
                                calculated to be understood by 
                                the average employee to whom 
                                the arrangement applies.
                          (ii) Timing and content 
                        requirements.--A notice shall not be 
                        treated as meeting the requirements of 
                        clause (i) with respect to an employee 
                        unless--
                                  (I) the notice explains the 
                                employee's right under the 
                                arrangement to elect not to 
                                have elective contributions 
                                made on the employee's behalf 
                                (or to elect to have such 
                                contributions made at a 
                                different percentage),
                                  (II) in the case of an 
                                arrangement under which the 
                                employee may elect among 2 or 
                                more investment options, the 
                                notice explains how 
                                contributions made under the 
                                arrangement will be invested in 
                                the absence of any investment 
                                election by the employee, and
                                  (III) the employee has a 
                                reasonable period of time after 
                                receipt of the notice described 
                                in subclauses (I) and (II) and 
                                before the first elective 
                                contribution is made to make 
                                either such election.
          (14) Special rules relating to hardship 
        withdrawals.--For purposes of paragraph (2)(B)(i)(IV)--
                  (A) Amounts which may be withdrawn.--The 
                following amounts may be distributed upon 
                hardship of the employee:
                          (i) Contributions to a profit-sharing 
                        or stock bonus plan to which section 
                        402(e)(3) applies.
                          (ii) Qualified nonelective 
                        contributions (as defined in subsection 
                        (m)(4)(C)).
                          (iii) Qualified matching 
                        contributions described in paragraph 
                        (3)(D)(ii)(I).
                          (iv) Earnings on any contributions 
                        described in clause (i), (ii), or 
                        (iii).
                  (B) No requirement to take available loan.--A 
                distribution shall not be treated as failing to 
                be made upon the hardship of an employee solely 
                because the employee does not take any 
                available loan under the plan.
  (l) Permitted disparity in plan contributions or benefits.--
          (1) In general.--The requirements of this subsection 
        are met with respect to a plan if--
                  (A) in the case of a defined contribution 
                plan, the requirements of paragraph (2) are 
                met, and
                  (B) in the case of a defined benefit plan, 
                the requirements of paragraph (3) are met.
          (2) Defined contribution plan.--
                  (A) In general.--A defined contribution plan 
                meets the requirements of this paragraph if the 
                excess contribution percentage does not exceed 
                the base contribution percentage by more than 
                the lesser of--
                          (i) the base contribution percentage, 
                        or
                          (ii) the greater of--
                                  (I) 5.7 percentage points, or
                                  (II) the percentage equal to 
                                the portion of the rate of tax 
                                under section 3111(a) (in 
                                effect as of the beginning of 
                                the year) which is attributable 
                                to old-age insurance.
                  (B) Contribution percentages.--For purposes 
                of this paragraph--
                          (i) Excess contribution percentage.--
                        The term ``excess contribution 
                        percentage'' means the percentage of 
                        compensation which is contributed by 
                        the employer under the plan with 
                        respect to that portion of each 
                        participant's compensation in excess of 
                        the integration level.
                          (ii) Base contribution percentage.--
                        The term ``base contribution 
                        percentage'' means the percentage of 
                        compensation contributed by the 
                        employer under the plan with respect to 
                        that portion of each participant's 
                        compensation not in excess of the 
                        integration level.
          (3) Defined benefit plan.--A defined benefit plan 
        meets the requirements of this paragraph if--
                  (A) Excess plans.--
                          (i) In general.--In the case of a 
                        plan other than an offset plan--
                                  (I) the excess benefit 
                                percentage does not exceed the 
                                base benefit percentage by more 
                                than the maximum excess 
                                allowance,
                                  (II) any optional form of 
                                benefit, preretirement benefit, 
                                actuarial factor, or other 
                                benefit or feature provided 
                                with respect to compensation in 
                                excess of the integration level 
                                is provided with respect to 
                                compensation not in excess of 
                                such level, and
                                  (III) benefits are based on 
                                average annual compensation.
                          (ii) Benefit percentages.--For 
                        purposes of this subparagraph, the 
                        excess and base benefit percentages 
                        shall be computed in the same manner as 
                        the excess and base contribution 
                        percentages under paragraph (2)(B), 
                        except that such determination shall be 
                        made on the basis of benefits 
                        attributable to employer contributions 
                        rather than contributions.
                  (B) Offset plans.--In the case of an offset 
                plan, the plan provides that--
                          (i) a participant's accrued benefit 
                        attributable to employer contributions 
                        (within the meaning of section 
                        411(c)(1)) may not be reduced (by 
                        reason of the offset) by more than the 
                        maximum offset allowance, and
                          (ii) benefits are based on average 
                        annual compensation.
          (4) Definitions relating to paragraph (3).--For 
        purposes of paragraph (3)--
                  (A) Maximum excess allowance.--The maximum 
                excess allowance is equal to--
                          (i) in the case of benefits 
                        attributable to any year of service 
                        with the employer taken into account 
                        under the plan, 3/4 of a percentage 
                        point, and
                          (ii) in the case of total benefits, 
                        3/4 of a percentage point, multiplied 
                        by the participant's years of service 
                        (not in excess of 35) with the employer 
                        taken into account under the plan.
                In no event shall the maximum excess allowance 
                exceed the base benefit percentage.
                  (B) Maximum offset allowance.--The maximum 
                offset allowance is equal to--
                          (i) in the case of benefits 
                        attributable to any year of service 
                        with the employer taken into account 
                        under the plan, 3/4 percent of the 
                        participant's final average 
                        compensation, and
                          (ii) in the case of total benefits, 
                        3/4 percent of the participant's final 
                        average compensation, multiplied by the 
                        participant's years of service (not in 
                        excess of 35) with the employer taken 
                        into account under the plan.
                In no event shall the maximum offset allowance 
                exceed 50 percent of the benefit which would 
                have accrued without regard to the offset 
                reduction.
                  (C) Reductions.--
                          (i) In general.--The Secretary shall 
                        prescribe regulations requiring the 
                        reduction of the 3/4 percentage factor 
                        under subparagraph (A) or (B)--
                                  (I) in the case of a plan 
                                other than an offset plan which 
                                has an integration level in 
                                excess of covered compensation, 
                                or
                                  (II) with respect to any 
                                participant in an offset plan 
                                who has final average 
                                compensation in excess of 
                                covered compensation.
                          (ii) Basis of reductions.--Any 
                        reductions under clause (i) shall be 
                        based on the percentages of 
                        compensation replaced by the employer-
                        derived portions of primary insurance 
                        amounts under the Social Security Act 
                        for participants with compensation in 
                        excess of covered compensation.
                  (D) Offset plan.--The term ``offset plan'' 
                means any plan with respect to which the 
                benefit attributable to employer contributions 
                for each participant is reduced by an amount 
                specified in the plan.
          (5) Other definitions and special rules.--For 
        purposes of this subsection--
                  (A) Integration level.--
                          (i) In general.--The term 
                        ``integration level'' means the amount 
                        of compensation specified under the 
                        plan (by dollar amount or formula) at 
                        or below which the rate at which 
                        contributions or benefits are provided 
                        (expressed as a percentage) is less 
                        than such rate above such amount.
                          (ii) Limitation.--The integration 
                        level for any year may not exceed the 
                        contribution and benefit base in effect 
                        under section 230 of the Social 
                        Security Act for such year.
                          (iii) Level to apply to all 
                        participants.--A plan's integration 
                        level shall apply with respect to all 
                        participants in the plan.
                          (iv) Multiple integration levels.--
                        Under rules prescribed by the 
                        Secretary, a defined benefit plan may 
                        specify multiple integration levels.
                  (B) Compensation.--The term ``compensation'' 
                has the meaning given such term by section 
                414(s).
                  (C) Average annual compensation.--The term 
                ``average annual compensation'' means the 
                participant's highest average annual 
                compensation for--
                          (i) any period of at least 3 
                        consecutive years, or
                          (ii) if shorter, the participant's 
                        full period of service.
                  (D) Final average compensation.--
                          (i) In general.--The term ``final 
                        average compensation'' means the 
                        participant's average annual 
                        compensation for--
                                  (I) the 3-consecutive year 
                                period ending with the current 
                                year, or
                                  (II) if shorter, the 
                                participant's full period of 
                                service.
                          (ii) Limitation.--A participant's 
                        final average compensation shall be 
                        determined by not taking into account 
                        in any year compensation in excess of 
                        the contribution and benefit base in 
                        effect under section 230 of the Social 
                        Security Act for such year.
                  (E) Covered compensation.--
                          (i) In general.--The term ``covered 
                        compensation'' means, with respect to 
                        an employee, the average of the 
                        contribution and benefit bases in 
                        effect under section 230 of the Social 
                        Security Act for each year in the 35-
                        year period ending with the year in 
                        which the employee attains the social 
                        security retirement age.
                          (ii) Computation for any year.--For 
                        purposes of clause (i), the 
                        determination for any year preceding 
                        the year in which the employee attains 
                        the social security retirement age 
                        shall be made by assuming that there is 
                        no increase in the bases described in 
                        clause (i) after the determination year 
                        and before the employee attains the 
                        social security retirement age.
                          (iii) Social security retirement 
                        age.--For purposes of this 
                        subparagraph, the term ``social 
                        security retirement age'' has the 
                        meaning given such term by section 
                        415(b)(8).
                  (F) Regulations.--The Secretary shall 
                prescribe such regulations as are necessary or 
                appropriate to carry out the purposes of this 
                subsection, including--
                          (i) in the case of a defined benefit 
                        plan which provides for unreduced 
                        benefits commencing before the social 
                        security retirement age (as defined in 
                        section 415(b)(8)), rules providing for 
                        the reduction of the maximum excess 
                        allowance and the maximum offset 
                        allowance, and
                          (ii) in the case of an employee 
                        covered by 2 or more plans of the 
                        employer which fail to meet the 
                        requirements of subsection (a)(4) 
                        (without regard to this subsection), 
                        rules preventing the multiple use of 
                        the disparity permitted under this 
                        subsection with respect to any 
                        employee.
                For purposes of clause (i), unreduced benefits 
                shall not include benefits for disability 
                (within the meaning of section 223(d) of the 
                Social Security Act).
          (6) Special rule for plan maintained by railroads.--
        In determining whether a plan which includes employees 
        of a railroad employer who are entitled to benefits 
        under the Railroad Retirement Act of 1974 meets the 
        requirements of this subsection, rules similar to the 
        rules set forth in this subsection shall apply. Such 
        rules shall take into account the employer-derived 
        portion of the employees' tier 2 railroad retirement 
        benefits and any supplemental annuity under the 
        Railroad Retirement Act of 1974.
  (m) Nondiscrimination test for matching contributions and 
employee contributions.--
          (1) In general.--A defined contribution plan shall be 
        treated as meeting the requirements of subsection 
        (a)(4) with respect to the amount of any matching 
        contribution or employee contribution for any plan year 
        only if the contribution percentage requirement of 
        paragraph (2) of this subsection is met for such plan 
        year.
          (2) Requirements.--
                  (A) Contribution percentage requirement.--A 
                plan meets the contribution percentage 
                requirement of this paragraph for any plan year 
                only if the contribution percentage for 
                eligible highly compensated employees for such 
                plan year does not exceed the greater of--
                          (i) 125 percent of such percentage 
                        for all other eligible employees for 
                        the preceding plan year, or
                          (ii) the lesser of 200 percent of 
                        such percentage for all other eligible 
                        employees for the preceding plan year, 
                        or such percentage for all other 
                        eligible employees for the preceding 
                        plan year plus 2 percentage points.
                This subparagraph may be applied by using the 
                plan year rather than the preceding plan year 
                if the employer so elects, except that if such 
                an election is made, it may not be changed 
                except as provided by the Secretary.
                  (B) Multiple plans treated as a single 
                plan.--If two or more plans of an employer to 
                which matching contributions, employee 
                contributions, or elective deferrals are made 
                are treated as one plan for purposes of section 
                410(b), such plans shall be treated as one plan 
                for purposes of this subsection. If a highly 
                compensated employee participates in two or 
                more plans of an employer to which 
                contributions to which this subsection applies 
                are made, all such contributions shall be 
                aggregated for purposes of this subsection.
          (3) Contribution percentage.--For purposes of 
        paragraph (2), the contribution percentage for a 
        specified group of employees for a plan year shall be 
        the average of the ratios (calculated separately for 
        each employee in such group) of--
                  (A) the sum of the matching contributions and 
                employee contributions paid under the plan on 
                behalf of each such employee for such plan 
                year, to
                  (B) the employee's compensation (within the 
                meaning of section 414(s)) for such plan year.
        Under regulations, an employer may elect to take into 
        account (in computing the contribution percentage) 
        elective deferrals and qualified nonelective 
        contributions under the plan or any other plan of the 
        employer. If matching contributions are taken into 
        account for purposes of subsection (k)(3)(A)(ii) for 
        any plan year, such contributions shall not be taken 
        into account under subparagraph (A) for such year. 
        Rules similar to the rules of subsection (k)(3)(E) 
        shall apply for purposes of this subsection.
          (4) Definitions.--For purposes of this subsection--
                  (A) Matching contribution.--The term 
                ``matching contribution'' means--
                          (i) any employer contribution made to 
                        a defined contribution plan on behalf 
                        of an employee on account of an 
                        employee contribution made by such 
                        employee, and
                          (ii) any employer contribution made 
                        to a defined contribution plan on 
                        behalf of an employee on account of an 
                        employee's elective deferral.
                  (B) Elective deferral.--The term ``elective 
                deferral'' means any employer contribution 
                described in section 402(g)(3).
                  (C) Qualified nonelective contributions.--The 
                term ``qualified nonelective contribution'' 
                means any employer contribution (other than a 
                matching contribution) with respect to which--
                          (i) the employee may not elect to 
                        have the contribution paid to the 
                        employee in cash instead of being 
                        contributed to the plan, and
                          (ii) the requirements of 
                        subparagraphs (B) and (C) of subsection 
                        (k)(2) are met.
          (5) Employees taken into consideration.--
                  (A) In general.--Any employee who is eligible 
                to make an employee contribution (or, if the 
                employer takes elective contributions into 
                account, elective contributions) or to receive 
                a matching contribution under the plan being 
                tested under paragraph (1) shall be considered 
                an eligible employee for purposes of this 
                subsection.
                  (B) Certain nonparticipants.--If an employee 
                contribution is required as a condition of 
                participation in the plan, any employee who 
                would be a participant in the plan if such 
                employee made such a contribution shall be 
                treated as an eligible employee on behalf of 
                whom no employer contributions are made.
                  (C) Special rule for early participation.--If 
                an employer elects to apply section 
                410(b)(4)(B) in determining whether a plan 
                meets the requirements of section 410(b), the 
                employer may, in determining whether the plan 
                meets the requirements of paragraph (2), 
                exclude from consideration all eligible 
                employees (other than highly compensated 
                employees) who have not met the minimum age and 
                service requirements of section 410(a)(1)(A).
          (6) Plan not disqualified if excess aggregate 
        contributions distributed before end of following plan 
        year.--
                  (A) In general.--A plan shall not be treated 
                as failing to meet the requirements of 
                paragraph (1) for any plan year if, before the 
                close of the following plan year, the amount of 
                the excess aggregate contributions for such 
                plan year (and any income allocable to such 
                contributions through the end of such year) is 
                distributed (or, if forfeitable, is forfeited). 
                Such contributions (and such income) may be 
                distributed without regard to any other 
                provision of law.
                  (B) Excess aggregate contributions.--For 
                purposes of subparagraph (A), the term ``excess 
                aggregate contributions'' means, with respect 
                to any plan year, the excess of--
                          (i) the aggregate amount of the 
                        matching contributions and employee 
                        contributions (and any qualified 
                        nonelective contribution or elective 
                        contribution taken into account in 
                        computing the contribution percentage) 
                        actually made on behalf of highly 
                        compensated employees for such plan 
                        year, over
                          (ii) the maximum amount of such 
                        contributions permitted under the 
                        limitations of paragraph (2)(A) 
                        (determined by reducing contributions 
                        made on behalf of highly compensated 
                        employees in order of their 
                        contribution percentages beginning with 
                        the highest of such percentages).
                  (C) Method of distributing excess aggregate 
                contributions.--Any distribution of the excess 
                aggregate contributions for any plan year shall 
                be made to highly compensated employees on the 
                basis of the amount of contributions on behalf 
                of, or by, each such employee. Forfeitures of 
                excess aggregate contributions may not be 
                allocated to participants whose contributions 
                are reduced under this paragraph.
                  (D) Coordination with subsection (k) and 
                402(g).--The determination of the amount of 
                excess aggregate contributions with respect to 
                a plan shall be made after--
                          (i) first determining the excess 
                        deferrals (within the meaning of 
                        section 402(g)), and
                          (ii) then determining the excess 
                        contributions under subsection (k).
          (7) Treatment of distributions.--
                  (A) Additional tax of section 72(t) not 
                applicable.--No tax shall be imposed under 
                section 72(t) on any amount required to be 
                distributed under paragraph (6).
                  (B) Exclusion of employee contributions.--Any 
                distribution attributable to employee 
                contributions shall not be included in gross 
                income except to the extent attributable to 
                income on such contributions.
          (8) Highly compensated employee.--For purposes of 
        this subsection, the term ``highly compensated 
        employee'' has the meaning given to such term by 
        section 414(q).
          (9) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary to carry out the 
        purposes of this subsection and subsection (k), 
        including regulations permitting appropriate 
        aggregation of plans and contributions.
          (10) Alternative method of satisfying tests.--A 
        defined contribution plan shall be treated as meeting 
        the requirements of paragraph (2) with respect to 
        matching contributions if the plan--
                  (A) meets the contribution requirements of 
                subparagraph (B) of subsection (k)(11),
                  (B) meets the exclusive plan requirements of 
                subsection (k)(11)(C), and
                  (C) meets the vesting requirements of section 
                408(p)(3).
          (11) Additional alternative method of satisfying 
        tests.--
                  (A) In general.--A defined contribution plan 
                shall be treated as meeting the requirements of 
                paragraph (2) with respect to matching 
                contributions if the plan--
                          (i) meets the contribution 
                        requirements of subparagraph (B) or (C) 
                        of subsection (k)(12),
                          (ii) meets the notice requirements of 
                        subsection (k)(12)(D), and
                          (iii) meets the requirements of 
                        subparagraph (B).
                  (B) Limitation on matching contributions.--
                The requirements of this subparagraph are met 
                if--
                          (i) matching contributions on behalf 
                        of any employee may not be made with 
                        respect to an employee's contributions 
                        or elective deferrals in excess of 6 
                        percent of the employee's compensation,
                          (ii) the rate of an employer's 
                        matching contribution does not increase 
                        as the rate of an employee's 
                        contributions or elective deferrals 
                        increase, and
                          (iii) the matching contribution with 
                        respect to any highly compensated 
                        employee at any rate of an employee 
                        contribution or rate of elective 
                        deferral is not greater than that with 
                        respect to an employee who is not a 
                        highly compensated employee.
          (12) Alternative method for automatic contribution 
        arrangements.--A defined contribution plan shall be 
        treated as meeting the requirements of paragraph (2) 
        with respect to matching contributions if the plan--
                  (A) is a qualified automatic contribution 
                arrangement (as defined in subsection (k)(13)), 
                and
                  (B) meets the requirements of paragraph 
                (11)(B).
          (13) Cross reference.--For excise tax on certain 
        excess contributions, see section 4979.
  (n) Coordination with qualified domestic relations orders.--
The Secretary shall prescribe such rules or regulations as may 
be necessary to coordinate the requirements of subsection 
(a)(13)(B) and section 414(p) (and the regulations issued by 
the Secretary of Labor thereunder) with the other provisions of 
this chapter.
  (o) Cross reference.--For exemption from tax of a trust 
qualified under this section, see section 501(a).

SEC. 402. TAXABILITY OF BENEFICIARY OF EMPLOYEES' TRUST.

  (a) Taxability of beneficiary of exempt trust.--Except as 
otherwise provided in this section, any amount actually 
distributed to any distributee by any employees' trust 
described in section 401(a) which is exempt from tax under 
section 501(a) shall be taxable to the distributee, in the 
taxable year of the distributee in which distributed, under 
section 72 (relating to annuities).
  (b) Taxability of beneficiary of nonexempt trust.--
          (1) Contributions.--Contributions to an employees' 
        trust made by an employer during a taxable year of the 
        employer which ends with or within a taxable year of 
        the trust for which the trust is not exempt from tax 
        under section 501(a) shall be included in the gross 
        income of the employee in accordance with section 83 
        (relating to property transferred in connection with 
        performance of services), except that the value of the 
        employee's interest in the trust shall be substituted 
        for the fair market value of the property for purposes 
        of applying such section.
          (2) Distributions.--The amount actually distributed 
        or made available to any distributee by any trust 
        described in paragraph (1) shall be taxable to the 
        distributee, in the taxable year in which so 
        distributed or made available, under section 72 
        (relating to annuities), except that distributions of 
        income of such trust before the annuity starting date 
        (as defined in section 72(c)(4)) shall be included in 
        the gross income of the employee without regard to 
        section 72(e)(5) (relating to amounts not received as 
        annuities).
          (3) Grantor trusts.--A beneficiary of any trust 
        described in paragraph (1) shall not be considered the 
        owner of any portion of such trust under subpart E of 
        part I of subchapter J (relating to grantors and others 
        treated as substantial owners).
          (4) Failure to meet requirements of section 410(b).--
                  (A) Highly compensated employees.--If 1 of 
                the reasons a trust is not exempt from tax 
                under section 501(a) is the failure of the plan 
                of which it is a part to meet the requirements 
                of section 401(a)(26) or 410(b), then a highly 
                compensated employee shall, in lieu of the 
                amount determined under paragraph (1) or (2) 
                include in gross income for the taxable year 
                with or within which the taxable year of the 
                trust ends an amount equal to the vested 
                accrued benefit of such employee (other than 
                the employee's investment in the contract) as 
                of the close of such taxable year of the trust.
                  (B) Failure to meet coverage tests.--If a 
                trust is not exempt from tax under section 
                501(a) for any taxable year solely because such 
                trust is part of a plan which fails to meet the 
                requirements of section 401(a)(26) or 410(b), 
                paragraphs (1) and (2) shall not apply by 
                reason of such failure to any employee who was 
                not a highly compensated employee during--
                          (i) such taxable year, or
                          (ii) any preceding period for which 
                        service was creditable to such employee 
                        under the plan.
                  (C) Highly compensated employee.--For 
                purposes of this paragraph, the term ``highly 
                compensated employee'' has the meaning given 
                such term by section 414(q).
  (c) Rules applicable to rollovers from exempt trusts.--
          (1) Exclusion from income.--If--
                  (A) any portion of the balance to the credit 
                of an employee in a qualified trust is paid to 
                the employee in an eligible rollover 
                distribution,
                  (B) the distributee transfers any portion of 
                the property received in such distribution to 
                an eligible retirement plan, and
                  (C) in the case of a distribution of property 
                other than money, the amount so transferred 
                consists of the property distributed,
        then such distribution (to the extent so transferred) 
        shall not be includible in gross income for the taxable 
        year in which paid.
          (2) Maximum amount which may be rolled over.--In the 
        case of any eligible rollover distribution, the maximum 
        amount transferred to which paragraph (1) applies shall 
        not exceed the portion of such distribution which is 
        includible in gross income (determined without regard 
        to paragraph (1)). The preceding sentence shall not 
        apply to such distribution to the extent--
                  (A) such portion is transferred in a direct 
                trustee-to-trustee transfer to a qualified 
                trust or to an annuity contract described in 
                section 403(b) and such trust or contract 
                provides for separate accounting for amounts so 
                transferred (and earnings thereon), including 
                separately accounting for the portion of such 
                distribution which is includible in gross 
                income and the portion of such distribution 
                which is not so includible, or
                  (B) such portion is transferred to an 
                eligible retirement plan described in clause 
                (i) or (ii) of paragraph (8)(B).
        In the case of a transfer described in subparagraph (A) 
        or (B), the amount transferred shall be treated as 
        consisting first of the portion of such distribution 
        that is includible in gross income (determined without 
        regard to paragraph (1)).
          (3) Time limit on transfers.--
                  (A) In general.--Except as provided in 
                subparagraphs (B) and (C), paragraph (1) shall 
                not apply to any transfer of a distribution 
                made after the 60th day following the day on 
                which the distributee received the property 
                distributed.
                  (B) Hardship exception.--The Secretary may 
                waive the 60-day requirement under subparagraph 
                (A) where the failure to waive such requirement 
                would be against equity or good conscience, 
                including casualty, disaster, or other events 
                beyond the reasonable control of the individual 
                subject to such requirement.
                  (C) Rollover of certain plan loan offset 
                amounts.--
                          (i) In general.--In the case of a 
                        qualified plan loan offset amount, 
                        paragraph (1) shall not apply to any 
                        transfer of such amount made after the 
                        due date (including extensions) for 
                        filing the return of tax for the 
                        taxable year in which such amount is 
                        treated as distributed from a qualified 
                        employer plan.
                          (ii) Qualified plan loan offset 
                        amount.--For purposes of this 
                        subparagraph, the term ``qualified plan 
                        loan offset amount'' means a plan loan 
                        offset amount which is treated as 
                        distributed from a qualified employer 
                        plan to a participant or beneficiary 
                        solely by reason of--
                                  (I) the termination of the 
                                qualified employer plan, or
                                  (II) the failure to meet the 
                                repayment terms of the loan 
                                from such plan because of the 
                                severance from employment of 
                                the participant.
                          (iii) Plan loan offset amount.--For 
                        purposes of clause (ii), the term 
                        ``plan loan offset amount'' means the 
                        amount by which the participant's 
                        accrued benefit under the plan is 
                        reduced in order to repay a loan from 
                        the plan.
                          (iv) Limitation.--This subparagraph 
                        shall not apply to any plan loan offset 
                        amount unless such plan loan offset 
                        amount relates to a loan to which 
                        section 72(p)(1) does not apply by 
                        reason of section 72(p)(2).
                          (v) Qualified employer plan.--For 
                        purposes of this subsection, the term 
                        ``qualified employer plan'' has the 
                        meaning given such term by section 
                        72(p)(4).
          (4) Eligible rollover distribution.--For purposes of 
        this subsection, the term ``eligible rollover 
        distribution'' means any distribution to an employee of 
        all or any portion of the balance to the credit of the 
        employee in a qualified trust; except that such term 
        shall not include--
                  (A) any distribution which is one of a series 
                of substantially equal periodic payments (not 
                less frequently than annually) made--
                          (i) for the life (or life expectancy) 
                        of the employee or the joint lives (or 
                        joint life expectancies) of the 
                        employee and the employee's designated 
                        beneficiary, or
                          (ii) for a specified period of 10 
                        years or more,
                  (B) any distribution to the extent such 
                distribution is required under section 
                401(a)(9), and
                  (C) any distribution which is made upon 
                hardship of the employee.
        If all or any portion of a distribution during 2009 is 
        treated as an eligible rollover distribution but would 
        not be so treated if the minimum distribution 
        requirements under section 401(a)(9) had applied during 
        2009, such distribution shall not be treated as an 
        eligible rollover distribution for purposes of section 
        401(a)(31) or 3405(c) or subsection (f) of this 
        section.
          (5) Transfer treated as rollover contribution under 
        section 408.--For purposes of this title, a transfer to 
        an eligible retirement plan described in clause (i) or 
        (ii) of paragraph (8)(B) resulting in any portion of a 
        distribution being excluded from gross income under 
        paragraph (1) shall be treated as a rollover 
        contribution described in section 408(d)(3).
          (6) Sales of distributed property.--For purposes of 
        this subsection--
                  (A) Transfer of proceeds from sale of 
                distributed property treated as transfer of 
                distributed property.--The transfer of an 
                amount equal to any portion of the proceeds 
                from the sale of property received in the 
                distribution shall be treated as the transfer 
                of property received in the distribution.
                  (B) Proceeds attributable to increase in 
                value.--The excess of fair market value of 
                property on sale over its fair market value on 
                distribution shall be treated as property 
                received in the distribution.
                  (C) Designation where amount of distribution 
                exceeds rollover contribution.--In any case 
                where part or all of the distribution consists 
                of property other than money--
                          (i) the portion of the money or other 
                        property which is to be treated as 
                        attributable to amounts not included in 
                        gross income, and
                          (ii) the portion of the money or 
                        other property which is to be treated 
                        as included in the rollover 
                        contribution,
                shall be determined on a ratable basis unless 
                the taxpayer designates otherwise. Any 
                designation under this subparagraph for a 
                taxable year shall be made not later than the 
                time prescribed by law for filing the return 
                for such taxable year (including extensions 
                thereof). Any such designation, once made, 
                shall be irrevocable.
                  (D) Nonrecognition of gain or loss.--No gain 
                or loss shall be recognized on any sale 
                described in subparagraph (A) to the extent 
                that an amount equal to the proceeds is 
                transferred pursuant to paragraph (1).
          (7) Special rule for frozen deposits.--
                  (A) In general.--The 60-day period described 
                in paragraph (3) shall not--
                          (i) include any period during which 
                        the amount transferred to the employee 
                        is a frozen deposit, or
                          (ii) end earlier than 10 days after 
                        such amount ceases to be a frozen 
                        deposit.
                  (B) Frozen deposits.--For purposes of this 
                subparagraph, the term ``frozen deposit'' means 
                any deposit which may not be withdrawn because 
                of--
                          (i) the bankruptcy or insolvency of 
                        any financial institution, or
                          (ii) any requirement imposed by the 
                        State in which such institution is 
                        located by reason of the bankruptcy or 
                        insolvency (or threat thereof) of 1 or 
                        more financial institutions in such 
                        State.
                A deposit shall not be treated as a frozen 
                deposit unless on at least 1 day during the 60-
                day period described in paragraph (3) (without 
                regard to this paragraph) such deposit is 
                described in the preceding sentence.
          (8) Definitions.--For purposes of this subsection--
                  (A) Qualified trust.--The term ``qualified 
                trust'' means an employees' trust described in 
                section 401(a) which is exempt from tax under 
                section 501(a).
                  (B) Eligible retirement plan.--The term 
                ``eligible retirement plan'' means--
                          (i) an individual retirement account 
                        described in section 408(a),
                          (ii) an individual retirement annuity 
                        described in section 408(b) (other than 
                        an endowment contract),
                          (iii) a qualified trust,
                          (iv) an annuity plan described in 
                        section 403(a),
                          (v) an eligible deferred compensation 
                        plan described in section 457(b) which 
                        is maintained by an eligible employer 
                        described in section 457(e)(1)(A), and
                          (vi) an annuity contract described in 
                        section 403(b).
                If any portion of an eligible rollover 
                distribution is attributable to payments or 
                distributions from a designated Roth account 
                (as defined in section 402A), an eligible 
                retirement plan with respect to such portion 
                shall include only another designated Roth 
                account and a Roth IRA.
          (9) Rollover where spouse receives distribution after 
        death of employee.--If any distribution attributable to 
        an employee is paid to the spouse of the employee after 
        the employee's death, the preceding provisions of this 
        subsection shall apply to such distribution in the same 
        manner as if the spouse were the employee.
          (10) Separate accounting.--Unless a plan described in 
        clause (v) of paragraph (8)(B) agrees to separately 
        account for amounts rolled into such plan from eligible 
        retirement plans not described in such clause, the plan 
        described in such clause may not accept transfers or 
        rollovers from such retirement plans.
          (11) Distributions to inherited individual retirement 
        plan of nonspouse beneficiary.--
                  (A) In general.--If, with respect to any 
                portion of a distribution from an eligible 
                retirement plan described in paragraph 
                (8)(B)(iii) of a deceased employee, a direct 
                trustee-to-trustee transfer is made to an 
                individual retirement plan described in clause 
                (i) or (ii) of paragraph (8)(B) established for 
                the purposes of receiving the distribution on 
                behalf of an individual who is a designated 
                beneficiary (as defined by section 
                401(a)(9)(E)) of the employee and who is not 
                the surviving spouse of the employee--
                          (i) the transfer shall be treated as 
                        an eligible rollover distribution,
                          (ii) the individual retirement plan 
                        shall be treated as an inherited 
                        individual retirement account or 
                        individual retirement annuity (within 
                        the meaning of section 408(d)(3)(C)) 
                        for purposes of this title, and
                          (iii) section 401(a)(9)(B) (other 
                        than clause (iv) thereof) shall apply 
                        to such plan.
                  (B) Certain trusts treated as 
                beneficiaries.--For purposes of this paragraph, 
                to the extent provided in rules prescribed by 
                the Secretary, a trust maintained for the 
                benefit of one or more designated beneficiaries 
                shall be treated in the same manner as a 
                designated beneficiary.
  (d) Taxability of beneficiary of certain foreign situs 
trusts.--For purposes of subsections (a), (b), and (c), a stock 
bonus, pension, or profit-sharing trust which would qualify for 
exemption from tax under section 501(a) except for the fact 
that it is a trust created or organized outside the United 
States shall be treated as if it were a trust exempt from tax 
under section 501(a).
  (e) Other rules applicable to exempt trusts.--
          (1) Alternate payees.--
                  (A) Alternate payee treated as distributee.--
                For purposes of subsection (a) and section 72, 
                an alternate payee who is the spouse or former 
                spouse of the participant shall be treated as 
                the distributee of any distribution or payment 
                made to the alternate payee under a qualified 
                domestic relations order (as defined in section 
                414(p)).
                  (B) Rollovers.--If any amount is paid or 
                distributed to an alternate payee who is the 
                spouse or former spouse of the participant by 
                reason of any qualified domestic relations 
                order (within the meaning of section 414(p)), 
                subsection (c) shall apply to such distribution 
                in the same manner as if such alternate payee 
                were the employee.
          (2) Distributions by United States to nonresident 
        aliens.--The amount includible under subsection (a) in 
        the gross income of a nonresident alien with respect to 
        a distribution made by the United States in respect of 
        services performed by an employee of the United States 
        shall not exceed an amount which bears the same ratio 
        to the amount includible in gross income without regard 
        to this paragraph as--
                  (A) the aggregate basic pay paid by the 
                United States to such employee for such 
                services, reduced by the amount of such basic 
                pay which was not includible in gross income by 
                reason of being from sources without the United 
                States, bears to
                  (B) the aggregate basic pay paid by the 
                United States to such employee for such 
                services.
        In the case of distributions under the civil service 
        retirement laws, the term ``basic pay'' shall have the 
        meaning provided in section 8331(3) of title 5, United 
        States Code.
          (3) Cash or deferred arrangements.--For purposes of 
        this title, contributions made by an employer on behalf 
        of an employee to a trust which is a part of a 
        qualified cash or deferred arrangement (as defined in 
        section 401(k)(2)) or which is part of a salary 
        reduction agreement under section 403(b) shall not be 
        treated as distributed or made available to the 
        employee nor as contributions made to the trust by the 
        employee merely because the arrangement includes 
        provisions under which the employee has an election 
        whether the contribution will be made to the trust or 
        received by the employee in cash.
          (4) Net unrealized appreciation.--
                  (A) Amounts attributable to employee 
                contributions.--For purposes of subsection (a) 
                and section 72, in the case of a distribution 
                other than a lump sum distribution, the amount 
                actually distributed to any distributee from a 
                trust described in subsection (a) shall not 
                include any net unrealized appreciation in 
                securities of the employer corporation 
                attributable to amounts contributed by the 
                employee (other than deductible employee 
                contributions within the meaning of section 
                72(o)(5)). This subparagraph shall not apply to 
                a distribution to which subsection (c) applies.
                  (B) Amounts attributable to employer 
                contributions.--For purposes of subsection (a) 
                and section 72, in the case of any lump sum 
                distribution which includes securities of the 
                employer corporation, there shall be excluded 
                from gross income the net unrealized 
                appreciation attributable to that part of the 
                distribution which consists of securities of 
                the employer corporation. In accordance with 
                rules prescribed by the Secretary, a taxpayer 
                may elect, on the return of tax on which a lump 
                sum distribution is required to be included, 
                not to have this subparagraph apply to such 
                distribution.
                  (C) Determination of amounts and 
                adjustments.--For purposes of subparagraphs (A) 
                and (B), net unrealized appreciation and the 
                resulting adjustments to basis shall be 
                determined in accordance with regulations 
                prescribed by the Secretary.
                  (D) Lump-sum distribution.--For purposes of 
                this paragraph--
                          (i) In general.--The term ``lump-sum 
                        distribution'' means the distribution 
                        or payment within one taxable year of 
                        the recipient of the balance to the 
                        credit of an employee which becomes 
                        payable to the recipient--
                                  (I) on account of the 
                                employee's death,
                                  (II) after the employee 
                                attains age 591/2,
                                  (III) on account of the 
                                employee's separation from 
                                service, or
                                  (IV) after the employee has 
                                become disabled (within the 
                                meaning of section 72(m)(7)),
                 from a trust which forms a part of a plan 
                described in section 401(a) and which is exempt 
                from tax under section 501 or from a plan 
                described in section 403(a). Subclause (III) of 
                this clause shall be applied only with respect 
                to an individual who is an employee without 
                regard to section 401(c)(1), and subclause (IV) 
                shall be applied only with respect to an 
                employee within the meaning of section 
                401(c)(1). For purposes of this clause, a 
                distribution to two or more trusts shall be 
                treated as a distribution to one recipient. For 
                purposes of this paragraph, the balance to the 
                credit of the employee does not include the 
                accumulated deductible employee contributions 
                under the plan (within the meaning of section 
                72(o)(5)).
                          (ii) Aggregation of certain trusts 
                        and plans.--For purposes of determining 
                        the balance to the credit of an 
                        employee under clause (i)--
                                  (I) all trusts which are part 
                                of a plan shall be treated as a 
                                single trust, all pension plans 
                                maintained by the employer 
                                shall be treated as a single 
                                plan, all profit-sharing plans 
                                maintained by the employer 
                                shall be treated as a single 
                                plan, and all stock bonus plans 
                                maintained by the employer 
                                shall be treated as a single 
                                plan, and
                                  (II) trusts which are not 
                                qualified trusts under section 
                                401(a) and annuity contracts 
                                which do not satisfy the 
                                requirements of section 
                                404(a)(2) shall not be taken 
                                into account.
                          (iii) Community property laws.--The 
                        provisions of this paragraph shall be 
                        applied without regard to community 
                        property laws.
                          (iv) Amounts subject to penalty.--
                        This paragraph shall not apply to 
                        amounts described in subparagraph (A) 
                        of section 72(m)(5) to the extent that 
                        section 72(m)(5) applies to such 
                        amounts.
                          (v) Balance to credit of employee not 
                        to include amounts payable under 
                        qualified domestic relations order.--
                        For purposes of this paragraph, the 
                        balance to the credit of an employee 
                        shall not include any amount payable to 
                        an alternate payee under a qualified 
                        domestic relations order (within the 
                        meaning of section 414(p)).
                          (vi) Transfers to cost-of-living 
                        arrangement not treated as 
                        distribution.--For purposes of this 
                        paragraph, the balance to the credit of 
                        an employee under a defined 
                        contribution plan shall not include any 
                        amount transferred from such defined 
                        contribution plan to a qualified cost-
                        of-living arrangement (within the 
                        meaning of section 415(k)(2)) under a 
                        defined benefit plan.
                          (vii) Lump-sum distributions of 
                        alternate payees.--If any distribution 
                        or payment of the balance to the credit 
                        of an employee would be treated as a 
                        lump-sum distribution, then, for 
                        purposes of this paragraph, the payment 
                        under a qualified domestic relations 
                        order (within the meaning of section 
                        414(p)) of the balance to the credit of 
                        an alternate payee who is the spouse or 
                        former spouse of the employee shall be 
                        treated as a lump-sum distribution. For 
                        purposes of this clause, the balance to 
                        the credit of the alternate payee shall 
                        not include any amount payable to the 
                        employee.
                  (E) Definitions relating to securities.--For 
                purposes of this paragraph--
                          (i) Securities.--The term 
                        ``securities'' means only shares of 
                        stock and bonds or debentures issued by 
                        a corporation with interest coupons or 
                        in registered form.
                          (ii) Securities of the employer.--The 
                        term ``securities of the employer 
                        corporation'' includes securities of a 
                        parent or subsidiary corporation (as 
                        defined in subsections (e) and (f) of 
                        section 424) of the employer 
                        corporation.
          (6) Direct trustee-to-trustee transfers.--Any amount 
        transferred in a direct trustee-to-trustee transfer in 
        accordance with section 401(a)(31) shall not be 
        includible in gross income for the taxable year of such 
        transfer.
  (f) Written explanation to recipients of distributions 
eligible for rollover treatment.--
          (1) In general.--The plan administrator of any plan 
        shall, within a reasonable period of time before making 
        an eligible rollover distribution, provide a written 
        explanation to the recipient--
                  (A) of the provisions under which the 
                recipient may have the distribution directly 
                transferred to an eligible retirement plan and 
                that the automatic distribution by direct 
                transfer applies to certain distributions in 
                accordance with section 401(a)(31)(B),
                  (B) of the provision which requires the 
                withholding of tax on the distribution if it is 
                not directly transferred to an eligible 
                retirement plan,
                  (C) of the provisions under which the 
                distribution will not be subject to tax if 
                transferred to an eligible retirement plan 
                within 60 days after the date on which the 
                recipient received the distribution,
                  (D) if applicable, of the provisions of 
                subsections (d) and (e) of this section, and
                  (E) of the provisions under which 
                distributions from the eligible retirement plan 
                receiving the distribution may be subject to 
                restrictions and tax consequences which are 
                different from those applicable to 
                distributions from the plan making such 
                distribution.
          (2) Definitions.--For purposes of this subsection--
                  (A) Eligible rollover distribution.--The term 
                ``eligible rollover distribution'' has the same 
                meaning as when used in subsection (c) of this 
                section, paragraph (4) of section 403(a), 
                subparagraph (A) of section 403(b)(8), or 
                subparagraph (A) of section 457(e)(16). Such 
                term shall include any distribution to a 
                designated beneficiary which would be treated 
                as an eligible rollover distribution by reason 
                of subsection (c)(11), or section 403(a)(4)(B), 
                403(b)(8)(B), or 457(e)(16)(B), if the 
                requirements of subsection (c)(11) were 
                satisfied.
                  (B) Eligible retirement plan.--The term 
                ``eligible retirement plan'' has the meaning 
                given such term by subsection (c)(8)(B).
  (g) Limitation on exclusion for elective deferrals.--
          (1) In general.--
                  (A) Limitation.--Notwithstanding subsections 
                (e)(3) and (h)(1)(B), the elective deferrals of 
                any individual for any taxable year shall be 
                included in such individual's gross income to 
                the extent the amount of such deferrals for the 
                taxable year exceeds the applicable dollar 
                amount. The preceding sentence shall not apply 
                to the portion of such excess as does not 
                exceed the designated Roth contributions of the 
                individual for the taxable year.
                  (B) Applicable dollar amount.--For purposes 
                of subparagraph (A), the applicable dollar 
                amount is $15,000.
                  (C) Catch-up contributions.--In addition to 
                subparagraph (A), in the case of an eligible 
                participant (as defined in section 414(v)), 
                gross income shall not include elective 
                deferrals in excess of the applicable dollar 
                amount under subparagraph (B) to the extent 
                that the amount of such elective deferrals does 
                not exceed the applicable dollar amount under 
                section 414(v)(2)(B)(i) for the taxable year 
                (without regard to the treatment of the 
                elective deferrals by an applicable employer 
                plan under section 414(v)).
          (2) Distribution of excess deferrals.--
                  (A) In general.--If any amount (hereinafter 
                in this paragraph referred to as ``excess 
                deferrals'') is included in the gross income of 
                an individual under paragraph (1) (or would be 
                included but for the last sentence thereof) for 
                any taxable year--
                          (i) not later than the 1st March 1 
                        following the close of the taxable 
                        year, the individual may allocate the 
                        amount of such excess deferrals among 
                        the plans under which the deferrals 
                        were made and may notify each such plan 
                        of the portion allocated to it, and
                          (ii) not later than the 1st April 15 
                        following the close of the taxable 
                        year, each such plan may distribute to 
                        the individual the amount allocated to 
                        it under clause (i) (and any income 
                        allocable to such amount through the 
                        end of such taxable year).
                The distribution described in clause (ii) may 
                be made notwithstanding any other provision of 
                law.
                  (B) Treatment of distribution under section 
                401(k).--Except to the extent provided under 
                rules prescribed by the Secretary, 
                notwithstanding the distribution of any portion 
                of an excess deferral from a plan under 
                subparagraph (A)(ii), such portion shall, for 
                purposes of applying section 401(k)(3)(A)(ii), 
                be treated as an employer contribution.
                  (C) Taxation of distribution.--In the case of 
                a distribution to which subparagraph (A) 
                applies--
                          (i) except as provided in clause 
                        (ii), such distribution shall not be 
                        included in gross income, and
                          (ii) any income on the excess 
                        deferral shall, for purposes of this 
                        chapter, be treated as earned and 
                        received in the taxable year in which 
                        such income is distributed.
                No tax shall be imposed under section 72(t) on 
                any distribution described in the preceding 
                sentence.
                  (D) Partial distributions.--If a plan 
                distributes only a portion of any excess 
                deferral and income allocable thereto, such 
                portion shall be treated as having been 
                distributed ratably from the excess deferral 
                and the income.
          (3) Elective deferrals.--For purposes of this 
        subsection, the term ``elective deferrals'' means, with 
        respect to any taxable year, the sum of--
                  (A) any employer contribution under a 
                qualified cash or deferred arrangement (as 
                defined in section 401(k)) to the extent not 
                includible in gross income for the taxable year 
                under subsection (e)(3) (determined without 
                regard to this subsection),
                  (B) any employer contribution to the extent 
                not includible in gross income for the taxable 
                year under subsection (h)(1)(B) (determined 
                without regard to this subsection),
                  (C) any employer contribution to purchase an 
                annuity contract under section 403(b) under a 
                salary reduction agreement (within the meaning 
                of section 3121(a)(5)(D)), and
                  (D) any elective employer contribution under 
                section 408(p)(2)(A)(i).
        An employer contribution shall not be treated as an 
        elective deferral described in subparagraph (C) if 
        under the salary reduction agreement such contribution 
        is made pursuant to a one-time irrevocable election 
        made by the employee at the time of initial eligibility 
        to participate in the agreement or is made pursuant to 
        a similar arrangement involving a one-time irrevocable 
        election specified in regulations.
          (4) Cost-of-living adjustment.--In the case of 
        taxable years beginning after December 31, 2006, the 
        Secretary shall adjust the $15,000 amount under 
        paragraph (1)(B) at the same time and in the same 
        manner as under section 415(d), except that the base 
        period shall be the calendar quarter beginning July 1, 
        2005, and any increase under this paragraph which is 
        not a multiple of $500 shall be rounded to the next 
        lowest multiple of $500.
          (5) Disregard of community property laws.--This 
        subsection shall be applied without regard to community 
        property laws.
          (6) Coordination with section 72.--For purposes of 
        applying section 72, any amount includible in gross 
        income for any taxable year under this subsection but 
        which is not distributed from the plan during such 
        taxable year shall not be treated as investment in the 
        contract.
          (7) Special rule for certain organizations.--
                  (A) In general.--In the case of a qualified 
                employee of a qualified organization, with 
                respect to employer contributions described in 
                paragraph (3)(C) made by such organization, the 
                limitation of paragraph (1) for any taxable 
                year shall be increased by whichever of the 
                following is the least:
                          (i) $3,000,
                          (ii) $15,000 reduced by the sum of--
                                  (I) the amounts not included 
                                in gross income for prior 
                                taxable years by reason of this 
                                paragraph, plus
                                  (II) the aggregate amount of 
                                designated Roth contributions 
                                (as defined in section 402A(c)) 
                                permitted for prior taxable 
                                years by reason of this 
                                paragraph, or
                          (iii) the excess of $5,000 multiplied 
                        by the number of years of service of 
                        the employee with the qualified 
                        organization over the employer 
                        contributions described in paragraph 
                        (3) made by the organization on behalf 
                        of such employee for prior taxable 
                        years (determined in the manner 
                        prescribed by the Secretary).
                  (B) Qualified organization.--For purposes of 
                this paragraph, the term ``qualified 
                organization'' means any educational 
                organization, hospital, home health service 
                agency, health and welfare service agency, 
                church, or convention or association of 
                churches. Such term includes any organization 
                described in section 414(e)(3)(B)(ii). Terms 
                used in this subparagraph shall have the same 
                meaning as when used in section 415(c)(4) (as 
                in effect before the enactment of the Economic 
                Growth and Tax Relief Reconciliation Act of 
                2001).
                  (C) Qualified employee.--For purposes of this 
                paragraph, the term ``qualified employee'' 
                means any employee who has completed 15 years 
                of service with the qualified organization.
                  (D) Years of service.--For purposes of this 
                paragraph, the term ``years of service'' has 
                the meaning given such term by section 403(b).
          (8) Matching contributions on behalf of self-employed 
        individuals not treated as elective employer 
        contributions.--Except as provided in section 
        401(k)(3)(D)(ii), any matching contribution described 
        in section 401(m)(4)(A) which is made on behalf of a 
        self-employed individual (as defined in section 401(c)) 
        shall not be treated as an elective employer 
        contribution under a qualified cash or deferred 
        arrangement (as defined in section 401(k)) for purposes 
        of this title.
  (h) Special rules for simplified employee pensions.--For 
purposes of this chapter--
          (1) In general.--Except as provided in paragraph (2), 
        contributions made by an employer on behalf of an 
        employee to an individual retirement plan pursuant to a 
        simplified employee pension (as defined in section 
        408(k))--
                  (A) shall not be treated as distributed or 
                made available to the employee or as 
                contributions made by the employee, and
                  (B) if such contributions are made pursuant 
                to an arrangement under section 408(k)(6) under 
                which an employee may elect to have the 
                employer make contributions to the simplified 
                employee pension on behalf of the employee, 
                shall not be treated as distributed or made 
                available or as contributions made by the 
                employee merely because the simplified employee 
                pension includes provisions for such election.
          (2) Limitations on employer contributions.--
        Contributions made by an employer to a simplified 
        employee pension with respect to an employee for any 
        year shall be treated as distributed or made available 
        to such employee and as contributions made by the 
        employee to the extent such contributions exceed the 
        lesser of--
                  (A) 25 percent of the compensation (within 
                the meaning of section 414(s)) from such 
                employer includible in the employee's gross 
                income for the year (determined without regard 
                to the employer contributions to the simplified 
                employee pension), or
                  (B) the limitation in effect under section 
                415(c)(1)(A), reduced in the case of any highly 
                compensated employee (within the meaning of 
                section 414(q)) by the amount taken into 
                account with respect to such employee under 
                section 408(k)(3)(D).
          (3) Distributions.--Any amount paid or distributed 
        out of an individual retirement plan pursuant to a 
        simplified employee pension shall be included in gross 
        income by the payee or distributee, as the case may be, 
        in accordance with the provisions of section 408(d).
  (i) Treatment of self-employed individuals.--For purposes of 
this section, except as otherwise provided in subsection 
(e)(4)(D)(i), the term ``employee'' includes a self-employed 
individual (as defined in section 401(c)(1)(B)) and the 
employer of such individual shall be the person treated as his 
employer under section 401(c)(4).
  (j) Effect of disposition of stock by plan on net unrealized 
appreciation.--
          (1) In general.--For purposes of subsection (e)(4), 
        in the case of any transaction to which this subsection 
        applies, the determination of net unrealized 
        appreciation shall be made without regard to such 
        transaction.
          (2) Transaction to which subsection applies.--This 
        subsection shall apply to any transaction in which--
                  (A) the plan trustee exchanges the plan's 
                securities of the employer corporation for 
                other such securities, or
                  (B) the plan trustee disposes of securities 
                of the employer corporation and uses the 
                proceeds of such disposition to acquire 
                securities of the employer corporation within 
                90 days (or such longer period as the Secretary 
                may prescribe), except that this subparagraph 
                shall not apply to any employee with respect to 
                whom a distribution of money was made during 
                the period after such disposition and before 
                such acquisition.
  (k) Treatment of simple retirement accounts.--Rules similar 
to the rules of paragraphs (1) and (3) of subsection (h) shall 
apply to contributions and distributions with respect to a 
simple retirement account under section 408(p).
  (l) Distributions from governmental plans for health and 
long-term care insurance.--
          (1) In general.--In the case of an employee who is an 
        eligible retired public safety officer who makes the 
        election described in paragraph (6) with respect to any 
        taxable year of such employee, gross income of such 
        employee for such taxable year does not include any 
        distribution from an eligible retirement plan 
        maintained by the employer described in paragraph 
        (4)(B) to the extent that the aggregate amount of such 
        distributions does not exceed the amount paid by such 
        employee for qualified health insurance premiums for 
        such taxable year.
          (2) Limitation.--The amount which may be excluded 
        from gross income for the taxable year by reason of 
        paragraph (1) shall not exceed $3,000.
          (3) Distributions must otherwise be includible.--
                  (A) In general.--An amount shall be treated 
                as a distribution for purposes of paragraph (1) 
                only to the extent that such amount would be 
                includible in gross income without regard to 
                paragraph (1).
                  (B) Application of section 72.--
                Notwithstanding section 72, in determining the 
                extent to which an amount is treated as a 
                distribution for purposes of subparagraph (A), 
                the aggregate amounts distributed from an 
                eligible retirement plan in a taxable year (up 
                to the amount excluded under paragraph (1)) 
                shall be treated as includible in gross income 
                (without regard to subparagraph (A)) to the 
                extent that such amount does not exceed the 
                aggregate amount which would have been so 
                includible if all amounts to the credit of the 
                eligible public safety officer in all eligible 
                retirement plans maintained by the employer 
                described in paragraph (4)(B) were distributed 
                during such taxable year and all such plans 
                were treated as 1 contract for purposes of 
                determining under section 72 the aggregate 
                amount which would have been so includible. 
                Proper adjustments shall be made in applying 
                section 72 to other distributions in such 
                taxable year and subsequent taxable years.
          (4) Definitions.--For purposes of this subsection--
                  (A) Eligible retirement plan.--For purposes 
                of paragraph (1), the term ``eligible 
                retirement plan'' means a governmental plan 
                (within the meaning of section 414(d)) which is 
                described in clause (iii), (iv), (v), or (vi) 
                of subsection (c)(8)(B).
                  (B) Eligible retired public safety officer.--
                The term ``eligible retired public safety 
                officer'' means an individual who, by reason of 
                disability or attainment of normal retirement 
                age, is separated from service as a public 
                safety officer with the employer who maintains 
                the eligible retirement plan from which 
                distributions subject to paragraph (1) are 
                made.
                  (C) Public safety officer.--The term ``public 
                safety officer'' shall have the same meaning 
                given such term by section 1204(9)(A) of the 
                Omnibus Crime Control and Safe Streets Act of 
                1968 (42 U.S.C. 3796b(9)(A)), as in effect 
                immediately before the enactment of the 
                National Defense Authorization Act for Fiscal 
                Year 2013.
                  (D) Qualified health insurance premiums.--The 
                term ``qualified health insurance premiums'' 
                means premiums for coverage for the eligible 
                retired public safety officer[, his spouse, and 
                dependents] and the spouse and dependents of 
                such officer (as defined in section 152), by an 
                accident or health plan or qualified long-term 
                care insurance contract (as defined in section 
                7702B(b)).
          (5) Special rules.--For purposes of this subsection--
                  (A) Direct payment to insurer required.--
                Paragraph (1) shall only apply to a 
                distribution if payment of the premiums is made 
                directly to the provider of the accident or 
                health plan or qualified long-term care 
                insurance contract by deduction from a 
                distribution from the eligible retirement plan.
                  (B) Related plans treated as 1.--All eligible 
                retirement plans of an employer shall be 
                treated as a single plan.
          (6) Election described.--
                  (A) In general.--For purposes of paragraph 
                (1), an election is described in this paragraph 
                if the election is made by an employee after 
                separation from service with respect to amounts 
                not distributed from an eligible retirement 
                plan to have amounts from such plan distributed 
                in order to pay for qualified health insurance 
                premiums.
                  (B) Special rule.--A plan shall not be 
                treated as violating the requirements of 
                section 401, or as engaging in a prohibited 
                transaction for purposes of section 503(b), 
                merely because it provides for an election with 
                respect to amounts that are otherwise 
                distributable under the plan or merely because 
                of a distribution made pursuant to an election 
                described in subparagraph (A).
          (7) Coordination with medical expense deduction.--The 
        amounts excluded from gross income under paragraph (1) 
        shall not be taken into account under section 213.
          (8) Coordination with deduction for health insurance 
        costs of self-employed individuals.--The amounts 
        excluded from gross income under paragraph (1) shall 
        not be taken into account under section 162(l).

           *       *       *       *       *       *       *

SEC. 408. INDIVIDUAL RETIREMENT ACCOUNTS.

  (a) Individual retirement account.--For purposes of this 
section, the term ``individual retirement account'' means a 
trust created or organized in the United States for the 
exclusive benefit of an individual or his beneficiaries, but 
only if the written governing instrument creating the trust 
meets the following requirements:
          (1) Except in the case of a rollover contribution 
        described in subsection (d)(3) or in section 402(c), 
        403(a)(4), 403(b)(8), or 457(e)(16), no contribution 
        will be accepted unless it is in cash, and 
        contributions will not be accepted for the taxable year 
        on behalf of any individual in excess of the amount in 
        effect for such taxable year under section 
        219(b)(1)(A).
          (2) The trustee is a bank (as defined in subsection 
        (n)) or such other person who demonstrates to the 
        satisfaction of the Secretary that the manner in which 
        such other person will administer the trust will be 
        consistent with the requirements of this section.
          (3) No part of the trust funds will be invested in 
        life insurance contracts.
          (4) The interest of an individual in the balance in 
        his account is nonforfeitable.
          (5) The assets of the trust will not be commingled 
        with other property except in a common trust fund or 
        common investment fund.
          (6) Under regulations prescribed by the Secretary, 
        rules similar to the rules of section 401(a)(9) and the 
        incidental death benefit requirements of section 401(a) 
        shall apply to the distribution of the entire interest 
        of an individual for whose benefit the trust is 
        maintained.
  (b) Individual retirement annuity.--For purposes of this 
section, the term ``individual retirement annuity'' means an 
annuity contract, or an endowment contract (as determined under 
regulations prescribed by the Secretary), issued by an 
insurance company which meets the following requirements:
          (1) The contract is not transferable by the owner.
          (2) Under the contract--
                  (A) the premiums are not fixed,
                  (B) the annual premium on behalf of any 
                individual will not exceed the dollar amount in 
                effect under section 219(b)(1)(A), and
                  (C) any refund of premiums will be applied 
                before the close of the calendar year following 
                the year of the refund toward the payment of 
                future premiums or the purchase of additional 
                benefits.
          (3) Under regulations prescribed by the Secretary, 
        rules similar to the rules of section 401(a)(9) and the 
        incidental death benefit requirements of section 401(a) 
        shall apply to the distribution of the entire interest 
        of the owner.
          (4) The entire interest of the owner is 
        nonforfeitable.
Such term does not include such an annuity contract for any 
taxable year of the owner in which it is disqualified on the 
application of subsection (e) or for any subsequent taxable 
year. For purposes of this subsection, no contract shall be 
treated as an endowment contract if it matures later than the 
taxable year in which the individual in whose name such 
contract is purchased attains age 701/2; if it is not for the 
exclusive benefit of the individual in whose name it is 
purchased or his beneficiaries; or if the aggregate annual 
premiums under all such contracts purchased in the name of such 
individual for any taxable year exceed the dollar amount in 
effect under section 219(b)(1)(A).
  (c) Accounts established by employers and certain 
associations of employees.--A trust created or organized in the 
United States by an employer for the exclusive benefit of his 
employees or their beneficiaries, or by an association of 
employees (which may include employees within the meaning of 
section 401(c)(1)) for the exclusive benefit of its members or 
their beneficiaries, shall be treated as an individual 
retirement account (described in subsection (a)), but only if 
the written governing instrument creating the trust meets the 
following requirements:
          (1) The trust satisfies the requirements of 
        paragraphs (1) through (6) of subsection (a).
          (2) There is a separate accounting for the interest 
        of each employee or member (or spouse of an employee or 
        member).
The assets of the trust may be held in a common fund for the 
account of all individuals who have an interest in the trust.
  (d) Tax treatment of distributions.--
          (1) In general.--Except as otherwise provided in this 
        subsection, any amount paid or distributed out of an 
        individual retirement plan shall be included in gross 
        income by the payee or distributee, as the case may be, 
        in the manner provided under section 72.
          (2) Special rules for applying section 72.--For 
        purposes of applying section 72 to any amount described 
        in paragraph (1)--
                  (A) all individual retirement plans shall be 
                treated as 1 contract,
                  (B) all distributions during any taxable year 
                shall be treated as 1 distribution, and
                  (C) the value of the contract, income on the 
                contract, and investment in the contract shall 
                be computed as of the close of the calendar 
                year in which the taxable year begins.
        For purposes of subparagraph (C), the value of the 
        contract shall be increased by the amount of any 
        distributions during the calendar year.
          (3) Rollover contribution.--An amount is described in 
        this paragraph as a rollover contribution if it meets 
        the requirements of subparagraphs (A) and (B).
                  (A) In general.--Paragraph (1) does not apply 
                to any amount paid or distributed out of an 
                individual retirement account or individual 
                retirement annuity to the individual for whose 
                benefit the account or annuity is maintained 
                if--
                          (i) the entire amount received 
                        (including money and any other 
                        property) is paid into an individual 
                        retirement account or individual 
                        retirement annuity (other than an 
                        endowment contract) for the benefit of 
                        such individual not later than the 60th 
                        day after the day on which he receives 
                        the payment or distribution; or
                          (ii) the entire amount received 
                        (including money and any other 
                        property) is paid into an eligible 
                        retirement plan for the benefit of such 
                        individual not later than the 60th day 
                        after the date on which the payment or 
                        distribution is received, except that 
                        the maximum amount which may be paid 
                        into such plan may not exceed the 
                        portion of the amount received which is 
                        includible in gross income (determined 
                        without regard to this paragraph).
                For purposes of clause (ii), the term 
                ``eligible retirement plan'' means an eligible 
                retirement plan described in clause (iii), 
                (iv), (v), or (vi) of section 402(c)(8)(B).
                  (B) Limitation.--This paragraph does not 
                apply to any amount described in subparagraph 
                (A)(i) received by an individual from an 
                individual retirement account or individual 
                retirement annuity if at any time during the 1-
                year period ending on the day of such receipt 
                such individual received any other amount 
                described in that subparagraph from an 
                individual retirement account or an individual 
                retirement annuity which was not includible in 
                his gross income because of the application of 
                this paragraph.
                  (C) Denial of rollover treatment for 
                inherited accounts, etc..--
                          (i) In general.--In the case of an 
                        inherited individual retirement account 
                        or individual retirement annuity--
                                  (I) this paragraph shall not 
                                apply to any amount received by 
                                an individual from such an 
                                account or annuity (and no 
                                amount transferred from such 
                                account or annuity to another 
                                individual retirement account 
                                or annuity shall be excluded 
                                from gross income by reason of 
                                such transfer), and
                                  (II) such inherited account 
                                or annuity shall not be treated 
                                as an individual retirement 
                                account or annuity for purposes 
                                of determining whether any 
                                other amount is a rollover 
                                contribution.
                          (ii) Inherited individual retirement 
                        account or annuity.--An individual 
                        retirement account or individual 
                        retirement annuity shall be treated as 
                        inherited if--
                                  (I) the individual for whose 
                                benefit the account or annuity 
                                is maintained acquired such 
                                account by reason of the death 
                                of another individual, and
                                  (II) such individual was not 
                                the surviving spouse of such 
                                other individual.
                  (D) Partial rollovers permitted.--
                          (i) In general.--If any amount paid 
                        or distributed out of an individual 
                        retirement account or individual 
                        retirement annuity would meet the 
                        requirements of subparagraph (A) but 
                        for the fact that the entire amount was 
                        not paid into an eligible plan as 
                        required by clause (i) or (ii) of 
                        subparagraph (A), such amount shall be 
                        treated as meeting the requirements of 
                        subparagraph (A) to the extent it is 
                        paid into an eligible plan referred to 
                        in such clause not later than the 60th 
                        day referred to in such clause.
                          (ii) Eligible plan.--For purposes of 
                        clause (i), the term ``eligible plan'' 
                        means any account, annuity, contract, 
                        or plan referred to in subparagraph 
                        (A).
                  (E) Denial of rollover treatment for required 
                distributions.--This paragraph shall not apply 
                to any amount to the extent such amount is 
                required to be distributed under subsection 
                (a)(6) or (b)(3).
                  (F) Frozen deposits.--For purposes of this 
                paragraph, rules similar to the rules of 
                section 402(c)(7) (relating to frozen deposits) 
                shall apply.
                  (G) Simple retirement accounts.--In the case 
                of any payment or distribution out of a simple 
                retirement account (as defined in subsection 
                (p)) to which section 72(t)(6) applies, this 
                paragraph shall not apply unless such payment 
                or distribution is paid into another simple 
                retirement account.
                  (H) Application of section 72.--
                          (i) In general.--If--
                                  (I) a distribution is made 
                                from an individual retirement 
                                plan, and
                                  (II) a rollover contribution 
                                is made to an eligible 
                                retirement plan described in 
                                section 402(c)(8)(B)(iii), 
                                (iv), (v), or (vi) with respect 
                                to all or part of such 
                                distribution,
                 then, notwithstanding paragraph (2), the rules 
                of clause (ii) shall apply for purposes of 
                applying section 72.
                          (ii) Applicable rules.--In the case 
                        of a distribution described in clause 
                        (i)--
                                  (I) section 72 shall be 
                                applied separately to such 
                                distribution,
                                  (II) notwithstanding the pro 
                                rata allocation of income on, 
                                and investment in, the contract 
                                to distributions under section 
                                72, the portion of such 
                                distribution rolled over to an 
                                eligible retirement plan 
                                described in clause (i) shall 
                                be treated as from income on 
                                the contract (to the extent of 
                                the aggregate income on the 
                                contract from all individual 
                                retirement plans of the 
                                distributee), and
                                  (III) appropriate adjustments 
                                shall be made in applying 
                                section 72 to other 
                                distributions in such taxable 
                                year and subsequent taxable 
                                years.
                  (I) Waiver of 60-day requirement.--The 
                Secretary may waive the 60-day requirement 
                under subparagraphs (A) and (D) where the 
                failure to waive such requirement would be 
                against equity or good conscience, including 
                casualty, disaster, or other events beyond the 
                reasonable control of the individual subject to 
                such requirement.
          (4) Contributions returned before due date of 
        return.--Paragraph (1) does not apply to the 
        distribution of any contribution paid during a taxable 
        year to an individual retirement account or for an 
        individual retirement annuity if--
                  (A) such distribution is received on or 
                before the day prescribed by law (including 
                extensions of time) for filing such 
                individual's return for such taxable year,
                  (B) no deduction is allowed under section 219 
                with respect to such contribution, and
                  (C) such distribution is accompanied by the 
                amount of net income attributable to such 
                contribution.
        In the case of such a distribution, for purposes of 
        section 61, any net income described in subparagraph 
        (C) shall be deemed to have been earned and receivable 
        in the taxable year in which such contribution is made.
          (5) Distributions of excess contributions after due 
        date for taxable year and certain excess rollover 
        contributions.--
                  (A) In general.--In the case of any 
                individual, if the aggregate contributions 
                (other than rollover contributions) paid for 
                any taxable year to an individual retirement 
                account or for an individual retirement annuity 
                do not exceed the dollar amount in effect under 
                section 219(b)(1)(A), paragraph (1) shall not 
                apply to the distribution of any such 
                contribution to the extent that such 
                contribution exceeds the amount allowable as a 
                deduction under section 219 for the taxable 
                year for which the contribution was paid--
                          (i) if such distribution is received 
                        after the date described in paragraph 
                        (4),
                          (ii) but only to the extent that no 
                        deduction has been allowed under 
                        section 219 with respect to such excess 
                        contribution.
                If employer contributions on behalf of the 
                individual are paid for the taxable year to a 
                simplified employee pension, the dollar 
                limitation of the preceding sentence shall be 
                increased by the lesser of the amount of such 
                contributions or the dollar limitation in 
                effect under section 415(c)(1)(A) for such 
                taxable year.
                  (B) Excess rollover contributions 
                attributable to erroneous information.--If--
                          (i) the taxpayer reasonably relies on 
                        information supplied pursuant to 
                        subtitle F for determining the amount 
                        of a rollover contribution, but
                          (ii) the information was erroneous,
                subparagraph (A) shall be applied by increasing 
                the dollar limit set forth therein by that 
                portion of the excess contribution which was 
                attributable to such information.
        For purposes of this paragraph, the amount allowable as 
        a deduction under section 219 shall be computed without 
        regard to section 219(g).
          (6) Transfer of account incident to divorce.--The 
        transfer of an individual's interest in an individual 
        retirement account or an individual retirement annuity 
        to [his spouse] the individual's spouse or former 
        spouse under a divorce or separation instrument 
        described in clause (i) of section 121(d)(3)(C) is not 
        to be considered a taxable transfer made by such 
        individual notwithstanding any other provision of this 
        subtitle, and such interest at the time of the transfer 
        is to be treated as an individual retirement account of 
        such spouse, and not of such individual. Thereafter 
        such account or annuity for purposes of this subtitle 
        is to be treated as maintained for the benefit of such 
        spouse.
          (7) Special rules for simplified employee pensions or 
        simple retirement accounts.--
                  (A) Transfer or rollover of contributions 
                prohibited until deferral test met.--
                Notwithstanding any other provision of this 
                subsection or section 72(t), paragraph (1) and 
                section 72(t)(1) shall apply to the transfer or 
                distribution from a simplified employee pension 
                of any contribution under a salary reduction 
                arrangement described in subsection (k)(6) (or 
                any income allocable thereto) before a 
                determination as to whether the requirements of 
                subsection (k)(6)(A)(iii) are met with respect 
                to such contribution.
                  (B) Certain exclusions treated as 
                deductions.--For purposes of paragraphs (4) and 
                (5) and section 4973, any amount excludable or 
                excluded from gross income under section 402(h) 
                or 402(k) shall be treated as an amount 
                allowable or allowed as a deduction under 
                section 219.
          (8) Distributions for charitable purposes.--
                  (A) In general.--So much of the aggregate 
                amount of qualified charitable distributions 
                with respect to a taxpayer made during any 
                taxable year which does not exceed $100,000 
                shall not be includible in gross income of such 
                taxpayer for such taxable year.
                  (B) Qualified charitable distribution.--For 
                purposes of this paragraph, the term 
                ``qualified charitable distribution'' means any 
                distribution from an individual retirement plan 
                (other than a plan described in subsection (k) 
                or (p))--
                          (i) which is made directly by the 
                        trustee to an organization described in 
                        section 170(b)(1)(A) (other than any 
                        organization described in section 
                        509(a)(3) or any fund or account 
                        described in section 4966(d)(2)), and
                          (ii) which is made on or after the 
                        date that the individual for whose 
                        benefit the plan is maintained has 
                        attained age 701/2.
                A distribution shall be treated as a qualified 
                charitable distribution only to the extent that 
                the distribution would be includible in gross 
                income without regard to subparagraph (A).
                  (C) Contributions must be otherwise 
                deductible.--For purposes of this paragraph, a 
                distribution to an organization described in 
                subparagraph (B)(i) shall be treated as a 
                qualified charitable distribution only if a 
                deduction for the entire distribution would be 
                allowable under section 170 (determined without 
                regard to subsection (b) thereof and this 
                paragraph).
                  (D) Application of section 72.--
                Notwithstanding section 72, in determining the 
                extent to which a distribution is a qualified 
                charitable distribution, the entire amount of 
                the distribution shall be treated as includible 
                in gross income without regard to subparagraph 
                (A) to the extent that such amount does not 
                exceed the aggregate amount which would have 
                been so includible if all amounts in all 
                individual retirement plans of the individual 
                were distributed during such taxable year and 
                all such plans were treated as 1 contract for 
                purposes of determining under section 72 the 
                aggregate amount which would have been so 
                includible. Proper adjustments shall be made in 
                applying section 72 to other distributions in 
                such taxable year and subsequent taxable years.
                  (E) Denial of deduction.--Qualified 
                charitable distributions which are not 
                includible in gross income pursuant to 
                subparagraph (A) shall not be taken into 
                account in determining the deduction under 
                section 170.
          (9) Distribution for health savings account 
        funding.--
                  (A) In general.--In the case of an individual 
                who is an eligible individual (as defined in 
                section 223(c)) and who elects the application 
                of this paragraph for a taxable year, gross 
                income of the individual for the taxable year 
                does not include a qualified HSA funding 
                distribution to the extent such distribution is 
                otherwise includible in gross income.
                  (B) Qualified HSA funding distribution.--For 
                purposes of this paragraph, the term 
                ``qualified HSA funding distribution'' means a 
                distribution from an individual retirement plan 
                (other than a plan described in subsection (k) 
                or (p)) of the employee to the extent that such 
                distribution is contributed to the health 
                savings account of the individual in a direct 
                trustee-to-trustee transfer.
                  (C) Limitations.--
                          (i) Maximum dollar limitation.--The 
                        amount excluded from gross income by 
                        subparagraph (A) shall not exceed the 
                        excess of--
                                  (I) the annual limitation 
                                under section 223(b) computed 
                                on the basis of the type of 
                                coverage under the high 
                                deductible health plan covering 
                                the individual at the time of 
                                the qualified HSA funding 
                                distribution, over
                                  (II) in the case of a 
                                distribution described in 
                                clause (ii)(II), the amount of 
                                the earlier qualified HSA 
                                funding distribution.
                          (ii) One-time transfer.--
                                  (I) In general.--Except as 
                                provided in subclause (II), an 
                                individual may make an election 
                                under subparagraph (A) only for 
                                one qualified HSA funding 
                                distribution during the 
                                lifetime of the individual. 
                                Such an election, once made, 
                                shall be irrevocable.
                                  (II) Conversion from self-
                                only to family coverage.--If a 
                                qualified HSA funding 
                                distribution is made during a 
                                month in a taxable year during 
                                which an individual has self-
                                only coverage under a high 
                                deductible health plan as of 
                                the first day of the month, the 
                                individual may elect to make an 
                                additional qualified HSA 
                                funding distribution during a 
                                subsequent month in such 
                                taxable year during which the 
                                individual has family coverage 
                                under a high deductible health 
                                plan as of the first day of the 
                                subsequent month.
                  (D) Failure to maintain high deductible 
                health plan coverage.--
                          (i) In general.--If, at any time 
                        during the testing period, the 
                        individual is not an eligible 
                        individual, then the aggregate amount 
                        of all contributions to the health 
                        savings account of the individual made 
                        under subparagraph (A)--
                                  (I) shall be includible in 
                                the gross income of the 
                                individual for the taxable year 
                                in which occurs the first month 
                                in the testing period for which 
                                such individual is not an 
                                eligible individual, and
                                  (II) the tax imposed by this 
                                chapter for any taxable year on 
                                the individual shall be 
                                increased by 10 percent of the 
                                amount which is so includible.
                          (ii) Exception for disability or 
                        death.--Subclauses (I) and (II) of 
                        clause (i) shall not apply if the 
                        individual ceased to be an eligible 
                        individual by reason of the death of 
                        the individual or the individual 
                        becoming disabled (within the meaning 
                        of section 72(m)(7)).
                          (iii) Testing period.--The term 
                        ``testing period'' means the period 
                        beginning with the month in which the 
                        qualified HSA funding distribution is 
                        contributed to a health savings account 
                        and ending on the last day of the 12th 
                        month following such month.
                  (E) Application of section 72.--
                Notwithstanding section 72, in determining the 
                extent to which an amount is treated as 
                otherwise includible in gross income for 
                purposes of subparagraph (A), the aggregate 
                amount distributed from an individual 
                retirement plan shall be treated as includible 
                in gross income to the extent that such amount 
                does not exceed the aggregate amount which 
                would have been so includible if all amounts 
                from all individual retirement plans were 
                distributed. Proper adjustments shall be made 
                in applying section 72 to other distributions 
                in such taxable year and subsequent taxable 
                years.
  (e) Tax treatment of accounts and annuities.--
          (1) Exemption from tax.--Any individual retirement 
        account is exempt from taxation under this subtitle 
        unless such account has ceased to be an individual 
        retirement account by reason of paragraph (2) or (3). 
        Notwithstanding the preceding sentence, any such 
        account is subject to the taxes imposed by section 511 
        (relating to imposition of tax on unrelated business 
        income of charitable, etc. organizations).
          (2) Loss of exemption of account where employee 
        engages in prohibited transaction.--
                  (A) In general.--If, during any taxable year 
                of the individual for whose benefit any 
                individual retirement account is established, 
                that individual or his beneficiary engages in 
                any transaction prohibited by section 4975 with 
                respect to such account, such account ceases to 
                be an individual retirement account as of the 
                first day of such taxable year. For purposes of 
                this paragraph--
                          (i) the individual for whose benefit 
                        any account was established is treated 
                        as the creator of such account, and
                          (ii) the separate account for any 
                        individual within an individual 
                        retirement account maintained by an 
                        employer or association of employees is 
                        treated as a separate individual 
                        retirement account.
                  (B) Account treated as distributing all its 
                assets.--In any case in which any account 
                ceases to be an individual retirement account 
                by reason of subparagraph (A) as of the first 
                day of any taxable year, paragraph (1) of 
                subsection (d) applies as if there were a 
                distribution on such first day in an amount 
                equal to the fair market value (on such first 
                day) of all assets in the account (on such 
                first day).
          (3) Effect of borrowing on annuity contract.--If 
        during any taxable year the owner of an individual 
        retirement annuity borrows any money under or by use of 
        such contract, the contract ceases to be an individual 
        retirement annuity as of the first day of such taxable 
        year. Such owner shall include in gross income for such 
        year an amount equal to the fair market value of such 
        contract as of such first day.
          (4) Effect of pledging account as security.--If, 
        during any taxable year of the individual for whose 
        benefit an individual retirement account is 
        established, that individual uses the account or any 
        portion thereof as security for a loan, the portion so 
        used is treated as distributed to that individual.
          (5) Purchase of endowment contract by individual 
        retirement account.--If the assets of an individual 
        retirement account or any part of such assets are used 
        to purchase an endowment contract for the benefit of 
        the individual for whose benefit the account is 
        established--
                  (A) to the extent that the amount of the 
                assets involved in the purchase are not 
                attributable to the purchase of life insurance, 
                the purchase is treated as a rollover 
                contribution described in subsection (d)(3), 
                and
                  (B) to the extent that the amount of the 
                assets involved in the purchase are 
                attributable to the purchase of life, health, 
                accident, or other insurance, such amounts are 
                treated as distributed to that individual (but 
                the provisions of subsection (f) do not apply).
          (6) Commingling individual retirement account amounts 
        in certain common trust funds and common investment 
        funds.--Any common trust fund or common investment fund 
        of individual retirement account assets which is exempt 
        from taxation under this subtitle does not cease to be 
        exempt on account of the participation or inclusion of 
        assets of a trust exempt from taxation under section 
        501(a) which is described in section 401(a).
  (g) Community property laws.--This section shall be applied 
without regard to any community property laws.
  (h) Custodial accounts.--For purposes of this section, a 
custodial account shall be treated as a trust if the assets of 
such account are held by a bank (as defined in subsection (n)) 
or another person who demonstrates, to the satisfaction of the 
Secretary, that the manner in which he will administer the 
account will be consistent with the requirements of this 
section, and if the custodial account would, except for the 
fact that it is not a trust, constitute an individual 
retirement account described in subsection (a). For purposes of 
this title, in the case of a custodial account treated as a 
trust by reason of the preceding sentence, the custodian of 
such account shall be treated as the trustee thereof.
  (i) Reports.--The trustee of an individual retirement account 
and the issuer of an endowment contract described in subsection 
(b) or an individual retirement annuity shall make such reports 
regarding such account, contract, or annuity to the Secretary 
and to the individuals for whom the account, contract, or 
annuity is, or is to be, maintained with respect to 
contributions (and the years to which they relate), 
distributions aggregating $10 or more in any calendar year, and 
such other matters as the Secretary may require. The reports 
required by this subsection--
          (1) shall be filed at such time and in such manner as 
        the Secretary prescribes, and
          (2) shall be furnished to individuals--
                  (A) not later than January 31 of the calendar 
                year following the calendar year to which such 
                reports relate, and
                  (B) in such manner as the Secretary 
                prescribes.
In the case of a simple retirement account under subsection 
(p), only one report under this subsection shall be required to 
be submitted each calendar year to the Secretary (at the time 
provided under paragraph (2)) but, in addition to the report 
under this subsection, there shall be furnished, within 31 days 
after each calendar year, to the individual on whose behalf the 
account is maintained a statement with respect to the account 
balance as of the close of, and the account activity during, 
such calendar year.
  (j) Increase in maximum limitations for simplified employee 
pensions.--In the case of any simplified employee pension, 
subsections (a)(1) and (b)(2) of this section shall be applied 
by increasing the amounts contained therein by the amount of 
the limitation in effect under section 415(c)(1)(A).
  (k) Simplified employee pension defined.--
          (1) In general.--For purposes of this title, the term 
        ``simplified employee pension'' means an individual 
        retirement account or individual retirement annuity--
                  (A) with respect to which the requirements of 
                paragraphs (2), (3), (4), and (5) of this 
                subsection are met, and
                  (B) if such account or annuity is part of a 
                top-heavy plan (as defined in section 416), 
                with respect to which the requirements of 
                section 416(c)(2) are met.
          (2) Participation requirements.--This paragraph is 
        satisfied with respect to a simplified employee pension 
        for a year only if for such year the employer 
        contributes to the simplified employee pension of each 
        employee who--
                  (A) has attained age 21,
                  (B) has performed service for the employer 
                during at least 3 of the immediately preceding 
                5 years, and
                  (C) received at least $450 in compensation 
                (within the meaning of section 414(q)(4)) from 
                the employer for the year.
        For purposes of this paragraph, there shall be excluded 
        from consideration employees described in subparagraph 
        (A) or (C) of section 410(b)(3). For purposes of any 
        arrangement described in subsection (k)(6), any 
        employee who is eligible to have employer contributions 
        made on the employee's behalf under such arrangement 
        shall be treated as if such a contribution was made.
          (3) Contributions may not discriminate in favor of 
        the highly compensated, etc..--
                  (A) In general.--The requirements of this 
                paragraph are met with respect to a simplified 
                employee pension for a year if for such year 
                the contributions made by the employer to 
                simplified employee pensions for his employees 
                do not discriminate in favor of any highly 
                compensated employee (within the meaning of 
                section 414(q)).
                  (B) Special rules.--For purposes of 
                subparagraph (A), there shall be excluded from 
                consideration employees described in 
                subparagraph (A) or (C) of section 410(b)(3).
                  (C) Contributions must bear uniform 
                relationship to total compensation.--For 
                purposes of subparagraph (A), and except as 
                provided in subparagraph (D), employer 
                contributions to simplified employee pensions 
                (other than contributions under an arrangement 
                described in paragraph (6)) shall be considered 
                discriminatory unless contributions thereto 
                bear a uniform relationship to the compensation 
                (not in excess of the first $200,000) of each 
                employee maintaining a simplified employee 
                pension.
                  (D) Permitted disparity.--For purposes of 
                subparagraph (C), the rules of section 
                401(l)(2) shall apply to contributions to 
                simplified employee pensions (other than 
                contributions under an arrangement described in 
                paragraph (6)).
          (4) Withdrawals must be permitted.--A simplified 
        employee pension meets the requirements of this 
        paragraph only if--
                  (A) employer contributions thereto are not 
                conditioned on the retention in such pension of 
                any portion of the amount contributed, and
                  (B) there is no prohibition imposed by the 
                employer on withdrawals from the simplified 
                employee pension.
          (5) Contributions must be made under written 
        allocation formula.--The requirements of this paragraph 
        are met with respect to a simplified employee pension 
        only if employer contributions to such pension are 
        determined under a definite written allocation formula 
        which specifies--
                  (A) the requirements which an employee must 
                satisfy to share in an allocation, and
                  (B) the manner in which the amount allocated 
                is computed.
          (6) Employee may elect salary reduction 
        arrangement.--
                  (A) Arrangements which qualify.--
                          (i) In general.--A simplified 
                        employee pension shall not fail to meet 
                        the requirements of this subsection for 
                        a year merely because, under the terms 
                        of the pension, an employee may elect 
                        to have the employer make payments--
                                  (I) as elective employer 
                                contributions to the simplified 
                                employee pension on behalf of 
                                the employee, or
                                  (II) to the employee directly 
                                in cash.
                          (ii) 50 percent of eligible employees 
                        must elect.--Clause (i) shall not apply 
                        to a simplified employee pension unless 
                        an election described in clause (i)(I) 
                        is made or is in effect with respect to 
                        not less than 50 percent of the 
                        employees of the employer eligible to 
                        participate.
                          (iii) Requirements relating to 
                        deferral percentage.--Clause (i) shall 
                        not apply to a simplified employee 
                        pension for any year unless the 
                        deferral percentage for such year of 
                        each highly compensated employee 
                        eligible to participate is not more 
                        than the product of--
                                  (I) the average of the 
                                deferral percentages for such 
                                year of all employees (other 
                                than highly compensated 
                                employees) eligible to 
                                participate, multiplied by
                                  (II) 1.25.
                          (iv) Limitations on elective 
                        deferrals.--Clause (i) shall not apply 
                        to a simplified employee pension unless 
                        the requirements of section 401(a)(30) 
                        are met.
                  (B) Exception where more than 25 employees.--
                This paragraph shall not apply with respect to 
                any year in the case of a simplified employee 
                pension maintained by an employer with more 
                than 25 employees who were eligible to 
                participate (or would have been required to be 
                eligible to participate if a pension was 
                maintained) at any time during the preceding 
                year.
                  (C) Distributions of excess contributions.--
                          (i) In general.--Rules similar to the 
                        rules of section 401(k)(8) shall apply 
                        to any excess contribution under this 
                        paragraph. Any excess contribution 
                        under a simplified employee pension 
                        shall be treated as an excess 
                        contribution for purposes of section 
                        4979.
                          (ii) Excess contribution.--For 
                        purposes of clause (i), the term 
                        ``excess contribution'' means, with 
                        respect to a highly compensated 
                        employee, the excess of elective 
                        employer contributions under this 
                        paragraph over the maximum amount of 
                        such contributions allowable under 
                        subparagraph (A)(iii).
                  (D) Deferral percentage.--For purposes of 
                this paragraph, the deferral percentage for an 
                employee for a year shall be the ratio of--
                          (i) the amount of elective employer 
                        contributions actually paid over to the 
                        simplified employee pension on behalf 
                        of the employee for the year, to
                          (ii) the employee's compensation (not 
                        in excess of the first $200,000) for 
                        the year.
                  (E) Exception for State and local and tax-
                exempt pensions.--This paragraph shall not 
                apply to a simplified employee pension 
                maintained by--
                          (i) a State or local government or 
                        political subdivision thereof, or any 
                        agency or instrumentality thereof, or
                          (ii) an organization exempt from tax 
                        under this title.
                  (F) Exception where pension does not meet 
                requirements necessary to insure distribution 
                of excess contributions.--This paragraph shall 
                not apply with respect to any year for which 
                the simplified employee pension does not meet 
                such requirements as the Secretary may 
                prescribe as are necessary to insure that 
                excess contributions are distributed in 
                accordance with subparagraph (C), including--
                          (i) reporting requirements, and
                          (ii) requirements which, 
                        notwithstanding paragraph (4), provide 
                        that contributions (and any income 
                        allocable thereto) may not be withdrawn 
                        from a simplified employee pension 
                        until a determination has been made 
                        that the requirements of subparagraph 
                        (A)(iii) have been met with respect to 
                        such contributions.
                  (G) Highly compensated employee.--For 
                purposes of this paragraph, the term ``highly 
                compensated employee'' has the meaning given 
                such term by section 414(q).
                  (H) Termination.--This paragraph shall not 
                apply to years beginning after December 31, 
                1996. The preceding sentence shall not apply to 
                a simplified employee pension of an employer if 
                the terms of simplified employee pensions of 
                such employer, as in effect on December 31, 
                1996, provide that an employee may make the 
                election described in subparagraph (A).
          (7) Definitions.--For purposes of this subsection and 
        subsection (l)--
                  (A) Employee, employer, or owner-employee.--
                The terms ``employee'', ``employer'', and 
                ``owner-employee'' shall have the respective 
                meanings given such terms by section 401(c).
                  (B) Compensation.--Except as provided in 
                paragraph (2)(C), the term ``compensation'' has 
                the meaning given such term by section 414(s).
                  (C) Year.--The term ``year'' means--
                          (i) the calendar year, or
                          (ii) if the employer elects, subject 
                        to such terms and conditions as the 
                        Secretary may prescribe, to maintain 
                        the simplified employee pension on the 
                        basis of the employer's taxable year.
          (8) Cost-of-living adjustment.--The Secretary shall 
        adjust the $450 amount in paragraph (2)(C) at the same 
        time and in the same manner as under section 415(d) and 
        shall adjust the $200,000 amount in paragraphs (3)(C) 
        and (6)(D)(ii) at the same time, and by the same 
        amount, as any adjustment under section 401(a)(17)(B); 
        except that any increase in the $450 amount which is 
        not a multiple of $50 shall be rounded to the next 
        lowest multiple of $50.
          (9) Cross reference.--For excise tax on certain 
        excess contributions, see section 4979.
  (l) Simplified employer reports.--
          (1) In general.--An employer who makes a contribution 
        on behalf of an employee to a simplified employee 
        pension shall provide such simplified reports with 
        respect to such contributions as the Secretary may 
        require by regulations. The reports required by this 
        subsection shall be filed at such time and in such 
        manner, and information with respect to such 
        contributions shall be furnished to the employee at 
        such time and in such manner, as may be required by 
        regulations.
          (2) Simple retirement accounts.--
                  (A) No employer reports.--Except as provided 
                in this paragraph, no report shall be required 
                under this section by an employer maintaining a 
                qualified salary reduction arrangement under 
                subsection (p).
                  (B) Summary description.--The trustee of any 
                simple retirement account established pursuant 
                to a qualified salary reduction arrangement 
                under subsection (p) and the issuer of an 
                annuity established under such an arrangement 
                shall provide to the employer maintaining the 
                arrangement, each year a description containing 
                the following information:
                          (i) The name and address of the 
                        employer and the trustee or issuer.
                          (ii) The requirements for eligibility 
                        for participation.
                          (iii) The benefits provided with 
                        respect to the arrangement.
                          (iv) The time and method of making 
                        elections with respect to the 
                        arrangement.
                          (v) The procedures for, and effects 
                        of, withdrawals (including rollovers) 
                        from the arrangement.
                  (C) Employee notification.--The employer 
                shall notify each employee immediately before 
                the period for which an election described in 
                subsection (p)(5)(C) may be made of the 
                employee's opportunity to make such election. 
                Such notice shall include a copy of the 
                description described in subparagraph (B).
  (m) Investment in collectibles treated as distributions.--
          (1) In general.--The acquisition by an individual 
        retirement account or by an individually-directed 
        account under a plan described in section 401(a) of any 
        collectible shall be treated (for purposes of this 
        section and section 402) as a distribution from such 
        account in an amount equal to the cost to such account 
        of such collectible.
          (2) Collectible defined.--For purposes of this 
        subsection, the term ``collectible'' means--
                  (A) any work of art,
                  (B) any rug or antique,
                  (C) any metal or gem,
                  (D) any stamp or coin,
                  (E) any alcoholic beverage, or
                  (F) any other tangible personal property 
                specified by the Secretary for purposes of this 
                subsection.
          (3) Exception for certain coins and bullion.--For 
        purposes of this subsection, the term ``collectible'' 
        shall not include--
                  (A) any coin which is--
                          (i) a gold coin described in 
                        paragraph (7), (8), (9), or (10) of 
                        section 5112(a) of title 31, United 
                        States Code,
                          (ii) a silver coin described in 
                        section 5112(e) of title 31, United 
                        States Code,
                          (iii) a platinum coin described in 
                        section 5112(k) of title 31, United 
                        States Code, or
                          (iv) a coin issued under the laws of 
                        any State, or
                  (B) any gold, silver, platinum, or palladium 
                bullion of a fineness equal to or exceeding the 
                minimum fineness that a contract market (as 
                described in section 5 of the Commodity 
                Exchange Act, 7 U.S.C. 7) requires for metals 
                which may be delivered in satisfaction of a 
                regulated futures contract,
        if such bullion is in the physical possession of a 
        trustee described under subsection (a) of this section.
  (n) Bank.--For purposes of subsection (a)(2), the term 
``bank'' means--
          (1) any bank (as defined in section 581),
          (2) an insured credit union (within the meaning of 
        paragraph (6) or (7) of section 101 of the Federal 
        Credit Union Act), and
          (3) a corporation which, under the laws of the State 
        of its incorporation, is subject to supervision and 
        examination by the Commissioner of Banking or other 
        officer of such State in charge of the administration 
        of the banking laws of such State.
  (o) Definitions and rules relating to nondeductible 
contributions to individual retirement plans.--
          (1) In general.--Subject to the provisions of this 
        subsection, designated nondeductible contributions may 
        be made on behalf of an individual to an individual 
        retirement plan.
          (2) Limits on amounts which may be contributed.--
                  (A) In general.--The amount of the designated 
                nondeductible contributions made on behalf of 
                any individual for any taxable year shall not 
                exceed the nondeductible limit for such taxable 
                year.
                  (B) Nondeductible limit.--For purposes of 
                this paragraph--
                          (i) In general.--The term 
                        ``nondeductible limit'' means the 
                        excess of--
                                  (I) the amount allowable as a 
                                deduction under section 219 
                                (determined without regard to 
                                section 219(g)), over
                                  (II) the amount allowable as 
                                a deduction under section 219 
                                (determined with regard to 
                                section 219(g)).
                          (ii) Taxpayer may elect to treat 
                        deductible contributions as 
                        nondeductible.--If a taxpayer elects 
                        not to deduct an amount which (without 
                        regard to this clause) is allowable as 
                        a deduction under section 219 for any 
                        taxable year, the nondeductible limit 
                        for such taxable year shall be 
                        increased by such amount.
                  (C) Designated nondeductible contributions.--
                          (i) In general.--For purposes of this 
                        paragraph, the term ``designated 
                        nondeductible contribution'' means any 
                        contribution to an individual 
                        retirement plan for the taxable year 
                        which is designated (in such manner as 
                        the Secretary may prescribe) as a 
                        contribution for which a deduction is 
                        not allowable under section 219.
                          (ii) Designation.--Any designation 
                        under clause (i) shall be made on the 
                        return of tax imposed by chapter 1 for 
                        the taxable year.
          (3) Time when contributions made.--In determining for 
        which taxable year a designated nondeductible 
        contribution is made, the rule of section 219(f)(3) 
        shall apply.
          (4) Individual required to report amount of 
        designated nondeductible contributions.--
                  (A) In general.--Any individual who--
                          (i) makes a designated nondeductible 
                        contribution to any individual 
                        retirement plan for any taxable year, 
                        or
                          (ii) receives any amount from any 
                        individual retirement plan for any 
                        taxable year,
                shall include on his return of the tax imposed 
                by chapter 1 for such taxable year and any 
                succeeding taxable year (or on such other form 
                as the Secretary may prescribe for any such 
                taxable year) information described in 
                subparagraph (B).
                  (B) Information required to be supplied.--The 
                following information is described in this 
                subparagraph:
                          (i) The amount of designated 
                        nondeductible contributions for the 
                        taxable year.
                          (ii) The amount of distributions from 
                        individual retirement plans for the 
                        taxable year.
                          (iii) The excess (if any) of--
                                  (I) the aggregate amount of 
                                designated nondeductible 
                                contributions for all preceding 
                                taxable years, over
                                  (II) the aggregate amount of 
                                distributions from individual 
                                retirement plans which was 
                                excludable from gross income 
                                for such taxable years.
                          (iv) The aggregate balance of all 
                        individual retirement plans of the 
                        individual as of the close of the 
                        calendar year in which the taxable year 
                        begins.
                          (v) Such other information as the 
                        Secretary may prescribe.
                  (C) Penalty for reporting contributions not 
                made.--For penalty where individual reports 
                designated nondeductible contributions not 
                made, see section 6693(b).
  (p) Simple retirement accounts.--
          (1) In general.--For purposes of this title, the term 
        ``simple retirement account'' means an individual 
        retirement plan (as defined in section 7701(a)(37))--
                  (A) with respect to which the requirements of 
                paragraphs (3), (4), and (5) are met; and
                  (B) except in the case of a rollover 
                contribution described in subsection (d)(3)(G) 
                or a rollover contribution otherwise described 
                in subsection (d)(3) or in section 402(c), 
                403(a)(4), 403(b)(8), or 457(e)(16), which is 
                made after the 2-year period described in 
                section 72(t)(6), with respect to which the 
                only contributions allowed are contributions 
                under a qualified salary reduction arrangement.
          (2) Qualified salary reduction arrangement.--
                  (A) In general.--For purposes of this 
                subsection, the term ``qualified salary 
                reduction arrangement'' means a written 
                arrangement of an eligible employer under 
                which--
                          (i) an employee eligible to 
                        participate in the arrangement may 
                        elect to have the employer make 
                        payments--
                                  (I) as elective employer 
                                contributions to a simple 
                                retirement account on behalf of 
                                the employee, or
                                  (II) to the employee directly 
                                in cash,
                          (ii) the amount which an employee may 
                        elect under clause (i) for any year is 
                        required to be expressed as a 
                        percentage of compensation and may not 
                        exceed a total of the applicable dollar 
                        amount for any year,
                          (iii) the employer is required to 
                        make a matching contribution to the 
                        simple retirement account for any year 
                        in an amount equal to so much of the 
                        amount the employee elects under clause 
                        (i)(I) as does not exceed the 
                        applicable percentage of compensation 
                        for the year, and
                          (iv) no contributions may be made 
                        other than contributions described in 
                        clause (i) or (iii).
                  (B) Employer may elect 2-percent nonelective 
                contribution.--
                          (i) In general.--An employer shall be 
                        treated as meeting the requirements of 
                        subparagraph (A)(iii) for any year if, 
                        in lieu of the contributions described 
                        in such clause, the employer elects to 
                        make nonelective contributions of 2 
                        percent of compensation for each 
                        employee who is eligible to participate 
                        in the arrangement and who has at least 
                        $5,000 of compensation from the 
                        employer for the year. If an employer 
                        makes an election under this 
                        subparagraph for any year, the employer 
                        shall notify employees of such election 
                        within a reasonable period of time 
                        before the 60-day period for such year 
                        under paragraph (5)(C).
                          (ii) Compensation limitation.--The 
                        compensation taken into account under 
                        clause (i) for any year shall not 
                        exceed the limitation in effect for 
                        such year under section 401(a)(17).
                  (C) Definitions.--For purposes of this 
                subsection--
                          (i) Eligible employer.--
                                  (I) In general.--The term 
                                ``eligible employer'' means, 
                                with respect to any year, an 
                                employer which had no more than 
                                100 employees who received at 
                                least $5,000 of compensation 
                                from the employer for the 
                                preceding year.
                                  (II) 2-year grace period.--An 
                                eligible employer who 
                                establishes and maintains a 
                                plan under this subsection for 
                                1 or more years and who fails 
                                to be an eligible employer for 
                                any subsequent year shall be 
                                treated as an eligible employer 
                                for the 2 years following the 
                                last year the employer was an 
                                eligible employer. If such 
                                failure is due to any 
                                acquisition, disposition, or 
                                similar transaction involving 
                                an eligible employer, the 
                                preceding sentence shall not 
                                apply.
                          (ii) Applicable percentage.--
                                  (I) In general.--The term 
                                ``applicable percentage'' means 
                                3 percent.
                                  (II) Election of lower 
                                percentage.--An employer may 
                                elect to apply a lower 
                                percentage (not less than 1 
                                percent) for any year for all 
                                employees eligible to 
                                participate in the plan for 
                                such year if the employer 
                                notifies the employees of such 
                                lower percentage within a 
                                reasonable period of time 
                                before the 60-day election 
                                period for such year under 
                                paragraph (5)(C). An employer 
                                may not elect a lower 
                                percentage under this subclause 
                                for any year if that election 
                                would result in the applicable 
                                percentage being lower than 3 
                                percent in more than 2 of the 
                                years in the 5-year period 
                                ending with such year.
                                  (III) Special rule for years 
                                arrangement not in effect.--If 
                                any year in the 5-year period 
                                described in subclause (II) is 
                                a year prior to the first year 
                                for which any qualified salary 
                                reduction arrangement is in 
                                effect with respect to the 
                                employer (or any predecessor), 
                                the employer shall be treated 
                                as if the level of the employer 
                                matching contribution was at 3 
                                percent of compensation for 
                                such prior year.
                  (D) Arrangement may be only plan of 
                employer.--
                          (i) In general.--An arrangement shall 
                        not be treated as a qualified salary 
                        reduction arrangement for any year if 
                        the employer (or any predecessor 
                        employer) maintained a qualified plan 
                        with respect to which contributions 
                        were made, or benefits were accrued, 
                        for service in any year in the period 
                        beginning with the year such 
                        arrangement became effective and ending 
                        with the year for which the 
                        determination is being made. If only 
                        individuals other than employees 
                        described in subparagraph (A) of 
                        section 410(b)(3) are eligible to 
                        participate in such arrangement, then 
                        the preceding sentence shall be applied 
                        without regard to any qualified plan in 
                        which only employees so described are 
                        eligible to participate.
                          (ii) Qualified plan.--For purposes of 
                        this subparagraph, the term ``qualified 
                        plan'' means a plan, contract, pension, 
                        or trust described in subparagraph (A) 
                        or (B) of section 219(g)(5).
                  (E) Applicable dollar amount; cost-of-living 
                adjustment.--
                          (i) In general.--For purposes of 
                        subparagraph (A)(ii), the applicable 
                        amount is $10,000.
                          (ii) Cost-of-living adjustment.--In 
                        the case of a year beginning after 
                        December 31, 2005, the Secretary shall 
                        adjust the $10,000 amount under clause 
                        (i) at the same time and in the same 
                        manner as under section 415(d), except 
                        that the base period taken into account 
                        shall be the calendar quarter beginning 
                        July 1, 2004, and any increase under 
                        this subparagraph which is not a 
                        multiple of $500 shall be rounded to 
                        the next lower multiple of $500.
          (3) Vesting requirements.--The requirements of this 
        paragraph are met with respect to a simple retirement 
        account if the employee's rights to any contribution to 
        the simple retirement account are nonforfeitable. For 
        purposes of this paragraph, rules similar to the rules 
        of subsection (k)(4) shall apply.
          (4) Participation requirements.--
                  (A) In general.--The requirements of this 
                paragraph are met with respect to any simple 
                retirement account for a year only if, under 
                the qualified salary reduction arrangement, all 
                employees of the employer who--
                          (i) received at least $5,000 in 
                        compensation from the employer during 
                        any 2 preceding years, and
                          (ii) are reasonably expected to 
                        receive at least $5,000 in compensation 
                        during the year,
                are eligible to make the election under 
                paragraph (2)(A)(i) or receive the nonelective 
                contribution described in paragraph (2)(B).
                  (B) Excludable employees.--An employer may 
                elect to exclude from the requirement under 
                subparagraph (A) employees described in section 
                410(b)(3).
          (5) Administrative requirements.--The requirements of 
        this paragraph are met with respect to any simple 
        retirement account if, under the qualified salary 
        reduction arrangement--
                  (A) an employer must--
                          (i) make the elective employer 
                        contributions under paragraph (2)(A)(i) 
                        not later than the close of the 30-day 
                        period following the last day of the 
                        month with respect to which the 
                        contributions are to be made, and
                          (ii) make the matching contributions 
                        under paragraph (2)(A)(iii) or the 
                        nonelective contributions under 
                        paragraph (2)(B) not later than the 
                        date described in section 404(m)(2)(B),
                  (B) an employee may elect to terminate 
                participation in such arrangement at any time 
                during the year, except that if an employee so 
                terminates, the arrangement may provide that 
                the employee may not elect to resume 
                participation until the beginning of the next 
                year, and
                  (C) each employee eligible to participate may 
                elect, during the 60-day period before the 
                beginning of any year (and the 60-day period 
                before the first day such employee is eligible 
                to participate), to participate in the 
                arrangement, or to modify the amounts subject 
                to such arrangement, for such year.
          (6) Definitions.--For purposes of this subsection--
                  (A) Compensation.--
                          (i) In general.--The term 
                        ``compensation'' means amounts 
                        described in paragraphs (3) and (8) of 
                        section 6051(a). For purposes of the 
                        preceding sentence, amounts described 
                        in section 6051(a)(3) shall be 
                        determined without regard to section 
                        3401(a)(3).
                          (ii) Self-employed.--In the case of 
                        an employee described in subparagraph 
                        (B), the term ``compensation'' means 
                        net earnings from self-employment 
                        determined under section 1402(a) 
                        without regard to any contribution 
                        under this subsection. The preceding 
                        sentence shall be applied as if the 
                        term ``trade or business'' for purposes 
                        of section 1402 included service 
                        described in section 1402(c)(6).
                  (B) Employee.--The term ``employee'' includes 
                an employee as defined in section 401(c)(1).
                  (C) Year.--The term ``year'' means the 
                calendar year.
          (7) Use of designated financial institution.--A plan 
        shall not be treated as failing to satisfy the 
        requirements of this subsection or any other provision 
        of this title merely because the employer makes all 
        contributions to the individual retirement accounts or 
        annuities of a designated trustee or issuer. The 
        preceding sentence shall not apply unless each plan 
        participant is notified in writing (either separately 
        or as part of the notice under subsection (l)(2)(C)) 
        that the participant's balance may be transferred 
        without cost or penalty to another individual account 
        or annuity in accordance with subsection (d)(3)(G).
          (8) Coordination with maximum limitation under 
        subsection (a).--In the case of any simple retirement 
        account, subsections (a)(1) and (b)(2) shall be applied 
        by substituting ``the sum of the dollar amount in 
        effect under paragraph (2)(A)(ii) of this subsection 
        and the employer contribution required under 
        subparagraph (A)(iii) or (B)(i) of paragraph (2) of 
        this subsection, whichever is applicable'' for ``the 
        dollar amount in effect under section 219(b)(1)(A)''.
          (9) Matching contributions on behalf of self-employed 
        individuals not treated as elective employer 
        contributions.--Any matching contribution described in 
        paragraph (2)(A)(iii) which is made on behalf of a 
        self-employed individual (as defined in section 401(c)) 
        shall not be treated as an elective employer 
        contribution to a simple retirement account for 
        purposes of this title.
          (10) Special rules for acquisitions, dispositions, 
        and similar transactions.--
                  (A) In general.--An employer which fails to 
                meet any applicable requirement by reason of an 
                acquisition, disposition, or similar 
                transaction shall not be treated as failing to 
                meet such requirement during the transition 
                period if--
                          (i) the employer satisfies 
                        requirements similar to the 
                        requirements of section 
                        410(b)(6)(C)(i)(II); and
                          (ii) the qualified salary reduction 
                        arrangement maintained by the employer 
                        would satisfy the requirements of this 
                        subsection after the transaction if the 
                        employer which maintained the 
                        arrangement before the transaction had 
                        remained a separate employer.
                  (B) Applicable requirement.--For purposes of 
                this paragraph, the term ``applicable 
                requirement'' means--
                          (i) the requirement under paragraph 
                        (2)(A)(i) that an employer be an 
                        eligible employer;
                          (ii) the requirement under paragraph 
                        (2)(D) that an arrangement be the only 
                        plan of an employer; and
                          (iii) the participation requirements 
                        under paragraph (4).
                  (C) Transition period.--For purposes of this 
                paragraph, the term ``transition period'' means 
                the period beginning on the date of any 
                transaction described in subparagraph (A) and 
                ending on the last day of the second calendar 
                year following the calendar year in which such 
                transaction occurs.
  (q) Deemed IRAs under qualified employer plans.--
          (1) General rule.--If--
                  (A) a qualified employer plan elects to allow 
                employees to make voluntary employee 
                contributions to a separate account or annuity 
                established under the plan, and
                  (B) under the terms of the qualified employer 
                plan, such account or annuity meets the 
                applicable requirements of this section or 
                section 408A for an individual retirement 
                account or annuity,
        then such account or annuity shall be treated for 
        purposes of this title in the same manner as an 
        individual retirement plan and not as a qualified 
        employer plan (and contributions to such account or 
        annuity as contributions to an individual retirement 
        plan and not to the qualified employer plan). For 
        purposes of subparagraph (B), the requirements of 
        subsection (a)(5) shall not apply.
          (2) Special rules for qualified employer plans.--For 
        purposes of this title, a qualified employer plan shall 
        not fail to meet any requirement of this title solely 
        by reason of establishing and maintaining a program 
        described in paragraph (1).
          (3) Definitions.--For purposes of this subsection--
                  (A) Qualified employer plan.--The term 
                ``qualified employer plan'' has the meaning 
                given such term by section 72(p)(4)(A)(i); 
                except that such term shall also include an 
                eligible deferred compensation plan (as defined 
                in section 457(b)) of an eligible employer 
                described in section 457(e)(1)(A).
                  (B) Voluntary employee contribution.--The 
                term ``voluntary employee contribution'' means 
                any contribution (other than a mandatory 
                contribution within the meaning of section 
                411(c)(2)(C))--
                          (i) which is made by an individual as 
                        an employee under a qualified employer 
                        plan which allows employees to elect to 
                        make contributions described in 
                        paragraph (1), and
                          (ii) with respect to which the 
                        individual has designated the 
                        contribution as a contribution to which 
                        this subsection applies.
  (r) Cross references.--
                  (1) For tax on excess contributions in 
                individual retirement accounts or annuities, 
                see section 4973.
                  (2) For tax on certain accumulations in 
                individual retirement accounts or annuities, 
                see section 4974.

           *       *       *       *       *       *       *

Subpart B--SPECIAL RULES

           *       *       *       *       *       *       *

SEC. 415. LIMITATIONS ON BENEFITS AND CONTRIBUTION UNDER QUALIFIED 
                    PLANS.

  (a) General rule.--
          (1) Trusts.--A trust which is a part of a pension, 
        profitsharing, or stock bonus plan shall not constitute 
        a qualified trust under section 401(a) if--
                  (A) in the case of a defined benefit plan, 
                the plan provides for the payment of benefits 
                with respect to a participant which exceed the 
                limitation of subsection (b), or
                  (B) in the case of a defined contribution 
                plan, contributions and other additions under 
                the plan with respect to any participant for 
                any taxable year exceed the limitation of 
                subsection (c).
          (2) Section applies to certain annuities and 
        accounts.--In the case of--
                  (A) an employee annuity plan described in 
                section 403(a),
                  (B) an annuity contract described in section 
                403(b), or
                  (C) a simplified employee pension described 
                in section 408(k),
        such a contract, plan, or pension shall not be 
        considered to be described in section 403(a), 403(b), 
        or 408(k), as the case may be, unless it satisfies the 
        requirements of subparagraph (A) or subparagraph (B) of 
        paragraph (1), whichever is appropriate, and has not 
        been disqualified under subsection (g). In the case of 
        an annuity contract described in section 403(b), the 
        preceding sentence shall apply only to the portion of 
        the annuity contract which exceeds the limitation of 
        subsection (b) or the limitation of subsection (c), 
        whichever is appropriate.
  (b) Limitation for defined benefit plans.--
          (1) In general.--Benefits with respect to a 
        participant exceed the limitation of this subsection 
        if, when expressed as an annual benefit (within the 
        meaning of paragraph (2)), such annual benefit is 
        greater than the lesser of--
                  (A) $160,000, or
                  (B) 100 percent of the participant's average 
                compensation for his high 3 years.
          (2) Annual benefit.--
                  (A) In general.--For purposes of paragraph 
                (1), the term ``annual benefit'' means a 
                benefit payable annually in the form of a 
                straight life annuity (with no ancillary 
                benefits) under a plan to which employees do 
                not contribute and under which no rollover 
                contributions (as defined in sections 402(c), 
                403(a)(4), 403(b)(8), 408(d)(3), and 
                457(e)(16)) are made.
                  (B) Adjustment for certain other forms of 
                benefit.--If the benefit under the plan is 
                payable in any form other than the form 
                described in subparagraph (A), or if the 
                employees contribute to the plan or make 
                rollover contributions (as defined in sections 
                402(c), 403(a)(4), 403(b)(8), 408(d)(3), and 
                457(e)(16)), the determinations as to whether 
                the limitation described in paragraph (1) has 
                been satisfied shall be made, in accordance 
                with regulations prescribed by the Secretary by 
                adjusting such benefit so that it is equivalent 
                to the benefit described in subparagraph (A). 
                For purposes of this subparagraph, any 
                ancillary benefit which is not directly related 
                to retirement income benefits shall not be 
                taken into account; and that portion of any 
                joint and survivor annuity which constitutes a 
                qualified joint and survivor annuity (as 
                defined in section 417) shall not be taken into 
                account.
                  (C) Adjustment to $160,000 limit where 
                benefit begins before age 62.--If the 
                retirement income benefit under the plan begins 
                before age 62, the determination as to whether 
                the $160,000 limitation set forth in paragraph 
                (1)(A) has been satisfied shall be made, in 
                accordance with regulations prescribed by the 
                Secretary, by reducing the limitation of 
                paragraph (1)(A) so that such limitation (as so 
                reduced) equals an annual benefit (beginning 
                when such retirement income benefit begins) 
                which is equivalent to a $160,000 annual 
                benefit beginning at age 62.
                  (D) Adjustment to $160,000 limit where 
                benefit begins after age 65.--If the retirement 
                income benefit under the plan begins after age 
                65, the determination as to whether the 
                $160,000 limitation set forth in paragraph 
                (1)(A) has been satisfied shall be made, in 
                accordance with regulations prescribed by the 
                Secretary, by increasing the limitation of 
                paragraph (1)(A) so that such limitation (as so 
                increased) equals an annual benefit (beginning 
                when such retirement income benefit begins) 
                which is equivalent to a $160,000 annual 
                benefit beginning at age 65.
                  (E) Limitation on certain assumptions.--(i) 
                For purposes of adjusting any limitation under 
                subparagraph (C) and, except as provided in 
                clause (ii), for purposes of adjusting any 
                benefit under subparagraph (B), the interest 
                rate assumption shall not be less than the 
                greater of 5 percent or the rate specified in 
                the plan.
                  (ii) For purposes of adjusting any benefit 
                under subparagraph (B) for any form of benefit 
                subject to section 417(e)(3), the interest rate 
                assumption shall not be less than the greatest 
                of--
                          (I) 5.5 percent,
                          (II) the rate that provides a benefit 
                        of not more than 105 percent of the 
                        benefit that would be provided if the 
                        applicable interest rate (as defined in 
                        section 417(e)(3)) were the interest 
                        rate assumption, or
                          (III) the rate specified under the 
                        plan.
                  (iii) For purposes of adjusting any 
                limitation under subparagraph (D), the interest 
                rate assumption shall not be greater than the 
                lesser of 5 percent or the rate specified in 
                the plan.
                  (iv) For purposes of this subsection, no 
                adjustments under subsection (d)(1) shall be 
                taken into account before the year for which 
                such adjustment first takes effect.
                  (v) For purposes of adjusting any benefit or 
                limitation under subparagraph (B), (C), or (D), 
                the mortality table used shall be the 
                applicable mortality table (within the meaning 
                of section 417(e)(3)(B)).
                  (vi) In the case of a plan maintained by an 
                eligible employer (as defined in section 
                408(p)(2)(C)(i)), clause (ii) shall be applied 
                without regard to subclause (II) thereof.
                  (G) Special limitation for qualified police 
                or firefighters.--In the case of a qualified 
                participant, subparagraph (C) of this paragraph 
                shall not apply.
                  (H) Qualified participant defined.--For 
                purposes of subparagraph (G), the term 
                ``qualified participant'' means a participant--
                          (i) in a defined benefit plan which 
                        is maintained by a State, Indian tribal 
                        government (as defined in section 
                        7701(a)(40)), or any political 
                        subdivision thereof,
                          (ii) with respect to whom the period 
                        of service taken into account in 
                        determining the amount of the benefit 
                        under such defined benefit plan 
                        includes at least 15 years of service 
                        of the participant--
                                  (I) as a full-time employee 
                                of any police department or 
                                fire department which is 
                                organized and operated by the 
                                State, Indian tribal government 
                                (as so defined), or any 
                                political subdivision 
                                maintaining such defined 
                                benefit plan to provide police 
                                protection, firefighting 
                                services, or emergency medical 
                                services for any area within 
                                the jurisdiction of such State, 
                                Indian tribal government (as so 
                                defined), or any political 
                                subdivision, or
                                  (II) as a member of the Armed 
                                Forces of the United States.
                  (I) Exemption for survivor and disability 
                benefits provided under governmental plans.--
                Subparagraph (C) of this paragraph and 
                paragraph (5) shall not apply to--
                          (i) income received from a 
                        governmental plan (as defined in 
                        section 414(d)) as a pension, annuity, 
                        or similar allowance as the result of 
                        the recipient becoming disabled by 
                        reason of personal injuries or 
                        sickness, or
                          (ii) amounts received from a 
                        governmental plan by the beneficiaries, 
                        survivors, or the estate of an employee 
                        as the result of the death of the 
                        employee.
          (3) Average compensation for high 3 years.--For 
        purposes of paragraph (1), a participant's high 3 years 
        shall be the period of consecutive calendar years (not 
        more than 3) during which the participant had the 
        greatest aggregate compensation from the employer. In 
        the case of an employee within the meaning of section 
        401(c)(1), the preceding sentence shall be applied by 
        substituting for ``compensation from the employer'' the 
        following: ``the participant's earned income (within 
        the meaning of section 401(c)(2) but determined without 
        regard to any exclusion under section 911)''.
          (4) Total annual benefits not in excess of $10,000.--
        Notwithstanding the preceding provisions of this 
        subsection, the benefits payable with respect to a 
        participant under any defined benefit plan shall be 
        deemed not to exceed the limitation of this subsection 
        if--
                  (A) the retirement benefits payable with 
                respect to such participant under such plan and 
                under all other defined benefit plans of the 
                employer do not exceed $10,000 for the plan 
                year, or for any prior plan year, and
                  (B) the employer has not at any time 
                maintained a defined contribution plan in which 
                the participant participated.
          (5) Reduction for participation or service of less 
        than 10 years.--
                  (A) Dollar limitation.--In the case of an 
                employee who has less than 10 years of 
                participation in a defined benefit plan, the 
                limitation referred to in paragraph (1)(A) 
                shall be the limitation determined under such 
                paragraph (without regard to this paragraph) 
                multiplied by a fraction--
                          (i) the numerator of which is the 
                        number of years (or part thereof) of 
                        participation in the defined benefit 
                        plan of the employer, and
                          (ii) the denominator of which is 10.
                  (B) Compensation and benefits limitations.--
                The provisions of subparagraph (A) shall apply 
                to the limitations under paragraphs (1)(B) and 
                (4), except that such subparagraph shall be 
                applied with respect to years of service with 
                an employer rather than years of participation 
                in a plan.
                  (C) Limitation on reduction.--In no event 
                shall subparagraph (A) or (B) reduce the 
                limitations referred to in paragraphs (1) and 
                (4) to an amount less than ? of such limitation 
                (determined without regard to this paragraph).
                  (D) Application to changes in benefit 
                structure.--To the extent provided in 
                regulations, subparagraph (A) shall be applied 
                separately with respect to each change in the 
                benefit structure of a plan.
          (6) Computation of benefits and contributions.--The 
        computation of--
                  (A) benefits under a defined contribution 
                plan, for purposes of section 401(a)(4),
                  (B) contributions made on behalf of a 
                participant in a defined benefit plan, for 
                purposes of section 401(a)(4), and
                  (C) contributions and benefits provided for a 
                participant in a plan described in section 
                414(k), for purposes of this section
        shall not be made on a basis inconsistent with 
        regulations prescribed by the Secretary.
          (7) Benefits under certain collectively bargained 
        plans.--For a year, the limitation referred to in 
        paragraph (1)(B) shall not apply to benefits with 
        respect to a participant under a defined benefit plan 
        (other than a multiemployer plan)--
                  (A) which is maintained for such year 
                pursuant to a collective bargaining agreement 
                between employee representatives and one or 
                more employers,
                  (B) which, at all times during such year, has 
                at least 100 participants,
                  (C) under which benefits are determined 
                solely by reference to length of service, the 
                particular years during which service was 
                rendered, age at retirement, and date of 
                retirement,
                  (D) which provides that an employee who has 
                at least 4 years of service has a 
                nonforfeitable right to 100 percent of his 
                accrued benefit derived from employer 
                contributions, and
                  (E) which requires, as a condition of 
                participation in the plan, that an employee 
                complete a period of not more than 60 
                consecutive days of service with the employer 
                or employers maintaining the plan.
        This paragraph shall not apply to a participant whose 
        compensation for any 3 years during the 10-year period 
        immediately preceding the year in which he separates 
        from service exceeded the average compensation for such 
        3 years of all participants in such plan. This 
        paragraph shall not apply to a participant for any 
        period for which he is a participant under another plan 
        to which this section applies which is maintained by an 
        employer maintaining this plan. For any year for which 
        the paragraph applies to benefits with respect to a 
        participant, paragraph (1)(A) and subsection (d)(1)(A) 
        shall be applied with respect to such participant by 
        substituting one-half the amount otherwise applicable 
        for such year under paragraph (1)(A) for ``$160,000''.
          (8) Social security retirement age defined.--For 
        purposes of this subsection, the term ``social security 
        retirement age'' means the age used as the retirement 
        age under section 216(l) of the Social Security Act, 
        except that such section shall be applied--
                  (A) without regard to the age increase 
                factor, and
                  (B) as if the early retirement age under 
                section 216(l)(2) of such Act were 62.
          (9) Special rule for commercial airline pilots.--
                  (A) In general.--Except as provided in 
                subparagraph (B), in the case of any 
                participant who is a commercial airline pilot, 
                if, as of the time of the participant's 
                retirement, regulations prescribed by the 
                Federal Aviation Administration require an 
                individual to separate from service as a 
                commercial airline pilot after attaining any 
                age occurring on or after age 60 and before age 
                62, paragraph (2)(C) shall be applied by 
                substituting such age for age 62.
                  (B) Individuals who separate from service 
                before age 60.--If a participant described in 
                subparagraph (A) separates from service before 
                age 60, the rules of paragraph (2)(C) shall 
                apply.
          (10) Special rule for State, Indian tribal, and local 
        government plans.--
                  (A) Limitation to equal accrued benefit.--In 
                the case of a plan maintained for its employees 
                by any State or political subdivision thereof, 
                or by any agency or instrumentality of the 
                foregoing, or a governmental plan described in 
                the last sentence of section 414(d) (relating 
                to plans of Indian tribal governments), the 
                limitation with respect to a qualified 
                participant under this subsection shall not be 
                less than the accrued benefit of the 
                participant under the plan (determined without 
                regard to any amendment of the plan made after 
                October 14, 1987).
                  (B) Qualified participant.--For purposes of 
                this paragraph, the term ``qualified 
                participant'' means a participant who first 
                became a participant in the plan maintained by 
                the employer before January 1, 1990.
                  (C) Election.--
                          (i) In general.--This paragraph shall 
                        not apply to any plan unless each 
                        employer maintaining the plan elects 
                        before the close of the 1st plan year 
                        beginning after December 31, 1989, to 
                        have this subsection (other than 
                        paragraph (2)(G)).
                          (ii) Revocation of election.--An 
                        election under clause (i) may be 
                        revoked not later than the last day of 
                        the third plan year beginning after the 
                        date of the enactment of this clause. 
                        The revocation shall apply to all plan 
                        years to which the election applied and 
                        to all subsequent plan years. Any 
                        amount paid by a plan in a taxable year 
                        ending after the revocation shall be 
                        includible in income in such taxable 
                        year under the rules of this chapter in 
                        effect for such taxable year, except 
                        that, for purposes of applying the 
                        limitations imposed by this section, 
                        any portion of such amount which is 
                        attributable to any taxable year during 
                        which the election was in effect shall 
                        be treated as received in such taxable 
                        year.
          (11) Special limitation rule for governmental and 
        multiemployer plans.--In the case of a governmental 
        plan (as defined in section 414(d)) or a multiemployer 
        plan (as defined in section 414(f)), subparagraph (B) 
        of paragraph (1) shall not apply. Subparagraph (B) of 
        paragraph (1) shall not apply to a plan maintained by 
        an organization described in section 3121(w)(3)(A) 
        except with respect to highly compensated benefits. For 
        purposes of this paragraph, the term ``highly 
        compensated benefits'' means any benefits accrued for 
        an employee in any year on or after the first year in 
        which such employee is a highly compensated employee 
        (as defined in section 414(q)) of the organization 
        described in section 3121(w)(3)(A). For purposes of 
        applying paragraph (1)(B) to highly compensated 
        benefits, all benefits of the employee otherwise taken 
        into account (without regard to this paragraph) shall 
        be taken into account.
  (c) Limitation for defined contribution plans.--
          (1) In general.--Contributions and other additions 
        with respect to a participant exceed the limitation of 
        this subsection if, when expressed as an annual 
        addition (within the meaning of paragraph (2)) to the 
        participant's account, such annual addition is greater 
        than the lesser of--
                  (A) $40,000, or
                  (B) 100 percent of the participant's 
                compensation.
          (2) Annual addition.--For purposes of paragraph (1), 
        the term ``annual addition'' means the sum of any year 
        of--
                  (A) employer contributions,
                  (B) the employee contributions, and
                  (C) forfeitures.
        For the purposes of this paragraph, employee 
        contributions under subparagraph (B) are determined 
        without regard to any rollover contributions (as 
        defined in sections 402(c), 403(a)(4), 403(b)(8), 
        408(d)(3), and 457(e)(16)) without regard to employee 
        contributions to a simplified employee pension which 
        are excludable from gross income under section 
        408(k)(6). Subparagraph (B) of paragraph (1) shall not 
        apply to any contribution for medical benefits (within 
        the meaning of section 419A(f)(2)) after separation 
        from service which is treated as an annual addition.
          (3) Participant's compensation.--For purposes of 
        paragraph (1)--
                  (A) In general.--The term ``participant's 
                compensation'' means the compensation of the 
                participant from the employer for the year.
                  (B) Special rule for self-employed 
                individuals.--In the case of an employee within 
                the meaning of section 401(c)(1), subparagraph 
                (A) shall be applied by substituting ``the 
                participant's earned income (within the meaning 
                of section 401(c)(2) but determined without 
                regard to any exclusion under section 911)'' 
                for ``compensation of the participant from the 
                employer''.
                  (C) Special rules for permanent and total 
                disability.--In the case of a participant in 
                any defined contribution plan--
                          (i) who is permanently and totally 
                        disabled (as defined in section 
                        22(e)(3)),
                          (ii) who is not a highly compensated 
                        employee (within the meaning of section 
                        414(q)), and
                          (iii) with respect to whom the 
                        employer elects, at such time and in 
                        such manner as the Secretary may 
                        prescribe, to have this subparagraph 
                        apply,
                the term ``participant's compensation'' means 
                the compensation the participant would have 
                received for the year if the participant was 
                paid at the rate of compensation paid 
                immediately before becoming permanently and 
                totally disabled. This subparagraph shall apply 
                only if contributions made with respect to 
                amounts treated as compensation under this 
                subparagraph are nonforfeitable when made. If a 
                defined contribution plan provides for the 
                continuation of contributions on behalf of all 
                participants described in clause (i) for a 
                fixed or determinable period, this subparagraph 
                shall be applied without regard to clauses (ii) 
                and (iii).
                  (D) Certain deferrals included.--The term 
                ``participant's compensation'' shall include--
                          (i) any elective deferral (as defined 
                        in section 402(g)(3)), and
                          (ii) any amount which is contributed 
                        or deferred by the employer at the 
                        election of the employee and which is 
                        not includible in the gross income of 
                        the employee by reason of section 125, 
                        132(f)(4), or 457.
                  (E) Annuity contracts.--In the case of an 
                annuity contract described in section 403(b), 
                the term ``participant's compensation'' means 
                the participant's includible compensation 
                determined under section 403(b)(3).
          (6) Special rule for employee stock ownership 
        plans.--If no more than one-third of the employer 
        contributions to an employee stock ownership plan (as 
        described in section 4975(e)(7)) for a year which are 
        deductible under paragraph (9) of section 404(a) are 
        allocated to highly compensated employees (within the 
        meaning of section 414(q)), the limitations imposed by 
        this section shall not apply to--
                  (A) forfeitures of employer securities 
                (within the meaning of section 409) under such 
                an employee stock ownership plan if such 
                securities were acquired with the proceeds of a 
                loan (as described in section 404(a)(9)(A)), or
                  (B) employer contributions to such an 
                employee stock ownership plan which are 
                deductible under section 404(a)(9)(B) and 
                charged against the participant's account.
        The amount of any qualified gratuitous transfer (as 
        defined in section 664(g)(1)) allocated to a 
        participant for any limitation year shall not exceed 
        the limitations imposed by this section, but such 
        amount shall not be taken into account in determining 
        whether any other amount exceeds the limitations 
        imposed by this section.
          (7) Special rules relating to church plans.--
                  (A) Alternative contribution limitation.--
                          (i) In general.--Notwithstanding any 
                        other provision of this subsection, at 
                        the election of a participant who is an 
                        employee of a church or a convention or 
                        association of churches, including an 
                        organization described in section 
                        414(e)(3)(B)(ii), contributions and 
                        other additions for an annuity contract 
                        or retirement income account described 
                        in section 403(b) with respect to such 
                        participant, when expressed as an 
                        annual addition to such participant's 
                        account, shall be treated as not 
                        exceeding the limitation of paragraph 
                        (1) if such annual addition is not in 
                        excess of $10,000.
                          (ii) $40,000 aggregate limitation.--
                        The total amount of additions with 
                        respect to any participant which may be 
                        taken into account for purposes of this 
                        subparagraph for all years may not 
                        exceed $40,000.
                  (B) Number of years of service for duly 
                ordained, commissioned, or licensed ministers 
                or lay employees.--For purposes of this 
                paragraph--
                          (i) all years of service by--
                                  (I) a duly ordained, 
                                commissioned, or licensed 
                                minister of a church, or
                                  (II) a lay person,
                 as an employee of a church, a convention or 
                association of churches, including an 
                organization described in section 
                414(e)(3)(B)(ii), shall be considered as years 
                of service for 1 employer, and
                          (ii) all amounts contributed for 
                        annuity contracts by each such church 
                        (or convention or association of 
                        churches) or such organization during 
                        such years for such minister or lay 
                        person shall be considered to have been 
                        contributed by 1 employer.
                  (C) Foreign missionaries.--In the case of any 
                individual described in subparagraph (B) 
                performing services outside the United States, 
                contributions and other additions for an 
                annuity contract or retirement income account 
                described in section 403(b) with respect to 
                such employee, when expressed as an annual 
                addition to such employee's account, shall not 
                be treated as exceeding the limitation of 
                paragraph (1) if such annual addition is not in 
                excess of $3,000. This subparagraph shall not 
                apply with respect to any taxable year to any 
                individual whose adjusted gross income for such 
                taxable year (determined separately and without 
                regard to community property laws) exceeds 
                $17,000.
                  (D) Annual addition.--For purposes of this 
                paragraph, the term ``annual addition'' has the 
                meaning given such term by paragraph (2).
                  (E) Church, convention or association of 
                churches.--For purposes of this paragraph, the 
                terms ``church'' and ``convention or 
                association of churches'' have the same meaning 
                as when used in section 414(e).
  (d) Cost-of-living adjustments.--
          (1) In general.--The Secretary shall adjust 
        annually--
                  (A) the $160,000 amount in subsection 
                (b)(1)(A),
                  (B) in the case of a participant who is 
                separated from service, the amount taken into 
                account under subsection (b)(1)(B), and
                  (C) the $40,000 amount in subsection 
                (c)(1)(A),
        for increases in the cost-of-living in accordance with 
        regulations prescribed by the Secretary.
          (2) Method.--The regulations prescribed under 
        paragraph (1) shall provide for--
                  (A) an adjustment with respect to any 
                calendar year based on the increase in the 
                applicable index for the calendar quarter 
                ending September 30 of the preceding calendar 
                year over such index for the base period, and
                  (B) adjustment procedures which are similar 
                to the procedures used to adjust benefit 
                amounts under section 215(i)(2)(A) of the 
                Social Security Act.
          (3) Base period.--For purposes of paragraph (2)--
                  (A) $160,000 amount.--The base period taken 
                into account for purposes of paragraph (1)(A) 
                is the calendar quarter beginning July 1, 2001.
                  (B) Separations after December 31, 1994.--The 
                base period taken into account for purposes of 
                paragraph (1)(B) with respect to individuals 
                separating from service with the employer after 
                December 31, 1994, is the calendar quarter 
                beginning July 1 of the calendar year preceding 
                the calendar year in which such separation 
                occurs.
                  (C) Separations before January 1, 1995.--The 
                base period taken into account for purposes of 
                paragraph (1)(B) with respect to individuals 
                separating from service with the employer 
                before January 1, 1995, is the calendar quarter 
                beginning October 1 of the calendar year 
                preceding the calendar year in which such 
                separation occurs.
                  (D) $40,000 amount.--The base period taken 
                into account for purposes of paragraph (1)(C) 
                is the calendar quarter beginning July 1, 2001.
          (4) Rounding.--
                  (A) $160,000 amount.--Any increase under 
                subparagraph (A) of paragraph (1) which is not 
                a multiple of $5,000 shall be rounded to the 
                next lowest multiple of $5,000. This 
                subparagraph shall also apply for purposes of 
                any provision of this title that provides for 
                adjustments in accordance with the method 
                contained in this subsection, except to the 
                extent provided in such provision.
                  (B) $40,000 amount.--Any increase under 
                subparagraph (C) of paragraph (1) which is not 
                a multiple of $1,000 shall be rounded to the 
                next lowest multiple of $1,000.
  (f) Combining of plans.--
          (1) In general.--For purposes of applying the 
        limitations of subsections (b) and (c)--
                  (A) all defined benefit plans (whether or not 
                terminated) of an employer are to be treated as 
                one defined benefit plan, and
                  (B) all defined contribution plans (whether 
                or not terminated) of an employer are to be 
                treated as one defined contribution plan.
          (2) Exception for multiemployer plans.--
        Notwithstanding paragraph (1) and subsection (g), a 
        multiemployer plan (as defined in section 414(f)) shall 
        not be combined or aggregated--
                  (A) with any other plan which is not a 
                multiemployer plan for purposes of applying 
                subsection (b)(1)(B) to such other plan, or
                  (B) with any other multiemployer plan for 
                purposes of applying the limitations 
                established in this section.
  (g) Aggregation of plans.--Except as provided in subsection 
(f)(2), the Secretary, in applying the provisions of this 
section to benefits or contributions under more than one plan 
maintained by the same employer, and to any trusts, contracts, 
accounts, or bonds referred to in subsection (a)(2), with 
respect to which the participant has the control required under 
section 414(b) or (c), as modified by subsection (h), shall, 
under regulations prescribed by the Secretary, disqualify one 
or more trusts, plans, contracts, accounts, or bonds, or any 
combination thereof until such benefits or contributions do not 
exceed the limitations contained in this section. In addition 
to taking into account such other factors as may be necessary 
to carry out the purposes of subsection (f), the regulations 
prescribed under this paragraph shall provide that no plan 
which has been terminated shall be disqualified until all other 
trusts, plans, contracts, accounts, or bonds have been 
disqualified.
  (h) 50 percent control.--For purposes of applying subsections 
(b) and (c) of section 414 to this section, the phrase ``more 
than 50 percent'' shall be substituted for the phrase ``at 
least 80 percent'' each place it appears in section 1563(a)(1).
  (i) Records not available for past periods.--Where for the 
period before January 1, 1976, or (if later) the first day of 
the first plan year of the plan, the records necessary for the 
application of this section are not available, the Secretary 
may by regulations prescribe alternate methods for determining 
the amounts to be taken into account for such period.
  (j) Regulations; definition of year.--The Secretary shall 
prescribe such regulations as may be necessary to carry out the 
purposes of this section, including, but not limited to, 
regulations defining the term ``year'' for purposes of any 
provision of this section.
  (k) Special rules.--
          (1) Defined benefit plan and defined contribution 
        plan.--For purposes of this title, the term ``defined 
        contribution plan'' or ``defined benefit plan'' means a 
        defined contribution plan (within the meaning of 
        section 414(i)) or a defined benefit plan (within the 
        meaning of section 414(j)), whichever applies, which 
        is--
                  (A) a plan described in section 401(a) which 
                includes a trust which is exempt from tax under 
                section 501(a),
                  (B) an annuity plan described in section 
                403(a),
                  (C) an annuity contract described in section 
                403(b), or
                  (D) a simplified employee pension.
          (2) Contributions to provide cost-of-living 
        protection under defined benefit plans.--
                  (A) In general.--In the case of a defined 
                benefit plan which maintains a qualified cost-
                of-living arrangement--
                          (i) any contribution made directly by 
                        an employee under such an arrangement 
                        shall not be treated as an annual 
                        addition for purposes of subsection 
                        (c), and
                          (ii) any benefit under such 
                        arrangement which is allocable to an 
                        employer contribution which was 
                        transferred from a defined contribution 
                        plan and to which the requirements of 
                        subsection (c) were applied shall, for 
                        purposes of subsection (b), be treated 
                        as a benefit derived from an employee 
                        contribution (and subsection (c) shall 
                        not again apply to such contribution by 
                        reason of such transfer).
                  (B) Qualified cost-of-living arrangement 
                defined.--For purposes of this paragraph, the 
                term ``qualified cost-of-living arrangement'' 
                means an arrangement under a defined benefit 
                plan which--
                          (i) provides a cost-of-living 
                        adjustment to a benefit provided under 
                        such plan or a separate plan subject to 
                        the requirements of section 412, and
                          (ii) meets the requirements of 
                        subparagraphs (C), (D), (E), and (F) 
                        and such other requirements as the 
                        Secretary may prescribe.
                  (C) Determination of amount of benefit.--An 
                arrangement meets the requirement of this 
                subparagraph only if the cost-of-living 
                adjustment of participants is based--
                          (i) on increases in the cost-of-
                        living after the annuity starting date, 
                        and
                          (ii) on average cost-of-living 
                        increases determined by reference to 1 
                        or more indexes prescribed by the 
                        Secretary, except that the arrangement 
                        may provide that the increase for any 
                        year will not be less than 3 percent of 
                        the retirement benefit (determined 
                        without regard to such increase).
                  (D) Arrangement elective; time for 
                election.--An arrangement meets the 
                requirements of this subparagraph only if it is 
                elective, it is available under the same terms 
                to all participants, and it provides that such 
                election may at least be made in the year in 
                which the participant--
                          (i) attains the earliest retirement 
                        age under the defined benefit plan 
                        (determined without regard to any 
                        requirement of separation from 
                        service), or
                          (ii) separates from service.
                  (E) Nondiscrimination requirements.--An 
                arrangement shall not meet the requirements of 
                this subparagraph if the Secretary finds that a 
                pattern of discrimination exists with respect 
                to participation.
                  (F) Special rules for key employees.--
                          (i) In general.--An arrangement shall 
                        not meet the requirements of this 
                        paragraph if any key employee is 
                        eligible to participate.
                          (ii) Key employee.--For purposes of 
                        this subparagraph, the term ``key 
                        employee'' has the meaning given such 
                        term by section 416(i)(1), except that 
                        in the case of a plan other than a top-
                        heavy plan (within the meaning of 
                        section 416(g)), such term shall not 
                        include an individual who is a key 
                        employee solely by reason of section 
                        416(i)(1)(A)(i).
          (3) Repayments of cashouts under governmental 
        plans.--In the case of any repayment of contributions 
        (including interest thereon) to the governmental plan 
        with respect to an amount previously refunded upon a 
        forfeiture of service credit under the plan or under 
        another governmental plan maintained by a State or 
        local government employer within the same State, any 
        such repayment shall not be taken into account for 
        purposes of this section.
          (4) Special rules for sections 403(b) and 408.--For 
        purposes of this section, any annuity contract 
        described in section 403(b) for the benefit of a 
        participant shall be treated as a defined contribution 
        plan maintained by each employer with respect to which 
        the participant has the control required under 
        subsection (b) or (c) of section 414 (as modified by 
        subsection (h)). For purposes of this section, any 
        contribution by an employer to a simplified employee 
        pension plan for an individual for a taxable year shall 
        be treated as an employer contribution to a defined 
        contribution plan for such individual for such year.
  (l) Treatment of certain medical benefits.--
          (1) In general.--For purposes of this section, 
        contributions allocated to any individual medical 
        benefit account which is part of a pension or annuity 
        plan shall be treated as an annual addition to a 
        defined contribution plan for purposes of subsection 
        (c). Subparagraph (B) of subsection (c)(1) shall not 
        apply to any amount treated as an annual addition under 
        the preceding sentence.
          (2) Individual medical benefit account.--For purposes 
        of paragraph (1), the term ``individual medical benefit 
        account'' means any separate account--
                  (A) which is established for a participant 
                under a pension or annuity plan, and
                  (B) from which benefits described in section 
                401(h) are payable solely to such participant[, 
                his spouse, or his dependents] or the 
                participant's spouse or dependents.
  (m) Treatment of qualified governmental excess benefit 
arrangements.--
          (1) Governmental plan not affected.--In determining 
        whether a governmental plan (as defined in section 
        414(d)) meets the requirements of this section, 
        benefits provided under a qualified governmental excess 
        benefit arrangement shall not be taken into account. 
        Income accruing to a governmental plan (or to a trust 
        that is maintained solely for the purpose of providing 
        benefits under a qualified governmental excess benefit 
        arrangement) in respect of a qualified governmental 
        excess benefit arrangement shall constitute income 
        derived from the exercise of an essential governmental 
        function upon which such governmental plan (or trust) 
        shall be exempt from tax under section 115.
          (2) Taxation of participant.--For purposes of this 
        chapter--
                  (A) the taxable year or years for which 
                amounts in respect of a qualified governmental 
                excess benefit arrangement are includible in 
                gross income by a participant, and
                  (B) the treatment of such amounts when so 
                includible by the participant,
        shall be determined as if such qualified governmental 
        excess benefit arrangement were treated as a plan for 
        the deferral of compensation which is maintained by a 
        corporation not exempt from tax under this chapter and 
        which does not meet the requirements for qualification 
        under section 401.
          (3) Qualified governmental excess benefit 
        arrangement.--For purposes of this subsection, the term 
        ``qualified governmental excess benefit arrangement'' 
        means a portion of a governmental plan if--
                  (A) such portion is maintained solely for the 
                purpose of providing to participants in the 
                plan that part of the participant's annual 
                benefit otherwise payable under the terms of 
                the plan that exceeds the limitations on 
                benefits imposed by this section,
                  (B) under such portion no election is 
                provided at any time to the participant 
                (directly or indirectly) to defer compensation, 
                and
                  (C) benefits described in subparagraph (A) 
                are not paid from a trust forming a part of 
                such governmental plan unless such trust is 
                maintained solely for the purpose of providing 
                such benefits.
  (n) Special rules relating to purchase of permissive service 
credit.--
          (1) In general.--If a participant makes 1 or more 
        contributions to a defined benefit governmental plan 
        (within the meaning of section 414(d)) to purchase 
        permissive service credit under such plan, then the 
        requirements of this section shall be treated as met 
        only if--
                  (A) the requirements of subsection (b) are 
                met, determined by treating the accrued benefit 
                derived from all such contributions as an 
                annual benefit for purposes of subsection (b), 
                or
                  (B) the requirements of subsection (c) are 
                met, determined by treating all such 
                contributions as annual additions for purposes 
                of subsection (c).
          (2) Application of limit.--For purposes of--
                  (A) applying paragraph (1)(A), the plan shall 
                not fail to meet the reduced limit under 
                subsection (b)(2)(C) solely by reason of this 
                subsection, and
                  (B) applying paragraph (1)(B), the plan shall 
                not fail to meet the percentage limitation 
                under subsection (c)(1)(B) solely by reason of 
                this subsection.
          (3) Permissive service credit.--For purposes of this 
        subsection--
                  (A) In general.--The term ``permissive 
                service credit'' means service credit--
                          (i) recognized by the governmental 
                        plan for purposes of calculating a 
                        participant's benefit under the plan,
                          (ii) which such participant has not 
                        received under such governmental plan, 
                        and
                          (iii) which such participant may 
                        receive only by making a voluntary 
                        additional contribution, in an amount 
                        determined under such governmental 
                        plan, which does not exceed the amount 
                        necessary to fund the benefit 
                        attributable to such service credit.
                Such term may include service credit for 
                periods for which there is no performance of 
                service, and, notwithstanding clause (ii), may 
                include service credited in order to provide an 
                increased benefit for service credit which a 
                participant is receiving under the plan.
                  (B) Limitation on nonqualified service 
                credit.--A plan shall fail to meet the 
                requirements of this section if--
                          (i) more than 5 years of nonqualified 
                        service credit are taken into account 
                        for purposes of this subsection, or
                          (ii) any nonqualified service credit 
                        is taken into account under this 
                        subsection before the employee has at 
                        least 5 years of participation under 
                        the plan.
                  (C) Nonqualified service credit.--For 
                purposes of subparagraph (B), the term 
                ``nonqualified service credit'' means 
                permissive service credit other than that 
                allowed with respect to--
                          (i) service (including parental, 
                        medical, sabbatical, and similar leave) 
                        as an employee of the Government of the 
                        United States, any State or political 
                        subdivision thereof, or any agency or 
                        instrumentality of any of the foregoing 
                        (other than military service or service 
                        for credit which was obtained as a 
                        result of a repayment described in 
                        subsection (k)(3)),
                          (ii) service (including parental, 
                        medical, sabbatical, and similar leave) 
                        as an employee (other than as an 
                        employee described in clause (i)) of an 
                        educational organization described in 
                        section 170(b)(1)(A)(ii) which is a 
                        public, private, or sectarian school 
                        which provides elementary or secondary 
                        education (through grade 12), or a 
                        comparable level of education, as 
                        determined under the applicable law of 
                        the jurisdiction in which the service 
                        was performed,
                          (iii) service as an employee of an 
                        association of employees who are 
                        described in clause (i), or
                          (iv) military service (other than 
                        qualified military service under 
                        section 414(u)) recognized by such 
                        governmental plan.
                In the case of service described in clause (i), 
                (ii), or (iii), such service will be 
                nonqualified service if recognition of such 
                service would cause a participant to receive a 
                retirement benefit for the same service under 
                more than one plan.
                  (D) Special rules for trustee-to-trustee 
                transfers.--In the case of a trustee-to-trustee 
                transfer to which section 403(b)(13)(A) or 
                457(e)(17)(A) applies (without regard to 
                whether the transfer is made between plans 
                maintained by the same employer)--
                          (i) the limitations of subparagraph 
                        (B) shall not apply in determining 
                        whether the transfer is for the 
                        purchase of permissive service credit, 
                        and
                          (ii) the distribution rules 
                        applicable under this title to the 
                        defined benefit governmental plan to 
                        which any amounts are so transferred 
                        shall apply to such amounts and any 
                        benefits attributable to such amounts.

           *       *       *       *       *       *       *

Subpart E--TREATMENT OF TRANSFERS TO RETIREE HEALTH ACCOUNTS

           *       *       *       *       *       *       *

SEC. 420. TRANSFERS OF EXCESS PENSION ASSETS TO RETIREE HEALTH 
                    ACCOUNTS.

  (a) General rule.--If there is a qualified transfer of any 
excess pension assets of a defined benefit plan to a health 
benefits account, or an applicable life insurance account, 
which is part of such plan--
          (1) a trust which is part of such plan shall not be 
        treated as failing to meet the requirements of 
        subsection (a) or (h) of section 401 solely by reason 
        of such transfer (or any other action authorized under 
        this section),
          (2) no amount shall be includible in the gross income 
        of the employer maintaining the plan solely by reason 
        of such transfer,
          (3) such transfer shall not be treated--
                  (A) as an employer reversion for purposes of 
                section 4980, or
                  (B) as a prohibited transaction for purposes 
                of section 4975, and
          (4) the limitations of subsection (d) shall apply to 
        such employer.
  (b) Qualified transfer.--For purposes of this section--
          (1) In general.--The term ``qualified transfer'' 
        means a transfer--
                  (A) of excess pension assets of a defined 
                benefit plan to a health benefits account, or 
                an applicable life insurance account, which is 
                part of such plan,
                  (B) which does not contravene any other 
                provision of law, and
                  (C) with respect to which the following 
                requirements are met in connection with the 
                plan--
                          (i) the use requirements of 
                        subsection (c)(1),
                          (ii) the vesting requirements of 
                        subsection (c)(2), and
                          (iii) the minimum cost requirements 
                        of subsection (c)(3).
          (2) Only 1 transfer per year.--No more than 1 
        transfer with respect to any plan during a taxable year 
        may be treated as a qualified transfer for purposes of 
        this section. If there is a transfer from a defined 
        benefit plan to both a health benefits account and an 
        applicable life insurance account during any taxable 
        year, such transfers shall be treated as 1 transfer for 
        purposes of this paragraph.
          (3) Limitation on amount transferred.--The amount of 
        excess pension assets which may be transferred to an 
        account in a qualified transfer shall not exceed the 
        amount which is reasonably estimated to be the amount 
        the employer maintaining the plan will pay (whether 
        directly or through reimbursement) out of such account 
        during the taxable year of the transfer for qualified 
        current retiree liabilities.
          (4) Expiration.--No transfer made after December 31, 
        2025, shall be treated as a qualified transfer.
  (c) Requirements of plans transferring assets.--
          (1) Use of transferred assets.--
                  (A) In general.--Any assets transferred to a 
                health benefits account, or an applicable life 
                insurance account, in a qualified transfer (and 
                any income allocable thereto) shall be used 
                only to pay qualified current retiree 
                liabilities (other than liabilities of key 
                employees not taken into account under 
                subsection (e)(1)(E)) for the taxable year of 
                the transfer (whether directly or through 
                reimbursement). In the case of a qualified 
                future transfer or collectively bargained 
                transfer to which subsection (f) applies, any 
                assets so transferred may also be used to pay 
                liabilities described in subsection (f)(2)(C).
                  (B) Amounts not used to pay for health 
                benefits or life insurance.--
                          (i) In general.--Any assets 
                        transferred to a health benefits 
                        account, or an applicable life 
                        insurance account, in a qualified 
                        transfer (and any income allocable 
                        thereto) which are not used as provided 
                        in subparagraph (A) shall be 
                        transferred out of the account to the 
                        transferor plan.
                          (ii) Tax treatment of amounts.--Any 
                        amount transferred out of an account 
                        under clause (i)--
                                  (I) shall not be includible 
                                in the gross income of the 
                                employer for such taxable year, 
                                but
                                  (II) shall be treated as an 
                                employer reversion for purposes 
                                of section 4980 (without regard 
                                to subsection (d) thereof).
                  (C) Ordering rule.--For purposes of this 
                section, any amount paid out of a health 
                benefits account, or an applicable life 
                insurance account, shall be treated as paid 
                first out of the assets and income described in 
                subparagraph (A).
          (2) Requirements relating to pension benefits 
        accruing before transfer.--The requirements of this 
        paragraph are met if the plan provides that the accrued 
        pension benefits of any participant or beneficiary 
        under the plan become nonforfeitable in the same manner 
        which would be required if the plan had terminated 
        immediately before the qualified transfer (or in the 
        case of a participant who separated during the 1-year 
        period ending on the date of the transfer, immediately 
        before such separation).
          (3) Minimum cost requirements.--
                  (A) In general.--The requirements of this 
                paragraph are met if each group health plan or 
                arrangement under which applicable health 
                benefits are provided, and each group-term life 
                insurance plan under which applicable life 
                insurance benefits are provided, provides that 
                the applicable employer cost for each taxable 
                year during the cost maintenance period shall 
                not be less than the higher of the applicable 
                employer costs for each of the 2 taxable years 
                immediately preceding the taxable year of the 
                qualified transfer or, in the case of a 
                transfer which involves a plan maintained by an 
                employer described in subsection 
                (f)(2)(E)(i)(III), if the plan meets the 
                requirements of subsection (f)(2)(D)(i)(II).
                  (B) Applicable employer cost.--For purposes 
                of this paragraph, the term ``applicable 
                employer cost'' means, with respect to any 
                taxable year, the amount determined by 
                dividing--
                          (i) the qualified current retiree 
                        liabilities of the employer for such 
                        taxable year determined--
                                  (I) separately with respect 
                                to applicable health benefits 
                                and applicable life insurance 
                                benefits,
                                  (II) without regard to any 
                                reduction under subsection 
                                (e)(1)(B), and
                                  (III) in the case of a 
                                taxable year in which there was 
                                no qualified transfer, in the 
                                same manner as if there had 
                                been such a transfer at the end 
                                of the taxable year, by
                          (ii) the number of individuals to 
                        whom coverage was provided during such 
                        taxable year for the benefits with 
                        respect to which the determination 
                        under clause (i) is made.
                  (C) Election to compute cost separately.--An 
                employer may elect to have this paragraph 
                applied separately for applicable health 
                benefits with respect to individuals eligible 
                for benefits under title XVIII of the Social 
                Security Act at any time during the taxable 
                year and with respect to individuals not so 
                eligible, and separately for applicable life 
                insurance benefits with respect to individuals 
                age 65 or older at any time during the taxable 
                year and with respect to individuals under age 
                65 during the taxable year.
                  (D) Cost maintenance period.--For purposes of 
                this paragraph, the term ``cost maintenance 
                period'' means the period of 5 taxable years 
                beginning with the taxable year in which the 
                qualified transfer occurs. If a taxable year is 
                in two or more overlapping cost maintenance 
                periods, this paragraph shall be applied by 
                taking into account the highest applicable 
                employer cost required to be provided under 
                subparagraph (A) for such taxable year.
                  (E) Regulations.--
                          (i) In general.--The Secretary shall 
                        prescribe such regulations as may be 
                        necessary to prevent an employer who 
                        significantly reduces retiree health 
                        coverage or retiree life insurance 
                        coverage, as the case may be, during 
                        the cost maintenance period from being 
                        treated as satisfying the minimum cost 
                        requirement of this subsection.
                          (ii) Insignificant cost reductions 
                        for retiree health coverage 
                        permitted.--
                                  (I) In general.--An eligible 
                                employer shall not be treated 
                                as failing to meet the 
                                requirements of this paragraph 
                                for any taxable year if, in 
                                lieu of any reduction of 
                                retiree health coverage 
                                permitted under the regulations 
                                prescribed under clause (i), 
                                the employer reduces applicable 
                                employer cost by an amount not 
                                in excess of the reduction in 
                                costs which would have occurred 
                                if the employer had made the 
                                maximum permissible reduction 
                                in retiree health coverage 
                                under such regulations. In 
                                applying such regulations to 
                                any subsequent taxable year, 
                                any reduction in applicable 
                                employer cost under this clause 
                                shall be treated as if it were 
                                an equivalent reduction in 
                                retiree health coverage.
                                  (II) Eligible employer.--For 
                                purposes of subclause (I), an 
                                employer shall be treated as an 
                                eligible employer for any 
                                taxable year if, for the 
                                preceding taxable year, the 
                                qualified current retiree 
                                liabilities of the employer 
                                with respect to applicable 
                                health benefits were at least 5 
                                percent of the gross receipts 
                                of the employer. For purposes 
                                of this subclause, the rules of 
                                paragraphs (2), (3)(B), and 
                                (3)(C) of section 448(c) shall 
                                apply in determining the amount 
                                of an employer's gross 
                                receipts.
  (d) Limitations on employer.--For purposes of this title--
          (1) Deduction limitations.--No deduction shall be 
        allowed--
                  (A) for the transfer of any amount to a 
                health benefits account, or an applicable life 
                insurance account, in a qualified transfer (or 
                any retransfer to the plan under subsection 
                (c)(1)(B)),
                  (B) for qualified current retiree liabilities 
                paid out of the assets (and income) described 
                in subsection (c)(1), or
                  (C) for any amounts to which subparagraph (B) 
                does not apply and which are paid for qualified 
                current retiree liabilities for the taxable 
                year to the extent such amounts are not greater 
                than the excess (if any) of--
                          (i) the amount determined under 
                        subparagraph (A) (and income allocable 
                        thereto), over
                          (ii) the amount determined under 
                        subparagraph (B).
          (2) No contributions allowed.--An employer may not 
        contribute any amount to a health benefits account or 
        welfare benefit fund (as defined in section 419(e)(1)) 
        with respect to qualified current retiree liabilities 
        for which transferred assets are required to be used 
        under subsection (c)(1).
  (e) Definition and special rules.--For purposes of this 
section--
          (1) Qualified current retiree liabilities.--For 
        purposes of this section--
                  (A) In general.--The term ``qualified current 
                retiree liabilities'' means, with respect to 
                any taxable year, the aggregate amounts 
                (including administrative expenses) which would 
                have been allowable as a deduction to the 
                employer for such taxable year with respect to 
                applicable health benefits and applicable life 
                insurance benefits provided during such taxable 
                year if--
                          (i) such benefits were provided 
                        directly by the employer, and
                          (ii) the employer used the cash 
                        receipts and disbursements method of 
                        accounting.
                For purposes of the preceding sentence, the 
                rule of section 419(c)(3)(B) shall apply.
                  (B) Reductions for amounts previously set 
                aside.--The amount determined under 
                subparagraph (A) shall be reduced by the amount 
                (determined separately for applicable health 
                benefits and applicable life insurance 
                benefits) which bears the same ratio to such 
                amount as--
                          (i) the value (as of the close of the 
                        plan year preceding the year of the 
                        qualified transfer) of the assets in 
                        all health benefits accounts or 
                        applicable life insurance accounts or 
                        welfare benefit funds (as defined in 
                        section 419(e)(1)) set aside to pay for 
                        the qualified current retiree 
                        liability, bears to
                          (ii) the present value of the 
                        qualified current retiree liabilities 
                        for all plan years (determined without 
                        regard to this subparagraph).
                  (C) Applicable health benefits.--The term 
                ``applicable health benefits'' means health 
                benefits or coverage which are provided to--
                          (i) retired employees who, 
                        immediately before the qualified 
                        transfer, are entitled to receive such 
                        benefits by reason of retirement and 
                        who are entitled to pension benefits 
                        under the plan, and
                          (ii) their spouses and dependents.
                  (D) Applicable life insurance benefits.--The 
                term ``applicable life insurance benefits'' 
                means group-term life insurance coverage 
                provided to retired employees who, immediately 
                before the qualified transfer, are entitled to 
                receive such coverage by reason of retirement 
                and who are entitled to pension benefits under 
                the plan, but only to the extent that such 
                coverage is provided under a policy for retired 
                employees and the cost of such coverage is 
                excludable from the retired employee's gross 
                income under section 79.
                  (E) Key employees excluded.--If an employee 
                is a key employee (within the meaning of 
                section 416(i)(1)) with respect to any plan 
                year ending in a taxable year, such employee 
                shall not be taken into account in computing 
                qualified current retiree liabilities for such 
                taxable year or in calculating applicable 
                employer cost under subsection (c)(3)(B).
          (2) Excess pension assets.--The term ``excess pension 
        assets'' means the excess (if any) of--
                  (A) the lesser of--
                          (i) the fair market value of the 
                        plan's assets (reduced by the 
                        prefunding balance and funding standard 
                        carryover balance determined under 
                        section 430(f)), or
                          (ii) the value of plan assets as 
                        determined under section 430(g)(3) 
                        after reduction under section 430(f), 
                        over
                  (B) 125 percent of the sum of the funding 
                target and the target normal cost determined 
                under section 430 for such plan year.
          (3) Health benefits account.--The term ``health 
        benefits account'' means an account established and 
        maintained under section 401(h).
          (4) Applicable life insurance account.--The term 
        ``applicable life insurance account'' means a separate 
        account established and maintained for amounts 
        transferred under this section for qualified current 
        retiree liabilities based on premiums for applicable 
        life insurance benefits.
          (5) Coordination with sections 430 and 433.--In the 
        case of a qualified transfer, any assets so transferred 
        shall not, for purposes of this section and sections 
        430 and 433, be treated as assets in the plan.
          (6) Application to multiemployer plans.--In the case 
        of a multiemployer plan, this section shall be applied 
        to any such plan--
                  (A) by treating any reference in this section 
                to an employer as a reference to all employers 
                maintaining the plan (or, if appropriate, the 
                plan sponsor), and
                  (B) in accordance with such modifications of 
                this section (and the provisions of this title 
                relating to this section) as the Secretary 
                determines appropriate to reflect the fact the 
                plan is not maintained by a single employer.
  (f) Qualified transfers to cover future retiree costs and 
collectively bargained retiree benefits.--
          (1) In general.--An employer maintaining a defined 
        benefit plan (other than a multiemployer plan) may, in 
        lieu of a qualified transfer, elect for any taxable 
        year to have the plan make--
                  (A) a qualified future transfer, or
                  (B) a collectively bargained transfer.
        Except as provided in this subsection, a qualified 
        future transfer and a collectively bargained transfer 
        shall be treated for purposes of this title and the 
        Employee Retirement Income Security Act of 1974 as if 
        it were a qualified transfer.
          (2) Qualified future and collectively bargained 
        transfers.--For purposes of this subsection--
                  (A) In general.--The terms ``qualified future 
                transfer'' and ``collectively bargained 
                transfer'' mean a transfer which meets all of 
                the requirements for a qualified transfer, 
                except that--
                          (i) the determination of excess 
                        pension assets shall be made under 
                        subparagraph (B),
                          (ii) the limitation on the amount 
                        transferred shall be determined under 
                        subparagraph (C),
                          (iii) the minimum cost requirements 
                        of subsection (c)(3) shall be modified 
                        as provided under subparagraph (D), and
                          (iv) in the case of a collectively 
                        bargained transfer, the requirements of 
                        subparagraph (E) shall be met with 
                        respect to the transfer.
                  (B) Excess pension assets.--
                          (i) In general.--In determining 
                        excess pension assets for purposes of 
                        this subsection, subsection (e)(2) 
                        shall be applied by substituting ``120 
                        percent'' for ``125 percent''.
                          (ii) Requirement to maintain funded 
                        status.--If, as of any valuation date 
                        of any plan year in the transfer 
                        period, the amount determined under 
                        subsection (e)(2)(B) (after application 
                        of clause (i)) exceeds the amount 
                        determined under subsection (e)(2)(A), 
                        either--
                                  (I) the employer maintaining 
                                the plan shall make 
                                contributions to the plan in an 
                                amount not less than the amount 
                                required to reduce such excess 
                                to zero as of such date, or
                                  (II) there is transferred 
                                from the health benefits 
                                account or applicable life 
                                insurance account, as the case 
                                may be, to the plan an amount 
                                not less than the amount 
                                required to reduce such excess 
                                to zero as of such date.
                  (C) Limitation on amount transferred.--
                Notwithstanding subsection (b)(3), the amount 
                of the excess pension assets which may be 
                transferred--
                          (i) in the case of a qualified future 
                        transfer shall be equal to the sum of--
                                  (I) if the transfer period 
                                includes the taxable year of 
                                the transfer, the amount 
                                determined under subsection 
                                (b)(3) for such taxable year, 
                                plus
                                  (II) in the case of all other 
                                taxable years in the transfer 
                                period, the sum of the 
                                qualified current retiree 
                                liabilities which the plan 
                                reasonably estimates, in 
                                accordance with guidance issued 
                                by the Secretary, will be 
                                incurred for each of such 
                                years, and
                          (ii) in the case of a collectively 
                        bargained transfer, shall not exceed 
                        the amount which is reasonably 
                        estimated, in accordance with the 
                        provisions of the collective bargaining 
                        agreement and generally accepted 
                        accounting principles, to be the amount 
                        the employer maintaining the plan will 
                        pay (whether directly or through 
                        reimbursement) out of such account 
                        during the collectively bargained cost 
                        maintenance period for collectively 
                        bargained retiree liabilities.
                  (D) Minimum cost requirements.--
                          (i) In general.--The requirements of 
                        subsection (c)(3) shall be treated as 
                        met if--
                                  (I) in the case of a 
                                qualified future transfer, each 
                                group health plan or 
                                arrangement under which 
                                applicable health benefits are 
                                provided, and each group-term 
                                life insurance plan or 
                                arrangement under which 
                                applicable life insurance 
                                benefits are provided, provides 
                                applicable health benefits or 
                                applicable life insurance 
                                benefits, as the case may be, 
                                during the period beginning 
                                with the first year of the 
                                transfer period and ending with 
                                the last day of the 4th year 
                                following the transfer period 
                                such that the annual average 
                                amount of the applicable 
                                employer cost during such 
                                period is not less than the 
                                applicable employer cost 
                                determined under subsection 
                                (c)(3)(A) with respect to the 
                                transfer, and
                                  (II) in the case of a 
                                collectively bargained 
                                transfer, each collectively 
                                bargained plan under which 
                                collectively bargained health 
                                benefits or collectively 
                                bargained life insurance 
                                benefits are provided provides 
                                that the collectively bargained 
                                employer cost for each taxable 
                                year during the collectively 
                                bargained cost maintenance 
                                period shall not be less than 
                                the amount specified by the 
                                collective bargaining 
                                agreement.
                          (ii) Election to maintain benefits 
                        for future transfers.--An employer may 
                        elect, in lieu of the requirements of 
                        clause (i)(I), to meet the requirements 
                        of subsection (c)(3) with respect to 
                        applicable health benefits or 
                        applicable life insurance benefits by 
                        meeting the requirements of such 
                        subsection (as in effect before the 
                        amendments made by section 535 of the 
                        Tax Relief Extension Act of 1999) for 
                        each of the years described in the 
                        period under clause (i)(I). Such 
                        election may be made separately with 
                        respect to applicable health benefits 
                        and applicable life insurance benefits. 
                        In the case of an election with respect 
                        to applicable life insurance benefits, 
                        the first sentence of this clause shall 
                        be applied as if subsection (c)(3) as 
                        in effect before the amendments made by 
                        such Act applied to such benefits.
                          (iii) Collectively bargained employer 
                        cost.--For purposes of this 
                        subparagraph, the term ``collectively 
                        bargained employer cost'' means the 
                        average cost per covered individual of 
                        providing collectively bargained health 
                        benefits, collectively bargained life 
                        insurance benefits, or both, as the 
                        case may be, as determined in 
                        accordance with the applicable 
                        collective bargaining agreement. Such 
                        agreement may provide for an 
                        appropriate reduction in the 
                        collectively bargained employer cost to 
                        take into account any portion of the 
                        collectively bargained health benefits, 
                        collectively bargained life insurance 
                        benefits, or both, as the case may be, 
                        that is provided or financed by a 
                        government program or other source.
                  (E) Special rules for collectively bargained 
                transfers.--
                          (i) In general.--A collectively 
                        bargained transfer shall only include a 
                        transfer which--
                                  (I) is made in accordance 
                                with a collective bargaining 
                                agreement,
                                  (II) before the transfer, the 
                                employer designates, in a 
                                written notice delivered to 
                                each employee organization that 
                                is a party to the collective 
                                bargaining agreement, as a 
                                collectively bargained transfer 
                                in accordance with this 
                                section, and
                                  (III) involves a defined 
                                benefit plan maintained by an 
                                employer which, in its taxable 
                                year ending in 2005, provided 
                                health benefits or coverage to 
                                retirees and their spouses and 
                                dependents under all of the 
                                health benefit plans maintained 
                                by the employer, but only if 
                                the aggregate cost (including 
                                administrative expenses) of 
                                such benefits or coverage which 
                                would have been allowable as a 
                                deduction to the employer (if 
                                such benefits or coverage had 
                                been provided directly by the 
                                employer and the employer used 
                                the cash receipts and 
                                disbursements method of 
                                accounting) is at least 5 
                                percent of the gross receipts 
                                of the employer (determined in 
                                accordance with the last 
                                sentence of subsection 
                                (c)(3)(E)(ii)(II)) for such 
                                taxable year, or a plan 
                                maintained by a successor to 
                                such employer.
                          (ii) Use of assets.--Any assets 
                        transferred to a health benefits 
                        account, or an applicable life 
                        insurance account, in a collectively 
                        bargained transfer (and any income 
                        allocable thereto) shall be used only 
                        to pay collectively bargained retiree 
                        liabilities (other than liabilities of 
                        key employees not taken into account 
                        under paragraph (6)(B)(iii)) for the 
                        taxable year of the transfer or for any 
                        subsequent taxable year during the 
                        collectively bargained cost maintenance 
                        period (whether directly or through 
                        reimbursement).
          (3) Coordination with other transfers.--In applying 
        subsection (b)(3) to any subsequent transfer during a 
        taxable year in a transfer period or collectively 
        bargained cost maintenance period, qualified current 
        retiree liabilities shall be reduced by any such 
        liabilities taken into account with respect to the 
        qualified future transfer or collectively bargained 
        transfer to which such period relates.
          (4) Special deduction rules for collectively 
        bargained transfers.--In the case of a collectively 
        bargained transfer--
                  (A) the limitation under subsection (d)(1)(C) 
                shall not apply, and
                  (B) notwithstanding subsection (d)(2), an 
                employer may contribute an amount to a health 
                benefits account or welfare benefit fund (as 
                defined in section 419(e)(1)) with respect to 
                collectively bargained retiree liabilities for 
                which transferred assets are required to be 
                used under subsection (c)(1)(B), and the 
                deductibility of any such contribution shall be 
                governed by the limits applicable to the 
                deductibility of contributions to a welfare 
                benefit fund under a collective bargaining 
                agreement (as determined under section 
                419A(f)(5)(A)) without regard to whether such 
                contributions are made to a health benefits 
                account or welfare benefit fund and without 
                regard to the provisions of section 404 or the 
                other provisions of this section.
        The Secretary shall provide rules to ensure that the 
        application of this paragraph does not result in a 
        deduction being allowed more than once for the same 
        contribution or for 2 or more contributions or 
        expenditures relating to the same collectively 
        bargained retiree liabilities.
          (5) Transfer period.--For purposes of this 
        subsection, the term ``transfer period'' means, with 
        respect to any transfer, a period of consecutive 
        taxable years (not less than 2) specified in the 
        election under paragraph (1) which begins and ends 
        during the 10-taxable-year period beginning with the 
        taxable year of the transfer.
          (6) Terms relating to collectively bargained 
        transfers.--For purposes of this subsection--
                  (A) Collectively bargained cost maintenance 
                period.--The term ``collectively bargained cost 
                maintenance period'' means, with respect to 
                each covered retiree and [his covered spouse 
                and dependents] the covered spouse and 
                dependents of such retiree, the shorter of--
                          (i) the remaining lifetime of such 
                        covered retiree and, in the case of a 
                        transfer to a health benefits account, 
                        [his covered spouse and dependents] the 
                        covered spouse and dependents of such 
                        retiree, or
                          (ii) the period of coverage provided 
                        by the collectively bargained plan 
                        (determined as of the date of the 
                        collectively bargained transfer) with 
                        respect to such covered retiree and, in 
                        the case of a transfer to a health 
                        benefits account, [his covered spouse 
                        and dependents] the covered spouse and 
                        dependents of such retiree.
                  (B) Collectively bargained retiree 
                liabilities.--
                          (i) In general.--The term 
                        ``collectively bargained retiree 
                        liabilities'' means the present value, 
                        as of the beginning of a taxable year 
                        and determined in accordance with the 
                        applicable collective bargaining 
                        agreement, of all collectively 
                        bargained health benefits, and 
                        collectively bargained life insurance 
                        benefits, (including administrative 
                        expenses) for such taxable year and all 
                        subsequent taxable years during the 
                        collectively bargained cost maintenance 
                        period.
                          (ii) Reduction for amounts previously 
                        set aside.--The amount determined under 
                        clause (i) shall be reduced by the 
                        value (as of the close of the plan year 
                        preceding the year of the collectively 
                        bargained transfer) of the assets in 
                        all health benefits accounts, 
                        applicable life insurance accounts, or 
                        welfare benefit funds (as defined in 
                        section 419(e)(1)) set aside to pay for 
                        the collectively bargained retiree 
                        liabilities. The preceding sentence 
                        shall be applied separately for 
                        collectively bargained health benefits 
                        and collectively bargained life 
                        insurance benefits.
                          (iii) Key employees excluded.--If an 
                        employee is a key employee (within the 
                        meaning of section 416(i)(1)) with 
                        respect to any plan year ending in a 
                        taxable year, such employee shall not 
                        be taken into account in computing 
                        collectively bargained retiree 
                        liabilities for such taxable year or in 
                        calculating collectively bargained 
                        employer cost under subsection 
                        (c)(3)(C).
                  (C) Collectively bargained health benefits.--
                The term ``collectively bargained health 
                benefits'' means health benefits or coverage--
                          (i) which are provided to retired 
                        employees who, immediately before the 
                        collectively bargained transfer, are 
                        entitled to receive such benefits by 
                        reason of retirement and who are 
                        entitled to pension benefits under the 
                        plan, and their spouses and dependents, 
                        and
                          (ii) if specified by the provisions 
                        of the collective bargaining agreement 
                        governing the collectively bargained 
                        transfer, which will be provided at 
                        retirement to employees who are not 
                        retired employees at the time of the 
                        transfer and who are entitled to 
                        receive such benefits and who are 
                        entitled to pension benefits under the 
                        plan, and their spouses and dependents.
                  (D) Collectively bargained life insurance 
                benefits.--The term ``collectively bargained 
                life insurance benefits'' means, with respect 
                to any collectively bargained transfer--
                          (i) applicable life insurance 
                        benefits which are provided to retired 
                        employees who, immediately before the 
                        transfer, are entitled to receive such 
                        benefits by reason of retirement, and
                          (ii) if specified by the provisions 
                        of the collective bargaining agreement 
                        governing the transfer, applicable life 
                        insurance benefits which will be 
                        provided at retirement to employees who 
                        are not retired employees at the time 
                        of the transfer.
                  (E) Collectively bargained plan.--The term 
                ``collectively bargained plan'' means a group 
                health plan or arrangement for retired 
                employees and their spouses and dependents, or 
                a group-term life insurance plan or arrangement 
                for retired employees, that is maintained 
                pursuant to 1 or more collective bargaining 
                agreements.
  (g) Segment rates determined without pension stabilization.--
For purposes of this section, section 430 shall be applied 
without regard to subsection (h)(2)(C)(iv) thereof.

PART II--CERTAIN STOCK OPTIONS

           *       *       *       *       *       *       *

SEC. 424. DEFINITIONS AND SPECIAL RULES.

  (a) Corporate reorganizations, liquidations, etc..--For 
purposes of this part, the term ``issuing or assuming a stock 
option in a transaction to which section 424(a) applies'' means 
a substitution of a new option for the old option, or an 
assumption of the old option, by an employer corporation, or a 
parent or subsidiary of such corporation, by reason of a 
corporate merger, consolidation, acquisition of property or 
stock, separation, reorganization, or liquidation, if--
          (1) the excess of the aggregate fair market value of 
        the shares subject to the option immediately after the 
        substitution or assumption over the aggregate option 
        price of such shares is not more than the excess of the 
        aggregate fair market value of all shares subject to 
        the option immediately before such substitution or 
        assumption over the aggregate option price of such 
        shares, and
          (2) the new option or the assumption of the old 
        option does not give the employee additional benefits 
        which he did not have under the old option.
For purposes of this subsection, the parent-subsidiary 
relationship shall be determined at the time of any such 
transaction under this subsection.
  (b) Acquisition of new stock.--For purposes of this part, if 
stock is received by an individual in a distribution to which 
section 305, 354, 355, 356, or 1036 (or so much of section 1031 
as relates to section 1036) applies, and such distribution was 
made with respect to stock transferred to him upon his exercise 
of the option, such stock shall be considered as having been 
transferred to him on his exercise of such option. A similar 
rule shall be applied in the case of a series of such 
distributions.
  (c) Disposition.--
          (1) In general.--Except as provided in paragraphs 
        (2), (3), and (4), for purposes of this part, the term 
        ``disposition'' includes a sale, exchange, gift, or a 
        transfer of legal title, but does not include--
                  (A) a transfer from a decedent to an estate 
                or a transfer by bequest or inheritance;
                  (B) an exchange to which section 354, 355, 
                356, or 1036 (or so much of section 1031 as 
                relates to section 1036) applies; or
                  (C) a mere pledge or hypothecation.
          (2) Joint tenancy.--The acquisition of a share of 
        stock in the name of the employee and another jointly 
        with the right of survivorship or a subsequent transfer 
        of a share of stock into such joint ownership shall not 
        be deemed a disposition, but a termination of such 
        joint tenancy (except to the extent such employee 
        acquires ownership of such stock) shall be treated as a 
        disposition by him occurring at the time such joint 
        tenancy is terminated.
          (3) Special rule where incentive stock is acquired 
        through use of other statutory option stock.--
                  (A) Nonrecognition sections not to apply.--
                If--
                          (i) there is a transfer of statutory 
                        option stock in connection with the 
                        exercise of any incentive stock option, 
                        and
                          (ii) the applicable holding period 
                        requirements (under section 422(a)(1) 
                        or 423(a)(1)) are not met before such 
                        transfer,
                then no section referred to in subparagraph (B) 
                of paragraph (1) shall apply to such transfer.
                  (B) Statutory option stock.--For purpose of 
                subparagraph (A), the term ``statutory option 
                stock'' means any stock acquired through the 
                exercise of an incentive stock option or an 
                option granted under an employee stock purchase 
                plan.
          (4) Transfers between spouses or incident to 
        divorce.--In the case of any transfer described in 
        subsection (a) of section 1041--
                  (A) such transfer shall not be treated as a 
                disposition for purposes of this part, and
                  (B) the same tax treatment under this part 
                with respect to the transferred property shall 
                apply to the transferee as would have applied 
                to the transferor.
  (d) Attribution of stock ownership.--For purposes of this 
part, in applying the percentage limitations of sections 
422(b)(6) and 423(b)(3)--
          (1) the individual with respect to whom such 
        limitation is being determined shall be considered as 
        owning the stock owned, directly or indirectly, by or 
        for [his] the individual's brothers and sisters 
        (whether by the whole or half blood), spouse, 
        ancestors, and lineal descendants; and
          (2) stock owned, directly or indirectly, by or for a 
        corporation, partnership, estate, or trust, shall be 
        considered as being owned proportionately by or for its 
        shareholders, partners, or beneficiaries.
  (e) Parent corporation.--For purposes of this part, the term 
``parent corporation'' means any corporation (other than the 
employer corporation) in an unbroken chain of corporations 
ending with the employer corporation if, at the time of the 
granting of the option, each of the corporations other than the 
employer corporation owns stock possessing 50 percent or more 
of the total combined voting power of all classes of stock in 
one of the other corporations in such chain.
  (f) Subsidiary corporation.--For purposes of this part, the 
term ``subsidiary corporation'' means any corporation (other 
than the employer corporation) in an unbroken chain of 
corporations beginning with the employer corporation if, at the 
time of the granting of the option, each of the corporations 
other than the last corporation in the unbroken chain owns 
stock possessing 50 percent or more of the total combined 
voting power of all classes of stock in one of the other 
corporations in such chain.
  (g) Special rule for applying subsections (e) and (f).--In 
applying subsections (e) and (f) for purposes of sections 
422(a)(2) and 423(a)(2), there shall be substituted for the 
term ``employer corporation'' wherever it appears in 
subsections (e) and (f) the term ``grantor corporation'' or the 
term ``corporation issuing or assuming a stock option in a 
transaction to which section 424(a) applies'', as the case may 
be.
  (h) Modification, extension, or renewal of option.--
          (1) In general.--For purposes of this part, if the 
        terms of any option to purchase stock are modified, 
        extended, or renewed, such modification, extension, or 
        renewal shall be considered as the granting of a new 
        option.
          (2) Special rule for section 423 options.--In the 
        case of the transfer of stock pursuant to the exercise 
        of an option to which section 423 applies and which has 
        been so modified, extended, or renewed, the fair market 
        value of such stock at the time of the granting of the 
        option shall be considered as whichever of the 
        following is the highest--
                  (A) the fair market value of such stock on 
                the date of the original granting of the 
                option,
                  (B) the fair market value of such stock on 
                the date of the making of such modification, 
                extension, or renewal, or
                  (C) the fair market value of such stock at 
                the time of the making of any intervening 
                modification, extension, or renewal.
          (3) Definition of modification.--The term 
        ``modification'' means any change in the terms of the 
        option which gives the employee additional benefits 
        under the option, but such term shall not include a 
        change in the terms of the option--
                  (A) attributable to the issuance or 
                assumption of an option under subsection (a);
                  (B) to permit the option to qualify under 
                section 423(b)(9); or
                  (C) in the case of an option not immediately 
                exercisable in full, to accelerate the time at 
                which the option may be exercised.
  (i) Stockholder approval.--For purposes of this part, if the 
grant of an option is subject to approval by stockholders, the 
date of grant of the option shall be determined as if the 
option had not been subject to such approval.
  (j) Cross references.--For provisions requiring the reporting 
of certain acts with respect to a qualified stock option, an 
incentive stock option, options granted under employer stock 
purchase plans, or a restricted stock option, see section 6039.

Subchapter E--ACCOUNTING PERIODS AND METHODS OF ACCOUNTING

           *       *       *       *       *       *       *

PART II--METHODS OF ACCOUNTING

           *       *       *       *       *       *       *

Subpart C--TAXABLE YEAR FOR WHICH DEDUCTIONS TAKEN

           *       *       *       *       *       *       *

SEC. 469. PASSIVE ACTIVITY LOSSES AND CREDITS LIMITED.

  (a) Disallowance.--
          (1) In general.--If for any taxable year the taxpayer 
        is described in paragraph (2), neither--
                  (A) the passive activity loss, nor
                  (B) the passive activity credit,
        for the taxable year shall be allowed.
          (2) Persons described.--The following are described 
        in this paragraph:
                  (A) any individual, estate, or trust,
                  (B) any closely held C corporation, and
                  (C) any personal service corporation.
  (b) Disallowed loss or credit carried to next year.--Except 
as otherwise provided in this section, any loss or credit from 
an activity which is disallowed under subsection (a) shall be 
treated as a deduction or credit allocable to such activity in 
the next taxable year.
  (c) Passive activity defined.--For purposes of this section--
          (1) In general.--The term ``passive activity'' means 
        any activity--
                  (A) which involves the conduct of any trade 
                or business, and
                  (B) in which the taxpayer does not materially 
                participate.
          (2) Passive activity includes any rental activity.--
        Except as provided in paragraph (7), the term ``passive 
        activity'' includes any rental activity.
          (3) Working interests in oil and gas property.--
                  (A) In general.--The term ``passive 
                activity'' shall not include any working 
                interest in any oil or gas property which the 
                taxpayer holds directly or through an entity 
                which does not limit the liability of the 
                taxpayer with respect to such interest.
                  (B) Income in subsequent years.--If any 
                taxpayer has any loss for any taxable year from 
                a working interest in any oil or gas property 
                which is treated as a loss which is not from a 
                passive activity, then any net income from such 
                property (or any property the basis of which is 
                determined in whole or in part by reference to 
                the basis of such property) for any succeeding 
                taxable year shall be treated as income of the 
                taxpayer which is not from a passive activity. 
                If the preceding sentence applies to the net 
                income from any property for any taxable year, 
                any credits allowable under subpart B (other 
                than section 27) or D of part IV of subchapter 
                A for such taxable year which are attributable 
                to such property shall be treated as credits 
                not from a passive activity to the extent the 
                amount of such credits does not exceed the 
                regular tax liability of the taxpayer for the 
                taxable year which is allocable to such net 
                income.
          (4) Material participation not required for 
        paragraphs (2) and (3).--Paragraphs (2) and (3) shall 
        be applied without regard to whether or not the 
        taxpayer materially participates in the activity.
          (5) Trade or business includes research and 
        experimentation activity.--For purposes of paragraph 
        (1)(A), the term ``trade or business'' includes any 
        activity involving research or experimentation (within 
        the meaning of section 174).
          (6) Activity in connection with trade or business or 
        production of income.--To the extent provided in 
        regulations, for purposes of paragraph (1)(A), the term 
        ``trade or business'' includes--
                  (A) any activity in connection with a trade 
                or business, or
                  (B) any activity with respect to which 
                expenses are allowable as a deduction under 
                section 212.
          (7) Special rules for taxpayers in real property 
        business.--
                  (A) In general.--If this paragraph applies to 
                any taxpayer for a taxable year--
                          (i) paragraph (2) shall not apply to 
                        any rental real estate activity of such 
                        taxpayer for such taxable year, and
                          (ii) this section shall be applied as 
                        if each interest of the taxpayer in 
                        rental real estate were a separate 
                        activity.
                Notwithstanding clause (ii), a taxpayer may 
                elect to treat all interests in rental real 
                estate as one activity. Nothing in the 
                preceding provisions of this subparagraph shall 
                be construed as affecting the determination of 
                whether the taxpayer materially participates 
                with respect to any interest in a limited 
                partnership as a limited partner.
                  (B) Taxpayers to whom paragraph applies.--
                This paragraph shall apply to a taxpayer for a 
                taxable year if--
                          (i) more than one-half of the 
                        personal services performed in trades 
                        or businesses by the taxpayer during 
                        such taxable year are performed in real 
                        property trades or businesses in which 
                        the taxpayer materially participates, 
                        and
                          (ii) such taxpayer performs more than 
                        750 hours of services during the 
                        taxable year in real property trades or 
                        businesses in which the taxpayer 
                        materially participates.
                In the case of a joint return, the requirements 
                of the preceding sentence are satisfied if and 
                only if either spouse separately satisfies such 
                requirements. For purposes of the preceding 
                sentence, activities in which a spouse 
                materially participates shall be determined 
                under subsection (h).
                  (C) Real property trade or business.--For 
                purposes of this paragraph, the term ``real 
                property trade or business'' means any real 
                property development, redevelopment, 
                construction, reconstruction, acquisition, 
                conversion, rental, operation, management, 
                leasing, or brokerage trade or business.
                  (D) Special rules for subparagraph (B).--
                          (i) Closely held C corporations.--In 
                        the case of a closely held C 
                        corporation, the requirements of 
                        subparagraph (B) shall be treated as 
                        met for any taxable year if more than 
                        50 percent of the gross receipts of 
                        such corporation for such taxable year 
                        are derived from real property trades 
                        or businesses in which the corporation 
                        materially participates.
                          (ii) Personal services as an 
                        employee.--For purposes of subparagraph 
                        (B), personal services performed as an 
                        employee shall not be treated as 
                        performed in real property trades or 
                        businesses. The preceding sentence 
                        shall not apply if such employee is a 
                        5-percent owner (as defined in section 
                        416(i)(1)(B)) in the employer.
  (d) Passive activity loss and credit defined.--For purposes 
of this section--
          (1) Passive activity loss.--The term ``passive 
        activity loss'' means the amount (if any) by which--
                  (A) the aggregate losses from all passive 
                activities for the taxable year, exceed
                  (B) the aggregate income from all passive 
                activities for such year.
          (2) Passive activity credit.--The term ``passive 
        activity credit'' means the amount (if any) by which--
                  (A) the sum of the credits from all passive 
                activities allowable for the taxable year 
                under--
                          (i) subpart D of part IV of 
                        subchapter A, or
                          (ii) subpart B (other than section 
                        27) of such part IV, exceeds
                  (B) the regular tax liability of the taxpayer 
                for the taxable year allocable to all passive 
                activities.
  (e) Special rules for determining income or loss from a 
passive activity.--For purposes of this section--
          (1) Certain income not treated as income from passive 
        activity.--In determining the income or loss from any 
        activity--
                  (A) In general.--There shall not be taken 
                into account--
                          (i) any--
                                  (I) gross income from 
                                interest, dividends, annuities, 
                                or royalties not derived in the 
                                ordinary course of a trade or 
                                business,
                                  (II) expenses (other than 
                                interest) which are clearly and 
                                directly allocable to such 
                                gross income, and
                                  (III) interest expense 
                                properly allocable to such 
                                gross income, and
                          (ii) gain or loss not derived in the 
                        ordinary course of a trade or business 
                        which is attributable to the 
                        disposition of property--
                                  (I) producing income of a 
                                type described in clause (i), 
                                or
                                  (II) held for investment.
                For purposes of clause (ii), any interest in a 
                passive activity shall not be treated as 
                property held for investment.
                  (B) Return on working capital.--For purposes 
                of subparagraph (A), any income, gain, or loss 
                which is attributable to an investment of 
                working capital shall be treated as not derived 
                in the ordinary course of a trade or business.
          (2) Passive losses of certain closely held 
        corporations may offset active income.--
                  (A) In general.--If a closely held C 
                corporation (other than a personal service 
                corporation) has net active income for any 
                taxable year, the passive activity loss of such 
                taxpayer for such taxable year (determined 
                without regard to this paragraph)--
                          (i) shall be allowable as a deduction 
                        against net active income, and
                          (ii) shall not be taken into account 
                        under subsection (a) to the extent so 
                        allowable as a deduction.
                A similar rule shall apply in the case of any 
                passive activity credit of the taxpayer.
                  (B) Net active income.--For purposes of this 
                paragraph, the term ``net active income'' means 
                the taxable income of the taxpayer for the 
                taxable year determined without regard to--
                          (i) any income or loss from a passive 
                        activity, and
                          (ii) any item of gross income, 
                        expense, gain, or loss described in 
                        paragraph (1)(A).
          (3) Compensation for personal services.--Earned 
        income (within the meaning of section 911(d)(2)(A)) 
        shall not be taken into account in computing the income 
        or loss from a passive activity for any taxable year.
          (4) Dividends reduced by dividends received 
        deduction.--For purposes of paragraphs (1) and (2), 
        income from dividends shall be reduced by the amount of 
        any dividends received deduction under section 243 or 
        245.
  (f) Treatment of former passive activities.--For purposes of 
this section--
          (1) In general.--If an activity is a former passive 
        activity for any taxable year--
                  (A) any unused deduction allocable to such 
                activity under subsection (b) shall be offset 
                against the income from such activity for the 
                taxable year,
                  (B) any unused credit allocable to such 
                activity under subsection (b) shall be offset 
                against the regular tax liability (computed 
                after the application of paragraph (1)) 
                allocable to such activity for the taxable 
                year, and
                  (C) any such deduction or credit remaining 
                after the application of subparagraphs (A) and 
                (B) shall continue to be treated as arising 
                from a passive activity.
          (2) Change in status of closely held C corporation or 
        personal service corporation.--If a taxpayer ceases for 
        any taxable year to be a closely held C corporation or 
        personal service corporation, this section shall 
        continue to apply to losses and credits to which this 
        section applied for any preceding taxable year in the 
        same manner as if such taxpayer continued to be a 
        closely held C corporation or personal service 
        corporation, whichever is applicable.
          (3) Former passive activity.--The term ``former 
        passive activity'' means any activity which, with 
        respect to the taxpayer--
                  (A) is not a passive activity for the taxable 
                year, but
                  (B) was a passive activity for any prior 
                taxable year.
  (g) Dispositions of entire interest in passive activity.--If 
during the taxable year a taxpayer disposes of his entire 
interest in any passive activity (or former passive activity), 
the following rules shall apply:
          (1) Fully taxable transaction.--
                  (A) In general.--If all gain or loss realized 
                on such disposition is recognized, the excess 
                of--
                          (i) any loss from such activity for 
                        such taxable year (determined after the 
                        application of subsection (b)), over
                          (ii) any net income or gain for such 
                        taxable year from all other passive 
                        activities (determined after the 
                        application of subsection (b)),
                shall be treated as a loss which is not from a 
                passive activity.
                  (B) Subparagraph (A) not to apply to 
                disposition involving related party.--If the 
                taxpayer and the person acquiring the interest 
                bear a relationship to each other described in 
                section 267(b) or section 707(b)(1), then 
                subparagraph (A) shall not apply to any loss of 
                the taxpayer until the taxable year in which 
                such interest is acquired (in a transaction 
                described in subparagraph (A)) by another 
                person who does not bear such a relationship to 
                the taxpayer.
                  (C) Income from prior years.--To the extent 
                provided in regulations, income or gain from 
                the activity for preceding taxable years shall 
                be taken into account under subparagraph 
                (A)(ii) for the taxable year to the extent 
                necessary to prevent the avoidance of this 
                section.
          (2) Disposition by death.--If an interest in the 
        activity is transferred by reason of the death of the 
        taxpayer--
                  (A) paragraph (1)(A) shall apply to losses 
                described in paragraph (1)(A) to the extent 
                such losses are greater than the excess (if 
                any) of--
                          (i) the basis of such property in the 
                        hands of the transferee, over
                          (ii) the adjusted basis of such 
                        property immediately before the death 
                        of the taxpayer, and
                  (B) any losses to the extent of the excess 
                described in subparagraph (A) shall not be 
                allowed as a deduction for any taxable year.
          (3) Installment sale of entire interest.--In the case 
        of an installment sale of an entire interest in an 
        activity to which section 453 applies, paragraph (1) 
        shall apply to the portion of such losses for each 
        taxable year which bears the same ratio to all such 
        losses as the gain recognized on such sale during such 
        taxable year bears to the gross profit from such sale 
        (realized or to be realized when payment is completed).
  (h) Material participation defined.--For purposes of this 
section--
          (1) In general.--A taxpayer shall be treated as 
        materially participating in an activity only if the 
        taxpayer is involved in the operations of the activity 
        on a basis which is--
                  (A) regular,
                  (B) continuous, and
                  (C) substantial.
          (2) Interests in limited partnerships.--Except as 
        provided in regulations, no interest in a limited 
        partnership as a limited partner shall be treated as an 
        interest with respect to which a taxpayer materially 
        participates.
          (3) Treatment of certain retired individuals and 
        surviving spouses.--A taxpayer shall be treated as 
        materially participating in any farming activity for a 
        taxable year if paragraph (4) or (5) of section 
        2032A(b) would cause the requirements of section 
        2032A(b)(1)(C)(ii) to be met with respect to real 
        property used in such activity if such taxpayer had 
        died during the taxable year.
          (4) Certain closely held C corporations and personal 
        service corporations.--A closely held C corporation or 
        personal service corporation shall be treated as 
        materially participating in an activity only if--
                  (A) 1 or more shareholders holding stock 
                representing more than 50 percent (by value) of 
                the outstanding stock of such corporation 
                materially participate in such activity, or
                  (B) in the case of a closely held C 
                corporation (other than a personal service 
                corporation), the requirements of section 
                465(c)(7)(C) (without regard to clause (iv)) 
                are met with respect to such activity.
          (5) Participation by spouse.--In determining whether 
        a taxpayer materially participates, the participation 
        of the spouse of the taxpayer shall be taken into 
        account.
  (i) $25,000 offset for rental real estate activities.--
          (1) In general.--In the case of any natural person, 
        subsection (a) shall not apply to that portion of the 
        passive activity loss or the deduction equivalent 
        (within the meaning of subsection (j)(5)) of the 
        passive activity credit for any taxable year which is 
        attributable to all rental real estate activities with 
        respect to which such individual actively participated 
        in such taxable year (and if any portion of such loss 
        or credit arose in another taxable year, in such other 
        taxable year).
          (2) Dollar limitation.--The aggregate amount to which 
        paragraph (1) applies for any taxable year shall not 
        exceed $25,000.
          (3) Phase-out of exemption.--
                  (A) In general.--In the case of any taxpayer, 
                the $25,000 amount under paragraph (2) shall be 
                reduced (but not below zero) by 50 percent of 
                the amount by which the adjusted gross income 
                of the taxpayer for the taxable year exceeds 
                $100,000.
                  (B) Special phase-out of rehabilitation 
                credit.--In the case of any portion of the 
                passive activity credit for any taxable year 
                which is attributable to the rehabilitation 
                credit determined under section 47, 
                subparagraph (A) shall be applied by 
                substituting ``$200,000'' for ``$100,000''.
                  (C) Exception for low-income housing 
                credit.--Subparagraph (A) shall not apply to 
                any portion of the passive activity credit for 
                any taxable year which is attributable to any 
                credit determined under section 42.
                  (D) Ordering rule.--Paragraph (1) shall be 
                applied for any taxable year--
                          (i) first, to the passive activity 
                        loss,
                          (ii) second, to the portion of the 
                        passive activity credit to which 
                        subparagraph (B) and (C) does not 
                        apply,
                          (iii) third, to the portion of such 
                        credit to which subparagraph (B) 
                        applies, and
                          (iv) then, to the portion of such 
                        credit to which subparagraph (C) 
                        applies.
                  (E) Adjusted gross income.--For purposes of 
                this paragraph, adjusted gross income shall be 
                determined without regard to--
                          (i) any amount includible in gross 
                        income under section 86,
                          (ii) the amounts excludable from 
                        gross income under sections 135 and 
                        137,
                          (iii) the amounts allowable as a 
                        deduction under sections 219, 221, 222, 
                        and 250, and
                          (iv) any passive activity loss or any 
                        loss allowable by reason of subsection 
                        (c)(7).
          (4) Special rule for estates.--
                  (A) In general.--In the case of taxable years 
                of an estate ending less than 2 years after the 
                date of the death of the decedent, this 
                subsection shall apply to all rental real 
                estate activities with respect to which such 
                decedent actively participated before his 
                death.
                  (B) Reduction for surviving spouse's 
                exemption.--For purposes of subparagraph (A), 
                the $25,000 amount under paragraph (2) shall be 
                reduced by the amount of the exemption under 
                paragraph (1) (without regard to paragraph (3)) 
                allowable to the surviving spouse of the 
                decedent for the taxable year ending with or 
                within the taxable year of the estate.
          (5) Married individuals filing separately.--
                  (A) In general.--Except as provided in 
                subparagraph (B), in the case of any married 
                individual filing a separate return, this 
                subsection shall be applied by substituting--
                          (i) ``$12,500'' for ``$25,000'' each 
                        place it appears,
                          (ii) ``$50,000'' for ``$100,000'' in 
                        paragraph (3)(A), and
                          (iii) ``$100,000'' for ``$200,000'' 
                        in paragraph (3)(B).
                  (B) Taxpayers not living apart.--This 
                subsection shall not apply to a taxpayer who--
                          (i) is a married individual filing a 
                        separate return for any taxable year, 
                        and
                          (ii) does not live apart from [his 
                        spouse] the individual's spouse at all 
                        times during such taxable year.
          (6) Active participation.--
                  (A) In general.--An individual shall not be 
                treated as actively participating with respect 
                to any interest in any rental real estate 
                activity for any period if, at any time during 
                such period, such interest (including any 
                interest of the spouse of the individual) is 
                less than 10 percent (by value) of all 
                interests in such activity.
                  (B) No participation requirement for low-
                income housing or rehabilitation credit.--
                Paragraphs (1) and (4)(A) shall be applied 
                without regard to the active participation 
                requirement in the case of--
                          (i) any credit determined under 
                        section 42 for any taxable year, or
                          (ii) any rehabilitation credit 
                        determined under section 47,
                  (C) Interest as a limited partner.--Except as 
                provided in regulations, no interest as a 
                limited partner in a limited partnership shall 
                be treated as an interest with respect to which 
                the taxpayer actively participates.
                  (D) Participation by spouse.--In determining 
                whether a taxpayer actively participates, the 
                participation of the spouse of the taxpayer 
                shall be taken into account.
  (j) Other definitions and special rules.--For purposes of 
this section--
          (1) Closely held C corporation.--The term ``closely 
        held C corporation'' means any C corporation described 
        in section 465(a)(1)(B).
          (2) Personal service corporation.--The term 
        ``personal service corporation'' has the meaning given 
        such term by section 269A(b)(1), except that section 
        269A(b)(2) shall be applied--
                  (A) by substituting ``any'' for ``more than 
                10 percent'', and
                  (B) by substituting ``any'' for ``50 percent 
                or more in value'' in section 318(a)(2)(C).
        A corporation shall not be treated as a personal 
        service corporation unless more than 10 percent of the 
        stock (by value) in such corporation is held by 
        employee-owners (within the meaning of section 
        269A(b)(2), as modified by the preceding sentence).
          (3) Regular tax liability.--The term ``regular tax 
        liability'' has the meaning given such term by section 
        26(b).
          (4) Allocation of passive activity loss and credit.--
        The passive activity loss and the passive activity 
        credit (and the $25,000 amount under subsection (i)) 
        shall be allocated to activities, and within 
        activities, on a pro rata basis in such manner as the 
        Secretary may prescribe.
          (5) Deduction equivalent.--The deduction equivalent 
        of credits from a passive activity for any taxable year 
        is the amount which (if allowed as a deduction) would 
        reduce the regular tax liability for such taxable year 
        by an amount equal to such credits.
          (6) Special rule for gifts.--In the case of a 
        disposition of any interest in a passive activity by 
        gift--
                  (A) the basis of such interest immediately 
                before the transfer shall be increased by the 
                amount of any passive activity losses allocable 
                to such interest with respect to which a 
                deduction has not been allowed by reason of 
                subsection (a), and
                  (B) such losses shall not be allowable as a 
                deduction for any taxable year.
          (7) Qualified residence interest.--The passive 
        activity loss of a taxpayer shall be computed without 
        regard to qualified residence interest (within the 
        meaning of section 163(h)(3)).
          (8) Rental activity.--The term ``rental activity'' 
        means any activity where payments are principally for 
        the use of tangible property.
          (9) Election to increase basis of property by amount 
        of disallowed credit.--For purposes of determining gain 
        or loss from a disposition of any property to which 
        subsection (g)(1) applies, the transferor may elect to 
        increase the basis of such property immediately before 
        the transfer by an amount equal to the portion of any 
        unused credit allowable under this chapter which 
        reduced the basis of such property for the taxable year 
        in which such credit arose. If the taxpayer elects the 
        application of this paragraph, such portion of the 
        passive activity credit of such taxpayer shall not be 
        allowed for any taxable year.
          (10) Coordination with section 280A.--If a passive 
        activity involves the use of a dwelling unit to which 
        section 280A(c)(5) applies for any taxable year, any 
        income, deduction, gain, or loss allocable to such use 
        shall not be taken into account for purposes of this 
        section for such taxable year.
          (11) Aggregation of members of affiliated groups.--
        Except as provided in regulations, all members of an 
        affiliated group which files a consolidated return 
        shall be treated as 1 corporation.
          (12) Special rule for distributions by estates or 
        trusts.--If any interest in a passive activity is 
        distributed by an estate or trust--
                  (A) the basis of such interest immediately 
                before such distribution shall be increased by 
                the amount of any passive activity losses 
                allocable to such interest, and
                  (B) such losses shall not be allowable as a 
                deduction for any taxable year.
  (k) Separate application of section in case of publicly 
traded partnerships.--
          (1) In general.--This section shall be applied 
        separately with respect to items attributable to each 
        publicly traded partnership (and subsection (i) shall 
        not apply with respect to items attributable to any 
        such partnership). The preceding sentence shall not 
        apply to any credit determined under section 42, or any 
        rehabilitation credit determined under section 47, 
        attributable to a publicly traded partnership to the 
        extent the amount of any such credits exceeds the 
        regular tax liability attributable to income from such 
        partnership.
          (2) Publicly traded partnership.--For purposes of 
        this section, the term ``publicly traded partnership'' 
        means any partnership if--
                  (A) interests in such partnership are traded 
                on an established securities market, or
                  (B) interests in such partnership are readily 
                tradable on a secondary market (or the 
                substantial equivalent thereof).
          (3) Coordination with subsection (g).--For purposes 
        of subsection (g), a taxpayer shall not be treated as 
        having disposed of his entire interest in an activity 
        of a publicly traded partnership until he disposes of 
        his entire interest in such partnership.
          (4) Application to regulated investment companies.--
        For purposes of this section, a regulated investment 
        company (as defined in section 851) holding an interest 
        in a qualified publicly traded partnership (as defined 
        in section 851(h)) shall be treated as a taxpayer 
        described in subsection (a)(2) with respect to items 
        attributable to such interest.
  (l) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary or appropriate to carry out 
provisions of this section, including regulations--
          (1) which specify what constitutes an activity, 
        material participation, or active participation for 
        purposes of this section,
          (2) which provide that certain items of gross income 
        will not be taken into account in determining income or 
        loss from any activity (and the treatment of expenses 
        allocable to such income),
          (3) requiring net income or gain from a limited 
        partnership or other passive activity to be treated as 
        not from a passive activity,
          (4) which provide for the determination of the 
        allocation of interest expense for purposes of this 
        section, and
          (5) which deal with changes in marital status and 
        changes between joint returns and separate returns.

Subchapter F--EXEMPT ORGANIZATIONS

           *       *       *       *       *       *       *

PART II--PRIVATE FOUNDATIONS

           *       *       *       *       *       *       *

SEC. 507. TERMINATION OF PRIVATE FOUNDATION STATUS.

  (a) General rule.--Except as provided in subsection (b), the 
status of any organization as a private foundation shall be 
terminated only if--
          (1) such organization notifies the Secretary (at such 
        time and in such manner as the Secretary may by 
        regulations prescribe) of its intent to accomplish such 
        termination, or
          (2)(A) with respect to such organization, there have 
        been either willful repeated acts (or failures to act), 
        or a willful and flagrant act (or failure to act), 
        giving rise to liability for tax under chapter 42, and
          (B) the Secretary notifies such organization that, by 
        reason of subparagraph (A), such organization is liable 
        for the tax imposed by subsection (c),
and either such organization pays the tax imposed by subsection 
(c) (or any portion not abated under subsection (g)) or the 
entire amount of such tax is abated under subsection (g).
  (b) Special rules.--
          (1) Transfer to, or operation as, public charity.--
        The status as a private foundation of any organization, 
        with respect to which there have not been either 
        willful repeated acts (or failures to act) or a willful 
        and flagrant act (or failure to act) giving rise to 
        liability for tax under chapter 42, shall be terminated 
        if--
                  (A) such organization distributes all of its 
                net assets to one or more organizations 
                described in section 170(b)(1)(A) (other than 
                in clauses (vii) and (viii)) each of which has 
                been in existence and so described for a 
                continuous period of at least 60 calendar 
                months immediately preceding such distribution, 
                or
                  (B)(i) such organization meets the 
                requirements of paragraph (1), (2), or (3) of 
                section 509(a) by the end of the 12-month 
                period beginning with its first taxable year 
                which begins after December 31, 1969, or for a 
                continuous period of 60 calendar months 
                beginning with the first day of any taxable 
                year which begins after December 31, 1969,
                  (ii) such organization notifies the Secretary 
                (in such manner as the Secretary may by 
                regulations prescribe) before the commencement 
                of such 12-month or 60-month period (or before 
                the 90th day after the day on which regulations 
                first prescribed under this subsection become 
                final) that it is terminating its private 
                foundation status, and
                  (iii) such organization establishes to the 
                satisfaction of the Secretary (in such manner 
                as the Secretary may by regulations prescribe) 
                immediately after the expiration of such 12-
                month or 60-month period that such organization 
                has complied with clause (i).
        If an organization gives notice under subparagraph 
        (B)(ii) of the commencement of a 60-month period and 
        such organization fails to meet the requirements of 
        paragraph (1), (2), or (3) of section 509(a) for the 
        entire 60-month period, this part and chapter 42 shall 
        not apply to such organization for any taxable year 
        within such 60-month period for which it does meet such 
        requirements.
          (2) Transferee foundations.--For purposes of this 
        part, in the case of a transfer of assets of any 
        private foundation to another private foundation 
        pursuant to any liquidation, merger, redemption, 
        recapitalization, or other adjustment, organization, or 
        reorganization, the transferee foundation shall not be 
        treated as a newly created organization.
  (c) Imposition of tax.--There is hereby imposed on each 
organization which is referred to in subsection (a) a tax equal 
to the lower of--
          (1) the amount which the private foundation 
        substantiates by adequate records or other 
        corroborating evidence as the aggregate tax benefit 
        resulting from the section 501(c)(3) status of such 
        foundation, or
          (2) the value of the net assets of such foundation.
  (d) Aggregate tax benefit.--
          (1) In general.--For purposes of subsection (c), the 
        aggregate tax benefit resulting from the section 
        501(c)(3) status of any private foundation is the sum 
        of--
                  (A) the aggregate increases in tax under 
                chapters 1, 11, and 12 (or the corresponding 
                provisions of prior law) which would have been 
                imposed with respect to all substantial 
                contributors to the foundation if deductions 
                for all contributions made by such contributors 
                to the foundation after February 28, 1913, had 
                been disallowed, and
                  (B) the aggregate increases in tax under 
                chapter 1 (or the corresponding provisions of 
                prior law) which would have been imposed with 
                respect to the income of the private foundation 
                for taxable years beginning after December 31, 
                1912, if (i) it had not been exempt from tax 
                under section 501(a) (or the corresponding 
                provisions of prior law), and (ii) in the case 
                of a trust, deductions under section 642(c) (or 
                the corresponding provisions of prior law) had 
                been limited to 20 percent of the taxable 
                income of the trust (computed without the 
                benefit of section 642(c) but with the benefit 
                of section 170(b)(1)(A)), and
                  (C) interest on the increases in tax 
                determined under subparagraphs (A) and (B) from 
                the first date on which each such increase 
                would have been due and payable to the date on 
                which the organization ceases to be a private 
                foundation.
          (2) Substantial contributor.--
                  (A) Definition.--For purposes of paragraph 
                (1), the term ``substantial contributor'' means 
                any person who contributed or bequeathed an 
                aggregate amount of more than $5,000 to the 
                private foundation, if such amount is more than 
                2 percent of the total contributions and 
                bequests received by the foundation before the 
                close of the taxable year of the foundation in 
                which the contribution or bequest is received 
                by the foundation from such person. In the case 
                of a trust, the term ``substantial 
                contributor'' also means the creator of the 
                trust.
                  (B) Special rules.--For purposes of 
                subparagraph (A)--
                          (i) each contribution or bequest 
                        shall be valued at fair market value on 
                        the date it was received,
                          (ii) in the case of a foundation 
                        which is in existence on October 9, 
                        1969, all contributions and bequests 
                        received on or before such date shall 
                        be treated (except for purposes of 
                        clause (i)) as if received on such 
                        date,
                          (iii) an individual shall be treated 
                        as making all contributions and 
                        bequests made by [his spouse] the 
                        individual's spouse, and
                          (iv) any person who is a substantial 
                        contributor on any date shall remain a 
                        substantial contributor for all 
                        subsequent periods.
                  (C) Person ceases to be substantial 
                contributor in certain cases.--
                          (i) In general.--A person shall cease 
                        to be treated as a substantial 
                        contributor with respect to any private 
                        foundation as of the close of any 
                        taxable year of such foundation if--
                                  (I) during the 10-year period 
                                ending at the close of such 
                                taxable year such person (and 
                                all related persons) have not 
                                made any contribution to such 
                                private foundation,
                                  (II) at no time during such 
                                10-year period was such person 
                                (or any related person) a 
                                foundation manager of such 
                                private foundation, and
                                  (III) the aggregate 
                                contributions made by such 
                                person (and related persons) 
                                are determined by the Secretary 
                                to be insignificant when 
                                compared to the aggregate 
                                amount of contributions to such 
                                foundation by one other person.
                 For purposes of subclause (III), appreciation 
                on contributions while held by the foundation 
                shall be taken into account.
                          (ii) Related person.--For purposes of 
                        clause (i), the term ``related person'' 
                        means, with respect to any person, any 
                        other person who would be a 
                        disqualified person (within the meaning 
                        of section 4946) by reason of his 
                        relationship to such person. In the 
                        case of a contributor which is a 
                        corporation, the term also includes any 
                        officer or director of such 
                        corporation.
          (3) Regulations.--For purposes of this section, the 
        determination as to whether and to what extent there 
        would have been any increase in tax shall be made in 
        accordance with regulations prescribed by the 
        Secretary.
  (e) Value of assets.--For purposes of subsection (c), the 
value of the net assets shall be determined at whichever time 
such value is higher: (1) the first day on which action is 
taken by the organization which culminates in its ceasing to be 
a private foundation, or (2) the date on which it ceases to be 
a private foundation.
  (f) Liability in case of transfers of assets from private 
foundation.--For purposes of determining liability for the tax 
imposed by subsection (c) in the case of assets transferred by 
the private foundation, such tax shall be deemed to have been 
imposed on the first day on which action is taken by the 
organization which culminates in its ceasing to be a private 
foundation.
  (g) Abatement of taxes.--The Secretary may abate the unpaid 
portion of the assessment of any tax imposed by subsection (c), 
or any liability in respect thereof, if--
          (1) the private foundation distributes all of its net 
        assets to one or more organizations described in 
        section 170(b)(1)(A) (other than in clauses (vii) and 
        (viii)) each of which has been in existence and so 
        described for a continuous period of at least 60 
        calendar months, or
          (2) following the notification prescribed in section 
        6104(c) to the appropriate State officer, such State 
        officer within one year notifies the Secretary, in such 
        manner as the Secretary may by regulations prescribe, 
        that corrective action has been initiated pursuant to 
        State law to insure that the assets of such private 
        foundation are preserved for such charitable or other 
        purposes specified in section 501(c)(3) as may be 
        ordered or approved by a court of competent 
        jurisdiction, and upon completion of the corrective 
        action, the Secretary receives certification from the 
        appropriate State officer that such action has resulted 
        in such preservation of assets.

Subchapter G--CORPORATIONS USED TO AVOID INCOME TAX ON SHAREHOLDERS

           *       *       *       *       *       *       *

PART II--PERSONAL HOLDING COMPANIES

           *       *       *       *       *       *       *

SEC. 544. RULES FOR DETERMINING STOCK OWNERSHIP.

  (a) Constructive ownership.--For purposes of determining 
whether a corporation is a personal holding company, insofar as 
such determination is based on stock ownership under section 
542(a)(2), section 543(a)(7), section 543(a)(6), or section 
543(a)(4)--
          (1) Stock not owned by individual.--Stock owned, 
        directly or indirectly, by or for a corporation, 
        partnership, estate, or trust shall be considered as 
        being owned proportionately by its shareholders, 
        partners, or beneficiaries.
          (2) Family and partnership ownership.--An individual 
        shall be considered as owning the stock owned, directly 
        or indirectly, by or for [his] the individual's family 
        or by or for [his] the individual's partner. For 
        purposes of this paragraph, the family of an individual 
        includes only [his] the individual's brothers and 
        sisters (whether by the whole or half blood), spouse, 
        ancestors, and lineal descendants.
          (3) Options.--If any person has an option to acquire 
        stock, such stock shall be considered as owned by such 
        person. For purposes of this paragraph, an option to 
        acquire such an option, and each one of a series of 
        such options, shall be considered as an option to 
        acquire such stock.
          (4) Application of family-partnership and option 
        rules.--Paragraphs (2) and (3) shall be applied--
                  (A) for purposes of the stock ownership 
                requirement provided in section 542(a)(2), if, 
                but only if, the effect is to make the 
                corporation a personal holding company;
                  (B) for purposes of section 543(a)(7) 
                (relating to personal service contracts), of 
                section 543(a)(6) (relating to use of property 
                by shareholders), or of section 543(a)(4) 
                (relating to copyright royalties), if, but only 
                if, the effect is to make the amounts therein 
                referred to includible under such paragraph as 
                personal holding company income.
          (5) Constructive ownership as actual ownership.--
        Stock constructively owned by a person by reason of the 
        application of paragraph (1) or (3), shall, for 
        purposes of applying paragraph (1) or (2), be treated 
        as actually owned by such person; but stock 
        constructively owned by an individual by reason of the 
        application of paragraph (2) shall not be treated as 
        owned by him for purposes of again applying such 
        paragraph in order to make another the constructive 
        owner of such stock.
          (6) Option rule in lieu of family and partnership 
        rule.--If stock may be considered as owned by an 
        individual under either paragraph (2) or (3) it shall 
        be considered as owned by him under paragraph (3).
  (b) Convertible securities.--Outstanding securities 
convertible into stock (whether or not convertible during the 
taxable year) shall be considered as outstanding stock--
          (1) for purposes of the stock ownership requirement 
        provided in section 542(a)(2), but only if the effect 
        of the inclusion of all such securities is to make the 
        corporation a personal holding company;
          (2) for purposes of section 543(a)(7) (relating to 
        personal service contracts), but only if the effect of 
        the inclusion of all such securities is to make the 
        amounts therein referred to includible under such 
        paragraph as personal holding company income;
          (3) for purposes of section 543(a)(6) (relating to 
        the use of property by shareholders), but only if the 
        effect of the inclusion of all such securities is to 
        make the amounts therein referred to includible under 
        such paragraph as personal holding company income; and
          (4) for purposes of section 543(a)(4) (relating to 
        copyright royalties), but only if the effect of the 
        inclusion of all such securities is to make the amounts 
        therein referred to includible under such paragraph as 
        personal holding company income.
The requirement in paragraphs (1), (2), (3), and (4) that all 
convertible securities must be included if any are to be 
included shall be subject to the exception that, where some of 
the outstanding securities are convertible only after a later 
date than in the case of others, the class having the earlier 
conversion date may be included although the others are not 
included, but no convertible securities shall be included 
unless all outstanding securities having a prior conversion 
date are also included.

Subchapter I--NATURAL RESOURCES

           *       *       *       *       *       *       *

PART I--DEDUCTIONS

           *       *       *       *       *       *       *

SEC. 613A. LIMITATIONS ON PERCENTAGE DEPLETION IN CASE OF OIL AND GAS 
                    WELLS.

  (a) General rule.--Except as otherwise provided in this 
section, the allowance for depletion under section 611 with 
respect to any oil or gas well shall be computed without regard 
to section 613.
  (b) Exemption for certain domestic gas wells.--
          (1) In general.--The allowance for depletion under 
        section 611 shall be computed in accordance with 
        section 613 with respect to--
                  (A) regulated natural gas, and
                  (B) natural gas sold under a fixed contract,
        and 22 percent shall be deemed to be specified in 
        subsection (b) of section 613 for purposes of 
        subsection (a) of that section.
          (2) Natural gas from geopressured brine.--The 
        allowance for depletion under section 611 shall be 
        computed in accordance with section 613 with respect to 
        any qualified natural gas from geopressured brine, and 
        10 percent shall be deemed to be specified in 
        subsection (b) of section 613 for purposes of 
        subsection (a) of such section.
          (3) Definitions.--For purposes of this subsection--
                  (A) Natural gas sold under a fixed 
                contract.--The term ``natural gas sold under a 
                fixed contract'' means domestic natural gas 
                sold by the producer under a contract, in 
                effect on February 1, 1975, and at all times 
                thereafter before such sale, under which the 
                price for such gas cannot be adjusted to 
                reflect to any extent the increase in 
                liabilities of the seller for tax under this 
                chapter by reason of the repeal of percentage 
                depletion for gas. Price increases after 
                February 1, 1975, shall be presumed to take 
                increases in tax liabilities into account 
                unless the taxpayer demonstrates to the 
                contrary by clear and convincing evidence.
                  (B) Regulated natural gas.--The term 
                ``regulated natural gas'' means domestic 
                natural gas produced and sold by the producer, 
                before July 1, 1976, subject to the 
                jurisdiction of the Federal Power Commission, 
                the price for which has not been adjusted to 
                reflect to any extent the increase in liability 
                of the seller for tax under this chapter by 
                reason of the repeal of percentage depletion 
                for gas. Price increases after February 1, 
                1975, shall be presumed to take increases in 
                tax liabilities into account unless the 
                taxpayer demonstrates the contrary by clear and 
                convincing evidence.
                  (C) Qualified natural gas from geopressured 
                brine.--The term ``qualified natural gas from 
                geopressured brine'' means any natural gas--
                          (i) which is determined in accordance 
                        with section 503 of the Natural Gas 
                        Policy Act of 1978 to be produced from 
                        geopressured brine, and
                          (ii) which is produced from any well 
                        the drilling of which began after 
                        September 30, 1978, and before January 
                        1, 1984.
  (c) Exemption for independent producers and royalty owners.--
          (1) In general.--Except as provided in subsection 
        (d), the allowance for depletion under section 611 
        shall be computed in accordance with section 613 with 
        respect to--
                  (A) so much of the taxpayer's average daily 
                production of domestic crude oil as does not 
                exceed the taxpayer's depletable oil quantity; 
                and
                  (B) so much of the taxpayer's average daily 
                production of domestic natural gas as does not 
                exceed the taxpayer's depletable natural gas 
                quantity;
        and 15 percent shall be deemed to be specified in 
        subsection (b) of section 613 for purposes of 
        subsection (a) of that section.
          (2) Average daily production.--For purposes of 
        paragraph (1)--
                  (A) the taxpayer's average daily production 
                of domestic crude oil or natural gas for any 
                taxable year, shall be determined by dividing 
                his aggregate production of domestic crude oil 
                or natural gas, as the case may be, during the 
                taxable year by the number of days in such 
                taxable year, and
                  (B) in the case of a taxpayer holding a 
                partial interest in the production from any 
                property (including an interest held in a 
                partnership) such taxpayer's production shall 
                be considered to be that amount of such 
                production determined by multiplying the total 
                production of such property by the taxpayer's 
                percentage participation in the revenues from 
                such property.
          (3) Depletable oil quantity.--
                  (A) In general.--For purposes of paragraph 
                (1), the taxpayer's depletable oil quantity 
                shall be equal to--
                          (i) the tentative quantity determined 
                        under subparagraph (B), reduced (but 
                        not below zero) by
                          (ii) except in the case of a taxpayer 
                        making an election under paragraph 
                        (6)(B), the taxpayer's average daily 
                        marginal production for the taxable 
                        year.
                  (B) Tentative quantity.--For purposes of 
                subparagraph (A), the tentative quantity is 
                1,000 barrels.
          (4) Daily depletable natural gas quantity.--For 
        purposes of paragraph (1), the depletable natural gas 
        quantity of any taxpayer for any taxable year shall be 
        equal to 6,000 cubic feet multiplied by the number of 
        barrels of the taxpayer's depletable oil quantity to 
        which the taxpayer elects to have this paragraph apply. 
        The taxpayer's depletable oil quantity for any taxable 
        year shall be reduced by the number of barrels with 
        respect to which an election under this paragraph 
        applies. Such election shall be made at such time and 
        in such manner as the Secretary shall by regulations 
        prescribe.
          (6) Oil and natural gas produced from marginal 
        properties.--
                  (A) In general.--Except as provided in 
                subsection (d) and subparagraph (B), the 
                allowance for depletion under section 611 shall 
                be computed in accordance with section 613 with 
                respect to--
                          (i) so much of the taxpayer's average 
                        daily marginal production of domestic 
                        crude oil as does not exceed the 
                        taxpayer's depletable oil quantity 
                        (determined without regard to paragraph 
                        (3)(A)(ii)), and
                          (ii) so much of the taxpayer's 
                        average daily marginal production of 
                        domestic natural gas as does not exceed 
                        the taxpayer's depletable natural gas 
                        quantity (determined without regard to 
                        paragraph (3)(A)(ii)),
                and the applicable percentage shall be deemed 
                to be specified in subsection (b) of section 
                613 for purposes of subsection (a) of that 
                section.
                  (B) Election to have paragraph apply to pro 
                rata portion of marginal production.--If the 
                taxpayer elects to have this subparagraph apply 
                for any taxable year, the rules of subparagraph 
                (A) shall apply to the average daily marginal 
                production of domestic crude oil or domestic 
                natural gas of the taxpayer to which paragraph 
                (1) would have applied without regard to this 
                paragraph.
                  (C) Applicable percentage.--For purposes of 
                subparagraph (A), the term ``applicable 
                percentage'' means the percentage (not greater 
                than 25 percent) equal to the sum of--
                          (i) 15 percent, plus
                          (ii) 1 percentage point for each 
                        whole dollar by which $20 exceeds the 
                        reference price for crude oil for the 
                        calendar year preceding the calendar 
                        year in which the taxable year begins.
                For purposes of this paragraph, the term 
                ``reference price'' means, with respect to any 
                calendar year, the reference price determined 
                for such calendar year under section 
                45K(d)(2)(C).
                  (D) Marginal production.--The term ``marginal 
                production'' means domestic crude oil or 
                domestic natural gas which is produced during 
                any taxable year from a property which--
                          (i) is a stripper well property for 
                        the calendar year in which the taxable 
                        year begins, or
                          (ii) is a property substantially all 
                        of the production of which during such 
                        calendar year is heavy oil.
                  (E) Stripper well property.--For purposes of 
                this paragraph, the term ``stripper well 
                property'' means, with respect to any calendar 
                year, any property with respect to which the 
                amount determined by dividing--
                          (i) the average daily production of 
                        domestic crude oil and domestic natural 
                        gas from producing wells on such 
                        property for such calendar year, by
                          (ii) the number of such wells,
                is 15 barrel equivalents or less.
                  (F) Heavy oil.--For purposes of this 
                paragraph, the term ``heavy oil'' means 
                domestic crude oil produced from any property 
                if such crude oil had a weighted average 
                gravity of 20 degrees API or less (corrected to 
                60 degrees Fahrenheit).
                  (G) Average daily marginal production.--For 
                purposes of this subsection--
                          (i) the taxpayer's average daily 
                        marginal production of domestic crude 
                        oil or natural gas for any taxable year 
                        shall be determined by dividing the 
                        taxpayer's aggregate marginal 
                        production of domestic crude oil or 
                        natural gas, as the case may be, during 
                        the taxable year by the number of days 
                        in such taxable year, and
                          (ii) in the case of a taxpayer 
                        holding a partial interest in the 
                        production from any property (including 
                        any interest held in any partnership), 
                        such taxpayer's production shall be 
                        considered to be that amount of such 
                        production determined by multiplying 
                        the total production of such property 
                        by the taxpayer's percentage 
                        participation in the revenues from such 
                        property.
          (7) Special rules.--
                  (A) Production of crude oil in excess of 
                depletable oil quantity.--If the taxpayer's 
                average daily production of domestic crude oil 
                exceeds his depletable oil quantity, the 
                allowance under paragraph (1)(A) with respect 
                to oil produced during the taxable year from 
                each property in the United States shall be 
                that amount which bears the same ratio to the 
                amount of depletion which would have been 
                allowable under section 613(a) for all of the 
                taxpayer's oil produced from such property 
                during the taxable year (computed as if section 
                613 applied to all of such production at the 
                rate specified in paragraph (1) or (6), as the 
                case may be) as his depletable oil quantity 
                bears to the aggregate number of barrels 
                representing the average daily production of 
                domestic crude oil of the taxpayer for such 
                year.
                  (B) Production of natural gas in excess of 
                depletable natural gas quantity.--If the 
                taxpayer's average daily production of domestic 
                natural gas exceeds his depletable natural gas 
                quantity, the allowance under paragraph (1)(B) 
                with respect to natural gas produced during the 
                taxable year from each property in the United 
                States shall be that amount which bears the 
                same ratio to the amount of depletion which 
                would have been allowable under section 613(a) 
                for all of the taxpayer's natural gas produced 
                from such property during the taxable year 
                (computed as if section 613 applied to all of 
                such production at the rate specified in 
                paragraph (1) or (6), as the case may be) as 
                the amount of his depletable natural gas 
                quantity in cubic feet bears to the aggregate 
                number of cubic feet representing the average 
                daily production of domestic natural gas of the 
                taxpayer for such year.
                  (C) Taxable income from the property.--If 
                both oil and gas are produced from the property 
                during the taxable year, for purposes of 
                subparagraphs (A) and (B) the taxable income 
                from the property, in applying the taxable 
                income limitation in section 613(a), shall be 
                allocated between the oil production and the 
                gas production in proportion to the gross 
                income during the taxable year from each.
                  (D) Partnerships.--In the case of a 
                partnership, the depletion allowance shall be 
                computed separately by the partners and not by 
                the partnership. The partnership shall allocate 
                to each partner his proportionate share of the 
                adjusted basis of each partnership oil or gas 
                property. The allocation is to be made as of 
                the later of the date of acquisition of the oil 
                or gas property by the partnership, or January 
                1, 1975. A partner's proportionate share of the 
                adjusted basis of partnership property shall be 
                determined in accordance with his interest in 
                partnership capital or income and, in the case 
                of property contributed to the partnership by a 
                partner, section 704(c) (relating to 
                contributed property) shall apply in 
                determining such share. Each partner shall 
                separately keep records of his share of the 
                adjusted basis in each oil and gas property of 
                the partnership, adjust such share of the 
                adjusted basis for any depletion taken on such 
                property, and use such adjusted basis each year 
                in the computation of his cost depletion or in 
                the computation of his gain or loss on the 
                disposition of such property by the 
                partnership. For purposes of section 732 
                (relating to basis of distributed property 
                other than money), the partnership's adjusted 
                basis in mineral property shall be an amount 
                equal to the sum of the partners' adjusted 
                basis in such property as determined under this 
                paragraph.
          (8) Business under common control; members of the 
        same family.--
                  (A) Component members of controlled group 
                treated as one taxpayer.--For purposes of this 
                subsection, persons who are members of the same 
                controlled group of corporations shall be 
                treated as one taxpayer.
                  (B) Aggregation of business entities under 
                common control.--If 50 percent or more of the 
                beneficial interest in two or more 
                corporations, trusts, or estates is owned by 
                the same or related persons (taking into 
                account only persons who own at least 5 percent 
                of such beneficial interest), the tentative 
                quantity determined under paragraph (3)(B) 
                shall be allocated among all such entities in 
                proportion to the respective production of 
                domestic crude oil during the period in 
                question by such entities.
                  (C) Allocation among members of the same 
                family.--In the case of individuals who are 
                members of the same family, the tentative 
                quantity determined under paragraph (3)(B) 
                shall be allocated among such individuals in 
                proportion to the respective production of 
                domestic crude oil during the period in 
                question by such individuals.
                  (D) Definition and special rules.--For 
                purposes of this paragraph--
                          (i) the term ``controlled group of 
                        corporations'' has the meaning given to 
                        such term by section 1563(a), except 
                        that section 1563(b)(2) shall not apply 
                        and except that ``more than 50 
                        percent'' shall be substituted for ``at 
                        least 80 percent'' each place it 
                        appears in section 1563(a),
                          (ii) a person is a related person to 
                        another person if such persons are 
                        members of the same controlled group of 
                        corporations or if the relationship 
                        between such persons would result in a 
                        disallowance of losses under section 
                        267 or 707(b), except that for this 
                        purpose the family of an individual 
                        includes only [his spouse] the 
                        individual's spouse and minor children.
                          (iii) the family of an individual 
                        includes only [his spouse] the 
                        individual's spouse and minor children, 
                        and
                          (iv) each 6,000 cubic feet of 
                        domestic natural gas shall be treated 
                        as 1 barrel of domestic crude oil.
          (9) Special rule for fiscal year taxpayers.--In 
        applying this subsection to a taxable year which is not 
        a calendar year, each portion of such taxable year 
        which occurs during a single calendar year shall be 
        treated as if it were a short taxable year.
          (10) Certain production not taken into account.--In 
        applying this subsection, there shall not be taken into 
        account the production of natural gas with respect to 
        which subsection (b) applies.
          (11) Subchapter S corporations.--
                  (A) Computation of depletion allowance at 
                shareholder level.--In the case of an S 
                corporation, the allowance for depletion with 
                respect to any oil or gas property shall be 
                computed separately by each shareholder.
                  (B) Allocation of basis.--The S corporation 
                shall allocate to each shareholder his pro rata 
                share of the adjusted basis of the S 
                corporation in each oil or gas property held by 
                the S corporation. The allocation shall be made 
                as of the later of the date of acquisition of 
                the property by the S corporation, or the first 
                day of the first taxable year of the S 
                corporation to which the Subchapter S Revision 
                Act of 1982 applies. Each shareholder shall 
                separately keep records of his share of the 
                adjusted basis in each oil and gas property of 
                the S corporation, adjust such share of the 
                adjusted basis for any depletion taken on such 
                property, and use such adjusted basis each year 
                in the computation of his cost depletion or in 
                the computation of his gain or loss on the 
                disposition of such property by the S 
                corporation. In the case of any distribution of 
                oil or gas property to its shareholders by the 
                S corporation, the corporation's adjusted basis 
                in the property shall be an amount equal to the 
                sum of the shareholders' adjusted bases in such 
                property, as determined under this 
                subparagraph.
  (d) Limitations on application of subsection (c).--
          (1) Limitation based on taxable income.--The 
        deduction for the taxable year attributable to the 
        application of subsection (c) shall not exceed 65 
        percent of the taxpayer's taxable income for the year 
        computed without regard to--
                  (A) any depletion on production from an oil 
                or gas property which is subject to the 
                provisions of subsection (c),
                  (B) any deduction allowable under section 
                199A,
                  (C) any net operating loss carryback to the 
                taxable year under section 172,
                  (D) any capital loss carryback to the taxable 
                year under section 1212, and
                  (E) in the case of a trust, any distributions 
                to its beneficiary, except in the case of any 
                trust where any beneficiary of such trust is a 
                member of the family (as defined in section 
                267(c)(4)) of a settlor who created inter vivos 
                and testamentary trusts for members of the 
                family and such settlor died within the last 
                six days of the fifth month in 1970, and the 
                law in the jurisdiction in which such trust was 
                created requires all or a portion of the gross 
                or net proceeds of any royalty or other 
                interest in oil, gas, or other mineral 
                representing any percentage depletion allowance 
                to be allocated to the principal of the trust.
        If an amount is disallowed as a deduction for the 
        taxable year by reason of application of the preceding 
        sentence, the disallowed amount shall be treated as an 
        amount allowable as a deduction under subsection (c) 
        for the following taxable year, subject to the 
        application of the preceding sentence to such taxable 
        year. For purposes of basis adjustments and determining 
        whether cost depletion exceeds percentage depletion 
        with respect to the production from a property, any 
        amount disallowed as a deduction on the application of 
        this paragraph shall be allocated to the respective 
        properties from which the oil or gas was produced in 
        proportion to the percentage depletion otherwise 
        allowable to such properties under subsection (c).
          (2) Retailers excluded.--Subsection (c) shall not 
        apply in the case of any taxpayer who directly, or 
        through a related person, sells oil or natural gas 
        (excluding bulk sales of such items to commercial or 
        industrial users), or any product derived from oil or 
        natural gas (excluding bulk sales of aviation fuels to 
        the Department of Defense)--
                  (A) through any retail outlet operated by the 
                taxpayer or a related person, or
                  (B) to any person--
                          (i) obligated under an agreement or 
                        contract with the taxpayer or a related 
                        person to use a trademark, trade name, 
                        or service mark or name owned by such 
                        taxpayer or a related person, in 
                        marketing or distributing oil or 
                        natural gas or any product derived from 
                        oil or natural gas, or
                          (ii) given authority, pursuant to an 
                        agreement or contract with the taxpayer 
                        or a related person, to occupy any 
                        retail outlet owned, leased, or in any 
                        way controlled by the taxpayer or a 
                        related person.
        Notwithstanding the preceding sentence this paragraph 
        shall not apply in any case where the combined gross 
        receipts from the sale of such oil, natural gas, or any 
        product derived therefrom, for the taxable year of all 
        retail outlets taken into account for purposes of this 
        paragraph do not exceed $5,000,000. For purposes of 
        this paragraph, sales of oil, natural gas, or any 
        product derived from oil or natural gas shall not 
        include sales made of such items outside the United 
        States, if no domestic production of the taxpayer or a 
        related person is exported during the taxable year or 
        the immediately preceding taxable year.
          (3) Related person.--For purposes of this subsection, 
        a person is a related person with respect to the 
        taxpayer if a significant ownership interest in either 
        the taxpayer or such person is held by the other, or if 
        a third person has a significant ownership interest in 
        both the taxpayer and such person. For purposes of the 
        preceding sentence, the term ``significant ownership 
        interest'' means--
                  (A) with respect to any corporation, 5 
                percent or more in value of the outstanding 
                stock of such corporation,
                  (B) with respect to a partnership, 5 percent 
                or more interest in the profits or capital of 
                such partnership, and
                  (C) with respect to an estate or trust, 5 
                percent or more of the beneficial interests in 
                such estate or trust.
        For purposes of determining a significant ownership 
        interest, an interest owned by or for a corporation, 
        partnership, trust, or estate shall be considered as 
        owned directly both by itself and proportionately by 
        its shareholders, partners, or beneficiaries, as the 
        case may be.
          (4) Certain refiners excluded.--If the taxpayer or 
        one or more related persons engages in the refining of 
        crude oil, subsection (c) shall not apply to the 
        taxpayer for a taxable year if the average daily 
        refinery runs of the taxpayer and such persons for the 
        taxable year exceed 75,000 barrels. For purposes of 
        this paragraph, the average daily refinery runs for any 
        taxable year shall be determined by dividing the 
        aggregate refinery runs for the taxable year by the 
        number of days in the taxable year.
          (5) Percentage depletion not allowed for lease 
        bonuses, etc..--In the case of any oil or gas property 
        to which subsection (c) applies, for purposes of 
        section 613, the term ``gross income from the 
        property'' shall not include any lease bonus, advance 
        royalty, or other amount payable without regard to 
        production from property.
  (e) Definitions.--For purposes of this section--
          (1) Crude oil.--The term ``crude oil'' includes a 
        natural gas liquid recovered from a gas well in lease 
        separators or field facilities.
          (2) Natural gas.--The term ``natural gas'' means any 
        product (other than crude oil) of an oil or gas well if 
        a deduction for depletion is allowable under section 
        611 with respect to such product.
          (3) Domestic.--The term ``domestic'' refers to 
        production from an oil or gas well located in the 
        United States or in a possession of the United States.
          (4) Barrel.--The term ``barrel'' means 42 United 
        States gallons.

Subchapter J--ESTATES, TRUSTS, BENEFICIARIES, AND DECEDENTS

           *       *       *       *       *       *       *

PART I--ESTATES, TRUSTS, AND BENEFICIARIES

           *       *       *       *       *       *       *

Subpart A--GENERAL RULES FOR TAXATION OF ESTATES AND TRUSTS

           *       *       *       *       *       *       *

SEC. 643. DEFINITIONS APPLICABLE TO SUBPARTS A, B, C, AND D.

  (a) Distributable net income.--For purposes of this part, the 
term ``distributable net income'' means, with respect to any 
taxable year, the taxable income of the estate or trust 
computed with the following modifications--
          (1) Deduction for distributions.--No deduction shall 
        be taken under sections 651 and 661 (relating to 
        additional deductions).
          (2) Deduction for personal exemption.--No deduction 
        shall be taken under section 642(b) (relating to 
        deduction for personal exemptions).
          (3) Capital gains and losses.--Gains from the sale or 
        exchange of capital assets shall be excluded to the 
        extent that such gains are allocated to corpus and are 
        not (A) paid, credited, or required to be distributed 
        to any beneficiary during the taxable year, or (B) 
        paid, permanently set aside, or to be used for the 
        purposes specified in section 642(c). Losses from the 
        sale or exchange of capital assets shall be excluded, 
        except to the extent such losses are taken into account 
        in determining the amount of gains from the sale or 
        exchange of capital assets which are paid, credited, or 
        required to be distributed to any beneficiary during 
        the taxable year. The exclusion under section 1202 
        shall not be taken into account.
          (4) Extraordinary dividends and taxable stock 
        dividends.--For purposes only of subpart B (relating to 
        trusts which distribute current income only), there 
        shall be excluded those items of gross income 
        constituting extraordinary dividends or taxable stock 
        dividends which the fiduciary, acting in good faith, 
        does not pay or credit to any beneficiary by reason of 
        his determination that such dividends are allocable to 
        corpus under the terms of the governing instrument and 
        applicable local law.
          (5) Tax-exempt interest.--There shall be included any 
        tax-exempt interest to which section 103 applies, 
        reduced by any amounts which would be deductible in 
        respect of disbursements allocable to such interest but 
        for the provisions of section 265 (relating to 
        disallowance of certain deductions).
          (6) Income of foreign trust.--In the case of a 
        foreign trust--
                  (A) There shall be included the amounts of 
                gross income from sources without the United 
                States, reduced by any amounts which would be 
                deductible in respect of disbursements 
                allocable to such income but for the provisions 
                of section 265(a)(1) (relating to disallowance 
                of certain deductions).
                  (B) Gross income from sources within the 
                United States shall be determined without 
                regard to section 894 (relating to income 
                exempt under treaty).
                  (C) Paragraph (3) shall not apply to a 
                foreign trust. In the case of such a trust, 
                there shall be included gains from the sale or 
                exchange of capital assets, reduced by losses 
                from such sales or exchanges to the extent such 
                losses do not exceed gains from such sales or 
                exchanges.
          (7) Abusive transactions.--The Secretary shall 
        prescribe such regulations as may be necessary or 
        appropriate to carry out the purposes of this part, 
        including regulations to prevent avoidance of such 
        purposes.
If the estate or trust is allowed a deduction under section 
642(c), the amount of the modifications specified in paragraphs 
(5) and (6) shall be reduced to the extent that the amount of 
income which is paid, permanently set aside, or to be used for 
the purposes specified in section 642(c) is deemed to consist 
of items specified in those paragraphs. For this purpose, such 
amount shall (in the absence of specific provisions in the 
governing instrument) be deemed to consist of the same 
proportion of each class of items of income of the estate or 
trust as the total of each class bears to the total of all 
classes.
  (b) Income.--For purposes of this subpart and subparts B, C, 
and D, the term ``income'', when not preceded by the words 
``taxable'', ``distributable net'', ``undistributed net'', or 
``gross'', means the amount of income of the estate or trust 
for the taxable year determined under the terms of the 
governing instrument and applicable local law. Items of gross 
income constituting extraordinary dividends or taxable stock 
dividends which the fiduciary, acting in good faith, determines 
to be allocable to corpus under the terms of the governing 
instrument and applicable local law shall not be considered 
income.
  (c) Beneficiary.--For purposes of this part, the term 
``beneficiary'' includes heir, legatee, devisee.
  (d) Coordination with back-up withholding.--Except to the 
extent otherwise provided in regulations, this subchapter shall 
be applied with respect to payments subject to withholding 
under section 3406--
          (1) by allocating between the estate or trust and its 
        beneficiaries any credit allowable under section 31(c) 
        (on the basis of their respective shares of any such 
        payment taken into account under this subchapter),
          (2) by treating each beneficiary to whom such credit 
        is allocated as if an amount equal to such credit has 
        been paid to him by the estate or trust, and
          (3) by allowing the estate or trust a deduction in an 
        amount equal to the credit so allocated to 
        beneficiaries.
  (e) Treatment of property distributed in kind.--
          (1) Basis of beneficiary.--The basis of any property 
        received by a beneficiary in a distribution from an 
        estate or trust shall be--
                  (A) the adjusted basis of such property in 
                the hands of the estate or trust immediately 
                before the distribution, adjusted for
                  (B) any gain or loss recognized to the estate 
                or trust on the distribution.
          (2) Amount of distribution.--In the case of any 
        distribution of property (other than cash), the amount 
        taken into account under sections 661(a)(2) and 
        662(a)(2) shall be the lesser of--
                  (A) the basis of such property in the hands 
                of the beneficiary (as determined under 
                paragraph (1)), or
                  (B) the fair market value of such property.
          (3) Election to recognize gain.--
                  (A) In general.--In the case of any 
                distribution of property (other than cash) to 
                which an election under this paragraph 
                applies--
                          (i) paragraph (2) shall not apply,
                          (ii) gain or loss shall be recognized 
                        by the estate or trust in the same 
                        manner as if such property had been 
                        sold to the distributee at its fair 
                        market value, and
                          (iii) the amount taken into account 
                        under sections 661(a)(2) and 662(a)(2) 
                        shall be the fair market value of such 
                        property.
                  (B) Election.--Any election under this 
                paragraph shall apply to all distributions made 
                by the estate or trust during a taxable year 
                and shall be made on the return of such estate 
                or trust for such taxable year.
        Any such election, once made, may be revoked only with 
        the consent of the Secretary.
          (4) Exception for distributions described in section 
        663(a).--This subsection shall not apply to any 
        distribution described in section 663(a).
  (f) Treatment of multiple trusts.--For purposes of this 
subchapter, under regulations prescribed by the Secretary, 2 or 
more trusts shall be treated as 1 trust if--
          (1) such trusts have substantially the same grantor 
        or grantors and substantially the same primary 
        beneficiary or beneficiaries, and
          (2) a principal purpose of such trusts is the 
        avoidance of the tax imposed by this chapter.
For purposes of the preceding sentence, a [husband and wife] 
married couple shall be treated as 1 person.
  (g) Certain payments of estimated tax treated as paid by 
beneficiary.--
          (1) In general.--In the case of a trust--
                  (A) the trustee may elect to treat any 
                portion of a payment of estimated tax made by 
                such trust for any taxable year of the trust as 
                a payment made by a beneficiary of such trust,
                  (B) any amount so treated shall be treated as 
                paid or credited to the beneficiary on the last 
                day of such taxable year, and
                  (C) for purposes of subtitle F, the amount so 
                treated--
                          (i) shall not be treated as a payment 
                        of estimated tax made by the trust, but
                          (ii) shall be treated as a payment of 
                        estimated tax made by such beneficiary 
                        on January 15 following the taxable 
                        year.
          (2) Time for making election.--An election under 
        paragraph (1) shall be made on or before the 65th day 
        after the close of the taxable year of the trust and in 
        such manner as the Secretary may prescribe.
          (3) Extension to last year of estate.--In the case of 
        a taxable year reasonably expected to be the last 
        taxable year of an estate--
                  (A) any reference in this subsection to a 
                trust shall be treated as including a reference 
                to an estate, and
                  (B) the fiduciary of the estate shall be 
                treated as the trustee.
  (h) Distributions by certain foreign trusts through 
nominees.--For purposes of this part, any amount paid to a 
United States person which is derived directly or indirectly 
from a foreign trust of which the payor is not the grantor 
shall be deemed in the year of payment to have been directly 
paid by the foreign trust to such United States person.
  (i) Loans from foreign trusts.--For purposes of subparts B, 
C, and D--
          (1) General rule.--Except as provided in regulations, 
        if a foreign trust makes a loan of cash or marketable 
        securities (or permits the use of any other trust 
        property) directly or indirectly to or by--
                  (A) any grantor or beneficiary of such trust 
                who is a United States person, or
                  (B) any United States person not described in 
                subparagraph (A) who is related to such grantor 
                or beneficiary,
        the amount of such loan (or the fair market value of 
        the use of such property) shall be treated as a 
        distribution by such trust to such grantor or 
        beneficiary (as the case may be).
          (2) Definitions and special rules.--For purposes of 
        this subsection--
                  (A) Cash.--The term ``cash'' includes foreign 
                currencies and cash equivalents.
                  (B) Related person.--
                          (i) In general.--A person is related 
                        to another person if the relationship 
                        between such persons would result in a 
                        disallowance of losses under section 
                        267 or 707(b). In applying section 267 
                        for purposes of the preceding sentence, 
                        section 267(c)(4) shall be applied as 
                        if the family of an individual includes 
                        the spouses of the members of the 
                        family.
                          (ii) Allocation.--If any person 
                        described in paragraph (1)(B) is 
                        related to more than one person, the 
                        grantor or beneficiary to whom the 
                        treatment under this subsection applies 
                        shall be determined under regulations 
                        prescribed by the Secretary.
                  (C) Exclusion of tax-exempts.--The term 
                ``United States person'' does not include any 
                entity exempt from tax under this chapter.
                  (D) Trust not treated as simple trust.--Any 
                trust which is treated under this subsection as 
                making a distribution shall be treated as not 
                described in section 651.
                  (E) Exception for compensated use of 
                property.--In the case of the use of any trust 
                property other than a loan of cash or 
                marketable securities, paragraph (1) shall not 
                apply to the extent that the trust is paid the 
                fair market value of such use within a 
                reasonable period of time of such use.
          (3) Subsequent transactions.--If any loan (or use of 
        property) is taken into account under paragraph (1), 
        any subsequent transaction between the trust and the 
        original borrower regarding the principal of the loan 
        (by way of complete or partial repayment, satisfaction, 
        cancellation, discharge, or otherwise) or the return of 
        such property shall be disregarded for purposes of this 
        title.

           *       *       *       *       *       *       *

Subpart E--GRANTORS AND OTHERS TREATED AS SUBSTANTIAL OWNERS

           *       *       *       *       *       *       *

SEC. 672. DEFINITIONS AND RULES.

  (a) Adverse party.--For purposes of this subpart, the term 
``adverse party'' means any person having a substantial 
beneficial interest in the trust which would be adversely 
affected by the exercise or nonexercise of the power which he 
possesses respecting the trust. A person having a general power 
of appointment over the trust property shall be deemed to have 
a beneficial interest in the trust.
  (b) Nonadverse party.--For purposes of this subpart, the term 
``nonadverse party'' means any person who is not an adverse 
party.
  (c) Related or subordinate party.--For purposes of this 
subpart, the term ``related or subordinate party'' means any 
nonadverse party who is--
          (1) the grantor's spouse if living with the grantor;
          (2) any one of the following: The grantor's father, 
        mother, issue, brother or sister; an employee of the 
        grantor; a corporation or any employee of a corporation 
        in which the stock holdings of the grantor and the 
        trust are significant from the viewpoint of voting 
        control; a subordinate employee of a corporation in 
        which the grantor is an executive.
For purposes of subsection (f) and sections 674 and 675, a 
related or subordinate party shall be presumed to be 
subservient to the grantor in respect of the exercise or 
nonexercise of the powers conferred on him unless such party is 
shown not to be subservient by a preponderance of the evidence.
  (d) Rule where power is subject to condition precedent.--A 
person shall be considered to have a power described in this 
subpart even though the exercise of the power is subject to a 
precedent giving of notice or takes effect only on the 
expiration of a certain period after the exercise of the power.
  (e) Grantor treated as holding any power or interest of 
grantor's spouse.--
          (1) In general.--For purposes of this subpart, a 
        grantor shall be treated as holding any power or 
        interest held by--
                  (A) any individual who was the spouse of the 
                grantor at the time of the creation of such 
                power or interest, or
                  (B) any individual who became the spouse of 
                the grantor after the creation of such power or 
                interest, but only with respect to periods 
                after such individual became the spouse of the 
                grantor.
          (2) Marital status.--For purposes of paragraph 
        (1)(A), an individual legally separated from [his 
        spouse] the individual's spouse under a decree of 
        divorce or of separate maintenance shall not be 
        considered as married.
  (f) Subpart not to result in foreign ownership.--
          (1) In general.--Notwithstanding any other provision 
        of this subpart, this subpart shall apply only to the 
        extent such application results in an amount (if any) 
        being currently taken into account (directly or through 
        1 or more entities) under this chapter in computing the 
        income of a citizen or resident of the United States or 
        a domestic corporation.
          (2) Exceptions.--
                  (A) Certain revocable and irrevocable 
                trusts.--Paragraph (1) shall not apply to any 
                portion of a trust if--
                          (i) the power to revest absolutely in 
                        the grantor title to the trust property 
                        to which such portion is attributable 
                        is exercisable solely by the grantor 
                        without the approval or consent of any 
                        other person or with the consent of a 
                        related or subordinate party who is 
                        subservient to the grantor, or
                          (ii) the only amounts distributable 
                        from such portion (whether income or 
                        corpus) during the lifetime of the 
                        grantor are amounts distributable to 
                        the grantor or the spouse of the 
                        grantor.
                  (B) Compensatory trusts.--Except as provided 
                in regulations, paragraph (1) shall not apply 
                to any portion of a trust distributions from 
                which are taxable as compensation for services 
                rendered.
          (3) Special rules.--Except as otherwise provided in 
        regulations prescribed by the Secretary--
                  (A) a controlled foreign corporation (as 
                defined in section 957) shall be treated as a 
                domestic corporation for purposes of paragraph 
                (1), and
                  (B) paragraph (1) shall not apply for 
                purposes of applying section 1297.
          (4) Recharacterization of purported gifts.--In the 
        case of any transfer directly or indirectly from a 
        partnership or foreign corporation which the transferee 
        treats as a gift or bequest, the Secretary may 
        recharacterize such transfer in such circumstances as 
        the Secretary determines to be appropriate to prevent 
        the avoidance of the purposes of this subsection.
          (5) Special rule where grantor is foreign person.--
        If--
                  (A) but for this subsection, a foreign person 
                would be treated as the owner of any portion of 
                a trust, and
                  (B) such trust has a beneficiary who is a 
                United States person,
        such beneficiary shall be treated as the grantor of 
        such portion to the extent such beneficiary has made 
        (directly or indirectly) transfers of property (other 
        than in a sale for full and adequate consideration) to 
        such foreign person. For purposes of the preceding 
        sentence, any gift shall not be taken into account to 
        the extent such gift would be excluded from taxable 
        gifts under section 2503(b).
          (6) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary or appropriate to carry 
        out the purposes of this subsection, including 
        regulations providing that paragraph (1) shall not 
        apply in appropriate cases.

Subchapter K--PARTNERS AND PARTNERSHIPS

           *       *       *       *       *       *       *

PART I--DETERMINATION OF TAX LIABILITY

           *       *       *       *       *       *       *

SEC. 704. PARTNER'S DISTRIBUTIVE SHARE.

  (a) Effect of partnership agreement.--A partner's 
distributive share of income, gain, loss, deduction, or credit 
shall, except as otherwise provided in this chapter, be 
determined by the partnership agreement.
  (b) Determination of distributive share.--A partner's 
distributive share of income, gain, loss, deduction, or credit 
(or item thereof) shall be determined in accordance with the 
partner's interest in the partnership (determined by taking 
into account all facts and circumstances), if--
          (1) the partnership agreement does not provide as to 
        the partner's distributive share of income, gain, loss, 
        deduction, or credit (or item thereof), or
          (2) the allocation to a partner under the agreement 
        of income, gain, loss, deduction, or credit (or item 
        thereof) does not have substantial economic effect.
  (c) Contributed property.--
          (1) In general.--Under regulations prescribed by the 
        Secretary--
                  (A) income, gain, loss, and deduction with 
                respect to property contributed to the 
                partnership by a partner shall be shared among 
                the partners so as to take account of the 
                variation between the basis of the property to 
                the partnership and its fair market value at 
                the time of contribution,
                  (B) if any property so contributed is 
                distributed (directly or indirectly) by the 
                partnership (other than to the contributing 
                partner) within 7 years of being contributed--
                          (i) the contributing partner shall be 
                        treated as recognizing gain or loss (as 
                        the case may be) from the sale of such 
                        property in an amount equal to the gain 
                        or loss which would have been allocated 
                        to such partner under subparagraph (A) 
                        by reason of the variation described in 
                        subparagraph (A) if the property had 
                        been sold at its fair market value at 
                        the time of the distribution,
                          (ii) the character of such gain or 
                        loss shall be determined by reference 
                        to the character of the gain or loss 
                        which would have resulted if such 
                        property had been sold by the 
                        partnership to the distributee, and
                          (iii) appropriate adjustments shall 
                        be made to the adjusted basis of the 
                        contributing partner's interest in the 
                        partnership and to the adjusted basis 
                        of the property distributed to reflect 
                        any gain or loss recognized under this 
                        subparagraph, and
                  (C) if any property so contributed has a 
                built-in loss--
                          (i) such built-in loss shall be taken 
                        into account only in determining the 
                        amount of items allocated to the 
                        contributing partner, and
                          (ii) except as provided in 
                        regulations, in determining the amount 
                        of items allocated to other partners, 
                        the basis of the contributed property 
                        in the hands of the partnership shall 
                        be treated as being equal to its fair 
                        market value at the time of 
                        contribution.
        For purposes of subparagraph (C), the term ``built-in 
        loss'' means the excess of the adjusted basis of the 
        property (determined without regard to subparagraph 
        (C)(ii)) over its fair market value at the time of 
        contribution.
          (2) Special rule for distributions where gain or loss 
        would not be recognized outside partnerships.--Under 
        regulations prescribed by the Secretary, if--
                  (A) property contributed by a partner 
                (hereinafter referred to as the ``contributing 
                partner'') is distributed by the partnership to 
                another partner, and
                  (B) other property of a like kind (within the 
                meaning of section 1031) is distributed by the 
                partnership to the contributing partner not 
                later than the earlier of--
                          (i) the 180th day after the date of 
                        the distribution described in 
                        subparagraph (A), or
                          (ii) the due date (determined with 
                        regard to extensions) for the 
                        contributing partner's return of the 
                        tax imposed by this chapter for the 
                        taxable year in which the distribution 
                        described in subparagraph (A) occurs,
        then to the extent of the value of the property 
        described in subparagraph (B), paragraph (1)(B) shall 
        be applied as if the contributing partner had 
        contributed to the partnership the property described 
        in subparagraph (B).
          (3) Other rules.--Under regulations prescribed by the 
        Secretary, rules similar to the rules of paragraph (1) 
        shall apply to contributions by a partner (using the 
        cash receipts and disbursements method of accounting) 
        of accounts payable and other accrued but unpaid items. 
        Any reference in paragraph (1) or (2) to the 
        contributing partner shall be treated as including a 
        reference to any successor of such partner.
  (d) Limitation on allowance of losses.--
          (1) In general.--A partner's distributive share of 
        partnership loss (including capital loss) shall be 
        allowed only to the extent of the adjusted basis of 
        such partner's interest in the partnership at the end 
        of the partnership year in which such loss occurred.
          (2) Carryover.--Any excess of such loss over such 
        basis shall be allowed as a deduction at the end of the 
        partnership year in which such excess is repaid to the 
        partnership.
          (3) Special rules.--
                  (A) In general.--In determining the amount of 
                any loss under paragraph (1), there shall be 
                taken into account the partner's distributive 
                share of amounts described in paragraphs (4) 
                and (6) of section 702(a).
                  (B) Exception.--In the case of a charitable 
                contribution of property whose fair market 
                value exceeds its adjusted basis, subparagraph 
                (A) shall not apply to the extent of the 
                partner's distributive share of such excess.
  (e) Partnership interests created by gift.--
          (1) Distributive share of donee includible in gross 
        income.--In the case of any partnership interest 
        created by gift, the distributive share of the donee 
        under the partnership agreement shall be includible in 
        his gross income, except to the extent that such share 
        is determined without allowance of reasonable 
        compensation for services rendered to the partnership 
        by the donor, and except to the extent that the portion 
        of such share attributable to donated capital is 
        proportionately greater than the share of the donor 
        attributable to the donor's capital. The distributive 
        share of a partner in the earnings of the partnership 
        shall not be diminished because of absence due to 
        military service.
          (2) Purchase of interest by member of family.--For 
        purposes of this subsection, an interest purchased by 
        one member of a family from another shall be considered 
        to be created by gift from the seller, and the fair 
        market value of the purchased interest shall be 
        considered to be donated capital. The ``family'' of any 
        individual shall include only [his spouse] the 
        individual's spouse, ancestors, and lineal descendants, 
        and any trusts for the primary benefit of such persons.
  (f) Cross reference.--For rules in the case of the sale, 
exchange, liquidation, or reduction of a partner's interest, 
see section 706(c)(2).

           *       *       *       *       *       *       *

PART III--DEFINITIONS

           *       *       *       *       *       *       *

SEC. 761. TERMS DEFINED.

  (a) Partnership.--For purposes of this subtitle, the term 
``partnership'' includes a syndicate, group, pool, joint 
venture, or other unincorporated organization through or by 
means of which any business, financial operation, or venture is 
carried on, and which is not, within the meaning of this title, 
a corporation or a trust or estate. Under regulations the 
Secretary may, at the election of all the members of an 
unincorporated organization, exclude such organization from the 
application of all or part of this subchapter, if it is availed 
of--
          (1) for investment purposes only and not for the 
        active conduct of a business,
          (2) for the joint production, extraction, or use of 
        property, but not for the purpose of selling services 
        or property produced or extracted, or
          (3) by dealers in securities for a short period for 
        the purpose of underwriting, selling, or distributing a 
        particular issue of securities,
if the income of the members of the organization may be 
adequately determined without the computation of partnership 
taxable income.
  (b) Partner.--For purposes of this subtitle, the term 
``partner'' means a member of a partnership. In the case of a 
capital interest in a partnership in which capital is a 
material income-producing factor, whether a person is a partner 
with respect to such interest shall be determined without 
regard to whether such interest was derived by gift from any 
other person.
  (c) Partnership agreement.--For purposes of this subchapter, 
a partnership agreement includes any modifications of the 
partnership agreement made prior to, or at, the time prescribed 
by law for the filing of the partnership return for the taxable 
year (not including extensions) which are agreed to by all the 
partners, or which are adopted in such other manner as may be 
provided by the partnership agreement.
  (d) Liquidation of a partner's interest.--For purposes of 
this subchapter, the term ``liquidation of a partner's 
interest'' means the termination of a partner's entire interest 
in a partnership by means of a distribution, or a series of 
distributions, to the partner by the partnership.
  (e) Distributions of partnership interests treated as 
exchanges.--Except as otherwise provided in regulations, for 
purposes of--
          (1) section 708 (relating to continuation of 
        partnership),
          (2) section 743 (relating to optional adjustment to 
        basis of partnership property), and
          (3) any other provision of this subchapter specified 
        in regulations prescribed by the Secretary,
any distribution of an interest in a partnership (not otherwise 
treated as an exchange) shall be treated as an exchange.
  (f) Qualified joint venture.--
          (1) In general.--In the case of a qualified joint 
        venture conducted by a [husband and wife] married 
        couple who file a joint return for the taxable year, 
        for purposes of this title--
                  (A) such joint venture shall not be treated 
                as a partnership,
                  (B) all items of income, gain, loss, 
                deduction, and credit shall be divided between 
                the spouses in accordance with their respective 
                interests in the venture, and
                  (C) each spouse shall take into account such 
                spouse's respective share of such items as if 
                they were attributable to a trade or business 
                conducted by such spouse as a sole proprietor.
          (2) Qualified joint venture.--For purposes of 
        paragraph (1), the term ``qualified joint venture'' 
        means any joint venture involving the conduct of a 
        trade or business if--
                  (A) the only members of such joint venture 
                are a [husband and wife] married couple,
                  (B) both spouses materially participate 
                (within the meaning of section 469(h) without 
                regard to paragraph (5) thereof) in such trade 
                or business, and
                  (C) both spouses elect the application of 
                this subsection.
  (g) Cross reference.--For rules in the case of the sale, 
exchange, liquidation, or reduction of a partner's interest, 
see sections 704(b) and 706(c)(2).

           *       *       *       *       *       *       *

 Subchapter N--TAX BASED ON INCOME FROM SOURCES WITHIN OR WITHOUT THE 
UNITED STATES

           *       *       *       *       *       *       *

PART III--INCOME FROM SOURCES WITHOUT THE UNITED STATES

           *       *       *       *       *       *       *

Subpart B--EARNED INCOME OF CITIZENS OR RESIDENTS OF UNITED STATES

           *       *       *       *       *       *       *

SEC. 911. CITIZENS OR RESIDENTS OF THE UNITED STATES LIVING ABROAD.

  (a) Exclusion from gross income.--At the election of a 
qualified individual (made separately with respect to 
paragraphs (1) and (2)), there shall be excluded from the gross 
income of such individual, and exempt from taxation under this 
subtitle, for any taxable year--
          (1) the foreign earned income of such individual, and
          (2) the housing cost amount of such individual.
  (b) Foreign earned income.--
          (1) Definition.--For purposes of this section--
                  (A) In general.--The term ``foreign earned 
                income'' with respect to any individual means 
                the amount received by such individual from 
                sources within a foreign country or countries 
                which constitute earned income attributable to 
                services performed by such individual during 
                the period described in subparagraph (A) or (B) 
                of subsection (d)(1), whichever is applicable.
                  (B) Certain amounts not included in foreign 
                earned income.--The foreign earned income for 
                an individual shall not include amounts--
                          (i) received as a pension or annuity,
                          (ii) paid by the United States or an 
                        agency thereof to an employee of the 
                        United States or an agency thereof,
                          (iii) included in gross income by 
                        reason of section 402(b) (relating to 
                        taxability of beneficiary of nonexempt 
                        trust) or section 403(c) (relating to 
                        taxability of beneficiary under a 
                        nonqualified annuity), or
                          (iv) received after the close of the 
                        taxable year following the taxable year 
                        in which the services to which the 
                        amounts are attributable are performed.
          (2) Limitation on foreign earned income.--
                  (A) In general.--The foreign earned income of 
                an individual which may be excluded under 
                subsection (a)(1) for any taxable year shall 
                not exceed the amount of foreign earned income 
                computed on a daily basis at an annual rate 
                equal to the exclusion amount for the calendar 
                year in which such taxable year begins.
                  (B) Attribution to year in which services are 
                performed.--For purposes of applying 
                subparagraph (A), amounts received shall be 
                considered received in the taxable year in 
                which the services to which the amounts are 
                attributable are performed.
                  [(C) Treatment of community income.--In 
                applying subparagraph (A) with respect to 
                amounts received from services performed by a 
                husband or wife which are community income 
                under community property laws applicable to 
                such income, the aggregate amount which may be 
                excludable from the gross income of such 
                husband and wife under subsection (a)(1) for 
                any taxable year shall equal the amount which 
                would be so excludable if such amounts did not 
                constitute community income.]
                  (C) Treatment of community income.--In 
                applying subparagraph (A) with respect to 
                amounts received from services performed by a 
                married individual which are community income 
                under community property laws applicable to 
                such income, the aggregate amount which may be 
                excludable from the gross income of such 
                individual and such individual's spouse under 
                subsection (a)(1) for any taxable year shall 
                equal the amount which would be so excludable 
                if such amounts did not constitute community 
                income.
                  (D) Exclusion amount.--
                          (i) In general.--The exclusion amount 
                        for any calendar year is $80,000.
                          (ii) Inflation adjustment.--In the 
                        case of any taxable year beginning in a 
                        calendar year after 2005, the $80,000 
                        amount in clause (i) shall be increased 
                        by an amount equal to the product of--
                                  (I) such dollar amount, and
                                  (II) the cost-of-living 
                                adjustment determined under 
                                section 1(f)(3) for the 
                                calendar year in which the 
                                taxable year begins, determined 
                                by substituting ``2004'' for 
                                ``2016'' in subparagraph 
                                (A)(ii) thereof.
                 If any increase determined under the preceding 
                sentence is not a multiple of $100, such 
                increase shall be rounded to the next lowest 
                multiple of $100.
  (c) Housing cost amount.--For purposes of this section--
          (1) In general.--The term ``housing cost amount'' 
        means an amount equal to the excess of--
                  (A) the housing expenses of an individual for 
                the taxable year to the extent such expenses do 
                not exceed the amount determined under 
                paragraph (2), over
                  (B) an amount equal to the product of--
                          (i) 16 percent of the amount 
                        (computed on a daily basis) in effect 
                        under subsection (b)(2)(D) for the 
                        calendar year in which such taxable 
                        year begins, multiplied by
                          (ii) the number of days of such 
                        taxable year within the applicable 
                        period described in subparagraph (A) or 
                        (B) of subsection (d)(1).
          (2) Limitation.--
                  (A) In general.--The amount determined under 
                this paragraph is an amount equal to the 
                product of--
                          (i) 30 percent (adjusted as may be 
                        provided under subparagraph (B)) of the 
                        amount (computed on a daily basis) in 
                        effect under subsection (b)(2)(D) for 
                        the calendar year in which the taxable 
                        year of the individual begins, 
                        multiplied by
                          (ii) the number of days of such 
                        taxable year within the applicable 
                        period described in subparagraph (A) or 
                        (B) of subsection (d)(1).
                  (B) Regulations.--The Secretary may issue 
                regulations or other guidance providing for the 
                adjustment of the percentage under subparagraph 
                (A)(i) on the basis of geographic differences 
                in housing costs relative to housing costs in 
                the United States.
          (3) Housing expenses.--
                  (A) In general.--The term ``housing 
                expenses'' means the reasonable expenses paid 
                or incurred during the taxable year by or on 
                behalf of an individual for housing for the 
                individual (and, if they reside with [him] the 
                individual, for [his spouse] the individual's 
                spouse and dependents) in a foreign country. 
                The term--
                          (i) includes expenses attributable to 
                        the housing (such as utilities and 
                        insurance), but
                          (ii) does not include interest and 
                        taxes of the kind deductible under 
                        section 163 or 164 or any amount 
                        allowable as a deduction under section 
                        216(a).
                Housing expenses shall not be treated as 
                reasonable to the extent such expenses are 
                lavish or extravagant under the circumstances.
                  (B) Second foreign household.--
                          (i) In general.--Except as provided 
                        in clause (ii), only housing expenses 
                        incurred with respect to that abode 
                        which bears the closest relationship to 
                        the tax home of the individual shall be 
                        taken into account under paragraph (1).
                          (ii) Separate household for spouse 
                        and dependents.--If an individual 
                        maintains a separate abode outside the 
                        United States for [his spouse] the 
                        individual's spouse and dependents and 
                        they do not reside with [him] the 
                        individual because of living conditions 
                        which are dangerous, unhealthful, or 
                        otherwise adverse, then--
                                  (I) the words ``if they 
                                reside with [him] the 
                                individual'' in subparagraph 
                                (A) shall be disregarded, and
                                  (II) the housing expenses 
                                incurred with respect to such 
                                abode shall be taken into 
                                account under paragraph (1).
          (4) Special rules where housing expenses not provided 
        by employer.--
                  (A) In general.--To the extent the housing 
                cost amount of any individual for any taxable 
                year is not attributable to employer provided 
                amounts, such amount shall be treated as a 
                deduction allowable in computing adjusted gross 
                income to the extent of the limitation of 
                subparagraph (B).
                  (B) Limitation.--For purposes of subparagraph 
                (A), the limitation of this subparagraph is the 
                excess of--
                          (i) the foreign earned income of the 
                        individual for the taxable year, over
                          (ii) the amount of such income 
                        excluded from gross income under 
                        subsection (a) for the taxable year.
                  (C) 1-year carryover of housing amounts not 
                allowed by reason of subparagraph (B).--
                          (i) In general.--The amount not 
                        allowable as a deduction for any 
                        taxable year under subparagraph (A) by 
                        reason of the limitation of 
                        subparagraph (B) shall be treated as a 
                        deduction allowable in computing 
                        adjusted gross income for the 
                        succeeding taxable year (and only for 
                        the succeeding taxable year) to the 
                        extent of the limitation of clause (ii) 
                        for such succeeding taxable year.
                          (ii) Limitation.--For purposes of 
                        clause (i), the limitation of this 
                        clause for any taxable year is the 
                        excess of--
                                  (I) the limitation of 
                                subparagraph (B) for such 
                                taxable year, over
                                  (II) amounts treated as a 
                                deduction under subparagraph 
                                (A) for such taxable year.
                  (D) Employer provided amounts.--For purposes 
                of this paragraph, the term ``employer provided 
                amounts'' means any amount paid or incurred on 
                behalf of the individual by the individual's 
                employer which is foreign earned income 
                included in the individual's gross income for 
                the taxable year (without regard to this 
                section).
                  (E) Foreign earned income.--For purposes of 
                this paragraph, an individual's foreign earned 
                income for any taxable year shall be determined 
                without regard to the limitation of 
                subparagraph (A) of subsection (b)(2).
  (d) Definitions and special rules.--For purposes of this 
section--
          (1) Qualified individual.--The term ``qualified 
        individual'' means an individual whose tax home is in a 
        foreign country and who is--
                  (A) a citizen of the United States and 
                establishes to the satisfaction of the 
                Secretary that he has been a bona fide resident 
                of a foreign country or countries for an 
                uninterrupted period which includes an entire 
                taxable year, or
                  (B) a citizen or resident of the United 
                States and who, during any period of 12 
                consecutive months, is present in a foreign 
                country or countries during at least 330 full 
                days in such period.
          (2) Earned income.--
                  (A) In general.--The term ``earned income'' 
                means wages, salaries, or professional fees, 
                and other amounts received as compensation for 
                personal services actually rendered, but does 
                not include that part of the compensation 
                derived by the taxpayer for personal services 
                rendered by him to a corporation which 
                represents a distribution of earnings or 
                profits rather than a reasonable allowance as 
                compensation for the personal services actually 
                rendered.
                  (B) Taxpayer engaged in trade or business.--
                In the case of a taxpayer engaged in a trade or 
                business in which both personal services and 
                capital are material income-producing factors, 
                under regulations prescribed by the Secretary, 
                a reasonable allowance as compensation for the 
                personal services rendered by the taxpayer, not 
                in excess of 30 percent of his share of the net 
                profits of such trade or business, shall be 
                considered as earned income.
          (3) Tax home.--The term ``tax home'' means, with 
        respect to any individual, such individual's home for 
        purposes of section 162(a)(2) (relating to traveling 
        expenses while away from home). An individual shall not 
        be treated as having a tax home in a foreign country 
        for any period for which his abode is within the United 
        States, unless such individual is serving in an area 
        designated by the President of the United States by 
        Executive order as a combat zone for purposes of 
        section 112 in support of the Armed Forces of the 
        United States.
          (4) Waiver of period of stay in foreign country.--
        Notwithstanding paragraph (1), an individual who--
                  (A) is a bona fide resident of, or is present 
                in, a foreign country for any period,
                  (B) leaves such foreign country after August 
                31, 1978--
                          (i) during any period during which 
                        the Secretary determines, after 
                        consultation with the Secretary of 
                        State or his delegate, that individuals 
                        were required to leave such foreign 
                        country because of war, civil unrest, 
                        or similar adverse conditions in such 
                        foreign country which precluded the 
                        normal conduct of business by such 
                        individuals, and
                          (ii) before meeting the requirements 
                        of such paragraph (1), and
                  (C) establishes to the satisfaction of the 
                Secretary that such individual could reasonably 
                have been expected to have met such 
                requirements but for the conditions referred to 
                in clause (i) of subparagraph (B),
        shall be treated as a qualified individual with respect 
        to the period described in subparagraph (A) during 
        which he was a bona fide resident of, or was present 
        in, the foreign country, and in applying subsections 
        (b)(2)(A), (c)(1)(B)(ii), and (c)(2)(A)(ii) with 
        respect to such individual, only the days within such 
        period shall be taken into account.
          (5) Test of bona fide residence.--If--
                  (A) an individual who has earned income from 
                sources within a foreign country submits a 
                statement to the authorities of that country 
                that he is not a resident of that country, and
                  (B) such individual is held not subject as a 
                resident of that country to the income tax of 
                that country by its authorities with respect to 
                such earnings,
        then such individual shall not be considered a bona 
        fide resident of that country for purposes of paragraph 
        (1)(A).
          (6) Denial of double benefits.--No deduction or 
        exclusion from gross income under this subtitle or 
        credit against the tax imposed by this chapter 
        (including any credit or deduction for the amount of 
        taxes paid or accrued to a foreign country or 
        possession of the United States) shall be allowed to 
        the extent such deduction, exclusion, or credit is 
        properly allocable to or chargeable against amounts 
        excluded from gross income under subsection (a).
          (7) Aggregate benefit cannot exceed foreign earned 
        income.--The sum of the amount excluded under 
        subsection (a) and the amount deducted under subsection 
        (c)(4)(A) for the taxable year shall not exceed the 
        individual's foreign earned income for such year.
          (8) Limitation on income earned in restricted 
        country.--
                  (A) In general.--If travel (or any 
                transaction in connection with such travel) 
                with respect to any foreign country is subject 
                to the regulations described in subparagraph 
                (B) during any period--
                          (i) the term ``foreign earned 
                        income'' shall not include any income 
                        from sources within such country 
                        attributable to services performed 
                        during such period,
                          (ii) the term ``housing expenses'' 
                        shall not include any expenses 
                        allocable to such period for housing in 
                        such country or for housing of the 
                        spouse or dependents of the taxpayer in 
                        another country while the taxpayer is 
                        present in such country, and
                          (iii) an individual shall not be 
                        treated as a bona fide resident of, or 
                        as present in, a foreign country for 
                        any day during which such individual 
                        was present in such country during such 
                        period.
                  (B) Regulations.--For purposes of this 
                paragraph, regulations are described in this 
                subparagraph if such regulations--
                          (i) have been adopted pursuant to the 
                        Trading With the Enemy Act (50 U.S.C. 
                        4301 et seq.) or the International 
                        Emergency Economic Powers Act (50 
                        U.S.C. 1701 et seq.), and
                          (ii) include provisions generally 
                        prohibiting citizens and residents of 
                        the United States from engaging in 
                        transactions related to travel to, 
                        from, or within a foreign country.
                  (C) Exception.--Subparagraph (A) shall not 
                apply to any individual during any period in 
                which such individual's activities are not in 
                violation of the regulations described in 
                subparagraph (B).
          (9) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary or appropriate to carry 
        out the purposes of this section, including regulations 
        providing rules--
                  (A) for cases [where a husband and wife each 
                have] where both spouses have earned income 
                from sources outside the United States, and
                  (B) for married individuals filing separate 
                returns.
  (e) Election.--
          (1) In general.--An election under subsection (a) 
        shall apply to the taxable year for which made and to 
        all subsequent taxable years unless revoked under 
        paragraph (2).
          (2) Revocation.--A taxpayer may revoke an election 
        made under paragraph (1) for any taxable year after the 
        taxable year for which such election was made. Except 
        with the consent of the Secretary, any taxpayer who 
        makes such a revocation for any taxable year may not 
        make another election under this section for any 
        subsequent taxable year before the 6th taxable year 
        after the taxable year for which such revocation was 
        made.
  (f) Determination of tax liability.--
          (1) In general.--If, for any taxable year, any amount 
        is excluded from gross income of a taxpayer under 
        subsection (a), then, notwithstanding sections 1 and 
        55--
                  (A) if such taxpayer has taxable income for 
                such taxable year, the tax imposed by section 1 
                for such taxable year shall be equal to the 
                excess (if any) of--
                          (i) the tax which would be imposed by 
                        section 1 for such taxable year if the 
                        taxpayer's taxable income were 
                        increased by the amount excluded under 
                        subsection (a) for such taxable year, 
                        over
                          (ii) the tax which would be imposed 
                        by section 1 for such taxable year if 
                        the taxpayer's taxable income were 
                        equal to the amount excluded under 
                        subsection (a) for such taxable year, 
                        and
                  (B) if such taxpayer has a taxable excess (as 
                defined in section 55(b)(1)(B)) for such 
                taxable year, the amount determined under the 
                first sentence of section 55(b)(1)(A) for such 
                taxable year shall be equal to the excess (if 
                any) of--
                          (i) the amount which would be 
                        determined under such sentence for such 
                        taxable year (subject to the limitation 
                        of section 55(b)(3)) if the taxpayer's 
                        taxable excess (as so defined) were 
                        increased by the amount excluded under 
                        subsection (a) for such taxable year, 
                        over
                          (ii) the amount which would be 
                        determined under such sentence for such 
                        taxable year if the taxpayer's taxable 
                        excess (as so defined) were equal to 
                        the amount excluded under subsection 
                        (a) for such taxable year.
        For purposes of this paragraph, the amount excluded 
        under subsection (a) shall be reduced by the aggregate 
        amount of any deductions or exclusions disallowed under 
        subsection (d)(6) with respect to such excluded amount.
          (2) Special rules.--
                  (A) Regular tax.--In applying section 1(h) 
                for purposes of determining the tax under 
                paragraph (1)(A)(i) for any taxable year in 
                which, without regard to this subsection, the 
                taxpayer's net capital gain exceeds taxable 
                income (hereafter in this subparagraph referred 
                to as the capital gain excess)--
                          (i) the taxpayer's net capital gain 
                        (determined without regard to section 
                        1(h)(11)) shall be reduced (but not 
                        below zero) by such capital gain 
                        excess,
                          (ii) the taxpayer's qualified 
                        dividend income shall be reduced by so 
                        much of such capital gain excess as 
                        exceeds the taxpayer's net capital gain 
                        (determined without regard to section 
                        1(h)(11) and the reduction under clause 
                        (i)), and
                          (iii) adjusted net capital gain, 
                        unrecaptured section 1250 gain, and 28-
                        percent rate gain shall each be 
                        determined after increasing the amount 
                        described in section 1(h)(4)(B) by such 
                        capital gain excess.
                  (B) Alternative minimum tax.--In applying 
                section 55(b)(3) for purposes of determining 
                the tax under paragraph (1)(B)(i) for any 
                taxable year in which, without regard to this 
                subsection, the taxpayer's net capital gain 
                exceeds the taxable excess (as defined in 
                section 55(b)(1)(B))--
                          (i) the rules of subparagraph (A) 
                        shall apply, except that such 
                        subparagraph shall be applied by 
                        substituting ``the taxable excess (as 
                        defined in section 55(b)(1)(B))'' for 
                        ``taxable income'', and
                          (ii) the reference in section 
                        55(b)(3)(B) to the excess described in 
                        section 1(h)(1)(B), and the reference 
                        in section 55(b)(3)(C)(ii) to the 
                        excess described in section 
                        1(h)(1)(C)(ii), shall each be treated 
                        as a reference to each such excess as 
                        determined under the rules of 
                        subparagraph (A) for purposes of 
                        determining the tax under paragraph 
                        (1)(A)(i).
                  (C) Definitions.--Terms used in this 
                paragraph which are also used in section 1(h) 
                shall have the respective meanings given such 
                terms by section 1(h), except that in applying 
                subparagraph (B) the adjustments under part VI 
                of subchapter A shall be taken into account.
  (g) Cross references.--For administrative and penal 
provisions relating to the exclusions provided for in this 
section, see sections 6001, 6011, 6012(c), and the other 
provisions of subtitle F.

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Subchapter O--GAIN OR LOSS ON DISPOSITION OF PROPERTY

           *       *       *       *       *       *       *

PART II--BASIS RULES OF GENERAL APPLICATION

           *       *       *       *       *       *       *

SEC. 1015. BASIS OF PROPERTY ACQUIRED BY GIFTS AND TRANSFERS IN TRUST.

  (a) Gifts after December 31, 1920.--If the property was 
acquired by gift after December 31, 1920, the basis shall be 
the same as it would be in the hands of the donor or the last 
preceding owner by whom it was not acquired by gift, except 
that if such basis (adjusted for the period before the date of 
the gift as provided in section 1016) is greater than the fair 
market value of the property at the time of the gift, then for 
the purpose of determining loss the basis shall be such fair 
market value. If the facts necessary to determine the basis in 
the hands of the donor or the last preceding owner are unknown 
to the donee, the Secretary shall, if possible, obtain such 
facts from such donor or last preceding owner, or any other 
person cognizant thereof. If the Secretary finds it impossible 
to obtain such facts, the basis in the hands of such donor or 
last preceding owner shall be the fair market value of such 
property as found by the Secretary as of the date or 
approximate date at which, according to the best information 
that the Secretary is able to obtain, such property was 
acquired by such donor or last preceding owner.
  (b) Transfer in trust after December 31, 1920.--If the 
property was acquired after December 31, 1920, by a transfer in 
trust (other than by a transfer in trust by a gift, bequest, or 
devise), the basis shall be the same as it would be in the 
hands of the grantor increased in the amount of gain or 
decreased in the amount of loss recognized to the grantor on 
such transfer under the law applicable to the year in which the 
transfer was made.
  (c) Gift or transfer in trust before January 1, 1921.--If the 
property was acquired by gift or transfer in trust on or before 
December 31, 1920, the basis shall be the fair market value of 
such property at the time of such acquisition.
  (d) Increased basis for gift tax paid.--
          (1) In general.--If--
                  (A) the property is acquired by gift on or 
                after September 2, 1958, the basis shall be the 
                basis determined under subsection (a), 
                increased (but not above the fair market value 
                of the property at the time of the gift) by the 
                amount of gift tax paid with respect to such 
                gift, or
                  (B) the property was acquired by gift before 
                September 2, 1958, and has not been sold, 
                exchanged, or otherwise disposed of before such 
                date, the basis of the property shall be 
                increased on such date by the amount of gift 
                tax paid with respect to such gift, but such 
                increase shall not exceed an amount equal to 
                the amount by which the fair market value of 
                the property at the time of the gift exceeded 
                the basis of the property in the hands of the 
                donor at the time of the gift.
          (2) Amount of tax paid with respect to gift.--For 
        purposes of paragraph (1), the amount of gift tax paid 
        with respect to any gift is an amount which bears the 
        same ratio to the amount of gift tax paid under chapter 
        12 with respect to all gifts made by the donor for the 
        calendar year (or preceding calendar period) in which 
        such gift is made as the amount of such gift bears to 
        the taxable gifts (as defined in section 2503(a) but 
        computed without the deduction allowed by section 2521) 
        made by the donor during such calendar year or period. 
        For purposes of the preceding sentence, the amount of 
        any gift shall be the amount included with respect to 
        such gift in determining (for the purposes of section 
        2503(a)) the total amount of gifts made during the 
        calendar year or period, reduced by the amount of any 
        deduction allowed with respect to such gift under 
        section 2522 (relating to charitable deduction) or 
        under section 2523 (relating to marital deduction).
          (3) Gifts treated as made one-half by each spouse.--
        For purposes of paragraph (1), where the donor and [his 
        spouse] the donor's spouse elected, under section 2513 
        to have the gift considered as made one-half by each, 
        the amount of gift tax paid with respect to such gift 
        under chapter 12 shall be the sum of the amounts of tax 
        paid with respect to each half of such gift (computed 
        in the manner provided in paragraph (2)).
          (4) Treatment as adjustment to basis.--For purposes 
        of section 1016(b), an increase in basis under 
        paragraph (1) shall be treated as an adjustment under 
        section 1016(a).
          (5) Application to gifts before 1955.--With respect 
        to any property acquired by gift before 1955, 
        references in this subsection to any provision of this 
        title shall be deemed to refer to the corresponding 
        provision of the Internal Revenue Code of 1939 or prior 
        revenue laws which was effective for the year in which 
        such gift was made.
          (6) Special rule for gifts made after December 31, 
        1976.--
                  (A) In general.--In the case of any gift made 
                after December 31, 1976, the increase in basis 
                provided by this subsection with respect to any 
                gift for the gift tax paid under chapter 12 
                shall be an amount (not in excess of the amount 
                of tax so paid) which bears the same ratio to 
                the amount of tax so paid as--
                          (i) the net appreciation in value of 
                        the gift, bears to
                          (ii) the amount of the gift.
                  (B) Net appreciation.--For purposes of 
                paragraph (1), the net appreciation in value of 
                any gift is the amount by which the fair market 
                value of the gift exceeds the donor's adjusted 
                basis immediately before the gift.
  (e) Gifts between spouses.--In the case of any property 
acquired by gift in a transfer described in section 1041(a), 
the basis of such property in the hands of the transferee shall 
be determined under section 1041(b)(2) and not this section.

Subchapter P--CAPITAL GAINS AND LOSSES

           *       *       *       *       *       *       *

PART IV--SPECIAL RULES FOR DETERMINING CAPITAL GAINS AND LOSSES

           *       *       *       *       *       *       *

SEC. 1233. GAINS AND LOSSES FROM SHORT SALES.

  (a) Capital assets.--For purposes of this subtitle, gain or 
loss from the short sale of property shall be considered as 
gain or loss from the sale or exchange of a capital asset to 
the extent that the property, including a commodity future, 
used to close the short sale constitutes a capital asset in the 
hands of the taxpayer.
  (b) Short-term gains and holding periods.--If gain or loss 
from a short sale is considered as gain or loss from the sale 
or exchange of a capital asset under subsection (a) and if on 
the date of such short sale substantially identical property 
has been held by the taxpayer for not more than 1 year 
(determined without regard to the effect, under paragraph (2) 
of this subsection, of such short sale on the holding period), 
or if substantially identical property is acquired by the 
taxpayer after such short sale and on or before the date of the 
closing thereof--
          (1) any gain on the closing of such short sale shall 
        be considered as a gain on the sale or exchange of a 
        capital asset held for not more than 1 year 
        (notwithstanding the period of time any property used 
        to close such short sale has been held); and
          (2) the holding period of such substantially 
        identical property shall be considered to begin 
        (notwithstanding section 1223, relating to the holding 
        period of property) on the date of the closing of the 
        short sale, or on the date of a sale, gift, or other 
        disposition of such property, whichever date occurs 
        first. This paragraph shall apply to such substantially 
        identical property in the order of the dates of the 
        acquisition of such property, but only to so much of 
        such property as does not exceed the quantity sold 
        short.
For purposes of this subsection, the acquisition of an option 
to sell property at a fixed price shall be considered as a 
short sale, and the exercise or failure to exercise such option 
shall be considered as a closing of such short sale.
  (c) Certain options to sell.--Subsection (b) shall not 
include an option to sell property at a fixed price acquired on 
the same day on which the property identified as intended to be 
used in exercising such option is acquired and which, if 
exercised, is exercised through the sale of the property so 
identified. If the option is not exercised, the cost of the 
option shall be added to the basis of the property with which 
the option is identified. This subsection shall apply only to 
options acquired after August 16, 1954.
  (d) Long-term losses.--If on the date of such short sale 
substantially identical property has been held by the taxpayer 
for more than 1 year, any loss on the closing of such short 
sale shall be considered as a loss on the sale or exchange of a 
capital asset held for more than 1 year (notwithstanding the 
period of time any property used to close such short sale has 
been held, and notwithstanding section 1234).
  (e) Rules for application of section.--(1) Subsection (b)(1) 
or (d) shall not apply to the gain or loss, respectively, on 
any quantity of property used to close such short sale which is 
in excess of the quantity of the substantially identical 
property referred to in the applicable subsection.
  (2) For purposes of subsections (b) and (d)--
          (A) the term ``property'' includes only stocks and 
        securities (including stocks and securities dealt with 
        on a ``when issued'' basis), and commodity futures, 
        which are capital assets in the hands of the taxpayer, 
        but does not include any position to which section 
        1092(b) applies;
          (B) in the case of futures transactions in any 
        commodity on or subject to the rules of a board of 
        trade or commodity exchange, a commodity future 
        requiring delivery in 1 calendar month shall not be 
        considered as property substantially identical to 
        another commodity future requiring delivery in a 
        different calendar month;
          (C) in the case of a short sale of property by an 
        individual, the term ``taxpayer'', in the application 
        of this subsection and subsections (b) and (d), shall 
        be read as ``taxpayer or [his spouse] the taxpayer's 
        spouse''; but an individual who is legally separated 
        from the taxpayer under a decree of divorce or of 
        separate maintenance shall not be considered as the 
        spouse of the taxpayer;
          (D) a securities futures contract (as defined in 
        section 1234B) to acquire substantially identical 
        property shall be treated as substantially identical 
        property; and
          (E) entering into a securities futures contract (as 
        so defined) to sell shall be considered to be a short 
        sale, and the settlement of such contract shall be 
        considered to be the closing of such short sale.
  (3) Where the taxpayer enters into 2 commodity futures 
transactions on the same day, one requiring delivery by him in 
one market and the other requiring delivery to him of the same 
(or substantially identical) commodity in the same calendar 
month in a different market, and the taxpayer subsequently 
closes both such transactions on the same day, subsections (b) 
and (d) shall have no application to so much of the commodity 
involved in either such transaction as does not exceed in 
quantity the commodity involved in the other.
  (4)(A) In the case of a taxpayer who is a dealer in 
securities (within the meaning of section 1236)--
          (i) if, on the date of a short sale of stock, 
        substantially identical property which is a capital 
        asset in the hands of the taxpayer has been held for 
        not more than 1 year, and
          (ii) if such short sale is closed more than 20 days 
        after the date on which it was made,
subsection (b)(2) shall apply in respect of the holding period 
of such substantially identical property.
  (B) For purposes of subparagraph (A)--
          (i) the last sentence of subsection (b) applies; and
          (ii) the term ``stock'' means any share or 
        certificate of stock in a corporation, any bond or 
        other evidence of indebtedness which is convertible 
        into any such share or certificate, or any evidence of 
        an interest in, or right to subscribe to or purchase, 
        any of the foregoing.
  (f) Arbitrage operations in securities.--In the case of a 
short sale which had been entered into as an arbitrage 
operation, to which sale the rule of subsection (b)(2) would 
apply except as otherwise provided in this subsection--
          (1) subsection (b)(2) shall apply first to 
        substantially identical assets acquired for arbitrage 
        operations held at the close of business on the day 
        such sale is made, and only to the extent that the 
        quantity sold short exceeds the substantially identical 
        assets acquired for arbitrage operations held at the 
        close of business on the day such sale is made, shall 
        the holding period of any other such identical assets 
        held by the taxpayer be affected;
          (2) in the event that assets acquired for arbitrage 
        operations are disposed of in such manner as to create 
        a net short position in assets acquired for arbitrage 
        operations, such net short position shall be deemed to 
        constitute a short sale made on that day;
          (3) for the purpose of paragraphs (1) and (2) of this 
        subsection the taxpayer will be deemed as of the close 
        of any business day to hold property which he is or 
        will be entitled to receive or acquire by virtue of any 
        other asset acquired for arbitrage operations or by 
        virtue of any contract he has entered into in an 
        arbitrage operation; and
          (4) for the purpose of this subsection arbitrage 
        operations are transactions involving the purchase and 
        sale of assets for the purpose of profiting from a 
        current difference between the price of the asset 
        purchased and the price of the asset sold, and in which 
        the asset purchased, if not identical to the asset 
        sold, is such that by virtue thereof the taxpayer is, 
        or will be, entitled to acquire assets identical to the 
        assets sold. Such operations must be clearly identified 
        by the taxpayer in his records as arbitrage operations 
        on the day of the transaction or as soon thereafter as 
        may be practicable. Assets acquired for arbitrage 
        operations will include stocks and securities and the 
        right to acquire stocks and securities.
  (g) Hedging transactions.--This section shall not apply in 
the case of a hedging transaction in commodity futures.
  (h) Short sales of property which becomes substantially 
worthless.--
          (1) In general.--If--
                  (A) the taxpayer enters into a short sale of 
                property, and
                  (B) such property becomes substantially 
                worthless,
        the taxpayer shall recognize gain in the same manner as 
        if the short sale were closed when the property becomes 
        substantially worthless. To the extent provided in 
        regulations prescribed by the Secretary, the preceding 
        sentence also shall apply with respect to any option 
        with respect to property, any offsetting notional 
        principal contract with respect to property, any 
        futures or forward contract to deliver any property, 
        and any other similar transaction.
          (2) Statute of limitations.--If property becomes 
        substantially worthless during a taxable year and any 
        short sale of such property remains open at the time 
        such property becomes substantially worthless, then--
                  (A) the statutory period for the assessment 
                of any deficiency attributable to any part of 
                the gain on such transaction shall not expire 
                before the earlier of--
                          (i) the date which is 3 years after 
                        the date the Secretary is notified by 
                        the taxpayer (in such manner as the 
                        Secretary may by regulations prescribe) 
                        of the substantial worthlessness of 
                        such property, or
                          (ii) the date which is 6 years after 
                        the date the return for such taxable 
                        year is filed, and
                  (B) such deficiency may be assessed before 
                the date applicable under subparagraph (A) 
                notwithstanding the provisions of any other law 
                or rule of law which would otherwise prevent 
                such assessment.

           *       *       *       *       *       *       *

SEC. 1235. SALE OR EXCHANGE OF PATENTS.

  (a) General.--A transfer (other than by gift, inheritance, or 
devise) of property consisting of all substantial rights to a 
patent, or an undivided interest therein which includes a part 
of all such rights, by any holder shall be considered the sale 
or exchange of a capital asset held for more than 1 year, 
regardless of whether or not payments in consideration of such 
transfer are--
          (1) payable periodically over a period generally 
        coterminous with the transferee's use of the patent, or
          (2) contingent on the productivity, use, or 
        disposition of the property transferred.
  (b)  ``Holder'' defined.--For purposes of this section, the 
term ``holder'' means--
          (1) any individual whose efforts created such 
        property, or
          (2) any other individual who has acquired his 
        interest in such property in exchange for consideration 
        in money or money's worth paid to such creator prior to 
        actual reduction to practice of the invention covered 
        by the patent, if such individual is neither--
                  (A) the employer of such creator, nor
                  (B) related to such creator (within the 
                meaning of subsection (c)).
  (c) Related persons.--Subsection (a) shall not apply to any 
transfer, directly or indirectly, between persons specified 
within any one of the paragraphs of section 267(b) or persons 
described in section 707(b); except that, in applying section 
267(b) and (c) and section 707(b) for purposes of this 
section--
          (1) the phrase ``25 percent or more'' shall be 
        substituted for the phrase ``more than 50 percent'' 
        each place it appears in section 267(b) or 707(b), and
          (2) paragraph (4) of section 267(c) shall be treated 
        as providing that the family of an individual shall 
        include only [his spouse] the individual's spouse, 
        ancestors, and lineal descendants.
  (d) Cross reference.--For special rule relating to 
nonresident aliens, see section 871(a).

           *       *       *       *       *       *       *

SEC. 1239. GAIN FROM SALE OF DEPRECIABLE PROPERTY BETWEEN CERTAIN 
                    RELATED TAXPAYERS.

  (a) Treatment of gain as ordinary income.--In the case of a 
sale or exchange of property, directly or indirectly, between 
related persons, any gain recognized to the transferor shall be 
treated as ordinary income if such property is, in the hands of 
the transferee, of a character which is subject to the 
allowance for depreciation provided in section 167.
  (b) Related persons.--For purposes of subsection (a), the 
term ``related persons'' means--
          (1) a person and all entities which are controlled 
        entities with respect to such person,
          (2) a taxpayer and any trust in which such taxpayer 
        (or [his spouse] the taxpayer's spouse) is a 
        beneficiary, unless such beneficiary's interest in the 
        trust is a remote contingent interest (within the 
        meaning of section 318(a)(3)(B)(i)), and
          (3) except in the case of a sale or exchange in 
        satisfaction of a pecuniary bequest, an executor of an 
        estate and a beneficiary of such estate.
  (c) Controlled entity defined.--
          (1) General rule.--For purposes of this section, the 
        term ``controlled entity'' means, with respect to any 
        person--
                  (A) a corporation more than 50 percent of the 
                value of the outstanding stock of which is 
                owned (directly or indirectly) by or for such 
                person,
                  (B) a partnership more than 50 percent of the 
                capital interest or profits interest in which 
                is owned (directly or indirectly) by or for 
                such person, and
                  (C) any entity which is a related person to 
                such person under paragraph (3), (10), (11), or 
                (12) of section 267(b).
          (2) Constructive ownership.--For purposes of this 
        section, ownership shall be determined in accordance 
        with rules similar to the rules under section 267(c) 
        (other than paragraph (3) thereof).
  (d) Employer and related employee association.--For purposes 
of subsection (a), the term ``related person'' also includes--
          (1) an employer and any person related to the 
        employer (within the meaning of subsection (b)), and
          (2) a welfare benefit fund (within the meaning of 
        section 419(e)) which is controlled directly or 
        indirectly by persons referred to in paragraph (1).
  (e) Patent applications treated as depreciable property.--For 
purposes of this section, a patent application shall be treated 
as property which, in the hands of the transferee, is of a 
character which is subject to the allowance for depreciation 
provided in section 167.

           *       *       *       *       *       *       *

SEC. 1244. LOSSES ON SMALL BUSINESS STOCK.

  (a) General rule.--In the case of an individual, a loss on 
section 1244 stock issued to such individual or to a 
partnership which would (but for this section) be treated as a 
loss from the sale or exchange of a capital asset shall, to the 
extent provided in this section, be treated as an ordinary 
loss.
  (b) Maximum amount for any taxable year.--For any taxable 
year the aggregate amount treated by the taxpayer by reason of 
this section as an ordinary loss shall not exceed--
          (1) $50,000, or
          (2) $100,000, in the case of [a husband and wife 
        filing] a joint return for such year under section 
        6013.
  (c) Section 1244 stock defined.--
          (1) In general.--For purposes of this section, the 
        term ``section 1244 stock'' means stock in a domestic 
        corporation if--
                  (A) at the time such stock is issued, such 
                corporation was a small business corporation,
                  (B) such stock was issued by such corporation 
                for money or other property (other than stock 
                and securities), and
                  (C) such corporation, during the period of 
                its 5 most recent taxable years ending before 
                the date the loss on such stock was sustained, 
                derived more than 50 percent of its aggregate 
                gross receipts from sources other than 
                royalties, rents, dividends, interests, 
                annuities, and sales or exchanges of stocks or 
                securities.
          (2) Rules for application of paragraph (1)(C).--
                  (A) Period taken into account with respect to 
                new corporations.--For purposes of paragraph 
                (1)(C), if the corporation has not been in 
                existence for 5 taxable years ending before the 
                date the loss on the stock was sustained, there 
                shall be substituted for such 5-year period--
                          (i) the period of the corporation's 
                        taxable years ending before such date, 
                        or
                          (ii) if the corporation has not been 
                        in existence for 1 taxable year ending 
                        before such date, the period such 
                        corporation has been in existence 
                        before such date.
                  (B) Gross receipts from sales of 
                securities.--For purposes of paragraph (1)(C), 
                gross receipts from the sales or exchanges of 
                stock or securities shall be taken into account 
                only to the extent of gains therefrom.
                  (C) Nonapplication where deductions exceed 
                gross income.--Paragraph (1)(C) shall not apply 
                with respect to any corporation if, for the 
                period taken into account for purposes of 
                paragraph (1)(C), the amount of the deductions 
                allowed by this chapter (other than by sections 
                172, 243, and 245) exceeds the amount of gross 
                income.
          (3) Small business corporation defined.--
                  (A) In general.--For purposes of this 
                section, a corporation shall be treated as a 
                small business corporation if the aggregate 
                amount of money and other property received by 
                the corporation for stock, as a contribution to 
                capital, and as paid-in surplus, does not 
                exceed $1,000,000. The determination under the 
                preceding sentence shall be made as of the time 
                of the issuance of the stock in question but 
                shall include amounts received for such stock 
                and for all stock theretofore issued.
                  (B) Amount taken into account with respect to 
                property.--For purposes of subparagraph (A), 
                the amount taken into account with respect to 
                any property other than money shall be the 
                amount equal to the adjusted basis to the 
                corporation of such property for determining 
                gain, reduced by any liability to which the 
                property was subject or which was assumed by 
                the corporation. The determination under the 
                preceding sentence shall be made as of the time 
                the property was received by the corporation.
  (d) Special rules.--
          (1) Limitations on amount of ordinary loss.--
                  (A) Contributions of property having basis in 
                excess of value.--If--
                          (i) section 1244 stock was issued in 
                        exchange for property,
                          (ii) the basis of such stock in the 
                        hands of the taxpayer is determined by 
                        reference to the basis in his hands of 
                        such property, and
                          (iii) the adjusted basis (for 
                        determining loss) of such property 
                        immediately before the exchange 
                        exceeded its fair market value at such 
                        time,
                then in computing the amount of the loss on 
                such stock for purposes of this section the 
                basis of such stock shall be reduced by an 
                amount equal to the excess described in clause 
                (iii).
                  (B) Increases in basis.--In computing the 
                amount of the loss on stock for purposes of 
                this section, any increase in the basis of such 
                stock (through contributions to the capital of 
                the corporation, or otherwise) shall be treated 
                as allocable to stock which is not section 1244 
                stock.
          (2) Recapitalizations, changes in name, etc..--To the 
        extent provided in regulations prescribed by the 
        Secretary, stock in a corporation, the basis of which 
        (in the hands of a taxpayer) is determined in whole or 
        in part by reference to the basis in his hands of stock 
        in such corporation which meets the requirements of 
        subsection (c)(1) (other than subparagraph (C) 
        thereof), or which is received in a reorganization 
        described in section 368(a)(1)(F) in exchange for stock 
        which meets such requirements, shall be treated as 
        meeting such requirements. For purposes of paragraphs 
        (1)(C) and (3)(A) of subsection (c), a successor 
        corporation in a reorganization described in section 
        368(a)(1)(F) shall be treated as the same corporation 
        as its predecessor.
          (3) Relationship to net operating loss deduction.--
        For purposes of section 172 (relating to the net 
        operating loss deduction), any amount of loss treated 
        by reason of this section as an ordinary loss shall be 
        treated as attributable to a trade or business of the 
        taxpayer.
          (4) Individual defined.--For purposes of this 
        section, the term ``individual'' does not include a 
        trust or estate.
  (e) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary to carry out the purposes of 
this section.

           *       *       *       *       *       *       *

PART V--SPECIAL RULES FOR BONDS AND OTHER DEBT INSTRUMENTS

           *       *       *       *       *       *       *

Subpart A--ORIGINAL ISSUE DISCOUNT

           *       *       *       *       *       *       *

SEC. 1272. CURRENT INCLUSION IN INCOME OF ORIGINAL ISSUE DISCOUNT.

  (a) Original issue discount included in income on basis of 
constant interest rate.--
          (1) General rule.--For purposes of this title, there 
        shall be included in the gross income of the holder of 
        any debt instrument having original issue discount, an 
        amount equal to the sum of the daily portions of the 
        original issue discount for each day during the taxable 
        year on which such holder held such debt instrument.
          (2) Exceptions.--Paragraph (1) shall not apply to--
                  (A) Tax-exempt obligations.--Any tax-exempt 
                obligation.
                  (B) United States savings bonds.--Any United 
                States savings bond.
                  (C) Short-term obligations.--Any debt 
                instrument which has a fixed maturity date not 
                more than 1 year from the date of issue.
                  (D) Loans between natural persons.--
                          (i) In general.--Any loan made by a 
                        natural person to another natural 
                        person if--
                                  (I) such loan is not made in 
                                the course of a trade or 
                                business of the lender, and
                                  (II) the amount of such loan 
                                (when increased by the 
                                outstanding amount of prior 
                                loans by such natural person to 
                                such other natural person) does 
                                not exceed $10,000.
                          (ii) Clause (i) not to apply where 
                        tax avoidance a principal purpose.--
                        Clause (i) shall not apply if the loan 
                        has as 1 of its principal purposes the 
                        avoidance of any Federal tax.
                          [(iii) Treatment of husband and 
                        wife.--For purposes of this 
                        subparagraph, a husband and wife shall 
                        be treated as 1 person. The preceding 
                        sentence shall not apply where the 
                        spouses lived apart at all times during 
                        the taxable year in which the loan is 
                        made.]
                          (iii) Treatment of a married 
                        couple.--For purposes of this 
                        subparagraph, a married couple shall be 
                        treated as 1 person. The preceding 
                        sentence shall not apply where the 
                        spouses lived apart at all times during 
                        the taxable year in which the loan is 
                        made.
          (3) Determination of daily portions.--For purposes of 
        paragraph (1), the daily portion of the original issue 
        discount on any debt instrument shall be determined by 
        allocating to each day in any accrual period its 
        ratable portion of the increase during such accrual 
        period in the adjusted issue price of the debt 
        instrument. For purposes of the preceding sentence, the 
        increase in the adjusted issue price for any accrual 
        period shall be an amount equal to the excess (if any) 
        of--
                  (A) the product of--
                          (i) the adjusted issue price of the 
                        debt instrument at the beginning of 
                        such accrual period, and
                          (ii) the yield to maturity 
                        (determined on the basis of compounding 
                        at the close of each accrual period and 
                        properly adjusted for the length of the 
                        accrual period), over
                  (B) the sum of the amounts payable as 
                interest on such debt instrument during such 
                accrual period.
          (4) Adjusted issue price.--For purposes of this 
        subsection, the adjusted issue price of any debt 
        instrument at the beginning of any accrual period is 
        the sum of--
                  (A) the issue price of such debt instrument, 
                plus
                  (B) the adjustments under this subsection to 
                such issue price for all periods before the 
                first day of such accrual period.
          (5) Accrual period.--Except as otherwise provided in 
        regulations prescribed by the Secretary, the term 
        ``accrual period'' means a 6-month period (or shorter 
        period from the date of original issue of the debt 
        instrument) which ends on a day in the calendar year 
        corresponding to the maturity date of the debt 
        instrument or the date 6 months before such maturity 
        date.
          (6) Determination of daily portions where principal 
        subject to acceleration.--
                  (A) In general.--In the case of any debt 
                instrument to which this paragraph applies, the 
                daily portion of the original issue discount 
                shall be determined by allocating to each day 
                in any accrual period its ratable portion of 
                the excess (if any) of--
                          (i) the sum of (I) the present value 
                        determined under subparagraph (B) of 
                        all remaining payments under the debt 
                        instrument as of the close of such 
                        period, and (II) the payments during 
                        the accrual period of amounts included 
                        in the stated redemption price of the 
                        debt instrument, over
                          (ii) the adjusted issue price of such 
                        debt instrument at the beginning of 
                        such period.
                  (B) Determination of present value.--For 
                purposes of subparagraph (A), the present value 
                shall be determined on the basis of--
                          (i) the original yield to maturity 
                        (determined on the basis of compounding 
                        at the close of each accrual period and 
                        properly adjusted for the length of the 
                        accrual period),
                          (ii) events which have occurred 
                        before the close of the accrual period, 
                        and
                          (iii) a prepayment assumption 
                        determined in the manner prescribed by 
                        regulations.
                  (C) Debt instruments to which paragraph 
                applies.--This paragraph applies to--
                          (i) any regular interest in a REMIC 
                        or qualified mortgage held by a REMIC,
                          (ii) any other debt instrument if 
                        payments under such debt instrument may 
                        be accelerated by reason of prepayments 
                        of other obligations securing such debt 
                        instrument (or, to the extent provided 
                        in regulations, by reason of other 
                        events), or
                          (iii) any pool of debt instruments 
                        the yield on which may be affected by 
                        reason of prepayments (or to the extent 
                        provided in regulations, by reason of 
                        other events).
                To the extent provided in regulations 
                prescribed by the Secretary, in the case of a 
                small business engaged in the trade or business 
                of selling tangible personal property at 
                retail, clause (iii) shall not apply to debt 
                instruments incurred in the ordinary course of 
                such trade or business while held by such 
                business.
          (7) Reduction where subsequent holder pays 
        acquisition premium.--
                  (A) Reduction.--For purposes of this 
                subsection, in the case of any purchase after 
                its original issue of a debt instrument to 
                which this subsection applies, the daily 
                portion for any day shall be reduced by an 
                amount equal to the amount which would be the 
                daily portion for such day (without regard to 
                this paragraph) multiplied by the fraction 
                determined under subparagraph (B).
                  (B) Determination of fraction.--For purposes 
                of subparagraph (A), the fraction determined 
                under this subparagraph is a fraction--
                          (i) the numerator of which is the 
                        excess (if any) of--
                                  (I) the cost of such debt 
                                instrument incurred by the 
                                purchaser, over
                                  (II) the issue price of such 
                                debt instrument, increased by 
                                the portion of original issue 
                                discount previously includible 
                                in the gross income of any 
                                holder (computed without regard 
                                to this paragraph), and
                          (ii) the denominator of which is the 
                        sum of the daily portions for such debt 
                        instrument for all days after the date 
                        of such purchase and ending on the 
                        stated maturity date (computed without 
                        regard to this paragraph).
  (b) Exceptions.--This section shall not apply to any holder--
          (1) who has purchased the debt instrument at a 
        premium, or
          (2) which is a life insurance company to which 
        section 811(b) applies.
  (c) Definition and special rule.--
          (1) Purchase defined.--For purposes of this section, 
        the term ``purchase'' means--
                  (A) any acquisition of a debt instrument, 
                where
                  (B) the basis of the debt instrument is not 
                determined in whole or in part by reference to 
                the adjusted basis of such debt instrument in 
                the hands of the person from whom acquired.
          (2) Basis adjustment.--The basis of any debt 
        instrument in the hands of the holder thereof shall be 
        increased by the amount included in his gross income 
        pursuant to this section.

Subchapter Q--READJUSTMENT OF TAX BETWEEN YEARS AND SPECIAL LIMITATIONS

           *       *       *       *       *       *       *

PART II--MITIGATION OF EFFECT OF LIMITATIONS AND OTHER PROVISIONS

           *       *       *       *       *       *       *

SEC. 1313. DEFINITIONS.

  (a) Determination.--For purposes of this part, the term 
``determination'' means--
          (1) a decision by the Tax Court or a judgment, 
        decree, or other order by any court of competent 
        jurisdiction, which has become final;
          (2) a closing agreement made under section 7121;
          (3) a final disposition by the Secretary of a claim 
        for refund. For purposes of this part, a claim for 
        refund shall be deemed finally disposed of by the 
        Secretary--
                  (A) as to items with respect to which the 
                claim was allowed, on the date of allowance of 
                refund or credit or on the date of mailing 
                notice of disallowance (by reason of offsetting 
                items) of the claim for refund, and
                  (B) as to items with respect to which the 
                claim was disallowed, in whole or in part, or 
                as to items applied by the Secretary in 
                reduction of the refund or credit, on 
                expiration of the time for instituting suit 
                with respect thereto (unless suit is instituted 
                before the expiration of such time); or
          (4) under regulations prescribed by the Secretary, an 
        agreement for purposes of this part, signed by the 
        Secretary and by any person, relating to the liability 
        of such person (or the person for whom he acts) in 
        respect of a tax under this subtitle for any taxable 
        period.
  (b) Taxpayer.--Notwithstanding section 7701(a)(14), the term 
``taxpayer'' means any person subject to a tax under the 
applicable revenue law.
  (c) Related taxpayer.--For purposes of this part, the term 
``related taxpayer'' means a taxpayer who, with the taxpayer 
with respect to whom a determination is made, stood, in the 
taxable year with respect to which the erroneous inclusion, 
exclusion, omission, allowance, or disallowance was made, in 
one of the following relationships:
          (1) [husband and wife] spouses ,
          (2) grantor and fiduciary,
          (3) grantor and beneficiary,
          (4) fiduciary and beneficiary, legatee, or heir,
          (5) decedent and decedent's estate,
          (6) partner, or
          (7) member of an affiliated group of corporations (as 
        defined in section 1504).

           *       *       *       *       *       *       *

Subchapter S--TAX TREATMENT OF S CORPORATIONS AND THEIR SHAREHOLDERS

           *       *       *       *       *       *       *

PART I--IN GENERAL

           *       *       *       *       *       *       *

SEC. 1361. S CORPORATION DEFINED.

  (a) S corporation defined.--
          (1) In general.--For purposes of this title, the term 
        ``S corporation'' means, with respect to any taxable 
        year, a small business corporation for which an 
        election under section 1362(a) is in effect for such 
        year.
          (2) C corporation.--For purposes of this title, the 
        term ``C corporation'' means, with respect to any 
        taxable year, a corporation which is not an S 
        corporation for such year.
  (b) Small business corporation.--
          (1) In general.--For purposes of this subchapter, the 
        term ``small business corporation'' means a domestic 
        corporation which is not an ineligible corporation and 
        which does not--
                  (A) have more than 100 shareholders,
                  (B) have as a shareholder a person (other 
                than an estate, a trust described in subsection 
                (c)(2), or an organization described in 
                subsection (c)(6)) who is not an individual,
                  (C) have a nonresident alien as a 
                shareholder, and
                  (D) have more than 1 class of stock.
          (2) Ineligible corporation defined.--For purposes of 
        paragraph (1), the term ``ineligible corporation'' 
        means any corporation which is--
                  (A) a financial institution which uses the 
                reserve method of accounting for bad debts 
                described in section 585,
                  (B) an insurance company subject to tax under 
                subchapter L, or
                  (C) a DISC or former DISC.
          (3) Treatment of certain wholly owned subsidiaries.--
                  (A) In general.--Except as provided in 
                regulations prescribed by the Secretary, for 
                purposes of this title--
                          (i) a corporation which is a 
                        qualified subchapter S subsidiary shall 
                        not be treated as a separate 
                        corporation, and
                          (ii) all assets, liabilities, and 
                        items of income, deduction, and credit 
                        of a qualified subchapter S subsidiary 
                        shall be treated as assets, 
                        liabilities, and such items (as the 
                        case may be) of the S corporation.
                  (B) Qualified subchapter S subsidiary.--For 
                purposes of this paragraph, the term 
                ``qualified subchapter S subsidiary'' means any 
                domestic corporation which is not an ineligible 
                corporation (as defined in paragraph (2)), if--
                          (i) 100 percent of the stock of such 
                        corporation is held by the S 
                        corporation, and
                          (ii) the S corporation elects to 
                        treat such corporation as a qualified 
                        subchapter S subsidiary.
                  (C) Treatment of terminations of qualified 
                subchapter S subsidiary status.--
                          (i) In general.--For purposes of this 
                        title, if any corporation which was a 
                        qualified subchapter S subsidiary 
                        ceases to meet the requirements of 
                        subparagraph (B), such corporation 
                        shall be treated as a new corporation 
                        acquiring all of its assets (and 
                        assuming all of its liabilities) 
                        immediately before such cessation from 
                        the S corporation in exchange for its 
                        stock.
                          (ii) Termination by reason of sale of 
                        stock.--If the failure to meet the 
                        requirements of subparagraph (B) is by 
                        reason of the sale of stock of a 
                        corporation which is a qualified 
                        subchapter S subsidiary, the sale of 
                        such stock shall be treated as if--
                                  (I) the sale were a sale of 
                                an undivided interest in the 
                                assets of such corporation 
                                (based on the percentage of the 
                                corporation's stock sold), and
                                  (II) the sale were followed 
                                by an acquisition by such 
                                corporation of all of its 
                                assets (and the assumption by 
                                such corporation of all of its 
                                liabilities) in a transaction 
                                to which section 351 applies.
                  (D) Election after termination.--If a 
                corporation's status as a qualified subchapter 
                S subsidiary terminates, such corporation (and 
                any successor corporation) shall not be 
                eligible to make--
                          (i) an election under subparagraph 
                        (B)(ii) to be treated as a qualified 
                        subchapter S subsidiary, or
                          (ii) an election under section 
                        1362(a) to be treated as an S 
                        corporation,
                before its 5th taxable year which begins after 
                the 1st taxable year for which such termination 
                was effective, unless the Secretary consents to 
                such election.
                  (E) Information returns.--Except to the 
                extent provided by the Secretary, this 
                paragraph shall not apply to part III of 
                subchapter A of chapter 61 (relating to 
                information returns).
  (c) Special rules for applying subsection (b).--
          (1) Members of a family treated as 1 shareholder.--
                  (A) In general.--For purposes of subsection 
                (b)(1)(A), there shall be treated as one 
                shareholder--
                          (i) [a husband and wife] a married 
                        couple (and their estates), and
                          (ii) all members of a family (and 
                        their estates).
                  (B) Members of a family.--For purposes of 
                this paragraph--
                          (i) In general.--The term ``members 
                        of a family'' means a common ancestor, 
                        any lineal descendant of such common 
                        ancestor, and any spouse or former 
                        spouse of such common ancestor or any 
                        such lineal descendant.
                          (ii) Common ancestor.--An individual 
                        shall not be considered to be a common 
                        ancestor if, on the applicable date, 
                        the individual is more than 6 
                        generations removed from the youngest 
                        generation of shareholders who would 
                        (but for this subparagraph) be members 
                        of the family. For purposes of the 
                        preceding sentence, a spouse (or former 
                        spouse) shall be treated as being of 
                        the same generation as the individual 
                        to whom such spouse is (or was) 
                        married.
                          (iii) Applicable date.--The term 
                        ``applicable date'' means the latest 
                        of--
                                  (I) the date the election 
                                under section 1362(a) is made,
                                  (II) the earliest date that 
                                an individual described in 
                                clause (i) holds stock in the S 
                                corporation, or
                                  (III) October 22, 2004.
                  (C) Effect of adoption, etc..--Any legally 
                adopted child of an individual, any child who 
                is lawfully placed with an individual for legal 
                adoption by the individual, and any eligible 
                foster child of an individual (within the 
                meaning of section 152(f)(1)(C)), shall be 
                treated as a child of such individual by blood.
          (2) Certain trusts permitted as shareholders.--
                  (A) In general.--For purposes of subsection 
                (b)(1)(B), the following trusts may be 
                shareholders:
                          (i) A trust all of which is treated 
                        (under subpart E of part I of 
                        subchapter J of this chapter) as owned 
                        by an individual who is a citizen or 
                        resident of the United States.
                          (ii) A trust which was described in 
                        clause (i) immediately before the death 
                        of the deemed owner and which continues 
                        in existence after such death, but only 
                        for the 2-year period beginning on the 
                        day of the deemed owner's death.
                          (iii) A trust with respect to stock 
                        transferred to it pursuant to the terms 
                        of a will, but only for the 2-year 
                        period beginning on the day on which 
                        such stock is transferred to it.
                          (iv) A trust created primarily to 
                        exercise the voting power of stock 
                        transferred to it.
                          (v) An electing small business trust.
                          (vi) In the case of a corporation 
                        which is a bank (as defined in section 
                        581) or a depository institution 
                        holding company (as defined in section 
                        3(w)(1) of the Federal Deposit 
                        Insurance Act (12 U.S.C. 1813(w)(1)), a 
                        trust which constitutes an individual 
                        retirement account under section 
                        408(a), including one designated as a 
                        Roth IRA under section 408A, but only 
                        to the extent of the stock held by such 
                        trust in such bank or company as of the 
                        date of the enactment of this clause.
                This subparagraph shall not apply to any 
                foreign trust.
                  (B) Treatment as shareholders.--For purposes 
                of subsection (b)(1)--
                          (i) In the case of a trust described 
                        in clause (i) of subparagraph (A), the 
                        deemed owner shall be treated as the 
                        shareholder.
                          (ii) In the case of a trust described 
                        in clause (ii) of subparagraph (A), the 
                        estate of the deemed owner shall be 
                        treated as the shareholder.
                          (iii) In the case of a trust 
                        described in clause (iii) of 
                        subparagraph (A), the estate of the 
                        testator shall be treated as the 
                        shareholder.
                          (iv) In the case of a trust described 
                        in clause (iv) of subparagraph (A), 
                        each beneficiary of the trust shall be 
                        treated as a shareholder.
                          (v) In the case of a trust described 
                        in clause (v) of subparagraph (A), each 
                        potential current beneficiary of such 
                        trust shall be treated as a 
                        shareholder; except that, if for any 
                        period there is no potential current 
                        beneficiary of such trust, such trust 
                        shall be treated as the shareholder 
                        during such period. This clause shall 
                        not apply for purposes of subsection 
                        (b)(1)(C).
                          (vi) In the case of a trust described 
                        in clause (vi) of subparagraph (A), the 
                        individual for whose benefit the trust 
                        was created shall be treated as the 
                        shareholder.
          (3) Estate of individual in bankruptcy may be 
        shareholder.--For purposes of subsection (b)(1)(B), the 
        term ``estate'' includes the estate of an individual in 
        a case under title 11 of the United States Code.
          (4) Differences in common stock voting rights 
        disregarded.--For purposes of subsection (b)(1)(D), a 
        corporation shall not be treated as having more than 1 
        class of stock solely because there are differences in 
        voting rights among the shares of common stock.
          (5) Straight debt safe harbor.--
                  (A) In general.--For purposes of subsection 
                (b)(1)(D), straight debt shall not be treated 
                as a second class of stock.
                  (B) Straight debt defined.--For purposes of 
                this paragraph, the term ``straight debt'' 
                means any written unconditional promise to pay 
                on demand or on a specified date a sum certain 
                in money if--
                          (i) the interest rate (and interest 
                        payment dates) are not contingent on 
                        profits, the borrower's discretion, or 
                        similar factors,
                          (ii) there is no convertibility 
                        (directly or indirectly) into stock, 
                        and
                          (iii) the creditor is an individual 
                        (other than a nonresident alien), an 
                        estate, a trust described in paragraph 
                        (2), or a person which is actively and 
                        regularly engaged in the business of 
                        lending money.
                  (C) Regulations.--The Secretary shall 
                prescribe such regulations as may be necessary 
                or appropriate to provide for the proper 
                treatment of straight debt under this 
                subchapter and for the coordination of such 
                treatment with other provisions of this title.
          (6) Certain exempt organizations permitted as 
        shareholders.--For purposes of subsection (b)(1)(B), an 
        organization which is--
                  (A) described in section 401(a) or 501(c)(3), 
                and
                  (B) exempt from taxation under section 
                501(a),
        may be a shareholder in an S corporation.
  (d) Special rule for qualified subchapter S trust.--
          (1) In general.--In the case of a qualified 
        subchapter S trust with respect to which a beneficiary 
        makes an election under paragraph (2)--
                  (A) such trust shall be treated as a trust 
                described in subsection (c)(2)(A)(i),
                  (B) for purposes of section 678(a), the 
                beneficiary of such trust shall be treated as 
                the owner of that portion of the trust which 
                consists of stock in an S corporation with 
                respect to which the election under paragraph 
                (2) is made, and
                  (C) for purposes of applying sections 465 and 
                469 to the beneficiary of the trust, the 
                disposition of the S corporation stock by the 
                trust shall be treated as a disposition by such 
                beneficiary.
          (2) Election.--
                  (A) In general.--A beneficiary of a qualified 
                subchapter S trust (or his legal 
                representative) may elect to have this 
                subsection apply.
                  (B) Manner and time of election.--
                          (i) Separate election with respect to 
                        each corporation.--An election under 
                        this paragraph shall be made separately 
                        with respect to each corporation the 
                        stock of which is held by the trust.
                          (ii) Elections with respect to 
                        successive income beneficiaries.--If 
                        there is an election under this 
                        paragraph with respect to any 
                        beneficiary, an election under this 
                        paragraph shall be treated as made by 
                        each successive beneficiary unless such 
                        beneficiary affirmatively refuses to 
                        consent to such election.
                          (iii) Time, manner, and form of 
                        election.--Any election, or refusal, 
                        under this paragraph shall be made in 
                        such manner and form, and at such time, 
                        as the Secretary may prescribe.
                  (C) Election irrevocable.--An election under 
                this paragraph, once made, may be revoked only 
                with the consent of the Secretary.
                  (D) Grace period.--An election under this 
                paragraph shall be effective up to 15 days and 
                2 months before the date of the election.
          (3) Qualified subchapter S trust.--For purposes of 
        this subsection, the term ``qualified subchapter S 
        trust'' means a trust--
                  (A) the terms of which require that--
                          (i) during the life of the current 
                        income beneficiary, there shall be only 
                        1 income beneficiary of the trust,
                          (ii) any corpus distributed during 
                        the life of the current income 
                        beneficiary may be distributed only to 
                        such beneficiary,
                          (iii) the income interest of the 
                        current income beneficiary in the trust 
                        shall terminate on the earlier of such 
                        beneficiary's death or the termination 
                        of the trust, and
                          (iv) upon the termination of the 
                        trust during the life of the current 
                        income beneficiary, the trust shall 
                        distribute all of its assets to such 
                        beneficiary, and
                  (B) all of the income (within the meaning of 
                section 643(b)) of which is distributed (or 
                required to be distributed) currently to 1 
                individual who is a citizen or resident of the 
                United States.
        A substantially separate and independent share of a 
        trust within the meaning of section 663(c) shall be 
        treated as a separate trust for purposes of this 
        subsection and subsection (c).
          (4) Trust ceasing to be qualified.--
                  (A) Failure to meet requirements of paragraph 
                (3)(A).--If a qualified subchapter S trust 
                ceases to meet any requirement of paragraph 
                (3)(A), the provisions of this subsection shall 
                not apply to such trust as of the date it 
                ceases to meet such requirement.
                  (B) Failure to meet requirements of paragraph 
                (3)(B).--If any qualified subchapter S trust 
                ceases to meet any requirement of paragraph 
                (3)(B) but continues to meet the requirements 
                of paragraph (3)(A), the provisions of this 
                subsection shall not apply to such trust as of 
                the first day of the first taxable year 
                beginning after the first taxable year for 
                which it failed to meet the requirements of 
                paragraph (3)(B).
  (e) Electing small business trust defined.--
          (1) Electing small business trust.--For purposes of 
        this section--
                  (A) In general.--Except as provided in 
                subparagraph (B), the term ``electing small 
                business trust'' means any trust if--
                          (i) such trust does not have as a 
                        beneficiary any person other than (I) 
                        an individual, (II) an estate, (III) an 
                        organization described in paragraph 
                        (2), (3), (4), or (5) of section 
                        170(c), or (IV) an organization 
                        described in section 170(c)(1) which 
                        holds a contingent interest in such 
                        trust and is not a potential current 
                        beneficiary,
                          (ii) no interest in such trust was 
                        acquired by purchase, and
                          (iii) an election under this 
                        subsection applies to such trust.
                  (B) Certain trusts not eligible.--The term 
                ``electing small business trust'' shall not 
                include--
                          (i) any qualified subchapter S trust 
                        (as defined in subsection (d)(3)) if an 
                        election under subsection (d)(2) 
                        applies to any corporation the stock of 
                        which is held by such trust,
                          (ii) any trust exempt from tax under 
                        this subtitle, and
                          (iii) any charitable remainder 
                        annuity trust or charitable remainder 
                        unitrust (as defined in section 
                        664(d)).
                  (C) Purchase.--For purposes of subparagraph 
                (A), the term ``purchase'' means any 
                acquisition if the basis of the property 
                acquired is determined under section 1012.
          (2) Potential current beneficiary.--For purposes of 
        this section, the term ``potential current 
        beneficiary'' means, with respect to any period, any 
        person who at any time during such period is entitled 
        to, or at the discretion of any person may receive, a 
        distribution from the principal or income of the trust 
        (determined without regard to any power of appointment 
        to the extent such power remains unexercised at the end 
        of such period). If a trust disposes of all of the 
        stock which it holds in an S corporation, then, with 
        respect to such corporation, the term ``potential 
        current beneficiary'' does not include any person who 
        first met the requirements of the preceding sentence 
        during the 1-year period ending on the date of such 
        disposition.
          (3) Election.--An election under this subsection 
        shall be made by the trustee. Any such election shall 
        apply to the taxable year of the trust for which made 
        and all subsequent taxable years of such trust unless 
        revoked with the consent of the Secretary.
          (4) Cross reference.--For special treatment of 
        electing small business trusts, see section 641(c).
  (f) Restricted bank director stock.--
          (1) In general.--Restricted bank director stock shall 
        not be taken into account as outstanding stock of the S 
        corporation in applying this subchapter (other than 
        section 1368(f)).
          (2) Restricted bank director stock.--For purposes of 
        this subsection, the term ``restricted bank director 
        stock'' means stock in a bank (as defined in section 
        581) or a depository institution holding company (as 
        defined in section 3(w)(1) of the Federal Deposit 
        Insurance Act (12 U.S.C. 1813(w)(1))), if such stock--
                  (A) is required to be held by an individual 
                under applicable Federal or State law in order 
                to permit such individual to serve as a 
                director, and
                  (B) is subject to an agreement with such bank 
                or company (or a corporation which controls 
                (within the meaning of section 368(c)) such 
                bank or company) pursuant to which the holder 
                is required to sell back such stock (at the 
                same price as the individual acquired such 
                stock) upon ceasing to hold the office of 
                director.
          (3) Cross reference.--For treatment of certain 
        distributions with respect to restricted bank director 
        stock, see section 1368(f).
  (g) Special rule for bank required to change from the reserve 
method of accounting on becoming S corporation.--In the case of 
a bank which changes from the reserve method of accounting for 
bad debts described in section 585 or 593 for its first taxable 
year for which an election under section 1362(a) is in effect, 
the bank may elect to take into account any adjustments under 
section 481 by reason of such change for the taxable year 
immediately preceding such first taxable year.

           *       *       *       *       *       *       *

CHAPTER 6--CONSOLIDATED RETURNS

           *       *       *       *       *       *       *

Subchapter B--RELATED RULES

           *       *       *       *       *       *       *

PART II--CERTAIN CONTROLLED CORPORATIONS

           *       *       *       *       *       *       *

SEC. 1563. DEFINITIONS AND SPECIAL RULES.

  (a) Controlled group of corporations.--For purposes of this 
part, the term ``controlled group of corporations'' means any 
group of--
          (1) Parent-subsidiary controlled group.--One or more 
        chains of corporations connected through stock 
        ownership with a common parent corporation if--
                  (A) stock possessing at least 80 percent of 
                the total combined voting power of all classes 
                of stock entitled to vote or at least 80 
                percent of the total value of shares of all 
                classes of stock of each of the corporations, 
                except the common parent corporation, is owned 
                (within the meaning of subsection (d)(1)) by 
                one or more of the other corporations; and
                  (B) the common parent corporation owns 
                (within the meaning of subsection (d)(1)) stock 
                possessing at least 80 percent of the total 
                combined voting power of all classes of stock 
                entitled to vote or at least 80 percent of the 
                total value of shares of all classes of stock 
                of at least one of the other corporations, 
                excluding, in computing such voting power or 
                value, stock owned directly by such other 
                corporations.
          (2) Brother-sister controlled group.--Two or more 
        corporations if 5 or fewer persons who are individuals, 
        estates, or trusts own (within the meaning of 
        subsection (d)(2)) stock possessing more than 50 
        percent of the total combined voting power of all 
        classes of stock entitled to vote or more than 50 
        percent of the total value of shares of all classes of 
        stock of each corporation, taking into account the 
        stock ownership of each such person only to the extent 
        such stock ownership is identical with respect to each 
        such corporation.
          (3) Combined group.--Three or more corporations each 
        of which is a member of a group of corporations 
        described in paragraph (1) or (2), and one of which--
                  (A) is a common parent corporation included 
                in a group of corporations described in 
                paragraph (1), and also
                  (B) is included in a group of corporations 
                described in paragraph (2).
          (4) Certain insurance companies.--Two or more 
        insurance companies subject to taxation under section 
        801 which are members of a controlled group of 
        corporations described in paragraph (1), (2), or (3). 
        Such insurance companies shall be treated as a 
        controlled group of corporations separate from any 
        other corporations which are members of the controlled 
        group of corporations described in paragraph (1), (2), 
        or (3).
  (b) Component member.--
          (1) General rule.--For purposes of this part, a 
        corporation is a component member of a controlled group 
        of corporations on a December 31 of any taxable year 
        (and with respect to the taxable year which includes 
        such December 31) if such corporation--
                  (A) is a member of such controlled group of 
                corporations on the December 31 included in 
                such year and is not treated as an excluded 
                member under paragraph (2), or
                  (B) is not a member of such controlled group 
                of corporations on the December 31 included in 
                such year but is treated as an additional 
                member under paragraph (3).
          (2) Excluded members.--A corporation which is a 
        member of a controlled group of corporations on 
        December 31 of any taxable year shall be treated as an 
        excluded member of such group for the taxable year 
        including such December 31 if such corporation--
                  (A) is a member of such group for less than 
                one-half the number of days in such taxable 
                year which precede such December 31,
                  (B) is exempt from taxation under section 
                501(a) (except a corporation which is subject 
                to tax on its unrelated business taxable income 
                under section 511) for such taxable year,
                  (C) is a foreign corporation subject to tax 
                under section 881 for such taxable year,
                  (D) is an insurance company subject to 
                taxation under section 801 (other than an 
                insurance company which is a member of a 
                controlled group described in subsection 
                (a)(4)), or
                  (E) is a franchised corporation, as defined 
                in subsection (f)(4).
          (3) Additional members.--A corporation which--
                  (A) was a member of a controlled group of 
                corporations at any time during a calendar 
                year,
                  (B) is not a member of such group on December 
                31 of such calendar year, and
                  (C) is not described, with respect to such 
                group, in subparagraph (B), (C), (D), or (E) of 
                paragraph (2),
        shall be treated as an additional member of such group 
        on December 31 for its taxable year including such 
        December 31 if it was a member of such group for one-
        half (or more) of the number of days in such taxable 
        year which precede such December 31.
          (4) Overlapping groups.--If a corporation is a 
        component member of more than one controlled group of 
        corporations with respect to any taxable year, such 
        corporation shall be treated as a component member of 
        only one controlled group. The determination as to the 
        group of which such corporation is a component member 
        shall be made under regulations prescribed by the 
        Secretary which are consistent with the purposes of 
        this part.
  (c) Certain stock excluded.--
          (1) General rule.--For purposes of this part, the 
        term ``stock'' does not include--
                  (A) nonvoting stock which is limited and 
                preferred as to dividends,
                  (B) treasury stock, and
                  (C) stock which is treated as ``excluded 
                stock'' under paragraph (2).
          (2) Stock treated as ``excluded stock''.--
                  (A) Parent-subsidiary controlled group.--For 
                purposes of subsection (a)(1), if a corporation 
                (referred to in this paragraph as ``parent 
                corporation'') owns (within the meaning of 
                subsections (d)(1) and (e)(4)), 50 percent or 
                more of the total combined voting power of all 
                classes of stock entitled to vote or 50 percent 
                or more of the total value of shares of all 
                classes of stock in another corporation 
                (referred to in this paragraph as ``subsidiary 
                corporation''), the following stock of the 
                subsidiary corporation shall be treated as 
                excluded stock--
                          (i) stock in the subsidiary 
                        corporation held by a trust which is 
                        part of a plan of deferred compensation 
                        for the benefit of the employees of the 
                        parent corporation or the subsidiary 
                        corporation,
                          (ii) stock in the subsidiary 
                        corporation owned by an individual 
                        (within the meaning of subsection 
                        (d)(2)) who is a principal stockholder 
                        or officer of the parent corporation. 
                        For purposes of this clause, the term 
                        ``principal stockholder'' of a 
                        corporation means an individual who 
                        owns (within the meaning of subsection 
                        (d)(2)) 5 percent or more of the total 
                        combined voting power of all classes of 
                        stock entitled to vote or 5 percent or 
                        more of the total value of shares of 
                        all classes of stock in such 
                        corporation,
                          (iii) stock in the subsidiary 
                        corporation owned (within the meaning 
                        of subsection (d)(2)) by an employee of 
                        the subsidiary corporation if such 
                        stock is subject to conditions which 
                        run in favor of such parent (or 
                        subsidiary) corporation and which 
                        substantially restrict or limit the 
                        employee's right (or if the employee 
                        constructively owns such stock, the 
                        direct owner's right) to dispose of 
                        such stock, or
                          (iv) stock in the subsidiary 
                        corporation owned (within the meaning 
                        of subsection (d)(2)) by an 
                        organization (other than the parent 
                        corporation) to which section 501 
                        (relating to certain educational and 
                        charitable organizations which are 
                        exempt from tax) applies and which is 
                        controlled directly or indirectly by 
                        the parent corporation or subsidiary 
                        corporation, by an individual, estate, 
                        or trust that is a principal 
                        stockholder (within the meaning of 
                        clause (ii)) of the parent corporation, 
                        by an officer of the parent 
                        corporation, or by any combination 
                        thereof.
                  (B) Brother-sister controlled group.--For 
                purposes of subsection (a)(2), if 5 or fewer 
                persons who are individuals, estates, or trusts 
                (referred to in this subparagraph as ``common 
                owners'') own (within the meaning of subsection 
                (d)(2)), 50 percent or more of the total 
                combined voting power of all classes of stock 
                entitled to vote or 50 percent or more of the 
                total value of shares of all classes of stock 
                in a corporation, the following stock of such 
                corporation shall be treated as excluded 
                stock--
                          (i) stock in such corporation held by 
                        an employees' trust described in 
                        section 401(a) which is exempt from tax 
                        under section 501(a), if such trust is 
                        for the benefit of the employees of 
                        such corporation,
                          (ii) stock in such corporation owned 
                        (within the meaning of subsection 
                        (d)(2)) by an employee of the 
                        corporation if such stock is subject to 
                        conditions which run in favor of any of 
                        such common owners (or such 
                        corporation) and which substantially 
                        restrict or limit the employee's right 
                        (or if the employee constructively owns 
                        such stock, the direct owner's right) 
                        to dispose of such stock. If a 
                        condition which limits or restricts the 
                        employee's right (or the direct owner's 
                        right) to dispose of such stock also 
                        applies to the stock held by any of the 
                        common owners pursuant to a bona fide 
                        reciprocal stock purchase arrangement, 
                        such condition shall not be treated as 
                        one which restricts or limits the 
                        employee's right to dispose of such 
                        stock, or
                          (iii) stock in such corporation owned 
                        (within the meaning of subsection 
                        (d)(2)) by an organization to which 
                        section 501 (relating to certain 
                        educational and charitable 
                        organizations which are exempt from 
                        tax) applies and which is controlled 
                        directly or indirectly by such 
                        corporation, by an individual, estate, 
                        or trust that is a principal 
                        stockholder (within the meaning of 
                        subparagraph (A)(ii)) of such 
                        corporation, by an officer of such 
                        corporation, or by any combination 
                        thereof.
  (d) Rules for determining stock ownership.--
          (1) Parent-subsidiary controlled group.--For purposes 
        of determining whether a corporation is a member of a 
        parent-subsidiary controlled group of corporations 
        (within the meaning of subsection (a)(1)), stock owned 
        by a corporation means--
                  (A) stock owned directly by such corporation, 
                and
                  (B) stock owned with the application of 
                paragraphs (1), (2), and (3) of subsection (e).
          (2) Brother-sister controlled group.--For purposes of 
        determining whether a corporation is a member of a 
        brother-sister controlled group of corporations (within 
        the meaning of subsection (a)(2)), stock owned by a 
        person who is an individual, estate, or trust means--
                  (A) stock owned directly by such person, and
                  (B) stock owned with the application of 
                subsection (e).
  (e) Constructive ownership.--
          (1) Options.--If any person has an option to acquire 
        stock, such stock shall be considered as owned by such 
        person. For purposes of this paragraph, an option to 
        acquire such an option, and each one of a series of 
        such options, shall be considered as an option to 
        acquire such stock.
          (2) Attribution from partnerships.--Stock owned, 
        directly or indirectly, by or for a partnership shall 
        be considered as owned by any partner having an 
        interest of 5 percent or more in either the capital or 
        profits of the partnership in proportion to his 
        interest in capital or profits, whichever such 
        proportion is the greater.
          (3) Attribution from estates or trusts.--(A) Stock 
        owned, directly or indirectly, by or for an estate or 
        trust shall be considered as owned by any beneficiary 
        who has an actuarial interest of 5 percent or more in 
        such stock, to the extent of such actuarial interest. 
        For purposes of this subparagraph, the actuarial 
        interest of each beneficiary shall be determined by 
        assuming the maximum exercise of discretion by the 
        fiduciary in favor of such beneficiary and the maximum 
        use of such stock to satisfy his rights as a 
        beneficiary.
          (B) Stock owned, directly or indirectly, by or for 
        any portion of a trust of which a person is considered 
        the owner under subpart E of part I of subchapter J 
        (relating to grantors and others treated as substantial 
        owners) shall be considered as owned by such person.
          (C) This paragraph shall not apply to stock owned by 
        any employees' trust described in section 401(a) which 
        is exempt from tax under section 501(a).
          (4) Attribution from corporations.--Stock owned, 
        directly or indirectly, by or for a corporation shall 
        be considered as owned by any person who owns (within 
        the meaning of subsection (d)) 5 percent or more in 
        value of its stock in that proportion which the value 
        of the stock which such person so owns bears to the 
        value of all the stock in such corporation.
          (5) Spouse.--An individual shall be considered as 
        owning stock in a corporation owned, directly or 
        indirectly, by or for [his spouse] the individual's 
        spouse (other than a spouse who is legally separated 
        from the individual under a decree of divorce whether 
        interlocutory or final, or a decree of separate 
        maintenance), except in the case of a corporation with 
        respect to which each of the following conditions is 
        satisfied for its taxable year--
                  (A) The individual does not, at any time 
                during such taxable year, own directly any 
                stock in such corporation;
                  (B) The individual is not a director or 
                employee and does not participate in the 
                management of such corporation at any time 
                during such taxable year;
                  (C) Not more than 50 percent of such 
                corporation's gross income for such taxable 
                year was derived from royalties, rents, 
                dividends, interest, and annuities; and
                  (D) Such stock in such corporation is not, at 
                any time during such taxable year, subject to 
                conditions which substantially restrict or 
                limit the spouse's right to dispose of such 
                stock and which run in favor of the individual 
                or [his children] the individual's children who 
                have not attained the age of 21 years.
          (6) Children, grandchildren, parents, and 
        grandparents.--
                  (A) Minor children.--An individual shall be 
                considered as owning stock owned, directly or 
                indirectly, by or for [his children] the 
                individual's children who have not attained the 
                age of 21 years, and, if the individual has not 
                attained the age of 21 years, the stock owned, 
                directly or indirectly, by or for [his parents] 
                the individual's parents .
                  (B) Adult children and grandchildren.--An 
                individual who owns (within the meaning of 
                subsection (d)(2), but without regard to this 
                subparagraph) more than 50 percent of the total 
                combined voting power of all classes of stock 
                entitled to vote or more than 50 percent of the 
                total value of shares of all classes of stock 
                in a corporation shall be considered as owning 
                the stock in such corporation owned, directly 
                or indirectly, by or for [his parents] the 
                individual's parents , grandparents, 
                grandchildren, and children who have attained 
                the age of 21 years.
                  (C) Adopted child.--For purposes of this 
                section, a legally adopted child of an 
                individual shall be treated as a child of such 
                individual by blood.
  (f) Other definitions and rules.--
          (1) Employee defined.--For purposes of this section 
        the term ``employee'' has the same meaning such term is 
        given by paragraphs (1) and (2) of section 3121(d).
          (2) Operating rules.--
                  (A) In general.--Except as provided in 
                subparagraph (B), stock constructively owned by 
                a person by reason of the application of 
                paragraph (1), (2), (3), (4), (5), or (6) of 
                subsection (e) shall, for purposes of applying 
                such paragraphs, be treated as actually owned 
                by such person.
                  (B) Members of family.--Stock constructively 
                owned by an individual by reason of the 
                application of paragraph (5) or (6) of 
                subsection (e) shall not be treated as owned by 
                [him] the individual for purposes of again 
                applying such paragraphs in order to make 
                another the constructive owner of such stock.
          (3) Special rules.--For purposes of this section--
                  (A) If stock may be considered as owned by a 
                person under subsection (e)(1) and under any 
                other paragraph of subsection (e), it shall be 
                considered as owned by him under subsection 
                (e)(1).
                  (B) If stock is owned (within the meaning of 
                subsection (d)) by two or more persons, such 
                stock shall be considered as owned by the 
                person whose ownership of such stock results in 
                the corporation being a component member of a 
                controlled group. If by reason of the preceding 
                sentence, a corporation would (but for this 
                sentence) become a component member of two 
                controlled groups, it shall be treated as a 
                component member of one controlled group. The 
                determination as to the group of which such 
                corporation is a component member shall be made 
                under regulations prescribed by the Secretary 
                which are consistent with the purposes of this 
                part.
                  (C) If stock is owned by a person within the 
                meaning of subsection (d) and such ownership 
                results in the corporation being a component 
                member of a controlled group, such stock shall 
                not be treated as excluded stock under 
                subsection (c)(2), if by reason of treating 
                such stock as excluded stock the result is that 
                such corporation is not a component member of a 
                controlled group of corporations.
          (4) Franchised corporation.--If--
                  (A) a parent corporation (as defined in 
                subsection (c)(2)(A)), or a common owner (as 
                defined in subsection (c)(2)(B)), of a 
                corporation which is a member of a controlled 
                group of corporations is under a duty (arising 
                out of a written agreement) to sell stock of 
                such corporation (referred to in this paragraph 
                as ``franchised corporation'') which is 
                franchised to sell the products of another 
                member, or the common owner, of such controlled 
                group;
                  (B) such stock is to be sold to an employee 
                (or employees) of such franchised corporation 
                pursuant to a bona fide plan designed to 
                eliminate the stock ownership of the parent 
                corporation or of the common owner in the 
                franchised corporation;
                  (C) such plan--
                          (i) provides a reasonable selling 
                        price for such stock, and
                          (ii) requires that a portion of the 
                        employee's share of the profits of such 
                        corporation (whether received as 
                        compensation or as a dividend) be 
                        applied to the purchase of such stock 
                        (or the purchase of notes, bonds, 
                        debentures or other similar evidence of 
                        indebtedness of such franchised 
                        corporation held by such parent 
                        corporation or common owner);
                  (D) such employee (or employees) owns 
                directly more than 20 percent of the total 
                value of shares of all classes of stock in such 
                franchised corporation;
                  (E) more than 50 percent of the inventory of 
                such franchised corporation is acquired from 
                members of the controlled group, the common 
                owner, or both; and
                  (F) all of the conditions contained in 
                subparagraphs (A), (B), (C), (D), and (E) have 
                been met for one-half (or more) of the number 
                of days preceding the December 31 included 
                within the taxable year (or if the taxable year 
                does not include December 31, the last day of 
                such year) of the franchised corporation,
        then such franchised corporation shall be treated as an 
        excluded member of such group, under subsection (b)(2), 
        for such taxable year.
          (5) Brother-sister controlled group definition for 
        provisions other than this part.--
                  (A) In general.--Except as specifically 
                provided in an applicable provision, subsection 
                (a)(2) shall be applied to an applicable 
                provision as if it read as follows:
          ``(2) Brother-sister controlled group.--``Two or more 
        corporations if 5 or fewer persons who are individuals, 
        estates, or trusts own (within the meaning of 
        subsection (d)(2) stock possessing--
                  ``(A) at least 80 percent of the total 
                combined voting power of all classes of stock 
                entitled to vote, or at least 80 percent of the 
                total value of shares of all classes of stock, 
                of each corporation, and
                  ``(B) more than 50 percent of the total 
                combined voting power of all classes of stock 
                entitled to vote or more than 50 percent of the 
                total value of shares of all classes of stock 
                of each corporation, taking into account the 
                stock ownership of each such person only to the 
                extent such stock ownership is identical with 
                respect to each such corporation.''
                  (B) Applicable provision.--For purposes of 
                this paragraph, an applicable provision is any 
                provision of law (other than this part) which 
                incorporates the definition of controlled group 
                of corporations under subsection (a).

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Subtitle B--Estate and Gift Taxes

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CHAPTER 11--ESTATE TAX

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Subchapter A--ESTATES OF CITIZENS OR RESIDENTS

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PART II--CREDITS AGAINST TAX

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SEC. 2012. CREDIT FOR GIFT TAX.

  (a) In general.--If a tax on a gift has been paid under 
chapter 12 (sec. 2501 and following), or under corresponding 
provisions of prior laws, and thereafter on the death of the 
donor any amount in respect of such gift is required to be 
included in the value of the gross estate of the decedent for 
purposes of this chapter, then there shall be credited against 
the tax imposed by section 2001 the amount of the tax paid on a 
gift under chapter 12, or under corresponding provisions of 
prior laws, with respect to so much of the property which 
constituted the gift as is included in the gross estate, except 
that the amount of such credit shall not exceed an amount which 
bears the same ratio to the tax imposed by section 2001 (after 
deducting from such tax the unified credit provided by section 
2010) as the value (at the time of the gift or at the time of 
the death, whichever is lower) of so much of the property which 
constituted the gift as is included in the gross estate bears 
to the value of the entire gross estate reduced by the 
aggregate amount of the charitable and marital deductions 
allowed under sections 2055, 2056, and 2106(a)(2).
  (b) Valuation reductions.--In applying, with respect to any 
gift, the ratio stated in subsection (a), the value at the time 
of the gift or at the time of the death, referred to in such 
ratio, shall be reduced--
          (1) by such amount as will properly reflect the 
        amount of such gift which was excluded in determining 
        (for purposes of section 2503(a)), or of corresponding 
        provisions of prior laws, the total amount of gifts 
        made during the calendar quarter (or calendar year if 
        the gift was made before January 1, 1971) in which the 
        gift was made;
          (2) if a deduction with respect to such gift is 
        allowed under section 2056(a) (relating to marital 
        deduction), then by the amount of such value, reduced 
        as provided in paragraph (1); and
          (3) if a deduction with respect to such gift is 
        allowed under sections 2055 or 2106(a)(2) (relating to 
        charitable deduction), then by the amount of such 
        value, reduced as provided in paragraph (1) of this 
        subsection.
  (c) Where gift considered made one-half by spouse.--Where the 
decedent was the donor of the gift but, under the provisions of 
section 2513, or corresponding provisions of prior laws, the 
gift was considered as made one-half by [his spouse] the 
decedent's spouse --
          (1) the term ``the amount of the tax paid on a gift 
        under chapter 12'', as used in subsection (a), includes 
        the amounts paid with respect to each half of such 
        gift, the amount paid with respect to each being 
        computed in the manner provided in subsection (d); and
          (2) in applying, with respect to such gift, the ratio 
        stated in subsection (a), the value at the time of the 
        gift or at the time of the death, referred to in such 
        ratio, includes such value with respect to each half of 
        such gift, each such value being reduced as provided in 
        paragraph (1) of subsection (b).
  (d) Computation of amount of gift tax paid.--
          (1) Amount of tax.--For purposes of subsection (a), 
        the amount of tax paid on a gift under chapter 12, or 
        under corresponding provisions of prior laws, with 
        respect to any gift shall be an amount which bears the 
        same ratio to the total tax paid for the calendar 
        quarter (or calendar year if the gift was made before 
        January 1, 1971) in which the gift was made as the 
        amount of such gift bears to the total amount of 
        taxable gifts (computed without deduction of the 
        specific exemption) for such quarter or year.
          (2) Amount of gift.--For purposes of paragraph (1), 
        the ``amount of such gift'' shall be the amount 
        included with respect to such gift in determining (for 
        the purposes of section 2503(a), or of corresponding 
        provisions of prior laws) the total amount of gifts 
        made during such quarter or year, reduced by the amount 
        of any deduction allowed with respect to such gift 
        under section 2522, or under corresponding provisions 
        of prior laws (relating to charitable deduction), or 
        under section 2523 (relating to marital deduction).
  (e) Section inapplicable to gifts made after December 31, 
1976.--No credit shall be allowed under this section with 
respect to the amount of any tax paid under chapter 12 on any 
gift made after December 31, 1976.

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PART III--GROSS ESTATE

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SEC. 2032A. VALUATION OF CERTAIN FARM, ETC., REAL PROPERTY.

  (a) Value based on use under which property qualifies.--
          (1) General rule.--If--
                  (A) the decedent was (at the time of his 
                death) a citizen or resident of the United 
                States, and
                  (B) the executor elects the application of 
                this section and files the agreement referred 
                to in subsection (d)(2),
        then, for purposes of this chapter, the value of 
        qualified real property shall be its value for the use 
        under which it qualifies, under subsection (b), as 
        qualified real property.
          (2) Limitation on aggregate reduction in fair market 
        value.--The aggregate decrease in the value of 
        qualified real property taken into account for purposes 
        of this chapter which results from the application of 
        paragraph (1) with respect to any decedent shall not 
        exceed $750,000.
          (3) Inflation adjustment.--In the case of estates of 
        decedents dying in a calendar year after 1998, the 
        $750,000 amount contained in paragraph (2) shall be 
        increased by an amount equal to--
                  (A) $750,000, multiplied by
                  (B) the cost-of-living adjustment determined 
                under section 1(f)(3) for such calendar year by 
                substituting ``calendar year 1997'' for 
                ``calendar year 2016'' in subparagraph (A)(ii) 
                thereof.
        If any amount as adjusted under the preceding sentence 
        is not a multiple of $10,000, such amount shall be 
        rounded to the next lowest multiple of $10,000.
  (b) Qualified real property.--
          (1) In general.--For purposes of this section, the 
        term ``qualified real property'' means real property 
        located in the United States which was acquired from or 
        passed from the decedent to a qualified heir of the 
        decedent and which, on the date of the decedent's 
        death, was being used for a qualified use by the 
        decedent or a member of the decedent's family, but only 
        if--
                  (A) 50 percent or more of the adjusted value 
                of the gross estate consists of the adjusted 
                value of real or personal property which--
                          (i) on the date of the decedent's 
                        death, was being used for a qualified 
                        use by the decedent or a member of the 
                        decedent's family, and
                          (ii) was acquired from or passed from 
                        the decedent to a qualified heir of the 
                        decedent.
                  (B) 25 percent or more of the adjusted value 
                of the gross estate consists of the adjusted 
                value of real property which meets the 
                requirements of subparagraphs (A)(ii) and (C),
                  (C) during the 8-year period ending on the 
                date of the decedent's death there have been 
                periods aggregating 5 years or more during 
                which--
                          (i) such real property was owned by 
                        the decedent or a member of the 
                        decedent's family and used for a 
                        qualified use by the decedent or a 
                        member of the decedent's family, and
                          (ii) there was material participation 
                        by the decedent or a member of the 
                        decedent's family in the operation of 
                        the farm or other business, and
                  (D) such real property is designated in the 
                agreement referred to in subsection (d)(2).
          (2) Qualified use.--For purposes of this section, the 
        term ``qualified use'' means the devotion of the 
        property to any of the following:
                  (A) use as a farm for farming purposes, or
                  (B) use in a trade or business other than the 
                trade or business of farming.
          (3) Adjusted value.--For purposes of paragraph (1), 
        the term ``adjusted value'' means--
                  (A) in the case of the gross estate, the 
                value of the gross estate for purposes of this 
                chapter (determined without regard to this 
                section), reduced by any amounts allowable as a 
                deduction under paragraph (4) of section 
                2053(a), or
                  (B) in the case of any real or personal 
                property, the value of such property for 
                purposes of this chapter (determined without 
                regard to this section), reduced by any amounts 
                allowable as a deduction in respect of such 
                property under paragraph (4) of section 
                2053(a).
          (4) Decedents who are retired or disabled.--
                  (A) In general.--If, on the date of the 
                decedent's death, the requirements of paragraph 
                (1)(C)(ii) with respect to the decedent for any 
                property are not met, and the decedent--
                          (i) was receiving old-age benefits 
                        under title II of the Social Security 
                        Act for a continuous period ending on 
                        such date, or
                          (ii) was disabled for a continuous 
                        period ending on such date,
                then paragraph (1)(C)(ii) shall be applied with 
                respect to such property by substituting ``the 
                date on which the longer of such continuous 
                periods began'' for ``the date of the 
                decedent's death'' in paragraph (1)(C).
                  (B) Disabled defined.--For purposes of 
                subparagraph (A), an individual shall be 
                disabled if such individual has a mental or 
                physical impairment which renders him unable to 
                materially participate in the operation of the 
                farm or other business.
                  (C) Coordination with recapture.--For 
                purposes of subsection (c)(6)(B)(i), if the 
                requirements of paragraph (1)(C)(ii) are met 
                with respect to any decedent by reason of 
                subparagraph (A), the period ending on the date 
                on which the continuous period taken into 
                account under subparagraph (A) began shall be 
                treated as the period immediately before the 
                decedent's death.
          (5) Special rules for surviving spouses.--
                  (A) In general.--If property is qualified 
                real property with respect to a decedent 
                (hereinafter in this paragraph referred to as 
                the ``first decedent'') and such property was 
                acquired from or passed from the first decedent 
                to the surviving spouse of the first decedent, 
                for purposes of applying this subsection and 
                subsection (c) in the case of the estate of 
                such surviving spouse, active management of the 
                farm or other business by the surviving spouse 
                shall be treated as material participation by 
                such surviving spouse in the operation of such 
                farm or business.
                  (B) Special rule.--For the purposes of 
                subparagraph (A), the determination of whether 
                property is qualified real property with 
                respect to the first decedent shall be made 
                without regard to subparagraph (D) of paragraph 
                (1) and without regard to whether an election 
                under this section was made.
                  (C) Coordination with paragraph (4).--In any 
                case in which to do so will enable the 
                requirements of paragraph (1)(C)(ii) to be met 
                with respect to the surviving spouse, this 
                subsection and subsection (c) shall be applied 
                by taking into account any application of 
                paragraph (4).
  (c) Tax treatment of dispositions and failures to use for 
qualified use.--
          (1) Imposition of additional estate tax.--If, within 
        10 years after the decedent's death and before the 
        death of the qualified heir--
                  (A) the qualified heir disposes of any 
                interest in qualified real property (other than 
                by a disposition to a member of his family), or
                  (B) the qualified heir ceases to use for the 
                qualified use the qualified real property which 
                was acquired (or passed) from the decedent,
        then, there is hereby imposed an additional estate tax.
          (2) Amount of additional tax.--
                  (A) In general.--The amount of the additional 
                tax imposed by paragraph (1) with respect to 
                any interest shall be the amount equal to the 
                lesser of--
                          (i) the adjusted tax difference 
                        attributable to such interest, or
                          (ii) the excess of the amount 
                        realized with respect to the interest 
                        (or, in any case other than a sale or 
                        exchange at arm's length, the fair 
                        market value of the interest) over the 
                        value of the interest determined under 
                        subsection (a).
                  (B) Adjusted tax difference attributable to 
                interest.--For purposes of subparagraph (A), 
                the adjusted tax difference attributable to an 
                interest is the amount which bears the same 
                ratio to the adjusted tax difference with 
                respect to the estate (determined under 
                subparagraph (C)) as--
                          (i) the excess of the value of such 
                        interest for purposes of this chapter 
                        (determined without regard to 
                        subsection (a)) over the value of such 
                        interest determined under subsection 
                        (a), bears to
                          (ii) a similar excess determined for 
                        all qualified real property.
                  (C) Adjusted tax difference with respect to 
                the estate.--For purposes of subparagraph (B), 
                the term ``adjusted tax difference with respect 
                to the estate'' means the excess of what would 
                have been the estate tax liability but for 
                subsection (a) over the estate tax liability. 
                For purposes of this subparagraph, the term 
                ``estate tax liability'' means the tax imposed 
                by section 2001 reduced by the credits 
                allowable against such tax.
                  (D) Partial dispositions.--For purposes of 
                this paragraph, where the qualified heir 
                disposes of a portion of the interest acquired 
                by (or passing to) such heir (or a predecessor 
                qualified heir) or there is a cessation of use 
                of such a portion--
                          (i) the value determined under 
                        subsection (a) taken into account under 
                        subparagraph (A)(ii) with respect to 
                        such portion shall be its pro rata 
                        share of such value of such interest, 
                        and
                          (ii) the adjusted tax difference 
                        attributable to the interest taken into 
                        account with respect to the transaction 
                        involving the second or any succeeding 
                        portion shall be reduced by the amount 
                        of the tax imposed by this subsection 
                        with respect to all prior transactions 
                        involving portions of such interest.
                  (E) Special rule for disposition of timber.--
                In the case of qualified woodland to which an 
                election under subsection (e)(13)(A) applies, 
                if the qualified heir disposes of (or severs) 
                any standing timber on such qualified 
                woodland--
                          (i) such disposition (or severance) 
                        shall be treated as a disposition of a 
                        portion of the interest of the 
                        qualified heir in such property, and
                          (ii) the amount of the additional tax 
                        imposed by paragraph (1) with respect 
                        to such disposition shall be an amount 
                        equal to the lesser of--
                                  (I) the amount realized on 
                                such disposition (or, in any 
                                case other than a sale or 
                                exchange at arm's length, the 
                                fair market value of the 
                                portion of the interest 
                                disposed or severed), or
                                  (II) the amount of additional 
                                tax determined under this 
                                paragraph (without regard to 
                                this subparagraph) if the 
                                entire interest of the 
                                qualified heir in the qualified 
                                woodland had been disposed of, 
                                less the sum of the amount of 
                                the additional tax imposed with 
                                respect to all prior 
                                transactions involving such 
                                woodland to which this 
                                subparagraph applied.
                For purposes of the preceding sentence, the 
                disposition of a right to sever shall be 
                treated as the disposition of the standing 
                timber. The amount of additional tax imposed 
                under paragraph (1) in any case in which a 
                qualified heir disposes of his entire interest 
                in the qualified woodland shall be reduced by 
                any amount determined under this subparagraph 
                with respect to such woodland.
          (3) Only 1 additional tax imposed with respect to any 
        1 portion.--In the case of an interest acquired from 
        (or passing from) any decedent, if subparagraph (A) or 
        (B) of paragraph (1) applies to any portion of an 
        interest, subparagraph (B) or (A), as the case may be, 
        of paragraph (1) shall not apply with respect to the 
        same portion of such interest.
          (4) Due date.--The additional tax imposed by this 
        subsection shall become due and payable on the day 
        which is 6 months after the date of the disposition or 
        cessation referred to in paragraph (1).
          (5) Liability for tax; furnishing of bond.--The 
        qualified heir shall be personally liable for the 
        additional tax imposed by this subsection with respect 
        to his interest unless the heir has furnished bond 
        which meets the requirements of subsection (e)(11).
          (6) Cessation of qualified use.--For purposes of 
        paragraph (1)(B), real property shall cease to be used 
        for the qualified use if--
                  (A) such property ceases to be used for the 
                qualified use set forth in subparagraph (A) or 
                (B) of subsection (b)(2) under which the 
                property qualified under subsection (b), or
                  (B) during any period of 8 years ending after 
                the date of the decedent's death and before the 
                date of the death of the qualified heir, there 
                had been periods aggregating more than 3 years 
                during which--
                          (i) in the case of periods during 
                        which the property was held by the 
                        decedent, there was no material 
                        participation by the decedent or any 
                        member of his family in the operation 
                        of the farm or other business, and
                          (ii) in the case of periods during 
                        which the property was held by any 
                        qualified heir, there was no material 
                        participation by such qualified heir or 
                        any member of his family in the 
                        operation of the farm or other 
                        business.
          (7) Special rules.--
                  (A) No tax if use begins within 2 years.--If 
                the date on which the qualified heir begins to 
                use the qualified real property (hereinafter in 
                this subparagraph referred to as the 
                commencement date) is before the date 2 years 
                after the decedent's death--
                          (i) no tax shall be imposed under 
                        paragraph (1) by reason of the failure 
                        by the qualified heir to so use such 
                        property before the commencement date, 
                        and
                          (ii) the 10-year period under 
                        paragraph (1) shall be extended by the 
                        period after the decedent's death and 
                        before the commencement date.
                  (B) Active management by eligible qualified 
                heir treated as material participation.--For 
                purposes of paragraph (6)(B)(ii), the active 
                management of a farm or other business by--
                          (i) an eligible qualified heir, or
                          (ii) a fiduciary of an eligible 
                        qualified heir described in clause (ii) 
                        or (iii) of subparagraph (C),
                shall be treated as material participation by 
                such eligible qualified heir in the operation 
                of such farm or business. In the case of an 
                eligible qualified heir described in clause 
                (ii), (iii), or (iv) of subparagraph (C), the 
                preceding sentence shall apply only during 
                periods during which such heir meets the 
                requirements of such clause.
                  (C) Eligible qualified heir.--For purposes of 
                this paragraph, the term ``eligible qualified 
                heir'' means a qualified heir who--
                          (i) is the surviving spouse of the 
                        decedent,
                          (ii) has not attained the age of 21,
                          (iii) is disabled (within the meaning 
                        of subsection (b)(4)(B)), or
                          (iv) is a student.
                  (D) Student.--For purposes of subparagraph 
                (C), an individual shall be treated as a 
                student with respect to periods during any 
                calendar year if (and only if) such individual 
                is a student (within the meaning of section 
                152(f)(2)) for such calendar year.
                  (E) Certain rents treated as qualified use.--
                For purposes of this subsection, a surviving 
                spouse or lineal descendant of the decedent 
                shall not be treated as failing to use 
                qualified real property in a qualified use 
                solely because such spouse or descendant rents 
                such property to a member of the family of such 
                spouse or descendant on a net cash basis. For 
                purposes of the preceding sentence, a legally 
                adopted child of an individual shall be treated 
                as the child of such individual by blood.
          (8) Qualified conservation contribution is not a 
        disposition.--A qualified conservation contribution (as 
        defined in section 170(h)) by gift or otherwise shall 
        not be deemed a disposition under subsection (c)(1)(A).
  (d) Election; agreement.--
          (1) Election.--The election under this section shall 
        be made on the return of the tax imposed by section 
        2001. Such election shall be made in such manner as the 
        Secretary shall by regulations prescribe. Such an 
        election, once made, shall be irrevocable.
          (2) Agreement.--The agreement referred to in this 
        paragraph is a written agreement signed by each person 
        in being who has an interest (whether or not in 
        possession) in any property designated in such 
        agreement consenting to the application of subsection 
        (c) with respect to such property.
          (3) Modification of election and agreement to be 
        permitted.--The Secretary shall prescribe procedures 
        which provide that in any case in which the executor 
        makes an election under paragraph (1) (and submits the 
        agreement referred to in paragraph (2)) within the time 
        prescribed therefor, but--
                  (A) the notice of election, as filed, does 
                not contain all required information, or
                  (B) signatures of 1 or more persons required 
                to enter into the agreement described in 
                paragraph (2) are not included on the agreement 
                as filed, or the agreement does not contain all 
                required information,
        the executor will have a reasonable period of time (not 
        exceeding 90 days) after notification of such failures 
        to provide such information or signatures.
  (e) Definitions; special rules.--For purposes of this 
section--
          (1) Qualified heir.--The term ``qualified heir'' 
        means, with respect to any property, a member of the 
        decedent's family who acquired such property (or to 
        whom such property passed) from the decedent. If a 
        qualified heir disposes of any interest in qualified 
        real property to any member of his family, such member 
        shall thereafter be treated as the qualified heir with 
        respect to such interest.
          (2) Member of family.--The term ``member of the 
        family'' means, with respect to any individual, only--
                  (A) an ancestor of such individual,
                  (B) the spouse of such individual,
                  (C) a lineal descendant of such individual, 
                of such individual's spouse, or of a parent of 
                such individual, or
                  (D) the spouse of any lineal descendant 
                described in subparagraph (C).
        For purposes of the preceding sentence, a legally 
        adopted child of an individual shall be treated as the 
        child of such individual by blood.
          (3) Certain real property included.--In the case of 
        real property which meets the requirements of 
        subparagraph (C) of subsection (b)(1), residential 
        buildings and related improvements on such real 
        property occupied on a regular basis by the owner or 
        lessee of such real property or by persons employed by 
        such owner or lessee for the purpose of operating or 
        maintaining such real property, and roads, buildings, 
        and other structures and improvements functionally 
        related to the qualified use shall be treated as real 
        property devoted to the qualified use.
          (4) Farm.--The term ``farm'' includes stock, dairy, 
        poultry, fruit, furbearing animal, and truck farms, 
        plantations, ranches, nurseries, ranges, greenhouses or 
        other similar structures used primarily for the raising 
        of agricultural or horticultural commodities, and 
        orchards and woodlands.
          (5) Farming purposes.--The term ``farming purposes'' 
        means--
                  (A) cultivating the soil or raising or 
                harvesting any agricultural or horticultural 
                commodity (including the raising, shearing, 
                feeding, caring for, training, and management 
                of animals) on a farm;
                  (B) handling, drying, packing, grading, or 
                storing on a farm any agricultural or 
                horticultural commodity in its unmanufactured 
                state, but only if the owner, tenant, or 
                operator of the farm regularly produces more 
                than one-half of the commodity so treated; and
                  (C)(i) the planting, cultivating, caring for, 
                or cutting of trees, or
                  (ii) the preparation (other than milling) of 
                trees for market.
          (6) Material participation.--Material participation 
        shall be determined in a manner similar to the manner 
        used for purposes of paragraph (1) of section 1402(a) 
        (relating to net earnings from self-employment).
          (7) Method of valuing farms.--
                  (A) In general.--Except as provided in 
                subparagraph (B), the value of a farm for 
                farming purposes shall be determined by 
                dividing--
                          (i) the excess of the average annual 
                        gross cash rental for comparable land 
                        used for farming purposes and located 
                        in the locality of such farm over the 
                        average annual State and local real 
                        estate taxes for such comparable land, 
                        by
                          (ii) the average annual effective 
                        interest rate for all new Federal Land 
                        Bank loans.
                For purposes of the preceding sentence, each 
                average annual computation shall be made on the 
                basis of the 5 most recent calendar years 
                ending before the date of the decedent's death.
                  (B) Value based on net share rental in 
                certain cases.--
                          (i) In general.--If there is no 
                        comparable land from which the average 
                        annual gross cash rental may be 
                        determined but there is comparable land 
                        from which the average net share rental 
                        may be determined, subparagraph (A)(i) 
                        shall be applied by substituting 
                        ``average annual net share rental'' for 
                        ``average annual gross cash rental''.
                          (ii) Net share rental.--For purposes 
                        of this paragraph, the term ``net share 
                        rental'' means the excess of--
                                  (I) the value of the produce 
                                received by the lessor of the 
                                land on which such produce is 
                                grown, over
                                  (II) the cash operating 
                                expenses of growing such 
                                produce which, under the lease, 
                                are paid by the lessor.
                  (C) Exception.--The formula provided by 
                subparagraph (A) shall not be used--
                          (i) where it is established that 
                        there is no comparable land from which 
                        the average annual gross cash rental 
                        may be determined, or
                          (ii) where the executor elects to 
                        have the value of the farm for farming 
                        purposes determined and that there is 
                        no comparable land from which the 
                        average net share rental may be 
                        determined under paragraph (8).
          (8) Method of valuing closely held business 
        interests, etc..--In any case to which paragraph (7)(A) 
        does not apply, the following factors shall apply in 
        determining the value of any qualified real property:
                  (A) The capitalization of income which the 
                property can be expected to yield for farming 
                or closely held business purposes over a 
                reasonable period of time under prudent 
                management using traditional cropping patterns 
                for the area, taking into account soil 
                capacity, terrain configuration, and similar 
                factors,
                  (B) The capitalization of the fair rental 
                value of the land for farm land or closely held 
                business purposes,
                  (C) Assessed land values in a State which 
                provides a differential or use value assessment 
                law for farmland or closely held business,
                  (D) Comparable sales of other farm or closely 
                held business land in the same geographical 
                area far enough removed from a metropolitan or 
                resort area so that nonagricultural use is not 
                a significant factor in the sales price, and
                  (E) Any other factor which fairly values the 
                farm or closely held business value of the 
                property.
          (9) Property acquired from decedent.--Property shall 
        be considered to have been acquired from or to have 
        passed from the decedent if--
                  (A) such property is so considered under 
                section 1014(b) (relating to basis of property 
                acquired from a decedent),
                  (B) such property is acquired by any person 
                from the estate, or
                  (C) such property is acquired by any person 
                from a trust (to the extent such property is 
                includible in the gross estate of the 
                decedent).
          (10) Community property.--If the decedent and [his 
        surviving spouse] the decedent's surviving spouse at 
        any time held qualified real property as community 
        property, the interest of the surviving spouse in such 
        property shall be taken into account under this section 
        to the extent necessary to provide a result under this 
        section with respect to such property which is 
        consistent with the result which would have obtained 
        under this section if such property had not been 
        community property.
          (11) Bond in lieu of personal liability.--If the 
        qualified heir makes written application to the 
        Secretary for determination of the maximum amount of 
        the additional tax which may be imposed by subsection 
        (c) with respect to the qualified heir's interest, the 
        Secretary (as soon as possible, and in any event within 
        1 year after the making of such application) shall 
        notify the heir of such maximum amount. The qualified 
        heir, on furnishing a bond in such amount and for such 
        period as may be required, shall be discharged from 
        personal liability for any additional tax imposed by 
        subsection (c) and shall be entitled to a receipt or 
        writing showing such discharge.
          (12) Active management.--The term ``active 
        management'' means the making of the management 
        decisions of a business (other than the daily operating 
        decisions).
          (13) Special rules for woodlands.--
                  (A) In general.--In the case of any qualified 
                woodland with respect to which the executor 
                elects to have this subparagraph apply, trees 
                growing on such woodland shall not be treated 
                as a crop.
                  (B) Qualified woodland.--The term ``qualified 
                woodland'' means any real property which--
                          (i) is used in timber operations, and
                          (ii) is an identifiable area of land 
                        such as an acre or other area for which 
                        records are normally maintained in 
                        conducting timber operations.
                  (C) Timber operations.--The term ``timber 
                operations'' means--
                          (i) the planting, cultivating, caring 
                        for, or cutting of trees, or
                          (ii) the preparation (other than 
                        milling) of trees for market.
                  (D) Election.--An election under subparagraph 
                (A) shall be made on the return of the tax 
                imposed by section 2001. Such election shall be 
                made in such manner as the Secretary shall by 
                regulations prescribe. Such an election, once 
                made, shall be irrevocable.
          (14) Treatment of replacement property acquired in 
        section 1031 or 1033 transactions.--
                  (A) In general.--In the case of any qualified 
                replacement property, any period during which 
                there was ownership, qualified use, or material 
                participation with respect to the replaced 
                property by the decedent or any member of his 
                family shall be treated as a period during 
                which there was such ownership, use, or 
                material participation (as the case may be) 
                with respect to the qualified replacement 
                property.
                  (B) Limitation.--Subparagraph (A) shall not 
                apply to the extent that the fair market value 
                of the qualified replacement property (as of 
                the date of its acquisition) exceeds the fair 
                market value of the replaced property (as of 
                the date of its disposition).
                  (C) Definitions.--For purposes of this 
                paragraph--
                          (i) Qualified replacement property.--
                        The term ``qualified replacement 
                        property'' means any real property 
                        which is--
                                  (I) acquired in an exchange 
                                which qualifies under section 
                                1031, or
                                  (II) the acquisition of which 
                                results in the nonrecognition 
                                of gain under section 1033.
                 Such term shall only include property which is 
                used for the same qualified use as the replaced 
                property was being used before the exchange.
                          (ii) Replaced property.--The term 
                        ``replaced property'' means--
                                  (I) the property transferred 
                                in the exchange which qualifies 
                                under section 1031, or
                                  (II) the property 
                                compulsorily or involuntarily 
                                converted (within the meaning 
                                of section 1033).
  (f) Statute of limitations.--If qualified real property is 
disposed of or ceases to be used for a qualified use, then--
          (1) the statutory period for the assessment of any 
        additional tax under subsection (c) attributable to 
        such disposition or cessation shall not expire before 
        the expiration of 3 years from the date the Secretary 
        is notified (in such manner as the Secretary may by 
        regulations prescribe) of such disposition or cessation 
        (or if later in the case of an involuntary conversion 
        or exchange to which subsection (h) or (i) applies, 3 
        years from the date the Secretary is notified of the 
        replacement of the converted property or of an 
        intention not to replace or of the exchange of 
        property), and
          (2) such additional tax may be assessed before the 
        expiration of such 3-year period notwithstanding the 
        provisions of any other law or rule of law which would 
        otherwise prevent such assessment.
  (g) Application of this section and section 6324B to 
interests in partnerships, corporations, and trusts.--The 
Secretary shall prescribe regulations setting forth the 
application of this section and section 6324B in the case of an 
interest in a partnership, corporation, or trust which, with 
respect to the decedent, is an interest in a closely held 
business (within the meaning of paragraph (1) of section 
6166(b)). For purposes of the preceding sentence, an interest 
in a discretionary trust all the beneficiaries of which are 
qualified heirs shall be treated as a present interest.
  (h) Special rules for involuntary conversions of qualified 
real property.--
          (1) Treatment of converted property.--
                  (A) In general.--If there is an involuntary 
                conversion of an interest in qualified real 
                property--
                          (i) no tax shall be imposed by 
                        subsection (c) on such conversion if 
                        the cost of the qualified replacement 
                        property equals or exceeds the amount 
                        realized on such conversion, or
                          (ii) if clause (i) does not apply, 
                        the amount of the tax imposed by 
                        subsection (c) on such conversion shall 
                        be the amount determined under 
                        subparagraph (B).
                  (B) Amount of tax where there is not complete 
                reinvestment.--The amount determined under this 
                subparagraph with respect to any involuntary 
                conversion is the amount of the tax which (but 
                for this subsection) would have been imposed on 
                such conversion reduced by an amount which--
                          (i) bears the same ratio to such tax, 
                        as
                          (ii) the cost of the qualified 
                        replacement property bears to the 
                        amount realized on the conversion.
          (2) Treatment of replacement property.--For purposes 
        of subsection (c)--
                  (A) any qualified replacement property shall 
                be treated in the same manner as if it were a 
                portion of the interest in qualified real 
                property which was involuntarily converted; 
                except that with respect to such qualified 
                replacement property the 10-year period under 
                paragraph (1) of subsection (c) shall be 
                extended by any period, beyond the 2-year 
                period referred to in section 1033(a)(2)(B)(i), 
                during which the qualified heir was allowed to 
                replace the qualified real property,
                  (B) any tax imposed by subsection (c) on the 
                involuntary conversion shall be treated as a 
                tax imposed on a partial disposition, and
                  (C) paragraph (6) of subsection (c) shall be 
                applied--
                          (i) by not taking into account 
                        periods after the involuntary 
                        conversion and before the acquisition 
                        of the qualified replacement property, 
                        and
                          (ii) by treating material 
                        participation with respect to the 
                        converted property as material 
                        participation with respect to the 
                        qualified replacement property.
          (3) Definitions and special rules.--For purposes of 
        this subsection--
                  (A) Involuntary conversion.--The term 
                ``involuntary conversion'' means a compulsory 
                or involuntary conversion within the meaning of 
                section 1033.
                  (B) Qualified replacement property.--The term 
                ``qualified replacement property'' means--
                          (i) in the case of an involuntary 
                        conversion described in section 
                        1033(a)(1), any real property into 
                        which the qualified real property is 
                        converted, or
                          (ii) in the case of an involuntary 
                        conversion described in section 
                        1033(a)(2), any real property purchased 
                        by the qualified heir during the period 
                        specified in section 1033(a)(2)(B) for 
                        purposes of replacing the qualified 
                        real property.
        Such term only includes property which is to be used 
        for the qualified use set forth in subparagraph (A) or 
        (B) of subsection (b)(2) under which the qualified real 
        property qualified under subsection (a).
          (4) Certain rules made applicable.--The rules of the 
        last sentence of section 1033(a)(2)(A) shall apply for 
        purposes of paragraph (3)(B)(ii).
  (i) Exchanges of qualified real property.--
          (1) Treatment of property exchanged.--
                  (A) Exchanges solely for qualified exchange 
                property.--If an interest in qualified real 
                property is exchanged solely for an interest in 
                qualified exchange property in a transaction 
                which qualifies under section 1031, no tax 
                shall be imposed by subsection (c) by reason of 
                such exchange.
                  (B) Exchanges where other property 
                received.--If an interest in qualified real 
                property is exchanged for an interest in 
                qualified exchange property and other property 
                in a transaction which qualifies under section 
                1031, the amount of the tax imposed by 
                subsection (c) by reason of such exchange shall 
                be the amount of tax which (but for this 
                subparagraph) would have been imposed on such 
                exchange under subsection (c)(1), reduced by an 
                amount which--
                          (i) bears the same ratio to such tax, 
                        as
                          (ii) the fair market value of the 
                        qualified exchange property bears to 
                        the fair market value of the qualified 
                        real property exchanged.
                For purposes of clause (ii) of the preceding 
                sentence, fair market value shall be determined 
                as of the time of the exchange.
          (2) Treatment of qualified exchange property.--For 
        purposes of subsection (c)--
                  (A) any interest in qualified exchange 
                property shall be treated in the same manner as 
                if it were a portion of the interest in 
                qualified real property which was exchanged,
                  (B) any tax imposed by subsection (c) by 
                reason of the exchange shall be treated as a 
                tax imposed on a partial disposition, and
                  (C) paragraph (6) of subsection (c) shall be 
                applied by treating material participation with 
                respect to the exchanged property as material 
                participation with respect to the qualified 
                exchange property.
          (3) Qualified exchange property.--For purposes of 
        this subsection, the term ``qualified exchange 
        property'' means real property which is to be used for 
        the qualified use set forth in subparagraph (A) or (B) 
        of subsection (b)(2) under which the real property 
        exchanged therefor originally qualified under 
        subsection (a).

           *       *       *       *       *       *       *

SEC. 2035. ADJUSTMENTS FOR CERTAIN GIFTS MADE WITHIN 3 YEARS OF 
                    DECEDENT'S DEATH.

  (a) Inclusion of certain property in gross estate.--If--
          (1) the decedent made a transfer (by trust or 
        otherwise) of an interest in any property, or 
        relinquished a power with respect to any property, 
        during the 3-year period ending on the date of the 
        decedent's death, and
          (2) the value of such property (or an interest 
        therein) would have been included in the decedent's 
        gross estate under section 2036, 2037, 2038, or 2042 if 
        such transferred interest or relinquished power had 
        been retained by the decedent on the date of his death,
the value of the gross estate shall include the value of any 
property (or interest therein) which would have been so 
included.
  (b) Inclusion of gift tax on gifts made during 3 years before 
decedent's death.--The amount of the gross estate (determined 
without regard to this subsection) shall be increased by the 
amount of any tax paid under chapter 12 by the decedent or [his 
estate] the decedent's estate on any gift made by the decedent 
or [his spouse] the decedent's spouse during the 3-year period 
ending on the date of the decedent's death.
  (c) Other rules relating to transfers within 3 years of 
death.--
          (1) In general.--For purposes of--
                  (A) section 303(b) (relating to distributions 
                in redemption of stock to pay death taxes),
                  (B) section 2032A (relating to special 
                valuation of certain farms, etc., real 
                property), and
                  (C) subchapter C of chapter 64 (relating to 
                lien for taxes),
        the value of the gross estate shall include the value 
        of all property to the extent of any interest therein 
        of which the decedent has at any time made a transfer, 
        by trust or otherwise, during the 3-year period ending 
        on the date of the decedent's death.
          (2) Coordination with section 6166.--An estate shall 
        be treated as meeting the 35 percent of adjusted gross 
        estate requirement of section 6166(a)(1) only if the 
        estate meets such requirement both with and without the 
        application of subsection (a).
          (3) Marital and small transfers.--Paragraph (1) shall 
        not apply to any transfer (other than a transfer with 
        respect to a life insurance policy) made during a 
        calendar year to any donee if the decedent was not 
        required by section 6019 (other than by reason of 
        section 6019(2)) to file any gift tax return for such 
        year with respect to transfers to such donee.
  (d) Exception.--Subsection (a) and paragraph (1) of 
subsection (c) shall not apply to any bona fide sale for an 
adequate and full consideration in money or money's worth.
  (e) Treatment of certain transfers from revocable trusts.--
For purposes of this section and section 2038, any transfer 
from any portion of a trust during any period that such portion 
was treated under section 676 as owned by the decedent by 
reason of a power in the grantor (determined without regard to 
section 672(e)) shall be treated as a transfer made directly by 
the decedent.

           *       *       *       *       *       *       *

SEC. 2040. JOINT INTERESTS.

  (a) General rule.--The value of the gross estate shall 
include the value of all property to the extent of the interest 
therein held as joint tenants with right of survivorship by the 
decedent and any other person, or as tenants by the entirety by 
the decedent and spouse, or deposited, with any person carrying 
on the banking business, in their joint names and payable to 
either or the survivor, except such part thereof as may be 
shown to have originally belonged to such other person and 
never to have been received or acquired by the latter from the 
decedent for less than an adequate and full consideration in 
money or money's worth: Provided, That where such property or 
any part thereof, or part of the consideration with which such 
property was acquired, is shown to have been at any time 
acquired by such other person from the decedent for less than 
an adequate and full consideration in money or money's worth, 
there shall be excepted only such part of the value of such 
property as is proportionate to the consideration furnished by 
such other person: Provided further, That where any property 
has been acquired by gift, bequest, devise, or inheritance, as 
a tenancy by the entirety by the decedent and spouse, then to 
the extent of one-half of the value thereof, or, where so 
acquired by the decedent and any other person as joint tenants 
with right of survivorship and their interests are not 
otherwise specified or fixed by law, then to the extent of the 
value of a fractional part to be determined by dividing the 
value of the property by the number of joint tenants with right 
of survivorship.
  (b)  [Certain Joint Interests of Husband and Wife] Certain 
Joint Interests of Married Couple.--
          (1) Interests of spouse excluded from gross estate.--
        Notwithstanding subsection (a), in the case of any 
        qualified joint interest, the value included in the 
        gross estate with respect to such interest by reason of 
        this section is one-half of the value of such qualified 
        joint interest.
          (2) Qualified joint interest defined.--For purposes 
        of paragraph (1), the term ``qualified joint interest'' 
        means any interest in property held by the decedent and 
        the decedent's spouse as--
                  (A) tenants by the entirety, or
                  (B) joint tenants with right of survivorship, 
                but only if the decedent and the spouse of the 
                decedent are the only joint tenants.

           *       *       *       *       *       *       *

PART IV--TAXABLE ESTATE

           *       *       *       *       *       *       *

SEC. 2056. BEQUESTS, ETC., TO SURVIVING SPOUSE.

  (a) Allowance of marital deduction.--For purposes of the tax 
imposed by section 2001, the value of the taxable estate shall, 
except as limited by subsection (b), be determined by deducting 
from the value of the gross estate an amount equal to the value 
of any interest in property which passes or has passed from the 
decedent to [his] surviving spouse, but only to the extent that 
such interest is included in determining the value of the gross 
estate.
  (b) Limitation in the case of life estate or other terminable 
interest.--
          (1) General rule.--Where, on the lapse of time, on 
        the occurrence of an event or contingency, or on the 
        failure of an event or contingency to occur, an 
        interest passing to the surviving spouse will terminate 
        or fail, no deduction shall be allowed under this 
        section with respect to such interest--
                  (A) if an interest in such property passes or 
                has passed (for less than an adequate and full 
                consideration in money or money's worth) from 
                the decedent to any person other than such 
                surviving spouse (or the estate of such 
                spouse); and
                  (B) if by reason of such passing such person 
                (or his heirs or assigns) may possess or enjoy 
                any part of such property after such 
                termination or failure of the interest so 
                passing to the surviving spouse;
        and no deduction shall be allowed with respect to such 
        interest (even if such deduction is not disallowed 
        under subparagraphs (A) and (B))--
                  (C) if such interest is to be acquired for 
                the surviving spouse, pursuant to directions of 
                the decedent, by his executor or by the trustee 
                of a trust.
        For purposes of this paragraph, an interest shall not 
        be considered as an interest which will terminate or 
        fail merely because it is the ownership of a bond, 
        note, or similar contractual obligation, the discharge 
        of which would not have the effect of an annuity for 
        life or for a term.
          (2) Interest in unidentified assets.--Where the 
        assets (included in the decedent's gross estate) out of 
        which, or the proceeds of which, an interest passing to 
        the surviving spouse may be satisfied include a 
        particular asset or assets with respect to which no 
        deduction would be allowed if such asset or assets 
        passed from the decedent to such spouse, then the value 
        of such interest passing to such spouse shall, for 
        purposes of subsection (a), be reduced by the aggregate 
        value of such particular assets.
          (3) Interest of spouse conditional on survival for 
        limited period.--For purposes of this subsection, an 
        interest passing to the surviving spouse shall not be 
        considered as an interest which will terminate or fail 
        on the death of such spouse if--
                  (A) such death will cause a termination or 
                failure of such interest only if it occurs 
                within a period not exceeding 6 months after 
                the decedent's death, or only if it occurs as a 
                result of a common disaster resulting in the 
                death of the decedent and the surviving spouse, 
                or only if it occurs in the case of either such 
                event; and
                  (B) such termination or failure does not in 
                fact occur.
          (4) Valuation of interest passing to surviving 
        spouse.--In determining for purposes of subsection (a) 
        the value of any interest in property passing to the 
        surviving spouse for which a deduction is allowed by 
        this section--
                  (A) there shall be taken into account the 
                effect which the tax imposed by section 2001, 
                or any estate, succession, legacy, or 
                inheritance tax, has on the net value to the 
                surviving spouse of such interest; and
                  (B) where such interest or property is 
                encumbered in any manner, or where the 
                surviving spouse incurs any obligation imposed 
                by the decedent with respect to the passing of 
                such interest, such encumbrance or obligation 
                shall be taken into account in the same manner 
                as if the amount of a gift to such spouse of 
                such interest were being determined.
          (5) Life estate with power of appointment in 
        surviving spouse.--In the case of an interest in 
        property passing from the decedent, if [his] surviving 
        spouse is entitled for life to all the income from the 
        entire interest, or all the income from a specific 
        portion thereof, payable annually or at more frequent 
        intervals, with power in the surviving spouse to 
        appoint the entire interest, or such specific portion 
        (exercisable in favor of such surviving spouse, or of 
        the estate of such surviving spouse, or in favor of 
        either, whether or not in each case the power is 
        exercisable in favor of others), and with no power in 
        any other person to appoint any part of the interest, 
        or such specific portion, to any person other than the 
        surviving spouse--
                  (A) the interest or such portion thereof so 
                passing shall, for purposes of subsection (a), 
                be considered as passing to the surviving 
                spouse, and
                  (B) no part of the interest so passing shall, 
                for purposes of paragraph (1)(A), be considered 
                as passing to any person other than the 
                surviving spouse.
        This paragraph shall apply only if such power in the 
        surviving spouse to appoint the entire interest, or 
        such specific portion thereof, whether exercisable by 
        will or during life, is exercisable by such spouse 
        alone and in all events.
          (6) Life insurance or annuity payments with power of 
        appointment in surviving spouse.--In the case of an 
        interest in property passing from the decedent 
        consisting of proceeds under a life insurance, 
        endowment, or annuity contract, if under the terms of 
        the contract such proceeds are payable in installments 
        or are held by the insurer subject to an agreement to 
        pay interest thereon (whether the proceeds, on the 
        termination of any interest payments, are payable in a 
        lump sum or in annual or more frequent installments), 
        and such installment or interest payments are payable 
        annually or at more frequent intervals, commencing not 
        later than 13 months after the decedent's death, and 
        all amounts, or a specific portion of all such amounts, 
        payable during the life of the surviving spouse are 
        payable only to such spouse, and such spouse has the 
        power to appoint all amounts, or such specific portion, 
        payable under such contract (exercisable in favor of 
        such surviving spouse, or of the estate of such 
        surviving spouse, or in favor of either, whether or not 
        in each case the power is exercisable in favor of 
        others), with no power in any other person to appoint 
        such amounts to any person other than the surviving 
        spouse--
                  (A) such amounts shall, for purposes of 
                subsection (a), be considered as passing to the 
                surviving spouse, and
                  (B) no part of such amounts shall, for 
                purposes of paragraph (1)(A), be considered as 
                passing to any person other than the surviving 
                spouse.
        This paragraph shall apply only if, under the terms of 
        the contract, such power in the surviving spouse to 
        appoint such amounts, whether exercisable by will or 
        during life, is exercisable by such spouse alone and in 
        all events.
          (7) Election with respect to life estate for 
        surviving spouse.--
                  (A) In general.--In the case of qualified 
                terminable interest property--
                          (i) for purposes of subsection (a), 
                        such property shall be treated as 
                        passing to the surviving spouse, and
                          (ii) for purposes of paragraph 
                        (1)(A), no part of such property shall 
                        be treated as passing to any person 
                        other than the surviving spouse.
                  (B) Qualified terminable interest property 
                defined.--For purposes of this paragraph--
                          (i) In general.--The term ``qualified 
                        terminable interest property'' means 
                        property--
                                  (I) which passes from the 
                                decedent,
                                  (II) in which the surviving 
                                spouse has a qualifying income 
                                interest for life, and
                                  (III) to which an election 
                                under this paragraph applies.
                          (ii) Qualifying income interest for 
                        life.--The surviving spouse has a 
                        qualifying income interest for life 
                        if--
                                  (I) the surviving spouse is 
                                entitled to all the income from 
                                the property, payable annually 
                                or at more frequent intervals, 
                                or has a usufruct interest for 
                                life in the property, and
                                  (II) no person has a power to 
                                appoint any part of the 
                                property to any person other 
                                than the surviving spouse.
                 Subclause (II) shall not apply to a power 
                exercisable only at or after the death of the 
                surviving spouse. To the extent provided in 
                regulations, an annuity shall be treated in a 
                manner similar to an income interest in 
                property (regardless of whether the property 
                from which the annuity is payable can be 
                separately identified).
                          (iii) Property includes interest 
                        therein.--The term ``property'' 
                        includes an interest in property.
                          (iv) Specific portion treated as 
                        separate property.--A specific portion 
                        of property shall be treated as 
                        separate property.
                          (v) Election.--An election under this 
                        paragraph with respect to any property 
                        shall be made by the executor on the 
                        return of tax imposed by section 2001. 
                        Such an election, once made, shall be 
                        irrevocable.
                  (C) Treatment of survivor annuities.--In the 
                case of an annuity included in the gross estate 
                of the decedent under section 2039 (or, in the 
                case of an interest in an annuity arising under 
                the community property laws of a State, 
                included in the gross estate of the decedent 
                under section 2033) where only the surviving 
                spouse has the right to receive payments before 
                the death of such surviving spouse--
                          (i) the interest of such surviving 
                        spouse shall be treated as a qualifying 
                        income interest for life, and
                          (ii) the executor shall be treated as 
                        having made an election under this 
                        subsection with respect to such annuity 
                        unless the executor otherwise elects on 
                        the return of tax imposed by section 
                        2001.
                An election under clause (ii), once made, shall 
                be irrevocable.
          (8) Special rule for charitable remainder trusts.--
                  (A) In general.--If the surviving spouse of 
                the decedent is the only beneficiary of a 
                qualified charitable remainder trust who is not 
                a charitable beneficiary nor an ESOP 
                beneficiary, paragraph (1) shall not apply to 
                any interest in such trust which passes or has 
                passed from the decedent to such surviving 
                spouse.
                  (B) Definitions.--For purposes of 
                subparagraph (A)--
                          (i) Charitable beneficiary.--The term 
                        ``charitable beneficiary'' means any 
                        beneficiary which is an organization 
                        described in section 170(c).
                          (ii) ESOP beneficiary.--The term 
                        ``ESOP beneficiary'' means any 
                        beneficiary which is an employee stock 
                        ownership plan (as defined in section 
                        4975(e)(7)) that holds a remainder 
                        interest in qualified employer 
                        securities (as defined in section 
                        664(g)(4)) to be transferred to such 
                        plan in a qualified gratuitous transfer 
                        (as defined in section 664(g)(1)).
                          (iii) Qualified charitable remainder 
                        trust.--The term ``qualified charitable 
                        remainder trust'' means a charitable 
                        remainder annuity trust or a charitable 
                        remainder unitrust (described in 
                        section 664).
          (9) Denial of double deduction.--Nothing in this 
        section or any other provision of this chapter shall 
        allow the value of any interest in property to be 
        deducted under this chapter more than once with respect 
        to the same decedent.
          (10) Specific portion.--For purposes of paragraphs 
        (5), (6), and (7)(B)(iv), the term ``specific portion'' 
        only includes a portion determined on a fractional or 
        percentage basis.
  (c) Definition.--For purposes of this section, an interest in 
property shall be considered as passing from the decedent to 
any person if and only if--
          (1) such interest is bequeathed or devised to such 
        person by the decedent;
          (2) such interest is inherited by such person from 
        the decedent;
          (3) such interest is the dower or curtesy interest 
        (or statutory interest in lieu thereof) of such person 
        as surviving spouse of the decedent;
          (4) such interest has been transferred to such person 
        by the decedent at any time;
          (5) such interest was, at the time of the decedent's 
        death, held by such person and the decedent (or by them 
        and any other person) in joint ownership with right of 
        survivorship;
          (6) the decedent had a power (either alone or in 
        conjunction with any person) to appoint such interest 
        and if he appoints or has appointed such interest to 
        such person, or if such person takes such interest in 
        default on the release or nonexercise of such power; or
          (7) such interest consists of proceeds of insurance 
        on the life of the decedent receivable by such person.
Except as provided in paragraph (5) or (6) of subsection (b), 
where at the time of the decedent's death it is not possible to 
ascertain the particular person or persons to whom an interest 
in property may pass from the decedent, such interest shall, 
for purposes of subparagraphs (A) and (B) of subsection (b)(1), 
be considered as passing from the decedent to a person other 
than the surviving spouse.
  (d) Disallowance of marital deduction where surviving spouse 
not United States citizen.--
          (1) In general.--Except as provided in paragraph (2), 
        if the surviving spouse of the decedent is not a 
        citizen of the United States--
                  (A) no deduction shall be allowed under 
                subsection (a), and
                  (B) section 2040(b) shall not apply.
          (2) Marital deduction allowed for certain transfers 
        in trust.--
                  (A) In general.--Paragraph (1) shall not 
                apply to any property passing to the surviving 
                spouse in a qualified domestic trust.
                  (B) Special rule.--If any property passes 
                from the decedent to the surviving spouse of 
                the decedent, for purposes of subparagraph (A), 
                such property shall be treated as passing to 
                such spouse in a qualified domestic trust if--
                          (i) such property is transferred to 
                        such a trust before the date on which 
                        the return of the tax imposed by this 
                        chapter is made, or
                          (ii) such property is irrevocably 
                        assigned to such a trust under an 
                        irrevocable assignment made on or 
                        before such date which is enforceable 
                        under local law.
          (3) Allowance of credit to certain spouses.--If--
                  (A) property passes to the surviving spouse 
                of the decedent (hereinafter in this paragraph 
                referred to as the ``first decedent''),
                  (B) without regard to this subsection, a 
                deduction would be allowable under subsection 
                (a) with respect to such property, and
                  (C) such surviving spouse dies and the estate 
                of such surviving spouse is subject to the tax 
                imposed by this chapter,
        the Federal estate tax paid (or treated as paid under 
        section 2056A(b)(7)) by the first decedent with respect 
        to such property shall be allowed as a credit under 
        section 2013 to the estate of such surviving spouse and 
        the amount of such credit shall be determined under 
        such section without regard to when the first decedent 
        died and without regard to subsection (d)(3) of such 
        section.
          (4) Special rule where resident spouse becomes 
        citizen.--Paragraph (1) shall not apply if--
                  (A) the surviving spouse of the decedent 
                becomes a citizen of the United States before 
                the day on which the return of the tax imposed 
                by this chapter is made, and
                  (B) such spouse was a resident of the United 
                States at all times after the date of the death 
                of the decedent and before becoming a citizen 
                of the United States.
          (5) Reformations permitted.--
                  (A) In general.--In the case of any property 
                with respect to which a deduction would be 
                allowable under subsection (a) but for this 
                subsection, the determination of whether a 
                trust is a qualified domestic trust shall be 
                made--
                          (i) as of the date on which the 
                        return of the tax imposed by this 
                        chapter is made, or
                          (ii) if a judicial proceeding is 
                        commenced on or before the due date 
                        (determined with regard to extensions) 
                        for filing such return to change such 
                        trust into a trust which is a qualified 
                        domestic trust, as of the time when the 
                        changes pursuant to such proceeding are 
                        made.
                  (B) Statute of limitations.--If a judicial 
                proceeding described in subparagraph (A)(ii) is 
                commenced with respect to any trust, the period 
                for assessing any deficiency of tax 
                attributable to any failure of such trust to be 
                a qualified domestic trust shall not expire 
                before the date 1 year after the date on which 
                the Secretary is notified that the trust has 
                been changed pursuant to such judicial 
                proceeding or that such proceeding has been 
                terminated.

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CHAPTER 12--GIFT TAX

           *       *       *       *       *       *       *

                        Subchapter B--TRANSFERS

Sec. 2511. Transfers in general.
     * * * * * * *
[Sec. 2513. Gift by husband or wife to third party.]
Sec. 2513. Gift by spouse to third party.

           *       *       *       *       *       *       *

SEC. 2513. [GIFT BY HUSBAND OR WIFE TO THIRD PARTY]  GIFT BY SPOUSE TO 
                    THIRD PARTY.

  (a) Considered as made one-half by each.--
          [(1) In general.--A gift made by one spouse to any 
        person other than his spouse shall, for the purposes of 
        this chapter, be considered as made one-half by him and 
        one-half by his spouse, but only if at the time of the 
        gift each spouse is a citizen or resident of the United 
        States. This paragraph shall not apply with respect to 
        a gift by a spouse of an interest in property if he 
        creates in his spouse a general power of appointment, 
        as defined in section 2514(c), over such interest. For 
        purposes of this section, an individual shall be 
        considered as the spouse of another individual only if 
        he is married to such individual at the time of the 
        gift and does not remarry during the remainder of the 
        calendar year.]
          (1) In general.--A gift made by one individual to any 
        person other than such individual's spouse shall, for 
        the purposes of this chapter, be considered as made 
        one-half by the individual and one-half by such 
        individual's spouse, but only if at the time of the 
        gift each spouse is a citizen or resident of the United 
        States. This paragraph shall not apply with respect to 
        a gift by an individual of an interest in property if 
        such individual creates in the individual's spouse a 
        general power of appointment, as defined in section 
        2514(c), over such interest. For purposes of this 
        section, an individual shall be considered as the 
        spouse of another only if the individual is married to 
        the individual's spouse at the time of the gift and 
        does not remarry during the remainder of the calendar 
        year.
          (2) Consent of both spouses.--Paragraph (1) shall 
        apply only if both spouses have signified (under the 
        regulations provided for in subsection (b)) their 
        consent to the application of paragraph (1) in the case 
        of all such gifts made during the calendar year by 
        either while married to the other.
  (b) Manner and time of signifying consent.--
          (1) Manner.-- A consent under this section shall be 
        signified in such manner as is provided under 
        regulations prescribed by the Secretary.
          (2) Time.--Such consent may be so signified at any 
        time after the close of the calendar year in which the 
        gift was made, subject to the following limitations--
                  (A) The consent may not be signified after 
                the 15th day of April following the close of 
                such year, unless before such 15th day no 
                return has been filed for such year by either 
                spouse, in which case the consent may not be 
                signified after a return for such year is filed 
                by either spouse.
                  (B) The consent may not be signified after a 
                notice of deficiency with respect to the tax 
                for such year has been sent to either spouse in 
                accordance with section 6212(a).
  (c) Revocation of consent.--Revocation of a consent 
previously signified shall be made in such manner as in 
provided under regulations prescribed by the Secretary, but the 
right to revoke a consent previously signified with respect to 
a calendar year--
          (1) shall not exist after the 15th day of April 
        following the close of such year if the consent was 
        signified on or before such 15th day; and
          (2) shall not exist if the consent was not signified 
        until after such 15th day.
  (d) Joint and several liability for tax.--If the consent 
required by subsection (a)(2) is signified with respect to a 
gift made in any calendar year, the liability with respect to 
the entire tax imposed by this chapter of each spouse for such 
year shall be joint and several.

           *       *       *       *       *       *       *

SEC. 2516. CERTAIN PROPERTY SETTLEMENTS.

   [Where a husband and wife enter] (a)  In General._ Where a 
married couple enters  into a written agreement relative to 
their marital and property rights and divorce occurs within the 
3-year period beginning on the date 1 year before such 
agreement is entered into (whether or not such agreement is 
approved by the divorce decree), any transfers of property or 
interests in property made pursuant to such agreement--
          (1) to either spouse in settlement of his or her 
        marital or property rights, or
          (2) to provide a reasonable allowance for the support 
        of issue of the marriage during minority,
shall be deemed to be transfers made for a full and adequate 
consideration in money or money's worth.
  (b) Spouse.--For purposes of this section, if the spouses 
referred to are divorced, wherever appropriate to the meaning 
of this section, the term ``spouse'' shall read ``former 
spouse''.

           *       *       *       *       *       *       *

Subchapter C--DEDUCTIONS

           *       *       *       *       *       *       *

SEC. 2523. GIFT TO SPOUSE.

  (a) Allowance of deduction.--Where a donor transfers during 
the calendar year by gift an interest in property to a donee 
who at the time of the gift is the donor's spouse, there shall 
be allowed as a deduction in computing taxable gifts for the 
calendar year an amount with respect to such interest equal to 
its value.
  (b) Life estate or other terminable interest.--Where, on the 
lapse of time, on the occurrence of an event or contingency, or 
on the failure of an event or contingency to occur, such 
interest transferred to the spouse will terminate or fail, no 
deduction shall be allowed with respect to such interest--
          (1) if the donor retains in [himself] the donor's 
        self , or transfers or has transferred (for less than 
        an adequate and full consideration in money or money's 
        worth) to any person other than such donee spouse (or 
        the estate of such spouse), an interest in such 
        property, and if by reason of such retention or 
        transfer the donor [(or his heirs or assigns) or such 
        person (or his heirs or assigns)] (or the donor's heirs 
        or assigns) or such person (or such person's heirs or 
        assigns) may possess or enjoy any part of such property 
        after such termination or failure of the interest 
        transferred to the donee spouse; or
          (2) if the donor immediately after the transfer to 
        the donee spouse has a power to appoint an interest in 
        such property which [he] the donor can exercise (either 
        alone or in conjunction with any person) in such manner 
        that the appointee may possess or enjoy any part of 
        such property after such termination or failure of the 
        interest transferred to the donee spouse. For purposes 
        of this paragraph, the donor shall be considered as 
        having immediately after the transfer to the donee 
        spouse such power to appoint even though such power 
        cannot be exercised until after the lapse of time, upon 
        the occurrence of an event or contingency, or on the 
        failure of an event or contingency to occur.
An exercise or release at any time by the donor, either alone 
or in conjunction with any person, of a power to appoint an 
interest in property, even though not otherwise a transfer, 
shall, for purposes of paragraph (1), be considered as a 
transfer by [him] the donor . Except as provided in subsection 
(e), where at the time of the transfer it is impossible to 
ascertain the particular person or persons who may receive from 
the donor an interest in property so transferred by [him] the 
donor , such interest shall, for purposes of paragraph (1), be 
considered as transferred to a person other than the donee 
spouse.
  (c) Interest in unidentified assets.--Where the assets out of 
which, or the proceeds of which, the interest transferred to 
the donee spouse may be satisfied include a particular asset or 
assets with respect to which no deduction would be allowed if 
such asset or assets were transferred from the donor to such 
spouse, then the value of the interest transferred to such 
spouse shall, for purposes of subsection (a), be reduced by the 
aggregate value of such particular assets.
  (d) Joint interests.--If the interest is transferred to the 
donee spouse as sole joint tenant with the donor or as tenant 
by the entirety, the interest of the donor in the property 
which exists solely by reason of the possibility that the donor 
may survive the donee spouse, or that there may occur a 
severance of the tenancy, shall not be considered for purposes 
of subsection (b) as an interest retained by the donor in 
[himself] the donor's self .
  (e) Life estate with power of appointment in donee spouse.--
Where the donor transfers an interest in property, if by such 
transfer [his spouse] the donor's spouse is entitled for life 
to all of the income from the entire interest, or all the 
income from a specific portion thereof, payable annually or at 
more frequent intervals, with power in the donee spouse to 
appoint the entire interest, or such specific portion 
(exercisable in favor of such donee spouse, or of the estate of 
such donee spouse, or in favor of either, whether or not in 
each case the power is exercisable in favor of others), and 
with no power in any other person to appoint any part of such 
interest, or such portion, to any person other than the donee 
spouse--
          (1) the interest, or such portion, so transferred 
        shall, for purposes of subsection (a) be considered as 
        transferred to the donee spouse, and
          (2) no part of the interest, or such portion, so 
        transferred shall, for purposes of subsection (b)(1), 
        be considered as retained in the donor or transferred 
        to any person other than the donee spouse.
This subsection shall apply only if, by such transfer, such 
power in the donee spouse to appoint the interest, or such 
portion, whether exercisable by will or during life, is 
exercisable by such spouse alone and in all events. For 
purposes of this subsection, the term ``specific portion'' only 
includes a portion determined on a fractional or percentage 
basis.
  (f) Election with respect to life estate for donee spouse.--
          (1) In general.--In the case of qualified terminable 
        interest property--
                  (A) for purposes of subsection (a), such 
                property shall be treated as transferred to the 
                donee spouse, and
                  (B) for purposes of subsection (b)(1), no 
                part of such property shall be considered as 
                retained in the donor or transferred to any 
                person other than the donee spouse.
          (2) Qualified terminable interest property.--For 
        purposes of this subsection, the term ``qualified 
        terminable interest property'' means any property--
                  (A) which is transferred by the donor spouse,
                  (B) in which the donee spouse has a 
                qualifying income interest for life, and
                  (C) to which an election under this 
                subsection applies.
          (3) Certain rules made applicable.--For purposes of 
        this subsection, rules similar to the rules of clauses 
        (ii), (iii), and (iv) of section 2056(b)(7)(B) shall 
        apply and the rules of section 2056(b)(10) shall apply.
          (4) Election.--
                  (A) Time and manner.--An election under this 
                subsection with respect to any property shall 
                be made on or before the date prescribed by 
                section 6075(b) for filing a gift tax return 
                with respect to the transfer (determined 
                without regard to section 6019(2)) and shall be 
                made in such manner as the Secretary shall by 
                regulations prescribe.
                  (B) Election irrevocable.--An election under 
                this subsection, once made, shall be 
                irrevocable.
          (5) Treatment of interest retained by donor spouse.--
                  (A) In general.--In the case of any qualified 
                terminable interest property--
                          (i) such property shall not be 
                        includible in the gross estate of the 
                        donor spouse, and
                          (ii) any subsequent transfer by the 
                        donor spouse of an interest in such 
                        property shall not be treated as a 
                        transfer for purposes of this chapter.
                  (B) Subparagraph (A) not to apply after 
                transfer by donee spouse.--Subparagraph (A) 
                shall not apply with respect to any property 
                after the donee spouse is treated as having 
                transferred such property under section 2519, 
                or such property is includible in the donee 
                spouse's gross estate under section 2044.
          (6) Treatment of joint and survivor annuities.--In 
        the case of a joint and survivor annuity where only the 
        donor spouse and donee spouse have the right to receive 
        payments before the death of the last spouse to die--
                  (A) the donee spouse's interest shall be 
                treated as a qualifying income interest for 
                life,
                  (B) the donor spouse shall be treated as 
                having made an election under this subsection 
                with respect to such annuity unless the donor 
                spouse otherwise elects on or before the date 
                specified in paragraph (4)(A),
                  (C) paragraph (5) and section 2519 shall not 
                apply to the donor spouse's interest in the 
                annuity, and
                  (D) if the donee spouse dies before the donor 
                spouse, no amount shall be includible in the 
                gross estate of the donee spouse under section 
                2044 with respect to such annuity.
        An election under subparagraph (B), once made, shall be 
        irrevocable.
  (g) Special rule for charitable remainder trusts.--
          (1) In general.--If, after the transfer, the donee 
        spouse is the only beneficiary who is not a charitable 
        beneficiary (other than the donor) of a qualified 
        charitable remainder trust, subsection (b) shall not 
        apply to the interest in such trust which is 
        transferred to the donee spouse.
          (2) Definitions.--For purposes of paragraph (1), the 
        term ``charitable beneficiary'' and ``qualified 
        charitable remainder trust'' have the meanings given to 
        such terms by section 2056(b)(8)(B).
  (h) Denial of double deduction.--Nothing in this section or 
any other provision of this chapter shall allow the value of 
any interest in property to be deducted under this chapter more 
than once with respect to the same donor.
  (i) Disallowance of marital deduction where spouse not 
citizen.--If the spouse of the donor is not a citizen of the 
United States--
          (1) no deduction shall be allowed under this section,
          (2) section 2503(b) shall be applied with respect to 
        gifts which are made by the donor to such spouse and 
        with respect to which a deduction would be allowable 
        under this section but for paragraph (1) by 
        substituting ``$100,000'' for ``$10,000'', and
          (3) the principles of sections 2515 and 2515A (as 
        such sections were in effect before their repeal by the 
        Economic Recovery Tax Act of 1981) shall apply, except 
        that the provisions of such section 2515 providing for 
        an election shall not apply.
This subsection shall not apply to any transfer resulting from 
the acquisition of rights under a joint and survivor annuity 
described in subsection (f)(6).

           *       *       *       *       *       *       *

Subtitle C--Employment Taxes

           *       *       *       *       *       *       *

CHAPTER 21--FEDERAL INSURANCE CONTRIBUTIONS ACT

           *       *       *       *       *       *       *

Subchapter C--GENERAL PROVISIONS

           *       *       *       *       *       *       *

SEC. 3121. DEFINITIONS.

  (a) Wages.--For purposes of this chapter, the term ``wages'' 
means all remuneration for employment, including the cash value 
of all remuneration (including benefits) paid in any medium 
other than cash; except that such term shall not include--
          (1) in the case of the taxes imposed by sections 
        3101(a) and 3111(a) that part of the remuneration 
        which, after remuneration (other than remuneration 
        referred to in the succeeding paragraphs of this 
        subsection) equal to the contribution and benefit base 
        (as determined under section 230 of the Social Security 
        Act) with respect to employment has been paid to an 
        individual by an employer during the calendar year with 
        respect to which such contribution and benefit base is 
        effective, is paid to such individual by such employer 
        during such calendar year. If an employer (hereinafter 
        referred to as successor employer) during any calendar 
        year acquires substantially all the property used in a 
        trade or business of another employer (hereinafter 
        referred to as a predecessor), or used in a separate 
        unit of a trade or business of a predecessor, and 
        immediately after the acquisition employs in his trade 
        or business an individual who immediately prior to the 
        acquisition was employed in the trade or business of 
        such predecessor, then, for the purpose of determining 
        whether the successor employer has paid remuneration 
        (other than remuneration referred to in the succeeding 
        paragraphs of this subsection) with respect to 
        employment equal to the contribution and benefit base 
        (as determined under section 230 of the Social Security 
        Act) to such individual during such calendar year, any 
        remuneration (other than remuneration referred to in 
        the succeeding paragraphs of this subsection) with 
        respect to employment paid (or considered under this 
        paragraph as having been paid) to such individual by 
        such predecessor during such calendar year and prior to 
        such acquisition shall be considered as having been 
        paid by such successor employer;
          (2) the amount of any payment (including any amount 
        paid by an employer for insurance or annuities, or into 
        a fund, to provide for any such payment) made to, or on 
        behalf of, an employee or any of his dependents under a 
        plan or system established by an employer which makes 
        provision for his employees generally (or for his 
        employees generally and their dependents) or for a 
        class or classes of his employees (or for a class or 
        classes of his employees and their dependents), on 
        account of--
                  (A) sickness or accident disability (but, in 
                the case of payments made to an employee or any 
                of his dependents, this subparagraph shall 
                exclude from the term ``wages'' only payments 
                which are received under a workman's 
                compensation law), or
                  (B) medical or hospitalization expenses in 
                connection with sickness or accident 
                disability, or
                  (C) death, except that this paragraph does 
                not apply to a payment for group-term life 
                insurance to the extent that such payment is 
                includible in the gross income of the employee;
          (4) any payment on account of sickness or accident 
        disability, or medical or hospitalization expenses in 
        connection with sickness or accident disability, made 
        by an employer to, or on behalf of, an employee after 
        the expiration of 6 calendar months following the last 
        calendar month in which the employee worked for such 
        employer;
          (5) any payment made to, or on behalf of, an employee 
        or his beneficiary--
                  (A) from or to a trust described in section 
                401(a) which is exempt from tax under section 
                501(a) at the time of such payment unless such 
                payment is made to an employee of the trust as 
                remuneration for services rendered as such 
                employee and not as a beneficiary of the trust,
                  (B) under or to an annuity plan which, at the 
                time of such payment, is a plan described in 
                section 403(a),
                  (C) under a simplified employee pension (as 
                defined in section 408(k)(1)), other than any 
                contributions described in section 408(k)(6),
                  (D) under or to an annuity contract described 
                in section 403(b), other than a payment for the 
                purchase of such contract which is made by 
                reason of a salary reduction agreement (whether 
                evidenced by a written instrument or 
                otherwise),
                  (E) under or to an exempt governmental 
                deferred compensation plan (as defined in 
                subsection (v)(3)),
                  (F) to supplement pension benefits under a 
                plan or trust described in any of the foregoing 
                provisions of this paragraph to take into 
                account some portion or all of the increase in 
                the cost of living (as determined by the 
                Secretary of Labor) since retirement but only 
                if such supplemental payments are under a plan 
                which is treated as a welfare plan under 
                section 3(2)(B)(ii) of the Employee Retirement 
                Income Security Act of 1974,
                  (G) under a cafeteria plan (within the 
                meaning of section 125) if such payment would 
                not be treated as wages without regard to such 
                plan and it is reasonable to believe that (if 
                section 125 applied for purposes of this 
                section) section 125 would not treat any wages 
                as constructively received,
                  (H) under an arrangement to which section 
                408(p) applies, other than any elective 
                contributions under paragraph (2)(A)(i) 
                thereof, or
                  (I) under a plan described in section 
                457(e)(11)(A)(ii) and maintained by an eligible 
                employer (as defined in section 457(e)(1));
          (6) the payment by an employer (without deduction 
        from the remuneration of the employee)--
                  (A) of the tax imposed upon an employee under 
                section 3101, or
                  (B) of any payment required from an employee 
                under a State unemployment compensation law,
        with respect to remuneration paid to an employee for 
        domestic service in a private home of the employer or 
        for agricultural labor;
          (7)(A) remuneration paid in any medium other than 
        cash to an employee for service not in the course of 
        the employer's trade or business or for domestic 
        service in a private home of the employer;
          (B) cash remuneration paid by an employer in any 
        calendar year to an employee for domestic service in a 
        private home of the employer (including domestic 
        service on a farm operated for profit), if the cash 
        remuneration paid in such year by the employer to the 
        employee for such service is less than the applicable 
        dollar threshold (as defined in subsection (x)) for 
        such year;
          (C) cash remuneration paid by an employer in any 
        calendar year to an employee for service not in the 
        course of the employer's trade or business, if the cash 
        remuneration paid in such year by the employer to the 
        employee for such service is less than $100. As used in 
        this subparagraph, the term ``service not in the course 
        of the employer's trade or business'' does not include 
        domestic service in a private home of the employer and 
        does not include service described in subsection 
        (g)(5);
          (8)(A) remuneration paid in any medium other than 
        cash for agricultural labor;
          (B) cash remuneration paid by an employer in any 
        calendar year to an employee for agricultural labor 
        unless--
                  (i) the cash remuneration paid in such year 
                by the employer to the employee for such labor 
                is $150 or more, or
                  (ii) the employer's expenditures for 
                agricultural labor in such year equal or exceed 
                $2,500,
except that clause (ii) shall not apply in determining whether 
remuneration paid to an employee constitutes ``wages'' under 
this section if such employee (I) is employed as a hand harvest 
laborer and is paid on a piece rate basis in an operation which 
has been, and is customarily and generally recognized as having 
been, paid on a piece rate basis in the region of employment, 
(II) commutes daily from his permanent residence to the farm on 
which he is so employed, and (III) has been employed in 
agriculture less than 13 weeks during the preceding calendar 
year;
          (10) remuneration paid by an employer in any calendar 
        year to an employee for service described in subsection 
        (d)(3)(C) (relating to home workers), if the cash 
        remuneration paid in such year by the employer to the 
        employee for such service is less than $100;
          (11) remuneration paid to or on behalf of an employee 
        if (and to the extent that) at the time of the payment 
        of such remuneration it is reasonable to believe that a 
        corresponding deduction is allowable under section 217 
        (determined without regard to section 274(n));
          (12)(A) tips paid in any medium other than cash;
          (B) cash tips received by an employee in any calendar 
        month in the course of his employment by an employer 
        unless the amount of such cash tips is $20 or more;
          (13) any payment or series of payments by an employer 
        to an employee or any of his dependents which is paid--
                  (A) upon or after the termination of an 
                employee's employment relationship because of 
                (i) death, or (ii) retirement for disability, 
                and
                  (B) under a plan established by the employer 
                which makes provision for his employees 
                generally or a class or classes of his 
                employees (or for such employees or class or 
                classes of employees and their dependents),
        other than any such payment or series of payments which 
        would have been paid if the employee's employment 
        relationship had not been so terminated;
          (14) any payment made by an employer to a survivor or 
        the estate of a former employee after the calendar year 
        in which such employee died;
          (15) any payment made by an employer to an employee, 
        if at the time such payment is made such employee is 
        entitled to disability insurance benefits under section 
        223(a) of the Social Security Act and such entitlement 
        commenced prior to the calendar year in which such 
        payment is made, and if such employee did not perform 
        any services for such employer during the period for 
        which such payment is made;
          (16) remuneration paid by an organization exempt from 
        income tax under section 501(a) (other than an 
        organization described in section 401(a)) or under 
        section 521 in any calendar year to an employee for 
        service rendered in the employ of such organization, if 
        the remuneration paid in such year by the organization 
        to the employee for such service is less than $100;
          (18) any payment made, or benefit furnished, to or 
        for the benefit of an employee if at the time of such 
        payment or such furnishing it is reasonable to believe 
        that the employee will be able to exclude such payment 
        or benefit from income under section 127, 129, 
        134(b)(4), or 134(b)(5);
          (19) the value of any meals or lodging furnished by 
        or on behalf of the employer if at the time of such 
        furnishing it is reasonable to believe that the 
        employee will be able to exclude such items from income 
        under section 119;
          (20) any benefit provided to or on behalf of an 
        employee if at the time such benefit is provided it is 
        reasonable to believe that the employee will be able to 
        exclude such benefit from income under section 74(c), 
        108(f)(4), 117, or 132;
          (21) in the case of a member of an Indian tribe, any 
        remuneration on which no tax is imposed by this chapter 
        by reason of section 7873 (relating to income derived 
        by Indians from exercise of fishing rights);
          (22) remuneration on account of--
                  (A) a transfer of a share of stock to any 
                individual pursuant to an exercise of an 
                incentive stock option (as defined in section 
                422(b)) or under an employee stock purchase 
                plan (as defined in section 423(b)), or
                  (B) any disposition by the individual of such 
                stock; or
          (23) any benefit or payment which is excludable from 
        the gross income of the employee under section 139B(b).
Nothing in the regulations prescribed for purposes of chapter 
24 (relating to income tax withholding) which provides an 
exclusion from ``wages'' as used in such chapter shall be 
construed to require a similar exclusion from ``wages'' in the 
regulations prescribed for purposes of this chapter. Except as 
otherwise provided in regulations prescribed by the Secretary, 
any third party which makes a payment included in wages solely 
by reason of the parenthetical matter contained in subparagraph 
(A) of paragraph (2) shall be treated for purposes of this 
chapter and chapter 22 as the employer with respect to such 
wages.
  (b) Employment.--For purposes of this chapter, the term 
``employment'' means any service, of whatever nature, performed 
(A) by an employee for the person employing him, irrespective 
of the citizenship or residence of either, (i) within the 
United States, or (ii) on or in connection with an American 
vessel or American aircraft under a contract of service which 
is entered into within the United States or during the 
performance of which and while the employee is employed on the 
vessel or aircraft it touches at a port in the United States, 
if the employee is employed on and in connection with such 
vessel or aircraft when outside the United States, or (B) 
outside the United States by a citizen or resident of the 
United States as an employee for an American employer (as 
defined in subsection (h)), or (C) if it is service, regardless 
of where or by whom performed, which is designated as 
employment or recognized as equivalent to employment under an 
agreement entered into under section 233 of the Social Security 
Act; except that such term shall not include--
          (1) service performed by foreign agricultural workers 
        lawfully admitted to the United States from the 
        Bahamas, Jamaica, and the other British West Indies, or 
        from any other foreign country or possession thereof, 
        on a temporary basis to perform agricultural labor;
          (2) domestic service performed in a local college 
        club, or local chapter of a college fraternity or 
        sorority, by a student who is enrolled and is regularly 
        attending classes at a school, college, or university;
          (3)(A) service performed by a child under the age of 
        18 in the employ of [his father] the child's father or 
        mother;
          (B) service not in the course of the employer's trade 
        or business, or domestic service in a private home of 
        the employer, performed by an individual under the age 
        of 21 in the employ of [his father] the individual's 
        father or mother, or performed by an individual in the 
        employ of [his spouse] the individual's spouse or son 
        or daughter; except that the provisions of this 
        subparagraph shall not be applicable to such domestic 
        service performed by an individual in the employ of 
        [his son] the individual's son or daughter if--
                  (i) the employer is a surviving spouse or a 
                divorced individual and has not remarried, or 
                has a spouse living in the home who has a 
                mental or physical condition which results in 
                such spouse's being incapable of caring for a 
                son, daughter, stepson, or stepdaughter 
                (referred to in clause (ii)) for at least 4 
                continuous weeks in the calendar quarter in 
                which the service is rendered, and
                  (ii) a son, daughter, stepson, or 
                stepdaughter of such employer is living in the 
                home, and
                  (iii) the son, daughter, stepson, or 
                stepdaughter (referred to in clause (ii)) has 
                not attained age 18 or has a mental or physical 
                condition which requires the personal care and 
                supervision of an adult for at least 4 
                continuous weeks in the calendar quarter in 
                which the service is rendered;
          (4) service performed by an individual on or in 
        connection with a vessel not an American vessel, or on 
        or in connection with an aircraft not an American 
        aircraft, if (A) the individual is employed on and in 
        connection with such vessel or aircraft, when outside 
        the United States and (B)(i) such individual is not a 
        citizen of the United States or (ii) the employer is 
        not an American employer;
          (5) service performed in the employ of the United 
        States or any instrumentality of the United States, if 
        such service--
                  (A) would be excluded from the term 
                ``employment'' for purposes of this title if 
                the provisions of paragraphs (5) and (6) of 
                this subsection as in effect in January 1983 
                had remained in effect, and
                  (B) is performed by an individual who--
                          (i) has been continuously performing 
                        service described in subparagraph (A) 
                        since December 31, 1983, and for 
                        purposes of this clause--
                                  (I) if an individual 
                                performing service described in 
                                subparagraph (A) returns to the 
                                performance of such service 
                                after being separated therefrom 
                                for a period of less than 366 
                                consecutive days, regardless of 
                                whether the period began 
                                before, on, or after December 
                                31, 1983, then such service 
                                shall be considered continuous,
                                  (II) if an individual 
                                performing service described in 
                                subparagraph (A) returns to the 
                                performance of such service 
                                after being detailed or 
                                transferred to an international 
                                organization as described under 
                                section 3343 of subchapter III 
                                of chapter 33 of title 5, 
                                United States Code, or under 
                                section 3581 of chapter 35 of 
                                such title, then the service 
                                performed for that organization 
                                shall be considered service 
                                described in subparagraph (A),
                                  (III) if an individual 
                                performing service described in 
                                subparagraph (A) is reemployed 
                                or reinstated after being 
                                separated from such service for 
                                the purpose of accepting 
                                employment with the American 
                                Institute in Taiwan as provided 
                                under section 3310 of chapter 
                                48 of title 22, United States 
                                Code, then the service 
                                performed for that Institute 
                                shall be considered service 
                                described in subparagraph (A),
                                  (IV) if an individual 
                                performing service described in 
                                subparagraph (A) returns to the 
                                performance of such service 
                                after performing service as a 
                                member of a uniformed service 
                                (including, for purposes of 
                                this clause, service in the 
                                National Guard and temporary 
                                service in the Coast Guard 
                                Reserve) and after exercising 
                                restoration or reemployment 
                                rights as provided under 
                                chapter 43 of title 38, United 
                                States Code, then the service 
                                so performed as a member of a 
                                uniformed service shall be 
                                considered service described in 
                                subparagraph (A), and
                                  (V) if an individual 
                                performing service described in 
                                subparagraph (A) returns to the 
                                performance of such service 
                                after employment (by a tribal 
                                organization) to which section 
                                104(e)(2) of the Indian Self-
                                Determination Act applies, then 
                                the service performed for that 
                                tribal organization shall be 
                                considered service described in 
                                subparagraph (A); or
                          (ii) is receiving an annuity from the 
                        Civil Service Retirement and Disability 
                        Fund, or benefits (for service as an 
                        employee) under another retirement 
                        system established by a law of the 
                        United States for employees of the 
                        Federal Government (other than for 
                        members of the uniformed service);
        except that this paragraph shall not apply with respect 
        to any such service performed on or after any date on 
        which such individual performs--
                  (C) service performed as the President or 
                Vice President of the United States,
                  (D) service performed--
                          (i) in a position placed in the 
                        Executive Schedule under sections 5312 
                        through 5317 of title 5, United States 
                        Code,
                          (ii) as a noncareer appointee in the 
                        Senior Executive Service or a noncareer 
                        member of the Senior Foreign Service, 
                        or
                          (iii) in a position to which the 
                        individual is appointed by the 
                        President (or his designee) or the Vice 
                        President under section 105(a)(1), 
                        106(a)(1), or 107 (a)(1) or (b)(1) of 
                        title 3, United States Code, if the 
                        maximum rate of basic pay for such 
                        position is at or above the rate for 
                        level V of the Executive Schedule,
                  (E) service performed as the Chief Justice of 
                the United States, an Associate Justice of the 
                Supreme Court, a judge of a United States court 
                of appeals, a judge of a United States district 
                court (including the district court of a 
                territory), a judge of the United States Court 
                of Federal Claims, a judge of the United States 
                Court of International Trade, a judge of the 
                United States Tax Court, a United States 
                magistrate judge, or a referee in bankruptcy or 
                United States bankruptcy judge,
                  (F) service performed as a Member, Delegate, 
                or Resident Commissioner of or to the Congress,
                  (G) any other service in the legislative 
                branch of the Federal Government if such 
                service--
                          (i) is performed by an individual who 
                        was not subject to subchapter III of 
                        chapter 83 of title 5, United States 
                        Code, or to another retirement system 
                        established by a law of the United 
                        States for employees of the Federal 
                        Government (other than for members of 
                        the uniformed services), on December 
                        31, 1983, or
                          (ii) is performed by an individual 
                        who has, at any time after December 31, 
                        1983, received a lump-sum payment under 
                        section 8342(a) of title 5, United 
                        States Code, or under the corresponding 
                        provision of the law establishing the 
                        other retirement system described in 
                        clause (i), or
                          (iii) is performed by an individual 
                        after such individual has otherwise 
                        ceased to be subject to subchapter III 
                        of chapter 83 of title 5, United States 
                        Code (without having an application 
                        pending for coverage under such 
                        subchapter), while performing service 
                        in the legislative branch (determined 
                        without regard to the provisions of 
                        subparagraph (B) relating to continuity 
                        of employment), for any period of time 
                        after December 31, 1983,
                and for purposes of this subparagraph (G) an 
                individual is subject to such subchapter III or 
                to any such other retirement system at any time 
                only if (a) such individual's pay is subject to 
                deductions, contributions, or similar payments 
                (concurrent with the service being performed at 
                that time) under section 8334(a) of such title 
                5 or the corresponding provision of the law 
                establishing such other system, or (in a case 
                to which section 8332(k)(1) of such title 
                applies) such individual is making payments of 
                amounts equivalent to such deductions, 
                contributions, or similar payments while on 
                leave without pay, or (b) such individual is 
                receiving an annuity from the Civil Service 
                Retirement and Disability Fund, or is receiving 
                benefits (for service as an employee) under 
                another retirement system established by a law 
                of the United States for employees of the 
                Federal Government (other than for members of 
                the uniformed services), or
                  (H) service performed by an individual--
                          (i) on or after the effective date of 
                        an election by such individual, under 
                        section 301 of the Federal Employees' 
                        Retirement System Act of 1986, section 
                        307 of the Central Intelligence Agency 
                        Retirement Act (50 U.S.C. 2157), or the 
                        Federal Employees' Retirement System 
                        Open Enrollment Act of 1997, to become 
                        subject to the Federal Employees' 
                        Retirement System provided in chapter 
                        84 of title 5, United States Code, or
                          (ii) on or after the effective date 
                        of an election by such individual, 
                        under regulations issued under section 
                        860 of the Foreign Service Act of 1980, 
                        to become subject to the Foreign 
                        Service Pension System provided in 
                        subchapter II of chapter 8 of title I 
                        of such Act;
          (6) service performed in the employ of the United 
        States or any instrumentality of the United States if 
        such service is performed--
                  (A) in a penal institution of the United 
                States by an inmate thereof;
                  (B) by any individual as an employee included 
                under section 5351(2) of title 5, United States 
                Code (relating to certain interns, student 
                nurses, and other student employees of 
                hospitals of the Federal Government), other 
                than as a medical or dental intern or a medical 
                or dental resident in training; or
                  (C) by any individual as an employee serving 
                on a temporary basis in case of fire, storm, 
                earthquake, flood, or other similar emergency;
          (7) service performed in the employ of a State, or 
        any political subdivision thereof, or any 
        instrumentality of any one or more of the foregoing 
        which is wholly owned thereby, except that this 
        paragraph shall not apply in the case of--
                  (A) service which, under subsection (j), 
                constitutes covered transportation service,
                  (B) service in the employ of the Government 
                of Guam or the Government of American Samoa or 
                any political subdivision thereof, or of any 
                instrumentality of any one or more of the 
                foregoing which is wholly owned thereby, 
                performed by an officer or employee thereof 
                (including a member of the legislature of any 
                such Government or political subdivision), and, 
                for purposes of this title with respect to the 
                taxes imposed by this chapter--
                          (i) any person whose service as such 
                        an officer or employee is not covered 
                        by a retirement system established by a 
                        law of the United States shall not, 
                        with respect to such service, be 
                        regarded as an employee of the United 
                        States or any agency or instrumentality 
                        thereof, and
                          (ii) the remuneration for service 
                        described in clause (i) (including fees 
                        paid to a public official) shall be 
                        deemed to have been paid by the 
                        Government of Guam or the Government of 
                        American Samoa or by a political 
                        subdivision thereof or an 
                        instrumentality of any one or more of 
                        the foregoing which is wholly owned 
                        thereby, whichever is appropriate,
                  (C) service performed in the employ of the 
                District of Columbia or any instrumentality 
                which is wholly owned thereby, if such service 
                is not covered by a retirement system 
                established by a law of the United States 
                (other than the Federal Employees Retirement 
                System provided in chapter 84 of title 5, 
                United States Code); except that the provisions 
                of this subparagraph shall not be applicable to 
                service performed--
                          (i) in a hospital or penal 
                        institution by a patient or inmate 
                        thereof;
                          (ii) by any individual as an employee 
                        included under section 5351(2) of title 
                        5, United States Code (relating to 
                        certain interns, student nurses, and 
                        other student employees of hospitals of 
                        the District of Columbia Government), 
                        other than as a medical or dental 
                        intern or as a medical or dental 
                        resident in training;
                          (iii) by any individual as an 
                        employee serving on a temporary basis 
                        in case of fire, storm, snow, 
                        earthquake, flood or other similar 
                        emergency; or
                          (iv) by a member of a board, 
                        committee, or council of the District 
                        of Columbia, paid on a per diem, 
                        meeting, or other fee basis,
                  (D) service performed in the employ of the 
                Government of Guam (or any instrumentality 
                which is wholly owned by such Government) by an 
                employee properly classified as a temporary or 
                intermittent employee, if such service is not 
                covered by a retirement system established by a 
                law of Guam; except that (i) the provisions of 
                this subparagraph shall not be applicable to 
                services performed by an elected official or a 
                member of the legislature or in a hospital or 
                penal institution by a patient or inmate 
                thereof, and (ii) for purposes of this 
                subparagraph, clauses (i) and (ii) of 
                subparagraph (B) shall apply,
                  (E) service included under an agreement 
                entered into pursuant to section 218 of the 
                Social Security Act, or
                  (F) service in the employ of a State (other 
                than the District of Columbia, Guam, or 
                American Samoa), of any political subdivision 
                thereof, or of any instrumentality of any one 
                or more of the foregoing which is wholly owned 
                thereby, by an individual who is not a member 
                of a retirement system of such State, political 
                subdivision, or instrumentality, except that 
                the provisions of this subparagraph shall not 
                be applicable to service performed--
                          (i) by an individual who is employed 
                        to relieve such individual from 
                        unemployment;
                          (ii) in a hospital, home, or other 
                        institution by a patient or inmate 
                        thereof;
                          (iii) by any individual as an 
                        employee serving on a temporary basis 
                        in case of fire, storm, snow, 
                        earthquake, flood, or other similar 
                        emergency;
                          (iv) by an election official or 
                        election worker if the remuneration 
                        paid in a calendar year for such 
                        service is less than $1,000 with 
                        respect to service performed during any 
                        calendar year commencing on or after 
                        January 1, 1995, ending on or before 
                        December 31, 1999, and the adjusted 
                        amount determined under section 
                        218(c)(8)(B) of the Social Security Act 
                        for any calendar year commencing on or 
                        after January 1, 2000, with respect to 
                        service performed during such calendar 
                        year; or
                          (v) by an employee in a position 
                        compensated solely on a fee basis which 
                        is treated pursuant to section 
                        1402(c)(2)(E) as a trade or business 
                        for purposes of inclusion of such fees 
                        in net earnings from self-employment;
                for purposes of this subparagraph, except as 
                provided in regulations prescribed by the 
                Secretary, the term ``retirement system'' has 
                the meaning given such term by section 
                218(b)(4) of the Social Security Act;
          (8)(A) service performed by a duly ordained, 
        commissioned, or licensed minister of a church in the 
        exercise of his ministry or by a member of a religious 
        order in the exercise of duties required by such order, 
        except that this subparagraph shall not apply to 
        service performed by a member of such an order in the 
        exercise of such duties, if an election of coverage 
        under subsection (r) is in effect with respect to such 
        order, or with respect to the autonomous subdivision 
        thereof to which such member belongs;
          (B) service performed in the employ of a church or 
        qualified church-controlled organization if such church 
        or organization has in effect an election under 
        subsection (w), other than service in an unrelated 
        trade or business (within the meaning of section 
        513(a));
          (9) service performed by an individual as an employee 
        or employee representative as defined in section 3231;
          (10) service performed in the employ of--
                  (A) a school, college, or university, or
                  (B) an organization described in section 
                509(a)(3) if the organization is organized, and 
                at all times thereafter is operated, 
                exclusively for the benefit of, to perform the 
                functions of, or to carry out the purposes of a 
                school, college, or university and is operated, 
                supervised, or controlled by or in connection 
                with such school, college, or university, 
                unless it is a school, college, or university 
                of a State or a political subdivision thereof 
                and the services performed in its employ by a 
                student referred to in section 218(c)(5) of the 
                Social Security Act are covered under the 
                agreement between the Commissioner of Social 
                Security and such State entered into pursuant 
                to section 218 of such Act;
        if such service is performed by a student who is 
        enrolled and regularly attending classes at such 
        school, college, or university;
          (11) service performed in the employ of a foreign 
        government (including service as a consular or other 
        officer or employee or a nondiplomatic representative);
          (12) service performed in the employ of an 
        instrumentality wholly owned by a foreign government--
                  (A) if the service is of a character similar 
                to that performed in foreign countries by 
                employees of the United States Government or of 
                an instrumentality thereof; and
                  (B) if the Secretary of State shall certify 
                to the Secretary of the Treasury that the 
                foreign government, with respect to whose 
                instrumentality and employees thereof exemption 
                is claimed, grants an equivalent exemption with 
                respect to similar service performed in the 
                foreign country by employees of the United 
                States Government and of instrumentalities 
                thereof;
          (13) service performed as a student nurse in the 
        employ of a hospital or a nurses' training school by an 
        individual who is enrolled and is regularly attending 
        classes in a nurses' training school chartered or 
        approved pursuant to State law;
          (14)(A) service performed by an individual under the 
        age of 18 in the delivery or distribution of newspapers 
        or shopping news, not including delivery or 
        distribution to any point for subsequent delivery or 
        distribution;
          (B) service performed by an individual in, and at the 
        time of, the sale of newspapers or magazines to 
        ultimate consumers, under an arrangement under which 
        the newspapers or magazines are to be sold by him at a 
        fixed price, his compensation being based on the 
        retention of the excess of such price over the amount 
        at which the newspapers or magazines are charged to 
        him, whether or not he is guaranteed a minimum amount 
        of compensation for such service, or is entitled to be 
        credited with the unsold newspapers or magazines turned 
        back;
          (15) service performed in the employ of an 
        international organization, except service which 
        constitutes ``employment'' under subsection (y);
          (16) service performed by an individual under an 
        arrangement with the owner or tenant of land pursuant 
        to which--
                  (A) such individual undertakes to produce 
                agricultural or horticultural commodities 
                (including livestock, bees, poultry, and fur-
                bearing animals and wildlife) on such land,
                  (B) the agricultural or horticultural 
                commodities produced by such individual, or the 
                proceeds therefrom, are to be divided between 
                such individual and such owner or tenant, and
                  (C) the amount of such individual's share 
                depends on the amount of the agricultural or 
                horticultural commodities produced;
          (18) service performed in Guam by a resident of the 
        Republic of the Philippines while in Guam on a 
        temporary basis as a nonimmigrant alien admitted to 
        Guam pursuant to section 101(a)(15)(H)(ii) of the 
        Immigration and Nationality Act (8 U.S.C. 
        1101(a)(15)(H)(ii));
          (19) Service which is performed by a nonresident 
        alien individual for the period he is temporarily 
        present in the United States as a nonimmigrant under 
        subparagraph (F), (J), (M), or (Q) of section 
        101(a)(15) of the Immigration and Nationality Act, as 
        amended, and which is performed to carry out the 
        purpose specified in subparagraph (F), (J), (M), or 
        (Q), as the case may be;
          (20) service (other than service described in 
        paragraph (3)(A)) performed by an individual on a boat 
        engaged in catching fish or other forms of aquatic 
        animal life under an arrangement with the owner or 
        operator of such boat pursuant to which--
                  (A) such individual does not receive any cash 
                remuneration other than as provided in 
                subparagraph (B) and other than cash 
                remuneration--
                          (i) which does not exceed $100 per 
                        trip;
                          (ii) which is contingent on a minimum 
                        catch; and
                          (iii) which is paid solely for 
                        additional duties (such as mate, 
                        engineer, or cook) for which additional 
                        cash remuneration is traditional in the 
                        industry,
                  (B) such individual receives a share of the 
                boat's (or the boats' in the case of a fishing 
                operation involving more than one boat) catch 
                of fish or other forms of aquatic animal life 
                or a share of the proceeds from the sale of 
                such catch, and
                  (C) the amount of such individual's share 
                depends on the amount of the boat's (or the 
                boats' in the case of a fishing operation 
                involving more than one boat) catch of fish or 
                other forms of aquatic animal life,
        but only if the operating crew of such boat (or each 
        boat from which the individual receives a share in the 
        case of a fishing operation involving more than one 
        boat) is normally made up of fewer than 10 individuals;
          (21) domestic service in a private home of the 
        employer which--
                  (A) is performed in any year by an individual 
                under the age of 18 during any portion of such 
                year; and
                  (B) is not the principal occupation of such 
                employee; or
          (22) service performed by members of Indian tribal 
        councils as tribal council members in the employ of an 
        Indian tribal government, except that this paragraph 
        shall not apply in the case of service included under 
        an agreement under section 218A of the Social Security 
        Act.
For purposes of paragraph (20), the operating crew of a boat 
shall be treated as normally made up of fewer than 10 
individuals if the average size of the operating crew on trips 
made during the preceding 4 calendar quarters consisted of 
fewer than 10 individuals.
  (c) Included and excluded service.--For purposes of this 
chapter, if the services performed during one-half or more of 
any pay period by an employee for the person employing him 
constitute employment, all the services of such employee for 
such period shall be deemed to be employment; but if the 
services performed during more than one-half of any such pay 
period by an employee for the person employing him do not 
constitute employment, then none of the services of such 
employee for such period shall be deemed to be employment. As 
used in this subsection, the term ``pay period'' means a period 
(of not more than 31 consecutive days) for which a payment of 
remuneration is ordinarily made to the employee by the person 
employing him. This subsection shall not be applicable with 
respect to services performed in a pay period by an employee 
for the person employing him, where any of such service is 
excepted by subsection (b)(9).
  (d) Employee.--For purposes of this chapter, the term 
``employee'' means--
          (1) any officer of a corporation; or
          (2) any individual who, under the usual common law 
        rules applicable in determining the employer-employee 
        relationship, has the status of an employee; or
          (3) any individual (other than an individual who is 
        an employee under paragraph (1) or (2)) who performs 
        services for remuneration for any person--
                  (A) as an agent-driver or commission-driver 
                engaged in distributing meat products, 
                vegetable products, fruit products, bakery 
                products, beverages (other than milk), or 
                laundry or dry-cleaning services, for his 
                principal;
                  (B) as a full-time life insurance salesman;
                  (C) as a home worker performing work, 
                according to specifications furnished by the 
                person for whom the services are performed, on 
                materials or goods furnished by such person 
                which are required to be returned to such 
                person or a person designated by him; or
                  (D) as a traveling or city salesman, other 
                than as an agent-driver or commission-driver, 
                engaged upon a full-time basis in the 
                solicitation on behalf of, and the transmission 
                to, his principal (except for side-line sales 
                activities on behalf of some other person) of 
                orders from wholesalers, retailers, 
                contractors, or operators of hotels, 
                restaurants, or other similar establishments 
                for merchandise for resale or supplies for use 
                in their business operations;
        if the contract of service contemplates that 
        substantially all of such services are to be performed 
        personally by such individual; except that an 
        individual shall not be included in the term 
        ``employee'' under the provisions of this paragraph if 
        such individual has a substantial investment in 
        facilities used in connection with the performance of 
        such services (other than in facilities for 
        transportation), or if the services are in the nature 
        of a single transaction not part of a continuing 
        relationship with the person for whom the services are 
        performed; or
          (4) any individual who performs services that are 
        included under an agreement entered into pursuant to 
        section 218 or 218A of the Social Security Act.
  (e) State, United States, and citizen.--For purposes of this 
chapter--
          (1) State.--The term ``State'' includes the District 
        of Columbia, the Commonwealth of Puerto Rico, the 
        Virgin Islands, Guam, and American Samoa.
          (2) United States.--The term ``United States'' when 
        used in a geographical sense includes the Commonwealth 
        of Puerto Rico, the Virgin Islands, Guam, and American 
        Samoa.
An individual who is a citizen of the Commonwealth of Puerto 
Rico (but not otherwise a citizen of the United States) shall 
be considered, for purposes of this section, as a citizen of 
the United States.
  (f) American vessel and aircraft.--For purposes of this 
chapter, the term ``American vessel'' means any vessel 
documented or numbered under the laws of the United States; and 
includes any vessel which is neither documented or numbered 
under the laws of the United States nor documented under the 
laws of any foreign country, if its crew is employed solely by 
one or more citizens or residents of the United States or 
corporations organized under the laws of the United States or 
of any State; and the term ``American aircraft'' means an 
aircraft registered under the laws of the United States.
  (g) Agricultural labor.--For purposes of this chapter, the 
term ``agricultural labor'' includes all service performed--
          (1) on a farm, in the employ of any person, in 
        connection with cultivating the soil, or in connection 
        with raising or harvesting any agricultural or 
        horticultural commodity, including the raising, 
        shearing, feeding, caring for, training, and management 
        of livestock, bees, poultry, and fur-bearing animals 
        and wildlife;
          (2) in the employ of the owner or tenant or other 
        operator of a farm, in connection with the operation, 
        management, conservation, improvement, or maintenance 
        of such farm and its tools and equipment, or in 
        salvaging timber or clearing land of brush and other 
        debris left by a hurricane, if the major part of such 
        service is performed on a farm;
          (3) in connection with the production or harvesting 
        of any commodity defined as an agricultural commodity 
        in section 15(g) of the Agricultural Marketing Act, as 
        amended (12 U.S.C. 1141j), or in connection with the 
        ginning of cotton, or in connection with the operation 
        or maintenance of ditches, canals, reservoirs, or 
        waterways, not owned or operated for profit, used 
        exclusively for supplying and storing water for farming 
        purposes;
          (4)(A) in the employ of the operator of a farm in 
        handling, planting, drying, packing, packaging, 
        processing, freezing, grading, storing, or delivering 
        to storage or to market or to a carrier for 
        transportation to market, in its unmanufactured state, 
        any agricultural or horticultural commodity; but only 
        if such operator produced more than one-half of the 
        commodity with respect to which such service is 
        performed;
          (B) in the employ of a group of operators of farms 
        (other than a cooperative organization) in the 
        performance of service described in subparagraph (A), 
        but only if such operators produced all of the 
        commodity with respect to which such service is 
        performed. For purposes of this subparagraph, any 
        unincorporated group of operators shall be deemed a 
        cooperative organization if the number of operators 
        comprising such group is more than 20 at any time 
        during the calendar year in which such service is 
        performed;
          (C) the provisions of subparagraphs (A) and (B) shall 
        not be deemed to be applicable with respect to service 
        performed in connection with commercial canning or 
        commercial freezing or in connection with any 
        agricultural or horticultural commodity after its 
        delivery to a terminal market for distribution for 
        consumption; or
          (5) on a farm operated for profit if such service is 
        not in the course of the employer's trade or business.
As used in this subsection, the term ``farm'' includes stock, 
dairy, poultry, fruit, fur-bearing animal, and truck farms, 
plantations, ranches, nurseries, ranges, greenhouses or other 
similar structures used primarily for the raising of 
agricultural or horticultural commodities, and orchards.
  (h) American employer.--For purposes of this chapter, the 
term ``American employer'' means an employer which is--
          (1) the United States or any instrumentality thereof,
          (2) an individual who is a resident of the United 
        States,
          (3) a partnership, if two-thirds or more of the 
        partners are residents of the United States,
          (4) a trust, if all of the trustees are residents of 
        the United States, or
          (5) a corporation organized under the laws of the 
        United States or of any State.
  (i) Computation of wages in certain cases.--
          (1) Domestic service.--For purposes of this chapter, 
        in the case of domestic service described in subsection 
        (a)(7)(B), any payment of cash remuneration for such 
        service which is more or less than a whole-dollar 
        amount shall, under such conditions and to such extent 
        as may be prescribed by regulations made under this 
        chapter, be computed to the nearest dollar. For the 
        purpose of the computation to the nearest dollar, the 
        payment of a fractional part of a dollar shall be 
        disregarded unless it amounts to one-half dollar or 
        more, in which case it shall be increased to $1. The 
        amount of any payment of cash remuneration so computed 
        to the nearest dollar shall, in lieu of the amount 
        actually paid, be deemed to constitute the amount of 
        cash remuneration for purposes of subsection (a)(7)(B).
          (2) Service in the uniformed services.--For purposes 
        of this chapter, in the case of an individual 
        performing service, as a member of a uniformed service, 
        to which the provisions of subsection (m)(1) are 
        applicable, the term ``wages'' shall, subject to the 
        provisions of subsection (a)(1) of this section, 
        include as such individual's remuneration for such 
        service only (A) his basic pay as described in chapter 
        3 and section 1009 of title 37, United States Code, in 
        the case of an individual performing service to which 
        subparagraph (A) of such subsection (m)(1) applies, or 
        (B) his compensation for such service as determined 
        under section 206(a) of title 37, United States Code, 
        in the case of an individual performing service to 
        which subparagraph (B) of such subsection (m)(1) 
        applies.
          (3) Peace Corps volunteer service.--For purposes of 
        this chapter, in the case of an individual performing 
        service, as a volunteer or volunteer leader within the 
        meaning of the Peace Corps Act, to which the provisions 
        of section 3121(p) are applicable, the term ``wages'' 
        shall, subject to the provisions of subsection (a)(1) 
        of this section, include as such individual's 
        remuneration for such service only amounts paid 
        pursuant to section 5(c) or 6(1) of the Peace Corps 
        Act.
          (4) Service performed by certain members of religious 
        orders.--For purposes of this chapter, in any case 
        where an individual is a member of a religious order 
        (as defined in subsection (r)(2)) performing service in 
        the exercise of duties required by such order, and an 
        election of coverage under subsection (r) is in effect 
        with respect to such order or with respect to the 
        autonomous subdivision thereof to which such member 
        belongs, the term ``wages'' shall, subject to the 
        provisions of subsection (a)(1), include as such 
        individual's remuneration for such service the fair 
        market value of any board, lodging, clothing, and other 
        perquisites furnished to such member by such order or 
        subdivision thereof or by any other person or 
        organization pursuant to an agreement with such order 
        or subdivision, except that the amount included as such 
        individual's remuneration under this paragraph shall 
        not be less than $100 a month.
          (5) Service performed by certain retired justices and 
        judges.--For purposes of this chapter, in the case of 
        an individual performing service under the provisions 
        of section 294 of title 28, United States Code 
        (relating to assignment of retired justices and judges 
        to active duty), the term ``wages'' shall not include 
        any payment under section 371(b) of such title 28 which 
        is received during the period of such service.
  (j) Covered transportation service.--For purposes of this 
chapter--
          (1) Existing transportation systems--General rule.--
        Except as provided in paragraph (2), all service 
        performed in the employ of a State or political 
        subdivision in connection with its operation of a 
        public transportation system shall constitute covered 
        transportation service if any part of the 
        transportation system was acquired from private 
        ownership after 1936 and prior to 1951.
          (2) Existing transportation systems--Cases in which 
        no transportation employees, or only certain employees, 
        are covered.--Service performed in the employ of a 
        State or political subdivision in connection with the 
        operation of its public transportation system shall not 
        constitute covered transportation service if--
                  (A) any part of the transportation system was 
                acquired from private ownership after 1936 and 
                prior to 1951, and substantially all service in 
                connection with the operation of the 
                transportation system was, on December 31, 
                1950, covered under a general retirement system 
                providing benefits which, by reason of a 
                provision of the State constitution dealing 
                specifically with retirement systems of the 
                State or political subdivisions thereof, cannot 
                be diminished or impaired; or
                  (B) no part of the transportation system 
                operated by the State or political subdivision 
                on December 31, 1950, was acquired from private 
                ownership after 1936 and prior to 1951;
        except that if such State or political subdivision 
        makes an acquisition after 1950 from private ownership 
        of any part of its transportation system, then, in the 
        case of any employee who--
                  (C) became an employee of such State or 
                political subdivision in connection with and at 
                the time of its acquisition after 1950 of such 
                part, and
                  (D) prior to such acquisition rendered 
                service in employment (including as employment 
                service covered by an agreement under section 
                218 of the Social Security Act) in connection 
                with the operation of such part of the 
                transportation system acquired by the State or 
                political subdivision,
        the service of such employee in connection with the 
        operation of the transportation system shall constitute 
        covered transportation service, commencing with the 
        first day of the third calendar quarter following the 
        calendar quarter in which the acquisition of such part 
        took place, unless on such first day such service of 
        such employee is covered by a general retirement system 
        which does not, with respect to such employee, contain 
        special provisions applicable only to employees 
        described in subparagraph (C).
          (3) Transportation systems acquired after 1950.--All 
        service performed in the employ of a State or political 
        subdivision thereof in connection with its operation of 
        a public transportation system shall constitute covered 
        transportation service if the transportation system was 
        not operated by the State or political subdivision 
        prior to 1951 and, at the time of its first acquisition 
        (after 1950) from private ownership of any part of its 
        transportation system, the State or political 
        subdivision did not have a general retirement system 
        covering substantially all service performed in 
        connection with the operation of the transportation 
        system.
          (4) Definitions.--For purposes of this subsection--
                  (A) The term ``general retirement system'' 
                means any pension, annuity, retirement, or 
                similar fund or system established by a State 
                or by a political subdivision thereof for 
                employees of the State, political subdivision, 
                or both; but such term shall not include such a 
                fund or system which covers only service 
                performed in positions connected with the 
                operation of its public transportation system.
                  (B) A transportation system or a part thereof 
                shall be considered to have been acquired by a 
                State or political subdivision from private 
                ownership if prior to the acquisition service 
                performed by employees in connection with the 
                operation of the system or part thereof 
                acquired constituted employment under this 
                chapter or subchapter A of chapter 9 of the 
                Internal Revenue Code of 1939 or was covered by 
                an agreement made pursuant to section 218 of 
                the Social Security Act and some of such 
                employees became employees of the State or 
                political subdivision in connection with and at 
                the time of such acquisition.
                  (C) The term ``political subdivision'' 
                includes an instrumentality of--
                          (i) a State,
                          (ii) one or more political 
                        subdivisions of a State, or
                          (iii) a State and one or more of its 
                        political subdivisions.
  (l) Agreements entered into by American employers with 
respect to foreign affiliates.--
          (1) Agreement with respect to certain employees of 
        foreign affiliate.--The Secretary shall, at the 
        American employer's request, enter into an agreement 
        (in such manner and form as may be prescribed by the 
        Secretary) with any American employer (as defined in 
        subsection (h)) who desires to have the insurance 
        system established by title II of the Social Security 
        Act extended to service performed outside the United 
        States in the employ of any 1 or more of such 
        employer's foreign affiliates (as defined in paragraph 
        (6)) by all employees who are citizens or residents of 
        the United States, except that the agreement shall not 
        apply to any service performed by, or remuneration paid 
        to, an employee if such service or remuneration would 
        be excluded from the term ``employment'' or ``wages'', 
        as defined in this section, had the service been 
        performed in the United States. Such agreement may be 
        amended at any time so as to be made applicable, in the 
        same manner and under the same conditions, with respect 
        to any other foreign affiliate of such American 
        employer. Such agreement shall be applicable with 
        respect to citizens or residents of the United States 
        who, on or after the effective date of the agreement, 
        are employees of and perform services outside the 
        United States for any foreign affiliate specified in 
        the agreement. Such agreement shall provide--
                  (A) that the American employer shall pay to 
                the Secretary, at such time or times as the 
                Secretary may by regulations prescribe, amounts 
                equivalent to the sum of the taxes which would 
                be imposed by sections 3101 and 3111 (including 
                amounts equivalent to the interest, additions 
                to the taxes, additional amounts, and penalties 
                which would be applicable) with respect to the 
                remuneration which would be wages if the 
                services covered by the agreement constituted 
                employment as defined in this section; and
                  (B) that the American employer will comply 
                with such regulations relating to payments and 
                reports as the Secretary may prescribe to carry 
                out the purposes of this subsection.
          (2) Effective period of agreement.--An agreement 
        entered into pursuant to paragraph (1) shall be in 
        effect for the period beginning with the first day of 
        the calendar quarter in which such agreement is entered 
        into or the first day of the succeeding calendar 
        quarter, as may be specified in the agreement; except 
        that in case such agreement is amended to include the 
        services performed for any other affiliate and such 
        amendment is executed after the first month following 
        the first calendar quarter for which the agreement is 
        in effect, the agreement shall be in effect with 
        respect to service performed for such other affiliate 
        only after the calendar quarter in which such amendment 
        is executed. Notwithstanding any other provision of 
        this subsection, the period for which any such 
        agreement is effective with respect to any foreign 
        entity shall terminate at the end of any calendar 
        quarter in which the foreign entity, at any time in 
        such quarter, ceases to be a foreign affiliate as 
        defined in paragraph (6).
          (3) No termination of agreement.--No agreement under 
        this subsection may be terminated, either in its 
        entirety or with respect to any foreign affiliate, on 
        or after June 15, 1989.
          (4) Deposits in trust funds.--For purposes of section 
        201 of the Social Security Act, relating to 
        appropriations to the Federal Old-Age and Survivors 
        Insurance Trust Fund and the Federal Disability 
        Insurance Trust Fund, such remuneration--
                  (A) paid for services covered by an agreement 
                entered into pursuant to paragraph (1) as would 
                be wages if the services constituted 
                employment, and
                  (B) as is reported to the Secretary pursuant 
                to the provisions of such agreement or of the 
                regulations issued under this subsection,
        shall be considered wages subject to the taxes imposed 
        by this chapter.
          (5) Overpayments and underpayments.--(A) If more or 
        less than the correct amount due under an agreement 
        entered into pursuant to this subsection is paid with 
        respect to any payment of remuneration, proper 
        adjustments with respect to the amounts due under such 
        agreement shall be made, without interest, in such 
        manner and at such times as may be required by 
        regulations prescribed by the Secretary.
          (B) If an overpayment cannot be adjusted under 
        subparagraph (A), the amount thereof shall be paid by 
        the Secretary, through the Fiscal Service of the 
        Treasury Department, but only if a claim for such 
        overpayment is filed with the Secretary within two 
        years from the time such overpayment was made.
          (6) Foreign affiliate defined.--For purposes of this 
        subsection and section 210(a) of the Social Security 
        Act--
                  (A) In general.--A foreign affiliate of an 
                American employer is any foreign entity in 
                which such American employer has not less than 
                a 10-percent interest.
                  (B) Determination of 10-percent interest.--
                For purposes of subparagraph (A), an American 
                employer has a 10-percent interest in any 
                entity if such employer has such an interest 
                directly (or through one or more entities)--
                          (i) in the case of a corporation, in 
                        the voting stock thereof, and
                          (ii) in the case of any other entity, 
                        in the profits thereof.
          (7) American employer as separate entity.--Each 
        American employer which enters into an agreement 
        pursuant to paragraph (1) of this subsection shall, for 
        purposes of this subsection and section 6413(c)(2)(C), 
        relating to special refunds in the case of employees of 
        certain foreign entities, be considered an employer in 
        its capacity as a party to such agreement separate and 
        distinct from its identity as a person employing 
        individuals on its own account.
          (8) Regulations.--Regulations of the Secretary to 
        carry out the purposes of this subsection shall be 
        designed to make the requirements imposed on American 
        employers with respect to services covered by an 
        agreement entered into pursuant to this subsection the 
        same, so far as practicable, as those imposed upon 
        employers pursuant to this title with respect to the 
        taxes imposed by this chapter.
  (m) Service in the uniformed services.--For purposes of this 
chapter--
          (1) Inclusion of service.--The term ``employment'' 
        shall, notwithstanding the provisions of subsection (b) 
        of this section, include--
                  (A) service performed by an individual as a 
                member of a uniformed service on active duty, 
                but such term shall not include any such 
                service which is performed while on leave 
                without pay, and
                  (B) service performed by an individual as a 
                member of a uniformed service on inactive duty 
                training.
          (2) Active duty.--The term ``active duty'' means 
        ``active duty'' as described in paragraph (21) of 
        section 101 of title 38, United States Code, except 
        that it shall also include ``active duty for training'' 
        as described in paragraph (22) of such section.
          (3) Inactive duty training.--The term ``inactive duty 
        training'' means ``inactive duty training'' as 
        described in paragraph (23) of such section 101.
  (n) Member of a uniformed service.--For purposes of this 
chapter, the term ``member of a uniformed service'' means any 
person appointed, enlisted, or inducted in a component of the 
Army, Navy, Air Force, Marine Corps, or Coast Guard (including 
a reserve component as defined in section 101(27) of title 38, 
United States Code), or in one of those services without 
specification of component, or as a commissioned officer of the 
Coast and Geodetic Survey, the National Oceanic and Atmospheric 
Administration Corps, or the Regular or Reserve Corps of the 
Public Health Service, and any person serving in the Army or 
Air Force under call or conscription. The term includes--
          (1) a retired member of any of those services;
          (2) a member of the Fleet Reserve or Fleet Marine 
        Corps Reserve;
          (3) a cadet at the United States Military Academy, a 
        midshipman at the United States Naval Academy, and a 
        cadet at the United States Coast Guard Academy or 
        United States Air Force Academy;
          (4) a member of the Reserve Officers' Training Corps, 
        the Naval Reserve Officers' Training Corps, or the Air 
        Force Reserve Officers' Training Corps, when ordered to 
        annual training duty for fourteen days or more, and 
        while performing authorized travel to and from that 
        duty; and
          (5) any person while en route to or from, or at, a 
        place for final acceptance or for entry upon active 
        duty in the military, naval, or air service--
                  (A) who has been provisionally accepted for 
                such duty; or
                  (B) who, under the Military Selective Service 
                Act, has been selected for active military, 
                naval, or air service;
        and has been ordered or directed to proceed to such 
        place.
The term does not include a temporary member of the Coast Guard 
Reserve.
  (o) Crew leader.--For purposes of this chapter, the term 
``crew leader'' means an individual who furnishes individuals 
to perform agricultural labor for another person, if such 
individual pays (either on his own behalf or on behalf of such 
person) the individuals so furnished by him for the 
agricultural labor performed by them and if such individual has 
not entered into a written agreement with such person whereby 
such individual has been designated as an employee of such 
person; and such individuals furnished by the crew leader to 
perform agricultural labor for another person shall be deemed 
to be the employees of such crew leader. For purposes of this 
chapter and chapter 2, a crew leader shall, with respect to 
service performed in furnishing individuals to perform 
agricultural labor for another person and service performed as 
a member of the crew, be deemed not to be an employee of such 
other person.
  (p) Peace Corps volunteer service.--For purposes of this 
chapter, the term ``employment'' shall, notwithstanding the 
provisions of subsection (b) of this section, include service 
performed by an individual as a volunteer or volunteer leader 
within the meaning of the Peace Corps Act.
  (q) Tips included for both employee and employer taxes.--For 
purposes of this chapter, tips received by an employee in the 
course of his employment shall be considered remuneration for 
such employment (and deemed to have been paid by the employer 
for purposes of subsections (a) and (b) of section 3111). Such 
remuneration shall be deemed to be paid at the time a written 
statement including such tips is furnished to the employer 
pursuant to section 6053(a) or (if no statement including such 
tips is so furnished) at the time received; except that, in 
determining the employer's liability in connection with the 
taxes imposed by section 3111 with respect to such tips in any 
case where no statement including such tips was so furnished 
(or to the extent that the statement so furnished was 
inaccurate or incomplete), such remuneration shall be deemed 
for purposes of subtitle F to be paid on the date on which 
notice and demand for such taxes is made to the employer by the 
Secretary.
  (r) Election of coverage by religious orders.--
          (1) Certificate of election by order.--A religious 
        order whose members are required to take a vow of 
        poverty, or any autonomous subdivision of such order, 
        may file a certificate (in such form and manner, and 
        with such official, as may be prescribed by regulations 
        under this chapter) electing to have the insurance 
        system established by title II of the Social Security 
        Act extended to services performed by its members in 
        the exercise of duties required by such order or such 
        subdivision thereof. Such certificate of election shall 
        provide that--
                  (A) such election of coverage by such order 
                or subdivision shall be irrevocable;
                  (B) such election shall apply to all current 
                and future members of such order, or in the 
                case of a subdivision thereof to all current 
                and future members of such order who belong to 
                such subdivision;
                  (C) all services performed by a member of 
                such an order or subdivision in the exercise of 
                duties required by such order or subdivision 
                shall be deemed to have been performed by such 
                member as an employee of such order or 
                subdivision; and
                  (D) the wages of each member, upon which such 
                order or subdivision shall pay the taxes 
                imposed by sections 3101 and 3111, will be 
                determined as provided in subsection (i)(4).
          (2) Definition of member.--For purposes of this 
        subsection, a member of a religious order means any 
        individual who is subject to a vow of poverty as a 
        member of such order and who performs tasks usually 
        required (and to the extent usually required) of an 
        active member of such order and who is not considered 
        retired because of old age or total disability.
          (3) Effective date for election.--(A) A certificate 
        of election of coverage shall be in effect, for 
        purposes of subsection (b)(8) and for purposes of 
        section 210(a)(8) of the Social Security Act, for the 
        period beginning with whichever of the following may be 
        designated by the order or subdivision thereof:
                  (i) the first day of the calendar quarter in 
                which the certificate is filed,
                  (ii) the first day of the calendar quarter 
                succeeding such quarter, or
                  (iii) the first day of any calendar quarter 
                preceding the calendar quarter in which the 
                certificate is filed, except that such date may 
                not be earlier than the first day of the 
                twentieth calendar quarter preceding the 
                quarter in which such certificate is filed.
        Whenever a date is designated under clause (iii), the 
        election shall apply to services performed before the 
        quarter in which the certificate is filed only if the 
        member performing such services was a member at the 
        time such services were performed and is living on the 
        first day of the quarter in which such certificate is 
        filed.
          (B) If a certificate of election filed pursuant to 
        this subsection is effective for one or more calendar 
        quarters prior to the quarter in which such certificate 
        is filed, then--
                  (i) for purposes of computing interest and 
                for purposes of section 6651 (relating to 
                addition to tax for failure to file tax 
                return), the due date for the return and 
                payment of the tax for such prior calendar 
                quarters resulting from the filing of such 
                certificate shall be the last day of the 
                calendar month following the calendar quarter 
                in which the certificate is filed; and
                  (ii) the statutory period for the assessment 
                of such tax shall not expire before the 
                expiration of 3 years from such due date.
  (s) Concurrent employment by two or more employers.--For 
purposes of sections 3102, 3111, and 3121(a)(1), if two or more 
related corporations concurrently employ the same individual 
and compensate such individual through a common paymaster which 
is one of such corporations, each such corporation shall be 
considered to have paid as remuneration to such individual only 
the amounts actually disbursed by it to such individual and 
shall not be considered to have paid as remuneration to such 
individual amounts actually disbursed to such individual by 
another of such corporations.
  (u) Application of hospital insurance tax to Federal, State, 
and local employment.--
          (1) Federal employment.--For purposes of the taxes 
        imposed by sections 3101(b) and 3111(b), subsection (b) 
        shall be applied without regard to paragraph (5) 
        thereof.
          (2) State and local employment.--For purposes of the 
        taxes imposed by sections 3101(b) and 3111(b)--
                  (A) In general.--Except as provided in 
                subparagraphs (B) and (C), subsection (b) shall 
                be applied without regard to paragraph (7) 
                thereof.
                  (B) Exception for certain services.--Service 
                shall not be treated as employment by reason of 
                subparagraph (A) if--
                          (i) the service is included under an 
                        agreement under section 218 of the 
                        Social Security Act, or
                          (ii) the service is performed--
                                  (I) by an individual who is 
                                employed by a State or 
                                political subdivision thereof 
                                to relieve him from 
                                unemployment,
                                  (II) in a hospital, home, or 
                                other institution by a patient 
                                or inmate thereof as an 
                                employee of a State or 
                                political subdivision thereof 
                                or of the District of Columbia,
                                  (III) by an individual, as an 
                                employee of a State or 
                                political subdivision thereof 
                                or of the District of Columbia, 
                                serving on a temporary basis in 
                                case of fire, storm, snow, 
                                earthquake, flood or other 
                                similar emergency,
                                  (IV) by any individual as an 
                                employee included under section 
                                5351(2) of title 5, United 
                                States Code (relating to 
                                certain interns, student 
                                nurses, and other student 
                                employees of hospitals of the 
                                District of Columbia 
                                Government), other than as a 
                                medical or dental intern or a 
                                medical or dental resident in 
                                training,
                                  (V) by an election official 
                                or election worker if the 
                                remuneration paid in a calendar 
                                year for such service is less 
                                than $1,000 with respect to 
                                service performed during any 
                                calendar year commencing on or 
                                after January 1, 1995, ending 
                                on or before December 31, 1999, 
                                and the adjusted amount 
                                determined under section 
                                218(c)(8)(B) of the Social 
                                Security Act for any calendar 
                                year commencing on or after 
                                January 1, 2000, with respect 
                                to service performed during 
                                such calendar year, or
                                  (VI) by an individual in a 
                                position described in section 
                                1402(c)(2)(E).
                As used in this subparagraph, the terms 
                ``State'' and ``political subdivision'' have 
                the meanings given those terms in section 
                218(b) of the Social Security Act.
                  (C) Exception for current employment which 
                continues.--Service performed for an employer 
                shall not be treated as employment by reason of 
                subparagraph (A) if--
                          (i) such service would be excluded 
                        from the term ``employment'' for 
                        purposes of this chapter if 
                        subparagraph (A) did not apply;
                          (ii) such service is performed by an 
                        individual--
                                  (I) who was performing 
                                substantial and regular service 
                                for remuneration for that 
                                employer before April 1, 1986,
                                  (II) who is a bona fide 
                                employee of that employer on 
                                March 31, 1986, and
                                  (III) whose employment 
                                relationship with that employer 
                                was not entered into for 
                                purposes of meeting the 
                                requirements of this 
                                subparagraph; and
                          (iii) the employment relationship 
                        with that employer has not been 
                        terminated after March 31, 1986.
                  (D) Treatment of agencies and 
                instrumentalities.--For purposes of 
                subparagraph (C), under regulations--
                          (i) All agencies and 
                        instrumentalities of a State (as 
                        defined in section 218(b) of the Social 
                        Security Act) or of the District of 
                        Columbia shall be treated as a single 
                        employer.
                          (ii) All agencies and 
                        instrumentalities of a political 
                        subdivision of a State (as so defined) 
                        shall be treated as a single employer 
                        and shall not be treated as described 
                        in clause (i).
          (3) Medicare qualified government employment.--For 
        purposes of this chapter, the term ``medicare qualified 
        government employment'' means service which--
                  (A) is employment (as defined in subsection 
                (b)) with the application of paragraphs (1) and 
                (2), but
                  (B) would not be employment (as so defined) 
                without the application of such paragraphs.
  (v) Treatment of certain deferred compensation and salary 
reduction arrangements.--
          (1) Certain employer contributions treated as 
        wages.--Nothing in any paragraph of subsection (a) 
        (other than paragraph (1)) shall exclude from the term 
        ``wages''--
                  (A) any employer contribution under a 
                qualified cash or deferred arrangement (as 
                defined in section 401(k)) to the extent not 
                included in gross income by reason of section 
                402(e)(3) or consisting of designated Roth 
                contributions (as defined in section 402A(c)), 
                or
                  (B) any amount treated as an employer 
                contribution under section 414(h)(2) where the 
                pickup referred to in such section is pursuant 
                to a salary reduction agreement (whether 
                evidenced by a written instrument or 
                otherwise).
          (2) Treatment of certain nonqualified deferred 
        compensation plans.--
                  (A) In general.--Any amount deferred under a 
                nonqualified deferred compensation plan shall 
                be taken into account for purposes of this 
                chapter as of the later of--
                          (i) when the services are performed, 
                        or
                          (ii) when there is no substantial 
                        risk of forfeiture of the rights to 
                        such amount.
                The preceding sentence shall not apply to any 
                excess parachute payment (as defined in section 
                280G(b)) or to any specified stock compensation 
                (as defined in section 4985) on which tax is 
                imposed by section 4985.
                  (B) Taxed only once.--Any amount taken into 
                account as wages by reason of subparagraph (A) 
                (and the income attributable thereto) shall not 
                thereafter be treated as wages for purposes of 
                this chapter.
                  (C) Nonqualified deferred compensation 
                plan.--For purposes of this paragraph, the term 
                ``nonqualified deferred compensation plan'' 
                means any plan or other arrangement for 
                deferral of compensation other than a plan 
                described in subsection (a)(5).
          (3) Exempt governmental deferred compensation plan.--
        For purposes of subsection (a)(5), the term ``exempt 
        governmental deferred compensation plan'' means any 
        plan providing for deferral of compensation established 
        and maintained for its employees by the United States, 
        by a State or political subdivision thereof, or by an 
        agency or instrumentality of any of the foregoing. Such 
        term shall not include--
                  (A) any plan to which section 83, 402(b), 
                403(c), 457(a), or 457(f)(1) applies,
                  (B) any annuity contract described in section 
                403(b), and
                  (C) the Thrift Savings Fund (within the 
                meaning of subchapter III of chapter 84 of 
                title 5, United States Code).
  (w) Exemption of churches and qualified church-controlled 
organizations.--
          (1) General rule.--Any church or qualified church-
        controlled organization (as defined in paragraph (3)) 
        may make an election within the time period described 
        in paragraph (2), in accordance with such procedures as 
        the Secretary determines to be appropriate, that 
        services performed in the employ of such church or 
        organization shall be excluded from employment for 
        purposes of title II of the Social Security Act and 
        this chapter. An election may be made under this 
        subsection only if the church or qualified church-
        controlled organization states that such church or 
        organization is opposed for religious reasons to the 
        payment of the tax imposed under section 3111.
          (2) Timing and duration of election.--An election 
        under this subsection must be made prior to the first 
        date, more than 90 days after July 18, 1984, on which a 
        quarterly employment tax return for the tax imposed 
        under section 3111 is due, or would be due but for the 
        election, from such church or organization. An election 
        under this subsection shall apply to current and future 
        employees, and shall apply to service performed after 
        December 31, 1983. The election may be revoked by the 
        church or organization under regulations prescribed by 
        the Secretary. The election shall be revoked by the 
        Secretary if such church or organization fails to 
        furnish the information required under section 6051 to 
        the Secretary for a period of 2 years or more with 
        respect to remuneration paid for such services by such 
        church or organization, and, upon request by the 
        Secretary, fails to furnish all such previously 
        unfurnished information for the period covered by the 
        election. Any revocation under the preceding sentence 
        shall apply retroactively to the beginning of the 2-
        year period for which the information was not 
        furnished.
          (3) Definitions.--(A) For purposes of this 
        subsection, the term ``church'' means a church, a 
        convention or association of churches, or an elementary 
        or secondary school which is controlled, operated, or 
        principally supported by a church or by a convention or 
        association of churches.
          (B) For purposes of this subsection, the term 
        ``qualified church-controlled organization'' means any 
        church-controlled tax-exempt organization described in 
        section 501(c)(3), other than an organization which--
                  (i) offers goods, services, or facilities for 
                sale, other than on an incidental basis, to the 
                general public, other than goods, services, or 
                facilities which are sold at a nominal charge 
                which is substantially less than the cost of 
                providing such goods, services, or facilities; 
                and
                  (ii) normally receives more than 25 percent 
                of its support from either (I) governmental 
                sources, or (II) receipts from admissions, 
                sales of merchandise, performance of services, 
                or furnishing of facilities, in activities 
                which are not unrelated trades or businesses, 
                or both.
  (x) Applicable dollar threshold.--For purposes of subsection 
(a)(7)(B), the term ``applicable dollar threshold'' means 
$1,000. In the case of calendar years after 1995, the 
Commissioner of Social Security shall adjust such $1,000 amount 
at the same time and in the same manner as under section 
215(a)(1)(B)(ii) of the Social Security Act with respect to the 
amounts referred to in section 215(a)(1)(B)(i) of such Act, 
except that, for purposes of this paragraph, 1993 shall be 
substituted for the calendar year referred to in section 
215(a)(1)(B)(ii)(II) of such Act. If any amount as adjusted 
under the preceding sentence is not a multiple of $100, such 
amount shall be rounded to the next lowest multiple of $100.
  (y) Service in the employ of international organizations by 
certain transferred Federal employees.--
          (1) In general.--For purposes of this chapter, 
        service performed in the employ of an international 
        organization by an individual pursuant to a transfer of 
        such individual to such international organization 
        pursuant to section 3582 of title 5, United States 
        Code, shall constitute ``employment'' if--
                  (A) immediately before such transfer, such 
                individual performed service with a Federal 
                agency which constituted ``employment'' under 
                subsection (b) for purposes of the taxes 
                imposed by sections 3101(a) and 3111(a), and
                  (B) such individual would be entitled, upon 
                separation from such international organization 
                and proper application, to reemployment with 
                such Federal agency under such section 3582.
          (2) Definitions.--For purposes of this subsection--
                  (A) Federal agency.--The term ``Federal 
                agency'' means an agency, as defined in section 
                3581(1) of title 5, United States Code.
                  (B) International organization.--The term 
                ``international organization'' has the meaning 
                provided such term by section 3581(3) of title 
                5, United States Code.
  (z) Treatment of certain foreign persons as American 
employers.--
          (1) In general.--If any employee of a foreign person 
        is performing services in connection with a contract 
        between the United States Government (or any 
        instrumentality thereof) and any member of any 
        domestically controlled group of entities which 
        includes such foreign person, such foreign person shall 
        be treated for purposes of this chapter as an American 
        employer with respect to such services performed by 
        such employee.
          (2) Domestically controlled group of entities.--For 
        purposes of this subsection--
                  (A) In general.--The term ``domestically 
                controlled group of entities'' means a 
                controlled group of entities the common parent 
                of which is a domestic corporation.
                  (B) Controlled group of entities.--The term 
                ``controlled group of entities'' means a 
                controlled group of corporations as defined in 
                section 1563(a)(1), except that--
                          (i) ``more than 50 percent'' shall be 
                        substituted for ``at least 80 percent'' 
                        each place it appears therein, and
                          (ii) the determination shall be made 
                        without regard to subsections (a)(4) 
                        and (b)(2) of section 1563.
                A partnership or any other entity (other than a 
                corporation) shall be treated as a member of a 
                controlled group of entities if such entity is 
                controlled (within the meaning of section 
                954(d)(3)) by members of such group (including 
                any entity treated as a member of such group by 
                reason of this sentence).
          (3) Liability of common parent.--In the case of a 
        foreign person who is a member of any domestically 
        controlled group of entities, the common parent of such 
        group shall be jointly and severally liable for any tax 
        under this chapter for which such foreign person is 
        liable by reason of this subsection, and for any 
        penalty imposed on such person by this title with 
        respect to any failure to pay such tax or to file any 
        return or statement with respect to such tax or wages 
        subject to such tax. No deduction shall be allowed 
        under this title for any liability imposed by the 
        preceding sentence.
          (4) Provisions preventing double taxation.--
                  (A) Agreements.--Paragraph (1) shall not 
                apply to any services which are covered by an 
                agreement under subsection (l).
                  (B) Equivalent foreign taxation.--Paragraph 
                (1) shall not apply to any services if the 
                employer establishes to the satisfaction of the 
                Secretary that the remuneration paid by such 
                employer for such services is subject to a tax 
                imposed by a foreign country which is 
                substantially equivalent to the taxes imposed 
                by this chapter.
          (5) Cross reference.--For relief from taxes in cases 
        covered by certain international agreements, see 
        sections 3101(c) and 3111(c).

           *       *       *       *       *       *       *

CHAPTER 23--FEDERAL UNEMPLOYMENT TAX ACT

           *       *       *       *       *       *       *

SEC. 3306. DEFINITIONS.

  (a) Employer.--For purposes of this chapter--
          (1) In general.--The term ``employer'' means, with 
        respect to any calendar year, any person who--
                  (A) during any calendar quarter in the 
                calendar year or the preceding calendar year 
                paid wages of $1,500 or more, or
                  (B) on each of some 20 days during the 
                calendar year or during the preceding calendar 
                year, each day being in a different calendar 
                week, employed at least one individual in 
                employment for some portion of the day.
        For purposes of this paragraph, there shall not be 
        taken into account any wages paid to, or employment of, 
        an employee performing domestic services referred to in 
        paragraph (3).
          (2) Agricultural labor.--In the case of agricultural 
        labor, the term ``employer'' means, with respect to any 
        calendar year, any person who--
                  (A) during any calendar quarter in the 
                calendar year or the preceding calendar year 
                paid wages of $20,000 or more for agricultural 
                labor, or
                  (B) on each of some 20 days during the 
                calendar year or during the preceding calendar 
                year, each day being in a different calendar 
                week, employed at least 10 individuals in 
                employment in agricultural labor for some 
                portion of the day.
          (3) Domestic service.--In the case of domestic 
        service in a private home, local college club, or local 
        chapter of a college fraternity or sorority, the term 
        ``employer'' means, with respect to any calendar year, 
        any person who during any calendar quarter in the 
        calendar year or the preceding calendar year paid wages 
        in cash of $1,000 or more for such service.
          (4) Special rule.--A person treated as an employer 
        under paragraph (3) shall not be treated as an employer 
        with respect to wages paid for any service other than 
        domestic service referred to in paragraph (3) unless 
        such person is treated as an employer under paragraph 
        (1) or (2) with respect to such other service.
  (b) Wages.--For purposes of this chapter, the term ``wages'' 
means all remuneration for employment, including the cash value 
of all remuneration (including benefits) paid in any medium 
other than cash; except that such term shall not include--
          (1) that part of the remuneration which, after 
        remuneration (other than remuneration referred to in 
        the succeeding paragraphs of this subsection) equal to 
        $7,000 with respect to employment has been paid to an 
        individual by an employer during any calendar year, is 
        paid to such individual by such employer during such 
        calendar year. If an employer (hereinafter referred to 
        as successor employer) during any calendar year 
        acquires substantially all the property used in a trade 
        or business of another employer (hereinafter referred 
        to as a predecessor), or used in a separate unit of a 
        trade or business of a predecessor, and immediately 
        after the acquisition employs in his trade or business 
        an individual who immediately prior to the acquisition 
        was employed in the trade or business of such 
        predecessor, then, for the purpose of determining 
        whether the successor employer has paid remuneration 
        (other than remuneration referred to in the succeeding 
        paragraphs of this subsection) with respect to 
        employment equal to $7,000 to such individual during 
        such calendar year, any remuneration (other than 
        remuneration referred to in the succeeding paragraphs 
        of this subsection) with respect to employment paid (or 
        considered under this paragraph as having been paid) to 
        such individual by such predecessor during such 
        calendar year and prior to such acquisition shall be 
        considered as having been paid by such successor 
        employer;
          (2) the amount of any payment (including any amount 
        paid by an employer for insurance or annuities, or into 
        a fund, to provide for any such payment) made to, or on 
        behalf of, an employee or any of his dependents under a 
        plan or system established by an employer which makes 
        provision for his employees generally (or for his 
        employees generally and their dependents) or for a 
        class or classes of his employees (or for a class or 
        classes of his employees and their dependents), on 
        account of--
                  (A) sickness or accident disability (but, in 
                the case of payments made to an employee or any 
                of his dependents, this subparagraph shall 
                exclude from the term ``wages'' only payments 
                which are received under a workmen's 
                compensation law), or
                  (B) medical or hospitalization expenses in 
                connection with sickness or accident 
                disability, or
                  (C) death;
          (4) any payment on account of sickness or accident 
        disability, or medical or hospitalization expenses in 
        connection with sickness or accident disability, made 
        by an employer to, or on behalf of, an employee after 
        the expiration of 6 calendar months following the last 
        calendar month in which the employee worked for such 
        employer;
          (5) any payment made to, or on behalf of, an employee 
        or his beneficiary--
                  (A) from or to a trust described in section 
                401(a) which is exempt from tax under section 
                501(a) at the time of such payment unless such 
                payment is made to an employee of the trust as 
                remuneration for services rendered as such 
                employee and not as a beneficiary of the trust, 
                or
                  (B) under or to an annuity plan which, at the 
                time of such payment, is a plan described in 
                section 403(a),
                  (C) under a simplified employee pension (as 
                defined in section 408(k)(1)), other than any 
                contributions described in section 408(k)(6),
                  (D) under or to an annuity contract described 
                in section 403(b), other than a payment for the 
                purchase of such contract which is made by 
                reason of a salary reduction agreement (whether 
                evidenced by a written instrument or 
                otherwise),
                  (E) under or to an exempt governmental 
                deferred compensation plan (as defined in 
                section 3121(v)(3)),
                  (F) to supplement pension benefits under a 
                plan or trust described in any of the foregoing 
                provisions of this paragraph to take into 
                account some portion or all of the increase in 
                the cost of living (as determined by the 
                Secretary of Labor) since retirement but only 
                if such supplemental payments are under a plan 
                which is treated as a welfare plan under 
                section 3(2)(B)(ii) of the Employee Retirement 
                Income Security Act of 1974,
                  (G) under a cafeteria plan (within the 
                meaning of section 125) if such payment would 
                not be treated as wages without regard to such 
                plan and it is reasonable to believe that (if 
                section 125 applied for purposes of this 
                section) section 125 would not treat any wages 
                as constructively received, or
                  (H) under an arrangement to which section 
                408(p) applies, other than any elective 
                contributions under paragraph (2)(A)(i) 
                thereof,
          (6) the payment by an employer (without deduction 
        from the remuneration of the employee)--
                  (A) of the tax imposed upon an employee under 
                section 3101, or
                  (B) of any payment required from an employee 
                under a State unemployment compensation law,
        with respect to remuneration paid to an employee for 
        domestic service in a private home of the employer or 
        for agricultural labor;
          (7) remuneration paid in any medium other than cash 
        to an employee for service not in the course of the 
        employer's trade or business;
          (9) remuneration paid to or on behalf of an employee 
        if (and to the extent that) at the time of the payment 
        of such remuneration it is reasonable to believe that a 
        corresponding deduction is allowable under section 217 
        (determined without regard to section 274(n));
          (10) any payment or series of payments by an employer 
        to an employee or any of his dependents which is paid--
                  (A) upon or after the termination of an 
                employee's employment relationship because of 
                (i) death, or (ii) retirement for disability, 
                and
                  (B) under a plan established by the employer 
                which makes provision for his employees 
                generally or a class or classes of his 
                employees (or for such employees or class or 
                classes of employees and their dependents),
        other than any such payment or series of payments which 
        would have been paid if the employee's employment 
        relationship had not been so terminated;
          (11) remuneration for agricultural labor paid in any 
        medium other than cash;
          (13) any payment made, or benefit furnished, to or 
        for the benefit of an employee if at the time of such 
        payment or such furnishing it is reasonable to believe 
        that the employee will be able to exclude such payment 
        or benefit from income under section 127, 129, 
        134(b)(4), or 134(b)(5);
          (14) the value of any meals or lodging furnished by 
        or on behalf of the employer if at the time of such 
        furnishing it is reasonable to believe that the 
        employee will be able to exclude such items from income 
        under section 119;
          (15) any payment made by an employer to a survivor or 
        the estate of a former employee after the calendar year 
        in which such employee died;
          (16) any benefit provided to or on behalf of an 
        employee if at the time such benefit is provided it is 
        reasonable to believe that the employee will be able to 
        exclude such benefit from income under section 74(c), 
        108(f)(4), 117, or 132;
          (17) any payment made to or for the benefit of an 
        employee if at the time of such payment it is 
        reasonable to believe that the employee will be able to 
        exclude such payment from income under section 106(b);
          (18) any payment made to or for the benefit of an 
        employee if at the time of such payment it is 
        reasonable to believe that the employee will be able to 
        exclude such payment from income under section 106(d);
          (19) remuneration on account of--
                  (A) a transfer of a share of stock to any 
                individual pursuant to an exercise of an 
                incentive stock option (as defined in section 
                422(b)) or under an employee stock purchase 
                plan (as defined in section 423(b)), or
                  (B) any disposition by the individual of such 
                stock; or
          (20) any benefit or payment which is excludable from 
        the gross income of the employee under section 139B(b).
Except as otherwise provided in regulations prescribed by the 
Secretary, any third party which makes a payment included in 
wages solely by reason of the parenthetical matter contained in 
subparagraph (A) of paragraph (2) shall be treated for purposes 
of this chapter and chapter 22 as the employer with respect to 
such wages. Nothing in the regulations prescribed for purposes 
of chapter 24 (relating to income tax withholding) which 
provides an exclusion from ``wages'' as used in such chapter 
shall be construed to require a similar exclusion from 
``wages'' in the regulations prescribed for purposes of this 
chapter.
  (c) Employment.--For purposes of this chapter, the term 
``employment'' means any service performed prior to 1955, which 
was employment for purposes of subchapter C of chapter 9 of the 
Internal Revenue Code of 1939 under the law applicable to the 
period in which such service was performed, and (A) any 
service, of whatever nature, performed after 1954 by an 
employee for the person employing him, irrespective of the 
citizenship or residence of either, (i) within the United 
States, or (ii) on or in connection with an American vessel or 
American aircraft under a contract of service which is entered 
into within the United States or during the performance of 
which and while the employee is employed on the vessel or 
aircraft it touches at a port in the United States, if the 
employee is employed on and in connection with such vessel or 
aircraft when outside the United States, and (B) any service, 
of whatever nature, performed after 1971 outside the United 
States (except in a contiguous country with which the United 
States has an agreement relating to unemployment compensation) 
by a citizen of the United States as an employee of an American 
employer (as defined in subsection (j)(3)), except--
          (1) agricultural labor (as defined in subsection (k)) 
        unless--
                  (A) such labor is performed for a person 
                who--
                          (i) during any calendar quarter in 
                        the calendar year or the preceding 
                        calendar year paid remuneration in cash 
                        of $20,000 or more to individuals 
                        employed in agricultural labor 
                        (including labor performed by an alien 
                        referred to in subparagraph (B)), or
                          (ii) on each of some 20 days during 
                        the calendar year or the preceding 
                        calendar year, each day being in a 
                        different calendar week, employed in 
                        agricultural labor (including labor 
                        performed by an alien referred to in 
                        subparagraph (B)) for some portion of 
                        the day (whether or not at the same 
                        moment of time) 10 or more individuals; 
                        and
                  (B) such labor is not agricultural labor 
                performed by an individual who is an alien 
                admitted to the United States to perform 
                agricultural labor pursuant to sections 214(c) 
                and 101(a)(15)(H) of the Immigration and 
                Nationality Act;
          (2) domestic service in a private home, local college 
        club, or local chapter of a college fraternity or 
        sorority unless performed for a person who paid cash 
        remuneration of $1,000 or more to individuals employed 
        in such domestic service in any calendar quarter in the 
        calendar year or the preceding calendar year;
          (3) service not in the course of the employer's trade 
        or business performed in any calendar quarter by an 
        employee, unless the cash remuneration paid for such 
        service is $50 or more and such service is performed by 
        an individual who is regularly employed by such 
        employer to perform such service. For purposes of this 
        paragraph, an individual shall be deemed to be 
        regularly employed by an employer during a calendar 
        quarter only if--
                  (A) on each of some 24 days during such 
                quarter such individual performs for such 
                employer for some portion of the day service 
                not in the course of the employer's trade or 
                business, or
                  (B) such individual was regularly employed 
                (as determined under subparagraph (A)) by such 
                employer in the performance of such service 
                during the preceding calendar quarter;
          (4) service performed on or in connection with a 
        vessel or aircraft not an American vessel or American 
        aircraft, if the employee is employed on and in 
        connection with such vessel or aircraft when outside 
        the United States;
          (5) service performed by an individual in the employ 
        of [his son] the individual's son , daughter, or 
        spouse, and service performed by a child under the age 
        of 21 in the employ of [his father] the child's father 
        or mother;
          (6) service performed in the employ of the United 
        States Government or of an instrumentality of the 
        United States which is--
                  (A) wholly or partially owned by the United 
                States, or
                  (B) exempt from the tax imposed by section 
                3301 by virtue of any provision of law which 
                specifically refers to such section (or the 
                corresponding section of prior law) in granting 
                such exemption;
          (7) service performed in the employ of a State, or 
        any political subdivision thereof, or in the employ of 
        an Indian tribe, or any instrumentality of any one or 
        more of the foregoing which is wholly owned by one or 
        more States or political subdivisions or Indian tribes; 
        and any service performed in the employ of any 
        instrumentality of one or more States or political 
        subdivisions to the extent that the instrumentality is, 
        with respect to such service, immune under the 
        Constitution of the United States from the tax imposed 
        by section 3301;
          (8) service performed in the employ of a religious, 
        charitable, educational, or other organization 
        described in section 501(c)(3) which is exempt from 
        income tax under section 501(a);
          (9) service performed by an individual as an employee 
        or employee representative as defined in section 1 of 
        the Railroad Unemployment Insurance Act (45 U.S.C. 
        351);
          (10)(A) service performed in any calendar quarter in 
        the employ of any organization exempt from income tax 
        under section 501(a) (other than an organization 
        described in section 401(a)) or under section 521, if 
        the remuneration for such service is less than $50, or
          (B) service performed in the employ of a school, 
        college, or university, if such service is performed 
        (i) by a student who is enrolled and is regularly 
        attending classes at such school, college, or 
        university, or (ii) by the spouse of such a student, if 
        such spouse is advised, at the time such spouse 
        commences to perform such service, that (I) the 
        employment of such spouse to perform such service is 
        provided under a program to provide financial 
        assistance to such student by such school, college, or 
        university, and (II) such employment will not be 
        covered by any program of unemployment insurance, or
          (C) service performed by an individual who is 
        enrolled at a nonprofit or public educational 
        institution which normally maintains a regular faculty 
        and curriculum and normally has a regularly organized 
        body of students in attendance at the place where its 
        educational activities are carried on as a student in a 
        full-time program, taken for credit at such 
        institution, which combines academic instruction with 
        work experience, if such service is an integral part of 
        such program, and such institution has so certified to 
        the employer, except that this subparagraph shall not 
        apply to service performed in a program established for 
        or on behalf of an employer or group of employers, or
          (D) service performed in the employ of a hospital, if 
        such service is performed by a patient of such 
        hospital;
          (11) service performed in the employ of a foreign 
        government (including service as a consular or other 
        officer or employee or a nondiplomatic representative);
          (12) service performed in the employ of an 
        instrumentality wholly owned by a foreign government--
                  (A) if the service is of a character similar 
                to that performed in foreign countries by 
                employees of the United States Government or of 
                an instrumentality thereof; and
                  (B) if the Secretary of State shall certify 
                to the Secretary of the Treasury that the 
                foreign government, with respect to whose 
                instrumentality exemption is claimed, grants an 
                equivalent exemption with respect to similar 
                service performed in the foreign country by 
                employees of the United States Government and 
                of instrumentalities thereof;
          (13) service performed as a student nurse in the 
        employ of a hospital or a nurses' training school by an 
        individual who is enrolled and is regularly attending 
        classes in a nurses' training school chartered or 
        approved pursuant to State law; and service performed 
        as an intern in the employ of a hospital by an 
        individual who has completed a 4 years' course in a 
        medical school chartered or approved pursuant to State 
        law;
          (14) service performed by an individual for a person 
        as an insurance agent or as an insurance solicitor, if 
        all such service performed by such individual for such 
        person is performed for remuneration solely by way of 
        commission;
          (15)(A) service performed by an individual under the 
        age of 18 in the delivery or distribution of newspapers 
        or shopping news, not including delivery or 
        distribution to any point for subsequent delivery or 
        distribution;
          (B) service performed by an individual in, and at the 
        time of, the sale of newspapers or magazines to 
        ultimate consumers, under an arrangement under which 
        the newspapers or magazines are to be sold by him at a 
        fixed price, his compensation being based on the 
        retention of the excess of such price over the amount 
        at which the newspapers or magazines are charged to 
        him, whether or not he is guaranteed a minimum amount 
        of compensation for such service, or is entitled to be 
        credited with the unsold newspapers or magazines turned 
        back;
          (16) service performed in the employ of an 
        international organization;
          (17) service performed by an individual in (or as an 
        officer or member of the crew of a vessel while it is 
        engaged in) the catching, taking, harvesting, 
        cultivating, or farming of any kind of fish, shellfish, 
        crustacea, sponges, seaweeds, or other aquatic forms of 
        animal and vegetable life (including service performed 
        by any such individual as an ordinary incident to any 
        such activity), except--
                  (A) service performed in connection with the 
                catching or taking of salmon or halibut, for 
                commercial purposes, and
                  (B) service performed on or in connection 
                with a vessel of more than 10 net tons 
                (determined in the manner provided for 
                determining the register tonnage of merchant 
                vessels under the laws of the United States);
          (18) service described in section 3121(b)(20);
          (19) service which is performed by a nonresident 
        alien individual for the period he is temporarily 
        present in the United States as a nonimmigrant under 
        subparagraph (F), (J), (M), or (Q) of section 
        101(a)(15) of the Immigration and Nationality Act, as 
        amended (8 U.S.C. 1101(a)(15)(F), (J), (M), or (Q)), 
        and which is performed to carry out the purpose 
        specified in subparagraph (F), (J), (M), or (Q), as the 
        case may be;
          (20) service performed by a full time student (as 
        defined in subsection (q)) in the employ of an 
        organized camp--
                  (A) if such camp--
                          (i) did not operate for more than 7 
                        months in the calendar year and did not 
                        operate for more than 7 months in the 
                        preceding calendar year, or
                          (ii) had average gross receipts for 
                        any 6 months in the preceding calendar 
                        year which were not more than 331/3 
                        percent of its average gross receipts 
                        for the other 6 months in the preceding 
                        calendar year; and
                  (B) if such full time student performed 
                services in the employ of such camp for less 
                than 13 calendar weeks in such calendar year; 
                or
          (21) service performed by a person committed to a 
        penal institution.
  (d) Included and excluded service.--For purposes of this 
chapter, if the services performed during one-half or more of 
any pay period by an employee for the person employing him 
constitute employment, all the services of such employee for 
such period shall be deemed to be employment; but if the 
services performed during more than one-half of any such pay 
period by an employee for the person employing him do not 
constitute employment, then none of the services of such 
employee for such period shall be deemed to be employment. As 
used in this subsection, the term ``pay period'' means a period 
(of not more than 31 consecutive days) for which a payment of 
remuneration is ordinarily made to the employee by the person 
employing him. This subsection shall not be applicable with 
respect to services performed in a pay period by an employee 
for the person employing him, where any of such service is 
excepted by subsection (c)(9).
  (e) State agency.--For purposes of this chapter, the term 
``State agency'' means any State officer, board, or other 
authority, designated under a State law to administer the 
unemployment fund in such State.
  (f) Unemployment fund.--For purposes of this chapter, the 
term ``unemployment fund'' means a special fund, established 
under a State law and administered by a State agency, for the 
payment of compensation. Any sums standing to the account of 
the State agency in the Unemployment Trust Fund established by 
section 904 of the Social Security Act, as amended (42 U.S.C. 
1104), shall be deemed to be a part of the unemployment fund of 
the State, and no sums paid out of the Unemployment Trust Fund 
to such State agency shall cease to be a part of the 
unemployment fund of the State until expended by such State 
agency. An unemployment fund shall be deemed to be maintained 
during a taxable year only if throughout such year, or such 
portion of the year as the unemployment fund was in existence, 
no part of the moneys of such fund was expended for any purpose 
other than the payment of compensation (exclusive of expenses 
of administration) and for refunds of sums erroneously paid 
into such fund and refunds paid in accordance with the 
provisions of section 3305(b); except that--
          (1) an amount equal to the amount of employee 
        payments into the unemployment fund of a State may be 
        used in the payment of cash benefits to individuals 
        with respect to their disability, exclusive of expenses 
        of administration;
          (2) the amounts specified by section 903(c)(2) or 
        903(d)(4) of the Social Security Act may, subject to 
        the conditions prescribed in such section, be used for 
        expenses incurred by the State for administration of 
        its unemployment compensation law and public employment 
        offices,
          (3) nothing in this subsection shall be construed to 
        prohibit deducting any amount from unemployment 
        compensation otherwise payable to an individual and 
        using the amount so deducted to pay for health 
        insurance, or the withholding of Federal, State, or 
        local individual income tax, if the individual elected 
        to have such deduction made and such deduction was made 
        under a program approved by the Secretary of Labor;
          (4) amounts may be deducted from unemployment 
        benefits and used to repay overpayments as provided in 
        section 303(g) of the Social Security Act;
          (5) amounts may be withdrawn for the payment of 
        short-time compensation under a short-time compensation 
        program (as defined in subsection (v)); and
          (6) amounts may be withdrawn for the payment of 
        allowances under a self-employment assistance program 
        (as defined in subsection (t)).
  (g) Contributions.--For purposes of this chapter, the term 
``contributions'' means payments required by a State law to be 
made into an unemployment fund by any person on account of 
having individuals in his employ, to the extent that such 
payments are made by him without being deducted or deductible 
from the remuneration of individuals in his employ.
  (h) Compensation.--For purposes of this chapter, the term 
``compensation'' means cash benefits payable to individuals 
with respect to their unemployment.
  (i) Employee.--For purposes of this chapter, the term 
``employee'' has the meaning assigned to such term by section 
3121(d), except that paragraph (4) and subparagraphs (B) and 
(C) of paragraph (3) shall not apply.
  (j) State, United States, and American employer.--For 
purposes of this chapter--
          (1) State.--The term ``State'' includes the District 
        of Columbia, the Commonwealth of Puerto Rico, and the 
        Virgin Islands.
          (2) United States.--The term ``United States'' when 
        used in a geographical sense includes the States, the 
        District of Columbia, the Commonwealth of Puerto Rico, 
        and the Virgin Islands.
          (3) American employer.--The term ``American 
        employer'' means a person who is--
                  (A) an individual who is a resident of the 
                United States,
                  (B) a partnership, if two-thirds or more of 
                the partners are residents of the United 
                States,
                  (C) a trust, if all of the trustees are 
                residents of the United States, or
                  (D) a corporation organized under the laws of 
                the United States or of any State.
An individual who is a citizen of the Commonwealth of Puerto 
Rico or the Virgin Islands (but not otherwise a citizen of the 
United States) shall be considered, for purposes of this 
section, as a citizen of the United States.
  (k) Agricultural labor.--For purposes of this chapter, the 
term ``agricultural labor'' has the meaning assigned to such 
term by subsection (g) of section 3121, except that for 
purposes of this chapter subparagraph (B) of paragraph (4) of 
such subsection (g) shall be treated as reading:
          
                  ``(B) in the employ of a group of operators 
                of farms (or a cooperative organization of 
                which such operators are members) in the 
                performance of service described in 
                subparagraph (A), but only if such operators 
                produced more than one-half of the commodity 
                with respect to which such service is 
                performed;''.
  (m) American vessel and aircraft.--For purposes of this 
chapter, the term ``American vessel'' means any vessel 
documented or numbered under the laws of the United States; and 
includes any vessel which is neither documented or numbered 
under the laws of the United States nor documented under the 
laws of any foreign country, if its crew is employed solely by 
one or more citizens or residents of the United States or 
corporations organized under the laws of the United States or 
of any State; and the term ``American aircraft'' means an 
aircraft registered under the laws of the United States.
  (n) Vessels operated by general agents of United States.--
Notwithstanding the provisions of subsection (c)(6), service 
performed by officers and members of the crew of a vessel which 
would otherwise be included as employment under subsection (c) 
shall not be excluded by reason of the fact that it is 
performed on or in connection with an American vessel--
          (1) owned by or bareboat chartered to the United 
        States and
          (2) whose business is conducted by a general agent of 
        the Secretary of Transportation.
For purposes of this chapter, each such general agent shall be 
considered a legal entity in his capacity as such general 
agent, separate and distinct from his identity as a person 
employing individuals on his own account, and the officers and 
members of the crew of such an American vessel whose business 
is conducted by a general agent of the Secretary of 
Transportation shall be deemed to be performing services for 
such general agent rather than the United States. Each such 
general agent who in his capacity as such is an employer within 
the meaning of subsection (a) shall be subject to all the 
requirements imposed upon an employer under this chapter with 
respect to service which constitutes employment by reason of 
this subsection.
  (o) Special rule in case of certain agricultural workers.--
          (1) Crew leaders who are registered or provide 
        specialized agricultural labor.--For purposes of this 
        chapter, any individual who is a member of a crew 
        furnished by a crew leader to perform agricultural 
        labor for any other person shall be treated as an 
        employee of such crew leader--
                  (A) if--
                          (i) such crew leader holds a valid 
                        certificate of registration under the 
                        Migrant and Seasonal Agricultural 
                        Worker Protection Act; or
                          (ii) substantially all the members of 
                        such crew operate or maintain tractors, 
                        mechanized harvesting or crop-dusting 
                        equipment, or any other mechanized 
                        equipment, which is provided by such 
                        crew leader; and
                  (B) if such individual is not an employee of 
                such other person within the meaning of 
                subsection (i).
          (2) Other crew leaders.--For purposes of this 
        chapter, in the case of any individual who is furnished 
        by a crew leader to perform agricultural labor for any 
        other person and who is not treated as an employee of 
        such crew leader under paragraph (1)--
                  (A) such other person and not the crew leader 
                shall be treated as the employer of such 
                individual; and
                  (B) such other person shall be treated as 
                having paid cash remuneration to such 
                individual in an amount equal to the amount of 
                cash remuneration paid to such individual by 
                the crew leader (either on his behalf or on 
                behalf of such other person) for the 
                agricultural labor performed for such other 
                person.
          (3) Crew leader.--For purposes of this subsection, 
        the term ``crew leader'' means an individual who--
                  (A) furnishes individuals to perform 
                agricultural labor for any other person,
                  (B) pays (either on his behalf or on behalf 
                of such other person) the individuals so 
                furnished by him for the agricultural labor 
                performed by them, and
                  (C) has not entered into a written agreement 
                with such other person under which such 
                individual is designated as an employee of such 
                other person.
  (p) Concurrent employment by two or more employers.--For 
purposes of sections 3301, 3302, and 3306(b)(1), if two or more 
related corporations concurrently employ the same individual 
and compensate such individual through a common paymaster which 
is one of such corporations, each such corporation shall be 
considered to have paid as remuneration to such individual only 
the amounts actually disbursed by it to such individual and 
shall not be considered to have paid as remuneration to such 
individual amounts actually disbursed to such individual by 
another of such corporations.
  (q) Full time student.--For purposes of subsection (c)(20), 
an individual shall be treated as a full time student for any 
period--
          (1) during which the individual is enrolled as a full 
        time student at an educational institution, or
          (2) which is between academic years or terms if--
                  (A) the individual was enrolled as a full 
                time student at an educational institution for 
                the immediately preceding academic year or 
                term, and
                  (B) there is a reasonable assurance that the 
                individual will be so enrolled for the 
                immediately succeeding academic year or term 
                after the period described in subparagraph (A).
  (r) Treatment of certain deferred compensation and salary 
reduction arrangements.--
          (1) Certain employer contributions treated as 
        wages.--Nothing in any paragraph of subsection (b) 
        (other than paragraph (1)) shall exclude from the term 
        ``wages''--
                  (A) any employer contribution under a 
                qualified cash or deferred arrangement (as 
                defined in section 401(k)) to the extent not 
                included in gross income by reason of section 
                402(e)(3), or
                  (B) any amount treated as an employer 
                contribution under section 414(h)(2) where the 
                pickup referred to in such section is pursuant 
                to a salary reduction agreement (whether 
                evidenced by a written instrument or 
                otherwise).
          (2) Treatment of certain nonqualified deferred 
        compensation plans.--
                  (A) In general.--Any amount deferred under a 
                nonqualified deferred compensation plan shall 
                be taken into account for purposes of this 
                chapter as of the later of--
                          (i) when the services are performed, 
                        or
                          (ii) when there is no substantial 
                        risk of forfeiture of the rights to 
                        such amount.
                  (B) Taxed only once.--Any amount taken into 
                account as wages by reason of subparagraph (A) 
                (and the income attributable thereto) shall not 
                thereafter be treated as wages for purposes of 
                this chapter.
                  (C) Nonqualified deferred compensation 
                plan.--For purposes of this paragraph, the term 
                ``nonqualified deferred compensation plan'' 
                means any plan or other arrangement for 
                deferral of compensation other than a plan 
                described in subsection (b)(5).
  (s) Tips treated as wages.--For purposes of this chapter, the 
term ``wages'' includes tips which are--
          (1) received while performing services which 
        constitute employment, and
          (2) included in a written statement furnished to the 
        employer pursuant to section 6053(a).
  (t) Self-employment assistance program.--For the purposes of 
this chapter, the term ``self-employment assistance program'' 
means a program under which--
          (1) individuals who meet the requirements described 
        in paragraph (3) are eligible to receive an allowance 
        in lieu of regular unemployment compensation under the 
        State law for the purpose of assisting such individuals 
        in establishing a business and becoming self-employed;
          (2) the allowance payable to individuals pursuant to 
        paragraph (1) is payable in the same amount, at the 
        same interval, on the same terms, and subject to the 
        same conditions, as regular unemployment compensation 
        under the State law, except that--
                  (A) State requirements relating to 
                availability for work, active search for work, 
                and refusal to accept work are not applicable 
                to such individuals;
                  (B) State requirements relating to 
                disqualifying income are not applicable to 
                income earned from self-employment by such 
                individuals; and
                  (C) such individuals are considered to be 
                unemployed for the purposes of Federal and 
                State laws applicable to unemployment 
                compensation,
        as long as such individuals meet the requirements 
        applicable under this subsection;
          (3) individuals may receive the allowance described 
        in paragraph (1) if such individuals--
                  (A) are eligible to receive regular 
                unemployment compensation under the State law, 
                or would be eligible to receive such 
                compensation except for the requirements 
                described in subparagraph (A) or (B) of 
                paragraph (2);
                  (B) are identified pursuant to a State worker 
                profiling system as individuals likely to 
                exhaust regular unemployment compensation; and
                  (C) are participating in self-employment 
                assistance activities which--
                          (i) include entrepreneurial training, 
                        business counseling, and technical 
                        assistance; and
                          (ii) are approved by the State 
                        agency; and
                  (D) are actively engaged on a full-time basis 
                in activities (which may include training) 
                relating to the establishment of a business and 
                becoming self-employed;
          (4) the aggregate number of individuals receiving the 
        allowance under the program does not at any time exceed 
        5 percent of the number of individuals receiving 
        regular unemployment compensation under the State law 
        at such time;
          (5) the program does not result in any cost to the 
        Unemployment Trust Fund (established by section 904(a) 
        of the Social Security Act) in excess of the cost that 
        would be incurred by such State and charged to such 
        Fund if the State had not participated in such program; 
        and
          (6) the program meets such other requirements as the 
        Secretary of Labor determines to be appropriate.
  (u) Indian tribe.--For purposes of this chapter, the term 
``Indian tribe'' has the meaning given to such term by section 
4(e) of the Indian Self-Determination and Education Assistance 
Act (25 U.S.C. 5304(e)), and includes any subdivision, 
subsidiary, or business enterprise wholly owned by such an 
Indian tribe.
  (v) Short-time compensation program.--For purposes of this 
section, the term ``short-time compensation program'' means a 
program under which--
          (1) the participation of an employer is voluntary;
          (2) an employer reduces the number of hours worked by 
        employees in lieu of layoffs;
          (3) such employees whose workweeks have been reduced 
        by at least 10 percent, and by not more than the 
        percentage, if any, that is determined by the State to 
        be appropriate (but in no case more than 60 percent), 
        are not disqualified from unemployment compensation;
          (4) the amount of unemployment compensation payable 
        to any such employee is a pro rata portion of the 
        unemployment compensation which would otherwise be 
        payable to the employee if such employee were 
        unemployed;
          (5) such employees meet the availability for work and 
        work search test requirements while collecting short-
        time compensation benefits, by being available for 
        their workweek as required by the State agency;
          (6) eligible employees may participate, as 
        appropriate, in training (including employer-sponsored 
        training or worker training funded under the Workforce 
        Investment Act of 1998) to enhance job skills if such 
        program has been approved by the State agency;
          (7) the State agency shall require employers to 
        certify that if the employer provides health benefits 
        and retirement benefits under a defined benefit plan 
        (as defined in section 414(j)) or contributions under a 
        defined contribution plan (as defined in section 
        414(i)) to any employee whose workweek is reduced under 
        the program that such benefits will continue to be 
        provided to employees participating in the short-time 
        compensation program under the same terms and 
        conditions as though the workweek of such employee had 
        not been reduced or to the same extent as other 
        employees not participating in the short-time 
        compensation program;
          (8) the State agency shall require an employer to 
        submit a written plan describing the manner in which 
        the requirements of this subsection will be implemented 
        (including a plan for giving advance notice, where 
        feasible, to an employee whose workweek is to be 
        reduced) together with an estimate of the number of 
        layoffs that would have occurred absent the ability to 
        participate in short-time compensation and such other 
        information as the Secretary of Labor determines is 
        appropriate;
          (9) the terms of the employer's written plan and 
        implementation shall be consistent with employer 
        obligations under applicable Federal and State laws; 
        and
          (10) upon request by the State and approval by the 
        Secretary of Labor, only such other provisions are 
        included in the State law that are determined to be 
        appropriate for purposes of a short-time compensation 
        program.

           *       *       *       *       *       *       *

CHAPTER 24--COLLECTION OF INCOME TAX AT SOURCE ON WAGES

           *       *       *       *       *       *       *

SEC. 3402. INCOME TAX COLLECTED AT SOURCE.

  (a) Requirement of withholding.--
          (1) In general.--Except as otherwise provided in this 
        section, every employer making payment of wages shall 
        deduct and withhold upon such wages a tax determined in 
        accordance with tables or computational procedures 
        prescribed by the Secretary. Any tables or procedures 
        prescribed under this paragraph shall--
                  (A) apply with respect to the amount of wages 
                paid during such periods as the Secretary may 
                prescribe, and
                  (B) be in such form, and provide for such 
                amounts to be deducted and withheld, as the 
                Secretary determines to be most appropriate to 
                carry out the purposes of this chapter and to 
                reflect the provisions of chapter 1 applicable 
                to such periods.
          (2) Amount of wages.--For purposes of applying tables 
        or procedures prescribed under paragraph (1), the term 
        ``the amount of wages'' means the amount by which the 
        wages exceed the taxpayer's withholding allowance, 
        prorated to the payroll period.
  (b) Percentage method of withholding.--(1) If wages are paid 
with respect to a period which is not a payroll period, the 
withholding allowance allowable with respect to each payment of 
such wages shall be the allowance allowed for a miscellaneous 
payroll period containing a number of days (including Sundays 
and holidays) equal to the number of days in the period with 
respect to which such wages are paid.
  (2) In any case in which wages are paid by an employer 
without regard to any payroll period or other period, the 
withholding allowance allowable with respect to each payment of 
such wages shall be the allowance allowed for a miscellaneous 
payroll period containing a number of days equal to the number 
of days (including Sundays and holidays) which have elapsed 
since the date of the last payment of such wages by such 
employer during the calendar year, or the date of commencement 
of employment with such employer during such year, or January 1 
of such year, whichever is the later.
  (3) In any case in which the period, or the time described in 
paragraph (2), in respect of any wages is less than one week, 
the Secretary, under regulations prescribed by him, may 
authorize an employer to compute the tax to be deducted and 
withheld as if the aggregate of the wages paid to the employee 
during the calendar week were paid for a weekly payroll period.
  (4) In determining the amount to be deducted and withheld 
under this subsection, the wages may, at the election of the 
employer, be computed to the nearest dollar.
  (c) Wage bracket withholding.--(1) At the election of the 
employer with respect to any employee, the employer shall 
deduct and withhold upon the wages paid to such employee a tax 
(in lieu of the tax required to be deducted and withheld under 
subsection (a)) determined in accordance with tables prescribed 
by the Secretary in accordance with paragraph (6).
  (2) If wages are paid with respect to a period which is not a 
payroll period, the amount to be deducted and withheld shall be 
that applicable in the case of a miscellaneous payroll period 
containing a number of days (including Sundays and holidays) 
equal to the number of days in the period with respect to which 
such wages are paid.
  (3) In any case in which wages are paid by an employer 
without regard to any payroll period or other period, the 
amount to be deducted and withheld shall be that applicable in 
the case of a miscellaneous payroll period containing a number 
of days equal to the number of days (including Sundays and 
holidays) which have elapsed since the date of the last payment 
of such wages by such employer during the calendar year, or the 
date of commencement of employment with such employer during 
such year, or January 1 of such year, whichever is the later.
  (4) In any case in which the period, or the time described in 
paragraph (3), in respect of any wages is less than one week, 
the Secretary, under regulations prescribed by him, may 
authorize an employer to determine the amount to be deducted 
and withheld under the tables applicable in the case of a 
weekly payroll period, in which case the aggregate of the wages 
paid to the employee during the calendar week shall be 
considered the weekly wages.
  (5) If the wages exceed the highest wage bracket, in 
determining the amount to be deducted and withheld under this 
subsection, the wages may, at the election of the employer, be 
computed to the nearest dollar.
  (6) In the case of wages paid after December 31, 1969, the 
amount deducted and withheld under paragraph (1) shall be 
determined in accordance with tables prescribed by the 
Secretary. In the tables so prescribed, the amounts set forth 
as amounts of wages and amounts of income tax to be deducted 
and withheld shall be computed on the basis of the table for an 
annual payroll period prescribed pursuant to subsection (a).
  (d) Tax paid by recipient.--If the employer, in violation of 
the provisions of this chapter, fails to deduct and withhold 
the tax under this chapter, and thereafter the tax against 
which such tax may be credited is paid, the tax so required to 
be deducted and withheld shall not be collected from the 
employer; but this subsection shall in no case relieve the 
employer from liability for any penalties or additions to the 
tax otherwise applicable in respect of such failure to deduct 
and withhold.
  (e) Included and excluded wages.--If the remuneration paid by 
an employer to an employee for services performed during one-
half or more of any payroll period of not more than 31 
consecutive days constitutes wages, all the remuneration paid 
by such employer to such employee for such period shall be 
deemed to be wages; but if the remuneration paid by an employer 
to an employee for services performed during more than one-half 
of any such payroll period does not constitute wages, then none 
of the remuneration paid by such employer to such employee for 
such period shall be deemed to be wages.
  (f) Withholding allowance.--
          (1) In general.--Under rules determined by the 
        Secretary, an employee receiving wages shall on any day 
        be entitled to a withholding allowance determined based 
        on--
                  (A) whether the employee is an individual for 
                whom a deduction is allowable with respect to 
                another taxpayer under section 151;
                  (B) if the employee is married, whether the 
                employee's spouse is entitled to an allowance, 
                or would be so entitled if such spouse were an 
                employee receiving wages, under subparagraph 
                (A) or (D), but only if such spouse does not 
                have in effect a withholding allowance 
                certificate claiming such allowance;
                  (C) the number of individuals with respect to 
                whom, on the basis of facts existing at the 
                beginning of such day, there may reasonably be 
                expected to be allowable a credit under section 
                24(a) for the taxable year under subtitle A in 
                respect of which amounts deducted and withheld 
                under this chapter in the calendar year in 
                which such day falls are allowed as a credit;
                  (D) any additional amounts to which the 
                employee elects to take into account under 
                subsection (m), but only if the employee's 
                spouse does not have in effect a withholding 
                allowance certificate making such an election;
                  (E) the standard deduction allowable to such 
                employee (one-half of such standard deduction 
                in the case of an employee who is married (as 
                determined under section 7703) and whose spouse 
                is an employee receiving wages subject to 
                withholding); and
                  (F) whether the employee has withholding 
                allowance certificates in effect with respect 
                to more than 1 employer.
          (2) Allowance certificates.--
                  (A) On commencement of employment.--On or 
                before the date of the commencement of 
                employment with an employer, the employee shall 
                furnish the employer with a signed withholding 
                allowance certificate relating to the 
                withholding allowance claimed by the employee, 
                which shall in no event exceed the amount to 
                which the employee is entitled.
                  (B) Change of status.--If, on any day during 
                the calendar year, an employee's withholding 
                allowance is in excess of the withholding 
                allowance to which the employee would be 
                entitled had the employee submitted a true and 
                accurate withholding allowance certificate to 
                the employer on that day, the employee shall 
                within 10 days thereafter furnish the employer 
                with a new withholding allowance certificate. 
                If, on any day during the calendar year, an 
                employee's withholding allowance is greater 
                than the withholding allowance claimed, the 
                employee may furnish the employer with a new 
                withholding allowance certificate relating to 
                the withholding allowance to which the employee 
                is so entitled, which shall in no event exceed 
                the amount to which the employee is entitled on 
                such day.
                  (C) Change of status which affects next 
                calendar year.--If on any day during the 
                calendar year the withholding allowance to 
                which the employee will be, or may reasonably 
                be expected to be, entitled at the beginning of 
                the employee's next taxable year under subtitle 
                A is different from the allowance to which the 
                employee is entitled on such day, the employee 
                shall, in such cases and at such times as the 
                Secretary shall by regulations prescribe, 
                furnish the employer with a withholding 
                allowance certificate relating to the 
                withholding allowance which the employee claims 
                with respect to such next taxable year, which 
                shall in no event exceed the withholding 
                allowance to which the employee will be, or may 
                reasonably be expected to be, so entitled.
          (3) When certificate takes effect.--
                  (A) First certificate furnished.--A 
                withholding allowance certificate furnished the 
                employer in cases in which no previous such 
                certificate is in effect shall take effect as 
                of the beginning of the first payroll period 
                ending, or the first payment of wages made 
                without regard to a payroll period, on or after 
                the date on which such certificate is so 
                furnished.
                  (B) Furnished to take place of existing 
                certificate.--
                          (i) In general.--Except as provided 
                        in clauses (ii) and (iii), a 
                        withholding allowance certificate 
                        furnished to the employer in cases in 
                        which a previous such certificate is in 
                        effect shall take effect as of the 
                        beginning of the 1st payroll period 
                        ending (or the 1st payment of wages 
                        made without regard to a payroll 
                        period) on or after the 30th day after 
                        the day on which such certificate is so 
                        furnished.
                          (ii) Employer may elect earlier 
                        effective date.--At the election of the 
                        employer, a certificate described in 
                        clause (i) may be made effective 
                        beginning with any payment of wages 
                        made on or after the day on which the 
                        certificate is so furnished and before 
                        the 30th day referred to in clause (i).
                          (iii) Change of status which affects 
                        next year.--Any certificate furnished 
                        pursuant to paragraph (2)(C) shall not 
                        take effect, and may not be made 
                        effective, with respect to any payment 
                        of wages made in the calendar year in 
                        which the certificate is furnished.
          (4) Period during which certificate remains in 
        effect.--A withholding allowance certificate which 
        takes effect under this subsection, or which on 
        December 31, 1954, was in effect under the 
        corresponding subsection of prior law, shall continue 
        in effect with respect to the employer until another 
        such certificate takes effect under this subsection.
          (5) Form and contents of certificate.--Withholding 
        allowance certificates shall be in such form and 
        contain such information as the Secretary may by 
        regulations prescribe.
          (6) Exemption of certain nonresident aliens.--
        Notwithstanding the provisions of paragraph (1), a 
        nonresident alien individual (other than an individual 
        described in section 3401(a)(6)(A) or (B)) shall be 
        entitled to only one withholding exemption.
          (7) Allowance where certificate with another employer 
        is in effect.--If a withholding allowance certificate 
        is in effect with respect to one employer, an employee 
        shall not be entitled under a certificate in effect 
        with any other employer to any withholding allowance 
        which he has claimed under such first certificate.
  (g) Overlapping pay periods, and payment by agent or 
fiduciary.--If a payment of wages is made to an employee by an 
employer--
          (1) with respect to a payroll period or other period, 
        any part of which is included in a payroll period or 
        other period with respect to which wages are also paid 
        to such employee by such employer, or
          (2) without regard to any payroll period or other 
        period, but on or prior to the expiration of a payroll 
        period or other period with respect to which wages are 
        also paid to such employee by such employer, or
          (3) with respect to a period beginning in one and 
        ending in another calendar year, or
          (4) through an agent, fiduciary, or other person who 
        also has the control, receipt, custody, or disposal of, 
        or pays, the wages payable by another employer to such 
        employee,
the manner of withholding and the amount to be deducted and 
withheld under this chapter shall be determined in accordance 
with regulations prescribed by the Secretary under which the 
withholding allowance allowed to the employee in any calendar 
year shall approximate the withholding allowance allowable with 
respect to an annual payroll period.
  (h) Alternative methods of computing amount to be withheld.--
The Secretary may, under regulations prescribed by him, 
authorize--
          (1) Withholding on basis of average wages.--An 
        employer--
                  (A) to estimate the wages which will be paid 
                to any employee in any quarter of the calendar 
                year,
                  (B) to determine the amount to be deducted 
                and withheld upon each payment of wages to such 
                employee during such quarter as if the 
                appropriate average of the wages so estimated 
                constituted the actual wages paid, and
                  (C) to deduct and withhold upon any payment 
                of wages to such employee during such quarter 
                (and, in the case of tips referred to in 
                subsection (k), within 30 days thereafter) such 
                amount as may be necessary to adjust the amount 
                actually deducted and withheld upon the wages 
                of such employee during such quarter to the 
                amount required to be deducted and withheld 
                during such quarter without regard to this 
                subsection.
          (2) Withholding on basis of annualized wages.--An 
        employer to determine the amount of tax to be deducted 
        and withheld upon a payment of wages to an employee for 
        a payroll period by--
                  (A) multiplying the amount of an employee's 
                wages for a payroll period by the number of 
                such payroll periods in the calendar year,
                  (B) determining the amount of tax which would 
                be required to be deducted and withheld upon 
                the amount determined under subparagraph (A) if 
                such amount constituted the actual wages for 
                the calendar year and the payroll period of the 
                employee were an annual payroll period, and
                  (C) dividing the amount of tax determined 
                under subparagraph (B) by the number of payroll 
                periods (described in subparagraph (A)) in the 
                calendar year.
          (3) Withholding on basis of cumulative wages.--An 
        employer, in the case of any employee who requests to 
        have the amount of tax to be withheld from his wages 
        computed on the basis of his cumulative wages, to--
                  (A) add the amount of the wages to be paid to 
                the employee for the payroll period to the 
                total amount of wages paid by the employer to 
                the employee during the calendar year,
                  (B) divide the aggregate amount of wages 
                computed under subparagraph (A) by the number 
                of payroll periods to which such aggregate 
                amount of wages relates,
                  (C) compute the total amount of tax that 
                would have been required to be deducted and 
                withheld under subsection (a) if the average 
                amount of wages (as computed under subparagraph 
                (B)) had been paid to the employee for the 
                number of payroll periods to which the 
                aggregate amount of wages (computed under 
                subparagraph (A)) relates,
                  (D) determine the excess, if any, of the 
                amount of tax computed under subparagraph (C) 
                over the total amount of tax deducted and 
                withheld by the employer from wages paid to the 
                employee during the calendar year, and
                  (E) deduct and withhold upon the payment of 
                wages (referred to in subparagraph (A)) to the 
                employee an amount equal to the excess (if any) 
                computed under subparagraph (D).
          (4) Other methods.--An employer to determine the 
        amount of tax to be deducted and withheld upon the 
        wages paid to an employee by any other method which 
        will require the employer to deduct and withhold upon 
        such wages substantially the same amount as would be 
        required to be deducted and withheld by applying 
        subsection (a) or (c), either with respect to a payroll 
        period or with respect to the entire taxable year.
  (i) Changes in withholding.--
          (1) In general.--The Secretary may by regulations 
        provide for increases in the amount of withholding 
        otherwise required under this section in cases where 
        the employee requests such changes.
          (2) Treatment as tax.--Any increased withholding 
        under paragraph (1) shall for all purposes be 
        considered tax required to be deducted and withheld 
        under this chapter.
  (j) Noncash remuneration to retail commission salesman.--In 
the case of remuneration paid in any medium other than cash for 
services performed by an individual as a retail salesman for a 
person, where the service performed by such individual for such 
person is ordinarily performed for remuneration solely by way 
of cash commission an employer shall not be required to deduct 
or withhold any tax under this subchapter with respect to such 
remuneration, provided that such employer files with the 
Secretary such information with respect to such remuneration as 
the Secretary may by regulation prescribe.
  (k) Tips.--In the case of tips which constitute wages, 
subsection (a) shall be applicable only to such tips as are 
included in a written statement furnished to the employer 
pursuant to section 6053(a), and only to the extent that the 
tax can be deducted and withheld by the employer, at or after 
the time such statement is so furnished and before the close of 
the calendar year in which such statement is furnished, from 
such wages of the employee (excluding tips, but including funds 
turned over by the employee to the employer for the purpose of 
such deduction and withholding) as are under the control of the 
employer; and an employer who is furnished by an employee a 
written statement of tips (received in a calendar month) 
pursuant to section 6053(a) to which paragraph (16)(B) of 
section 3401(a) is applicable may deduct and withhold the tax 
with respect to such tips from any wages of the employee 
(excluding tips) under his control, even though at the time 
such statement is furnished the total amount of the tips 
included in statements furnished to the employer as having been 
received by the employee in such calendar month in the course 
of his employment by such employer is less than $20. Such tax 
shall not at any time be deducted and withheld in an amount 
which exceeds the aggregate of such wages and funds (including 
funds turned over under section 3102(c)(2) or section 
3202(c)(2)) minus any tax required by section 3102(a) or 
section 3202(a) to be collected from such wages and funds.
  (l) Determination and disclosure of marital status.--
          (1) Determination of status by employer.--For 
        purposes of applying the tables in subsections (a) and 
        (c) to a payment of wages, the employer shall treat the 
        employee as a single person unless there is in effect 
        with respect to such payment of wages a withholding 
        allowance certificate furnished to the employer by the 
        employee after the date of the enactment of this 
        subsection indicating that the employee is married.
          (2) Disclosure of status by employee.--An employee 
        shall be entitled to furnish the employer with a 
        withholding allowance certificate indicating [he] the 
        employee is married only if, on the day of such 
        furnishing, [he] the employee is married (determined 
        with the application of the rules in paragraph (3)). An 
        employee whose marital status changes from married to 
        single shall, at such time as the Secretary may by 
        regulations prescribe, furnish the employer with a new 
        withholding allowance certificate.
          (3) Determination of marital status.--For purposes of 
        paragraph (2), an employee shall on any day be 
        considered--
                  (A) as not married, if (i) [he] the employee 
                is legally separated from [his spouse] the 
                employee's spouse under a decree of divorce or 
                separate maintenance, or (ii) either [he] the 
                employee or [his spouse] the employee's spouse 
                is, or on any preceding day within the calendar 
                year was, a nonresident alien; or
                  (B) as married, if (i) [his spouse] the 
                employee's spouse (other than a spouse referred 
                to in subparagraph (A)) died within the portion 
                of [his taxable year] the employee's taxable 
                year which precedes such day, or (ii) [his 
                spouse] the employee's spouse died during one 
                of the two taxable years immediately preceding 
                the current taxable year and, on the basis of 
                facts existing at the beginning of such day, 
                the employee reasonably expects, at the close 
                of [his taxable year] the employee's taxable 
                year , to be a surviving spouse (as defined in 
                section 2(a)).
  (m) Withholding allowances.--Under regulations prescribed by 
the Secretary, an employee shall be entitled to an additional 
withholding allowance or additional reductions in withholding 
under this subsection. In determining the additional 
withholding allowance or the amount of additional reductions in 
withholding under this subsection, the employee may take into 
account (to the extent and in the manner provided by such 
regulations)--
          (1) estimated itemized deductions allowable under 
        chapter 1 and the estimated deduction allowed under 
        section 199A (other than the deductions referred to in 
        section 151 and other than the deductions required to 
        be taken into account in determining adjusted gross 
        income under section 62(a)),
          (2) estimated tax credits allowable under chapter 1, 
        and
          (3) such additional deductions (including the 
        additional standard deduction under section 63(c)(3) 
        for the aged and blind) and other items as may be 
        specified by the Secretary in regulations.
  (n) Employees incurring no income tax liability.--
Notwithstanding any other provision of this section, an 
employer shall not be required to deduct and withhold any tax 
under this chapter upon a payment of wages to an employee if 
there is in effect with respect to such payment a withholding 
allowance certificate (in such form and containing such other 
information as the Secretary may prescribe) furnished to the 
employer by the employee certifying that the employee--
          (1) incurred no liability for income tax imposed 
        under subtitle A for his preceding taxable year, and
          (2) anticipates that he will incur no liability for 
        income tax imposed under subtitle A for his current 
        taxable year.
The Secretary shall by regulations provide for the coordination 
of the provisions of this subsection with the provisions of 
subsection (f).
  (o) Extension of withholding to certain payments other than 
wages.--
          (1) General rule.--For purposes of this chapter (and 
        so much of subtitle F as relates to this chapter)--
                  (A) any supplemental unemployment 
                compensation benefit paid to an individual,
                  (B) any payment of an annuity to an 
                individual, if at the time the payment is made 
                a request that such annuity be subject to 
                withholding under this chapter is in effect, 
                and
                  (C) any payment to an individual of sick pay 
                which does not constitute wages (determined 
                without regard to this subsection), if at the 
                time the payment is made a request that such 
                sick pay be subject to withholding under this 
                chapter is in effect,
        shall be treated as if it were a payment of wages by an 
        employer to an employee for a payroll period.
          (2) Definitions.--
                  (A) Supplemental unemployment compensation 
                benefits.--For purposes of paragraph (1), the 
                term ``supplemental unemployment compensation 
                benefits'' means amounts which are paid to an 
                employee, pursuant to a plan to which the 
                employer is a party, because of an employee's 
                involuntary separation from employment (whether 
                or not such separation is temporary), resulting 
                directly from a reduction in force, the 
                discontinuance of a plant or operation, or 
                other similar conditions, but only to the 
                extent such benefits are includible in the 
                employee's gross income.
                  (B) Annuity.--For purposes of this 
                subsection, the term ``annuity'' means any 
                amount paid to an individual as a pension or 
                annuity.
                  (C) Sick pay.--For purposes of this 
                subsection, the term ``sick pay'' means any 
                amount which--
                          (i) is paid to an employee pursuant 
                        to a plan to which the employer is a 
                        party, and
                          (ii) constitutes remuneration or a 
                        payment in lieu of remuneration for any 
                        period during which the employee is 
                        temporarily absent from work on account 
                        of sickness or personal injuries.
          (3) Amount withheld from annuity payments or sick 
        pay.--If a payee makes a request that an annuity or any 
        sick pay be subject to withholding under this chapter, 
        the amount to be deducted and withheld under this 
        chapter from any payment to which such request applies 
        shall be an amount (not less than a minimum amount 
        determined under regulations prescribed by the 
        Secretary) specified by the payee in such request. The 
        amount deducted and withheld with respect to a payment 
        which is greater or less than a full payment shall bear 
        the same relation to the specified amount as such 
        payment bears to a full payment.
          (4) Request for withholding.--A request that an 
        annuity or any sick pay be subject to withholding under 
        this chapter--
                  (A) shall be made by the payee in writing to 
                the person making the payments and shall 
                contain the social security number of the 
                payee,
                  (B) shall specify the amount to be deducted 
                and withheld from each full payment, and
                  (C) shall take effect--
                          (i) in the case of sick pay, with 
                        respect to payments made more than 7 
                        days after the date on which such 
                        request is furnished to the payor, or
                          (ii) in the case of an annuity, at 
                        such time (after the date on which such 
                        request is furnished to the payor) as 
                        the Secretary shall by regulations 
                        prescribe.
        Such a request may be changed or terminated by 
        furnishing to the person making the payments a written 
        statement of change or termination which shall take 
        effect in the same manner as provided in subparagraph 
        (C). At the election of the payor, any such request (or 
        statement of change or revocation) may take effect 
        earlier than as provided in subparagraph (C).
          (5) Special rule for sick pay paid pursuant to 
        certain collective-bargaining agreements.--In the case 
        of any sick pay paid pursuant to a collective-
        bargaining agreement between employee representatives 
        and one or more employers which contains a provision 
        specifying that this paragraph is to apply to sick pay 
        paid pursuant to such agreement and contains a 
        provision for determining the amount to be deducted and 
        withheld from each payment of such sick pay--
                  (A) the requirement of paragraph (1)(C) that 
                a request for withholding be in effect shall 
                not apply, and
                  (B) except as provided in subsection (n), the 
                amounts to be deducted and withheld under this 
                chapter shall be determined in accordance with 
                such agreement.
        The preceding sentence shall not apply with respect to 
        sick pay paid pursuant to any agreement to any 
        individual unless the social security number of such 
        individual is furnished to the payor and the payor is 
        furnished with such information as is necessary to 
        determine whether the payment is pursuant to the 
        agreement and to determine the amount to be deducted 
        and withheld.
          (6) Coordination with withholding on designated 
        distributions under section 3405.--This subsection 
        shall not apply to any amount which is a designated 
        distribution (within the meaning of section 
        3405(e)(1)).
  (p) Voluntary withholding agreements.--
          (1) Certain Federal payments.--
                  (A) In general.--If, at the time a specified 
                Federal payment is made to any person, a 
                request by such person is in effect that such 
                payment be subject to withholding under this 
                chapter, then for purposes of this chapter and 
                so much of subtitle F as relates to this 
                chapter, such payment shall be treated as if it 
                were a payment of wages by an employer to an 
                employee.
                  (B) Amount withheld.--The amount to be 
                deducted and withheld under this chapter from 
                any payment to which any request under 
                subparagraph (A) applies shall be an amount 
                equal to the percentage of such payment 
                specified in such request. Such a request shall 
                apply to any payment only if the percentage 
                specified is 7 percent, any percentage 
                applicable to any of the 3 lowest income 
                brackets in the table under section 1(c), or 
                such other percentage as is permitted under 
                regulations prescribed by the Secretary.
                  (C) Specified Federal payments.--For purposes 
                of this paragraph, the term ``specified Federal 
                payment'' means--
                          (i) any payment of a social security 
                        benefit (as defined in section 86(d)),
                          (ii) any payment referred to in the 
                        second sentence of section 451(d)   
                        which is treated as insurance proceeds,
                          (iii) any amount which is includible 
                        in gross income under section 77(a), 
                        and
                          (iv) any other payment made pursuant 
                        to Federal law which is specified by 
                        the Secretary for purposes of this 
                        paragraph.
                  (D) Requests for withholding.--Rules similar 
                to the rules that apply to annuities under 
                subsection (o)(4) shall apply to requests under 
                this paragraph and paragraph (2).
          (2) Voluntary withholding on unemployment benefits.--
        If, at the time a payment of unemployment compensation 
        (as defined in section 85(b)) is made to any person, a 
        request by such person is in effect that such payment 
        be subject to withholding under this chapter, then for 
        purposes of this chapter and so much of subtitle F as 
        relates to this chapter, such payment shall be treated 
        as if it were a payment of wages by an employer to an 
        employee. The amount to be deducted and withheld under 
        this chapter from any payment to which any request 
        under this paragraph applies shall be an amount equal 
        to 10 percent of such payment.
          (3) Authority for other voluntary withholding.--The 
        Secretary is authorized by regulations to provide for 
        withholding--
                  (A) from remuneration for services performed 
                by an employee for the employee's employer 
                which (without regard to this paragraph) does 
                not constitute wages, and
                  (B) from any other type of payment with 
                respect to which the Secretary finds that 
                withholding would be appropriate under the 
                provisions of this chapter,
        if the employer and employee, or the person making and 
        the person receiving such other type of payment, agree 
        to such withholding. Such agreement shall be in such 
        form and manner as the Secretary may by regulations 
        prescribe. For purposes of this chapter (and so much of 
        subtitle F as relates to this chapter), remuneration or 
        other payments with respect to which such agreement is 
        made shall be treated as if they were wages paid by an 
        employer to an employee to the extent that such 
        remuneration is paid or other payments are made during 
        the period for which the agreement is in effect.
  (q) Extension of withholding to certain gambling winnings.--
          (1) General rule.--Every person, including the 
        Government of the United States, a State, or a 
        political subdivision thereof, or any instrumentalities 
        of the foregoing, making any payment of winnings which 
        are subject to withholding shall deduct and withhold 
        from such payment a tax in an amount equal to the 
        product of the third lowest rate of tax applicable 
        under section 1(c)   and such payment.
          (2) Exemption where tax otherwise withheld.--In the 
        case of any payment of winnings which are subject to 
        withholding made to a nonresident alien individual or a 
        foreign corporation, the tax imposed under paragraph 
        (1) shall not apply to any such payment subject to tax 
        under section 1441(a) (relating to withholding on 
        nonresident aliens) or tax under section 1442(a) 
        (relating to withholding on foreign corporations).
          (3) Winnings which are subject to withholding.--For 
        purposes of this subsection, the term ``winnings which 
        are subject to withholding'' means proceeds from a 
        wager determined in accordance with the following:
                  (A) In general.--Except as provided in 
                subparagraphs (B) and (C), proceeds of more 
                than $5,000 from a wagering transaction, if the 
                amount of such proceeds is at least 300 times 
                as large as the amount wagered.
                  (B) State-conducted lotteries.--Proceeds of 
                more than $5,000 from a wager placed in a 
                lottery conducted by an agency of a State 
                acting under authority of State law, but only 
                if such wager is placed with the State agency 
                conducting such lottery, or with its authorized 
                employees or agents.
                  (C) Sweepstakes, wagering pools, certain 
                parimutuel pools, jai alai, and lotteries.--
                Proceeds of more than $5,000 from--
                          (i) a wager placed in a sweepstakes, 
                        wagering pool, or lottery (other than a 
                        wager described in subparagraph (B)), 
                        or
                          (ii) a wagering transaction in a 
                        parimutuel pool with respect to horse 
                        races, dog races, or jai alai if the 
                        amount of such proceeds is at least 300 
                        times as large as the amount wagered.
          (4) Rules for determining proceeds from a wager.--For 
        purposes of this subsection--
                  (A) proceeds from a wager shall be determined 
                by reducing the amount received by the amount 
                of the wager, and
                  (B) proceeds which are not money shall be 
                taken into account at their fair market value.
          (5) Exemption for bingo, keno, and slot machines.--
        The tax imposed under paragraph (1) shall not apply to 
        winnings from a slot machine, keno, and bingo.
          (6) Statement by recipient.--Every person who is to 
        receive a payment of winnings which are subject to 
        withholding shall furnish the person making such 
        payment a statement, made under the penalties of 
        perjury, containing the name, address, and taxpayer 
        identification number of the person receiving the 
        payment and of each person entitled to any portion of 
        such payment.
          (7) Coordination with other sections.--For purposes 
        of sections 3403 and 3404 and for purposes of so much 
        of subtitle F (except section 7205) as relates to this 
        chapter, payments to any person of winnings which are 
        subject to withholding shall be treated as if they were 
        wages paid by an employer to an employee.
  (r) Extension of withholding to certain taxable payments of 
Indian casino profits.--
          (1) In general.--Every person, including an Indian 
        tribe, making a payment to a member of an Indian tribe 
        from the net revenues of any class II or class III 
        gaming activity conducted or licensed by such tribe 
        shall deduct and withhold from such payment a tax in an 
        amount equal to such payment's proportionate share of 
        the annualized tax.
          (2) Exception.--The tax imposed by paragraph (1) 
        shall not apply to any payment to the extent that the 
        payment, when annualized, does not exceed an amount 
        equal to the sum of--
                  (A) the basic standard deduction (as defined 
                in section 63(c)) for an individual to whom 
                section 63(c)(2)(C) applies, and
                  (B) the exemption amount (as defined in 
                section 151(d)).
          (3) Annualized tax.--For purposes of paragraph (1), 
        the term ``annualized tax'' means, with respect to any 
        payment, the amount of tax which would be imposed by 
        section 1(c) (determined without regard to any rate of 
        tax in excess of the fourth lowest rate of tax 
        applicable under section 1(c)) on an amount of taxable 
        income equal to the excess of--
                  (A) the annualized amount of such payment, 
                over
                  (B) the amount determined under paragraph 
                (2).
          (4) Classes of gaming activities, etc..--For purposes 
        of this subsection, terms used in paragraph (1) which 
        are defined in section 4 of the Indian Gaming 
        Regulatory Act (25 U.S.C. 2701 et seq.), as in effect 
        on the date of the enactment of this subsection, shall 
        have the respective meanings given such terms by such 
        section.
          (5) Annualization.--Payments shall be placed on an 
        annualized basis under regulations prescribed by the 
        Secretary.
          (6) Alternate withholding procedures.--At the 
        election of an Indian tribe, the tax imposed by this 
        subsection on any payment made by such tribe shall be 
        determined in accordance with such tables or 
        computational procedures as may be specified in 
        regulations prescribed by the Secretary (in lieu of in 
        accordance with paragraphs (2) and (3)).
          (7) Coordination with other sections.--For purposes 
        of this chapter and so much of subtitle F as relates to 
        this chapter, payments to any person which are subject 
        to withholding under this subsection shall be treated 
        as if they were wages paid by an employer to an 
        employee.
  (s) Exemption from withholding for any vehicle fringe 
benefit.--
          (1) Employer election not to withhold.--The employer 
        may elect not to deduct and withhold any tax under this 
        chapter with respect to any vehicle fringe benefit 
        provided to any employee if such employee is notified 
        by the employer of such election (at such time and in 
        such manner as the Secretary shall by regulations 
        prescribe). The preceding sentence shall not apply to 
        any vehicle fringe benefit unless the amount of such 
        benefit is included by the employer on a statement 
        timely furnished under section 6051.
          (2) Employer must furnish W-2.--Any vehicle fringe 
        benefit shall be treated as wages from which amounts 
        are required to be deducted and withheld under this 
        chapter for purposes of section 6051.
          (3) Vehicle fringe benefit.--For purposes of this 
        subsection, the term ``vehicle fringe benefit'' means 
        any fringe benefit--
                  (A) which constitutes wages (as defined in 
                section 3401), and
                  (B) which consists of providing a highway 
                motor vehicle for the use of the employee.
  (t) Rate of withholding for certain stock.--In the case of 
any qualified stock (as defined in section 83(i)(2)) with 
respect to which an election is made under section 83(i)--
          (1) the rate of tax under subsection (a) shall not be 
        less than the maximum rate of tax in effect under 
        section 1, and
          (2) such stock shall be treated for purposes of 
        section 3501(b) in the same manner as a non-cash fringe 
        benefit.

           *       *       *       *       *       *       *

Subtitle D--Miscellaneous Excise Taxes

           *       *       *       *       *       *       *

CHAPTER 40--GENERAL PROVISIONS RELATING TO OCCUPATIONAL TAXES

           *       *       *       *       *       *       *

SEC. 4905. LIABILITY IN CASE OF DEATH OR CHANGE OF LOCATION.

  (a) Requirements.--When any person who has paid the special 
tax for any trade or business dies, [his spouse] such person's 
spouse or child, or executors or administrators or other legal 
representatives, may occupy the house or premises, and in like 
manner carry on, for the residue of the term for which the tax 
is paid, the same trade or business as the deceased before 
carried on, in the same house and upon the same premises, 
without the payment of any additional tax. When any person 
removes from the house or premises for which any trade or 
business was taxed to any other place, he may carry on the 
trade or business specified in the register kept in the office 
of the official in charge of the internal revenue district at 
the place to which he removes, without the payment of any 
additional tax: Provided, That all cases of death, change, or 
removal, as aforesaid, with the name of the successor to any 
person deceased, or of the person making such change or 
removal, shall be registered with the Secretary, under 
regulations to be prescribed by the Secretary.
  (b) Registration.--For registration in case of wagering, see 
section 4412.

           *       *       *       *       *       *       *

     CHAPTER 42--PRIVATE FOUNDATIONS; AND CERTAIN OTHER TAX-EXEMPT 
ORGANIZATIONS

           *       *       *       *       *       *       *

Subchapter A--PRIVATE FOUNDATIONS

           *       *       *       *       *       *       *

SEC. 4946. DEFINITIONS AND SPECIAL RULES.

  (a) Disqualified person.--
          (1) In general.--For purposes of this subchapter, the 
        term ``disqualified person'' means, with respect to a 
        private foundation, a person who is--
                  (A) a substantial contributor to the 
                foundation,
                  (B) a foundation manager (within the meaning 
                of subsection (b)(1)),
                  (C) an owner of more than 20 percent of--
                          (i) the total combined voting power 
                        of a corporation,
                          (ii) the profits interest of a 
                        partnership, or
                          (iii) the beneficial interest of a 
                        trust or unincorporated enterprise,
                which is a substantial contributor to the 
                foundation,
                  (D) a member of the family (as defined in 
                subsection (d)) of any individual described in 
                subparagraph (A), (B), or (C),
                  (E) a corporation of which persons described 
                in subparagraph (A), (B), (C), or (D) own more 
                than 35 percent of the total combined voting 
                power,
                  (F) a partnership in which persons described 
                in subparagraph (A), (B), (C), or (D) own more 
                than 35 percent of the profits interest,
                  (G) a trust or estate in which persons 
                described in subparagraph (A), (B), (C), or (D) 
                hold more than 35 percent of the beneficial 
                interest,
                  (H) only for purposes of section 4943, a 
                private foundation--
                          (i) which is effectively controlled 
                        (directly or indirectly) by the same 
                        person or persons who control the 
                        private foundation in question, or
                          (ii) substantially all of the 
                        contributions to which were made 
                        (directly or indirectly) by the same 
                        person or persons described in 
                        subparagraph (A), (B), or (C), or 
                        members of their families (within the 
                        meaning of subsection (d)), who made 
                        (directly or indirectly) substantially 
                        all of the contributions to the private 
                        foundation in question, and
                  (I) only for purposes of section 4941, a 
                government official (as defined in subsection 
                (c)).
          (2) Substantial contributors.--For purposes of 
        paragraph (1), the term ``substantial contributor'' 
        means a person who is described in section 507(d)(2).
          (3) Stockholdings.--For purposes of paragraphs 
        (1)(C)(i) and (1)(E), there shall be taken into account 
        indirect stockholdings which would be taken into 
        account under section 267(c), except that, for purposes 
        of this paragraph, section 267(c)(4) shall be treated 
        as providing that the members of the family of an 
        individual are the members within the meaning of 
        subsection (d).
          (4) Partnerships; trusts.--For purposes of paragraphs 
        (1)(C)(ii) and (iii), (1)(F), and (1)(G), the ownership 
        of profits or beneficial interests shall be determined 
        in accordance with the rules for constructive ownership 
        of stock provided in section 267(c) (other than 
        paragraph (3) thereof), except that section 267(c)(4) 
        shall be treated as providing that the members of the 
        family of an individual are the members within the 
        meaning of subsection (d).
  (b) Foundation manager.--For purposes of this subchapter, the 
term ``foundation manager'' means, with respect to any private 
foundation--
          (1) an officer, director, or trustee of a foundation 
        (or an individual having powers or responsibilities 
        similar to those of officers, directors, or trustees of 
        the foundation), and
          (2) with respect to any act (or failure to act), the 
        employees of the foundation having authority or 
        responsibility with respect to such act (or failure to 
        act).
  (c) Government official.--For purposes of subsection 
(a)(1)(I) and section 4941, the term ``government official'' 
means, with respect to an act of self-dealing described in 
section 4941, an individual who, at the time of such act, holds 
any of the following offices or positions (other than as a 
``special Government employee'', as defined in section 202(a) 
of title 18, United States Code):
          (1) an elective public office in the executive or 
        legislative branch of the Government of the United 
        States,
          (2) an office in the executive or judicial branch of 
        the Government of the United States, appointment to 
        which was made by the President,
          (3) a position in the executive, legislative, or 
        judicial branch of the Government of the United 
        States--
                  (A) which is listed in schedule C of rule VI 
                of the Civil Service Rules, or
                  (B) the compensation for which is equal to or 
                greater than the lowest rate of basic pay for 
                the Senior Executive Service under section 5382 
                of title 5, United States Code,
          (4) a position under the House of Representatives or 
        the Senate of the United States held by an individual 
        receiving gross compensation at an annual rate of 
        $15,000 or more,
          (5) an elective or appointive public office in the 
        executive, legislative, or judicial branch of the 
        government of a State, possession of the United States, 
        or political subdivision or other area of any of the 
        foregoing, or of the District of Columbia, held by an 
        individual receiving gross compensation at an annual 
        rate of $20,000 or more,
          (6) a position as personal or executive assistant or 
        secretary to any of the foregoing, or
          (7) a member of the Internal Revenue Service 
        Oversight Board.
  (d) Members of family.--For purposes of subsection (a)(1), 
the family of any individual shall include only [his spouse] 
the individual's spouse , ancestors, children, grandchildren, 
great grandchildren, and the spouses of children, 
grandchildren, and great grandchildren.

           *       *       *       *       *       *       *

CHAPTER 43--QUALIFIED PENSION, ETC., PLANS

           *       *       *       *       *       *       *

SEC. 4975. TAX ON PROHIBITED TRANSACTIONS.

  (a) Initial taxes on disqualified person.--There is hereby 
imposed a tax on each prohibited transaction. The rate of tax 
shall be equal to 15 percent of the amount involved with 
respect to the prohibited transaction for each year (or part 
thereof) in the taxable period. The tax imposed by this 
subsection shall be paid by any disqualified person who 
participates in the prohibited transaction (other than a 
fiduciary acting only as such).
  (b) Additional taxes on disqualified person.--In any case in 
which an initial tax is imposed by subsection (a) on a 
prohibited transaction and the transaction is not corrected 
within the taxable period, there is hereby imposed a tax equal 
to 100 percent of the amount involved. The tax imposed by this 
subsection shall be paid by any disqualified person who 
participated in the prohibited transaction (other than a 
fiduciary acting only as such).
  (c) Prohibited transaction.--
          (1) General rule.--For purposes of this section, the 
        term ``prohibited transaction'' means any direct or 
        indirect--
                  (A) sale or exchange, or leasing, of any 
                property between a plan and a disqualified 
                person;
                  (B) lending of money or other extension of 
                credit between a plan and a disqualified 
                person;
                  (C) furnishing of goods, services, or 
                facilities between a plan and a disqualified 
                person;
                  (D) transfer to, or use by or for the benefit 
                of, a disqualified person of the income or 
                assets of a plan;
                  (E) act by a disqualified person who is a 
                fiduciary whereby he deals with the income or 
                assets of a plan in his own interest or for his 
                own account; or
                  (F) receipt of any consideration for his own 
                personal account by any disqualified person who 
                is a fiduciary from any party dealing with the 
                plan in connection with a transaction involving 
                the income or assets of the plan.
          (2) Special exemption.--The Secretary shall establish 
        an exemption procedure for purposes of this subsection. 
        Pursuant to such procedure, he may grant a conditional 
        or unconditional exemption of any disqualified person 
        or transaction, orders of disqualified persons or 
        transactions, from all or part of the restrictions 
        imposed by paragraph (1) of this subsection. Action 
        under this subparagraph may be taken only after 
        consultation and coordination with the Secretary of 
        Labor. The Secretary may not grant an exemption under 
        this paragraph unless he finds that such exemption is--
                  (A) administratively feasible,
                  (B) in the interests of the plan and of its 
                participants and beneficiaries, and
                  (C) protective of the rights of participants 
                and beneficiaries of the plan.
        Before granting an exemption under this paragraph, the 
        Secretary shall require adequate notice to be given to 
        interested persons and shall publish notice in the 
        Federal Register of the pendency of such exemption and 
        shall afford interested persons an opportunity to 
        present views. No exemption may be granted under this 
        paragraph with respect to a transaction described in 
        subparagraph (E) or (F) of paragraph (1) unless the 
        Secretary affords an opportunity for a hearing and 
        makes a determination on the record with respect to the 
        findings required under subparagraphs (A), (B), and (C) 
        of this paragraph, except that in lieu of such hearing 
        the Secretary may accept any record made by the 
        Secretary of Labor with respect to an application for 
        exemption under section 408(a) of title I of the 
        Employee Retirement Income Security Act of 1974.
          (3) Special rule for individual retirement 
        accounts.--An individual for whose benefit an 
        individual retirement account is established and his 
        beneficiaries shall be exempt from the tax imposed by 
        this section with respect to any transaction concerning 
        such account (which would otherwise be taxable under 
        this section) if, with respect to such transaction, the 
        account ceases to be an individual retirement account 
        by reason of the application of section 408(e)(2)(A) or 
        if section 408(e)(4) applies to such account.
          (4) Special rule for Archer MSAs.--An individual for 
        whose benefit an Archer MSA (within the meaning of 
        section 220(d)) is established shall be exempt from the 
        tax imposed by this section with respect to any 
        transaction concerning such account (which would 
        otherwise be taxable under this section) if section 
        220(e)(2) applies to such transaction.
          (5) Special rule for Coverdell education savings 
        accounts.--An individual for whose benefit a Coverdell 
        education savings account is established and any 
        contributor to such account shall be exempt from the 
        tax imposed by this section with respect to any 
        transaction concerning such account (which would 
        otherwise be taxable under this section) if section 
        530(d) applies with respect to such transaction.
          (6) Special rule for health savings accounts.--An 
        individual for whose benefit a health savings account 
        (within the meaning of section 223(d)) is established 
        shall be exempt from the tax imposed by this section 
        with respect to any transaction concerning such account 
        (which would otherwise be taxable under this section) 
        if, with respect to such transaction, the account 
        ceases to be a health savings account by reason of the 
        application of section 223(e)(2) to such account.
  (d) Exemptions.--Except as provided in subsection (f)(6), the 
prohibitions provided in subsection (c) shall not apply to--
          (1) any loan made by the plan to a disqualified 
        person who is a participant or beneficiary of the plan 
        if such loan--
                  (A) is available to all such participants or 
                beneficiaries on a reasonably equivalent basis,
                  (B) is not made available to highly 
                compensated employees (within the meaning of 
                section 414(q)) in an amount greater than the 
                amount made available to other employees,
                  (C) is made in accordance with specific 
                provisions regarding such loans set forth in 
                the plan,
                  (D) bears a reasonable rate of interest, and
                  (E) is adequately secured;
          (2) any contract, or reasonable arrangement, made 
        with a disqualified person for office space, or legal, 
        accounting, or other services necessary for the 
        establishment or operation of the plan, if no more than 
        reasonable compensation is paid therefor;
          (3) any loan to a leveraged employee stock ownership 
        plan (as defined in subsection (e)(7)), if--
                  (A) such loan is primarily for the benefit of 
                participants and beneficiaries of the plan, and
                  (B) such loan is at a reasonable rate of 
                interest, and any collateral which is given to 
                a disqualified person by the plan consists only 
                of qualifying employer securities (as defined 
                in subsection (e)(8));
          (4) the investment of all or part of a plan's assets 
        in deposits which bear a reasonable interest rate in a 
        bank or similar financial institution supervised by the 
        United States or a State, if such bank or other 
        institution is a fiduciary of such plan and if--
                  (A) the plan covers only employees of such 
                bank or other institution and employees of 
                affiliates of such bank or other institution, 
                or
                  (B) such investment is expressly authorized 
                by a provision of the plan or by a fiduciary 
                (other than such bank or institution or 
                affiliates thereof) who is expressly empowered 
                by the plan to so instruct the trustee with 
                respect to such investment;
          (5) any contract for life insurance, health 
        insurance, or annuities with one or more insurers which 
        are qualified to do business in a State if the plan 
        pays no more than adequate consideration, and if each 
        such insurer or insurers is--
                  (A) the employer maintaining the plan, or
                  (B) a disqualified person which is wholly 
                owned (directly or indirectly) by the employer 
                establishing the plan, or by any person which 
                is a disqualified person with respect to the 
                plan, but only if the total premiums and 
                annuity considerations written by such insurers 
                for life insurance, health insurance, or 
                annuities for all plans (and their employers) 
                with respect to which such insurers are 
                disqualified persons (not including premiums or 
                annuity considerations written by the employer 
                maintaining the plan) do not exceed 5 percent 
                of the total premiums and annuity 
                considerations written for all lines of 
                insurance in that year by such insurers (not 
                including premiums or annuity considerations 
                written by the employer maintaining the plan);
          (6) the provision of any ancillary service by a bank 
        or similar financial institution supervised by the 
        United States or a State, if such service is provided 
        at not more than reasonable compensation, if such bank 
        or other institution is a fiduciary of such plan, and 
        if--
                  (A) such bank or similar financial 
                institution has adopted adequate internal 
                safeguards which assure that the provision of 
                such ancillary service is consistent with sound 
                banking and financial practice, as determined 
                by Federal or State supervisory authority, and
                  (B) the extent to which such ancillary 
                service is provided is subject to specific 
                guidelines issued by such bank or similar 
                financial institution (as determined by the 
                Secretary after consultation with Federal and 
                State supervisory authority), and under such 
                guidelines the bank or similar financial 
                institution does not provide such ancillary 
                service--
                          (i) in an excessive or unreasonable 
                        manner, and
                          (ii) in a manner that would be 
                        inconsistent with the best interests of 
                        participants and beneficiaries of 
                        employee benefit plans;
          (7) the exercise of a privilege to convert 
        securities, to the extent provided in regulations of 
        the Secretary, but only if the plan receives no less 
        than adequate consideration pursuant to such 
        conversion;
          (8) any transaction between a plan and a common or 
        collective trust fund or pooled investment fund 
        maintained by a disqualified person which is a bank or 
        trust company supervised by a State or Federal agency 
        or between a plan and a pooled investment fund of an 
        insurance company qualified to do business in a State 
        if--
                  (A) the transaction is a sale or purchase of 
                an interest in the fund,
                  (B) the bank, trust company, or insurance 
                company receives not more than a reasonable 
                compensation, and
                  (C) such transaction is expressly permitted 
                by the instrument under which the plan is 
                maintained, or by a fiduciary (other than the 
                bank, trust company, or insurance company, or 
                an affiliate thereof) who has authority to 
                manage and control the assets of the plan;
          (9) receipt by a disqualified person of any benefit 
        to which he may be entitled as a participant or 
        beneficiary in the plan, so long as the benefit is 
        computed and paid on a basis which is consistent with 
        the terms of the plan as applied to all other 
        participants and beneficiaries;
          (10) receipt by a disqualified person of any 
        reasonable compensation for services rendered, or for 
        the reimbursement of expenses properly and actually 
        incurred, in the performance of his duties with the 
        plan, but no person so serving who already receives 
        full-time pay from an employer or an association of 
        employers, whose employees are participants in the plan 
        or from an employee organization whose members are 
        participants in such plan shall receive compensation 
        from such fund, except for reimbursement of expenses 
        properly and actually incurred;
          (11) service by a disqualified person as a fiduciary 
        in addition to being an officer, employee, agent, or 
        other representative of a disqualified person;
          (12) the making by a fiduciary of a distribution of 
        the assets of the trust in accordance with the terms of 
        the plan if such assets are distributed in the same 
        manner as provided under section 4044 of title IV of 
        the Employee Retirement Income Security Act of 1974 
        (relating to allocation of assets);
          (13) any transaction which is exempt from section 406 
        of such Act by reason of section 408(e) of such Act (or 
        which would be so exempt if such section 406 applied to 
        such transaction) or which is exempt from section 406 
        of such Act by reason of section 408(b)(12) of such 
        Act;
          (14) any transaction required or permitted under part 
        1 of subtitle E of title IV or section 4223 of the 
        Employee Retirement Income Security Act of 1974, but 
        this paragraph shall not apply with respect to the 
        application of subsection (c)(1) (E) or (F);
          (15) a merger of multiemployer plans, or the transfer 
        of assets or liabilities between multiemployer plans, 
        determined by the Pension Benefit Guaranty Corporation 
        to meet the requirements of section 4231 of such Act, 
        but this paragraph shall not apply with respect to the 
        application of subsection (c)(1)(E) or (F);
          (16) a sale of stock held by a trust which 
        constitutes an individual retirement account under 
        section 408(a) to the individual for whose benefit such 
        account is established if--
                  (A) such stock is in a bank (as defined in 
                section 581) or a depository institution 
                holding company (as defined in section 3(w)(1) 
                of the Federal Deposit Insurance Act (12 U.S.C. 
                1813(w)(1))),
                  (B) such stock is held by such trust as of 
                the date of the enactment of this paragraph,
                  (C) such sale is pursuant to an election 
                under section 1362(a) by such bank or company,
                  (D) such sale is for fair market value at the 
                time of sale (as established by an independent 
                appraiser) and the terms of the sale are 
                otherwise at least as favorable to such trust 
                as the terms that would apply on a sale to an 
                unrelated party,
                  (E) such trust does not pay any commissions, 
                costs, or other expenses in connection with the 
                sale, and
                  (F) the stock is sold in a single transaction 
                for cash not later than 120 days after the S 
                corporation election is made;
          (17) any transaction in connection with the provision 
        of investment advice described in subsection (e)(3)(B) 
        to a participant or beneficiary in a plan that permits 
        such participant or beneficiary to direct the 
        investment of plan assets in an individual account, 
        if--
                  (A) the transaction is--
                          (i) the provision of the investment 
                        advice to the participant or 
                        beneficiary of the plan with respect to 
                        a security or other property available 
                        as an investment under the plan,
                          (ii) the acquisition, holding, or 
                        sale of a security or other property 
                        available as an investment under the 
                        plan pursuant to the investment advice, 
                        or
                          (iii) the direct or indirect receipt 
                        of fees or other compensation by the 
                        fiduciary adviser or an affiliate 
                        thereof (or any employee, agent, or 
                        registered representative of the 
                        fiduciary adviser or affiliate) in 
                        connection with the provision of the 
                        advice or in connection with an 
                        acquisition, holding, or sale of a 
                        security or other property available as 
                        an investment under the plan pursuant 
                        to the investment advice; and
                  (B) the requirements of subsection (f)(8) are 
                met,
          (18) any transaction involving the purchase or sale 
        of securities, or other property (as determined by the 
        Secretary of Labor), between a plan and a disqualified 
        person (other than a fiduciary described in subsection 
        (e)(3)) with respect to a plan if--
                  (A) the transaction involves a block trade,
                  (B) at the time of the transaction, the 
                interest of the plan (together with the 
                interests of any other plans maintained by the 
                same plan sponsor), does not exceed 10 percent 
                of the aggregate size of the block trade,
                  (C) the terms of the transaction, including 
                the price, are at least as favorable to the 
                plan as an arm's length transaction, and
                  (D) the compensation associated with the 
                purchase and sale is not greater than the 
                compensation associated with an arm's length   
                transaction with an unrelated party,
          (19) any transaction involving the purchase or sale 
        of securities, or other property (as determined by the 
        Secretary of Labor), between a plan and a disqualified 
        person if--
                  (A) the transaction is executed through an 
                electronic communication network, alternative 
                trading system, or similar execution system or 
                trading venue subject to regulation and 
                oversight by--
                          (i) the applicable Federal regulating 
                        entity, or
                          (ii) such foreign regulatory entity 
                        as the Secretary of Labor may determine 
                        by regulation,
                  (B) either--
                          (i) the transaction is effected 
                        pursuant to rules designed to match 
                        purchases and sales at the best price 
                        available through the execution system 
                        in accordance with applicable rules of 
                        the Securities and Exchange Commission 
                        or other relevant governmental 
                        authority, or
                          (ii) neither the execution system nor 
                        the parties to the transaction take 
                        into account the identity of the 
                        parties in the execution of trades,
                  (C) the price and compensation associated 
                with the purchase and sale are not greater than 
                the price and compensation associated with an 
                arm's length transaction with an unrelated 
                party,
                  (D) if the disqualified person has an 
                ownership interest in the system or venue 
                described in subparagraph (A), the system or 
                venue has been authorized by the plan sponsor 
                or other independent fiduciary for transactions 
                described in this paragraph, and
                  (E) not less than 30 days prior to the 
                initial transaction described in this paragraph 
                executed through any system or venue described 
                in subparagraph (A), a plan fiduciary is 
                provided written or electronic notice of the 
                execution of such transaction through such 
                system or venue,
          (20) transactions described in subparagraphs (A), 
        (B), and (D) of subsection (c)(1) between a plan and a 
        person that is a disqualified person other than a 
        fiduciary (or an affiliate) who has or exercises any 
        discretionary authority or control with respect to the 
        investment of the plan assets involved in the 
        transaction or renders investment advice (within the 
        meaning of subsection (e)(3)(B)) with respect to those 
        assets, solely by reason of providing services to the 
        plan or solely by reason of a relationship to such a 
        service provider described in subparagraph (F), (G), 
        (H), or (I) of subsection (e)(2), or both, but only if 
        in connection with such transaction the plan receives 
        no less, nor pays no more, than adequate consideration,
          (21) any foreign exchange transactions, between a 
        bank or broker-dealer (or any affiliate of either) and 
        a plan (as defined in this section) with respect to 
        which such bank or broker-dealer (or affiliate) is a 
        trustee, custodian, fiduciary, or other disqualified 
        person, if--
                  (A) the transaction is in connection with the 
                purchase, holding, or sale of securities or 
                other investment assets (other than a foreign 
                exchange transaction unrelated to any other 
                investment in securities or other investment 
                assets),
                  (B) at the time the foreign exchange 
                transaction is entered into, the terms of the 
                transaction are not less favorable to the plan 
                than the terms generally available in 
                comparable arm's length foreign exchange 
                transactions between unrelated parties, or the 
                terms afforded by the bank or broker-dealer (or 
                any affiliate of either) in comparable arm's-
                length foreign exchange transactions involving 
                unrelated parties,
                  (C) the exchange rate used by such bank or 
                broker-dealer (or affiliate) for a particular 
                foreign exchange transaction does not deviate 
                by more than 3 percent from the interbank bid 
                and asked rates for transactions of comparable 
                size and maturity at the time of the 
                transaction as displayed on an independent 
                service that reports rates of exchange in the 
                foreign currency market for such currency, and
                  (D) the bank or broker-dealer (or any 
                affiliate of either) does not have investment 
                discretion, or provide investment advice, with 
                respect to the transaction,
          (22) any transaction described in subsection 
        (c)(1)(A) involving the purchase and sale of a security 
        between a plan and any other account managed by the 
        same investment manager, if--
                  (A) the transaction is a purchase or sale, 
                for no consideration other than cash payment 
                against prompt delivery of a security for which 
                market quotations are readily available,
                  (B) the transaction is effected at the 
                independent current market price of the 
                security (within the meaning of section 
                270.17a-7(b) of title 17, Code of Federal 
                Regulations),
                  (C) no brokerage commission, fee (except for 
                customary transfer fees, the fact of which is 
                disclosed pursuant to subparagraph (D)), or 
                other remuneration is paid in connection with 
                the transaction,
                  (D) a fiduciary (other than the investment 
                manager engaging in the cross-trades or any 
                affiliate) for each plan participating in the 
                transaction authorizes in advance of any cross-
                trades (in a document that is separate from any 
                other written agreement of the parties) the 
                investment manager to engage in cross trades at 
                the investment manager's discretion, after such 
                fiduciary has received disclosure regarding the 
                conditions under which cross trades may take 
                place (but only if such disclosure is separate 
                from any other agreement or disclosure 
                involving the asset management relationship), 
                including the written policies and procedures 
                of the investment manager described in 
                subparagraph (H),
                  (E) each plan participating in the 
                transaction has assets of at least 
                $100,000,000, except that if the assets of a 
                plan are invested in a master trust containing 
                the assets of plans maintained by employers in 
                the same controlled group (as defined in 
                section 407(d)(7) of the Employee Retirement 
                Income Security Act of 1974), the master trust 
                has assets of at least $100,000,000,
                  (F) the investment manager provides to the 
                plan fiduciary who authorized cross trading 
                under subparagraph (D) a quarterly report 
                detailing all cross trades executed by the 
                investment manager in which the plan 
                participated during such quarter, including the 
                following information, as applicable: (i) the 
                identity of each security bought or sold; (ii) 
                the number of shares or units traded; (iii) the 
                parties involved in the cross-trade; and (iv) 
                trade price and the method used to establish 
                the trade price,
                  (G) the investment manager does not base its 
                fee schedule on the plan's consent to cross 
                trading, and no other service (other than the 
                investment opportunities and cost savings 
                available through a cross trade) is conditioned 
                on the plan's consent to cross trading,
                  (H) the investment manager has adopted, and 
                cross-trades are effected in accordance with, 
                written cross-trading policies and procedures 
                that are fair and equitable to all accounts 
                participating in the cross-trading program, and 
                that include a description of the manager's 
                pricing policies and procedures, and the 
                manager's policies and procedures for 
                allocating cross trades in an objective manner 
                among accounts participating in the cross-
                trading program, and
                  (I) the investment manager has designated an 
                individual responsible for periodically 
                reviewing such purchases and sales to ensure 
                compliance with the written policies and 
                procedures described in subparagraph (H), and 
                following such review, the individual shall 
                issue an annual written report no later than 90 
                days following the period to which it relates 
                signed under penalty of perjury to the plan 
                fiduciary who authorized cross trading under 
                subparagraph (D) describing the steps performed 
                during the course of the review, the level of 
                compliance, and any specific instances of non-
                compliance.
        The written report shall also notify the plan fiduciary 
        of the plan's right to terminate participation in the 
        investment manager's cross-trading program at any time, 
        or
          (23) except as provided in subsection (f)(11), a 
        transaction described in subparagraph (A), (B), (C), or 
        (D) of subsection (c)(1) in connection with the 
        acquisition, holding, or disposition of any security or 
        commodity, if the transaction is corrected before the 
        end of the correction period.
  (e) Definitions.--
          (1) Plan.--For purposes of this section, the term 
        ``plan'' means--
                  (A) a trust described in section 401(a) which 
                forms a part of a plan, or a plan described in 
                section 403(a), which trust or plan is exempt 
                from tax under section 501(a),
                  (B) an individual retirement account 
                described in section 408(a),
                  (C) an individual retirement annuity 
                described in section 408(b),
                  (D) an Archer MSA described in section 
                220(d),
                  (E) a health savings account described in 
                section 223(d),
                  (F) a Coverdell education savings account 
                described in section 530, or
                  (G) a trust, plan, account, or annuity which, 
                at any time, has been determined by the 
                Secretary to be described in any preceding 
                subparagraph of this paragraph.
          (2) Disqualified person.--For purposes of this 
        section, the term ``disqualified person'' means a 
        person who is--
                  (A) a fiduciary;
                  (B) a person providing services to the plan;
                  (C) an employer any of whose employees are 
                covered by the plan;
                  (D) an employee organization any of whose 
                members are covered by the plan;
                  (E) an owner, direct or indirect, of 50 
                percent or more of--
                          (i) the combined voting power of all 
                        classes of stock entitled to vote or 
                        the total value of shares of all 
                        classes of stock of a corporation,
                          (ii) the capital interest or the 
                        profits interest of a partnership, or
                          (iii) the beneficial interest of a 
                        trust or unincorporated enterprise,
                which is an employer or an employee 
                organization described in subparagraph (C) or 
                (D);
                  (F) a member of the family (as defined in 
                paragraph (6)) of any individual described in 
                subparagraph (A), (B), (C), or (E);
                  (G) a corporation, partnership, or trust or 
                estate of which (or in which) 50 percent or 
                more of--
                          (i) the combined voting power of all 
                        classes of stock entitled to vote or 
                        the total value of shares of all 
                        classes of stock of such corporation,
                          (ii) the capital interest or profits 
                        interest of such partnership, or
                          (iii) the beneficial interest of such 
                        trust or estate,
                is owned directly or indirectly, or held by 
                persons described in subparagraph (A), (B), 
                (C), (D), or (E);
                  (H) an officer, director (or an individual 
                having powers or responsibilities similar to 
                those of officers or directors), a 10 percent 
                or more shareholder, or a highly compensated 
                employee (earning 10 percent or more of the 
                yearly wages of an employer) of a person 
                described in subparagraph (C), (D), (E), or 
                (G); or
                  (I) a 10 percent or more (in capital or 
                profits) partner or joint venturer of a person 
                described in subparagraph (C), (D), (E), or 
                (G).
        The Secretary, after consultation and coordination with 
        the Secretary of Labor or his delegate, may by 
        regulation prescribe a percentage lower than 50 percent 
        for subparagraphs (E) and (G) and lower than 10 percent 
        for subparagraphs (H) and (I).
          (3) Fiduciary.--For purposes of this section, the 
        term ``fiduciary'' means any person who--
                  (A) exercises any discretionary authority or 
                discretionary control respecting management of 
                such plan or exercises any authority or control 
                respecting management or disposition of its 
                assets,
                  (B) renders investment advice for a fee or 
                other compensation, direct or indirect, with 
                respect to any moneys or other property of such 
                plan, or has any authority or responsibility to 
                do so, or
                  (C) has any discretionary authority or 
                discretionary responsibility in the 
                administration of such plan.
        Such term includes any person designated under section 
        405(c)(1)(B) of the Employee Retirement Income Security 
        Act of 1974.
          (4) Stockholdings.--For purposes of paragraphs 
        (2)(E)(i) and (G)(i) there shall be taken into account 
        indirect stockholdings which would be taken into 
        account under section 267(c), except that, for purposes 
        of this paragraph, section 267(c)(4) shall be treated 
        as providing that the members of the family of an 
        individual are the members within the meaning of 
        paragraph (6).
          (5) Partnerships; trusts.--For purposes of paragraphs 
        (2)(E)(ii) and (iii), (G)(ii) and (iii), and (I) the 
        ownership of profits or beneficial interests shall be 
        determined in accordance with the rules for 
        constructive ownership of stock provided in section 
        267(c) (other than paragraph (3) thereof), except that 
        section 267(c)(4) shall be treated as providing that 
        the members of the family of an individual are the 
        members within the meaning of paragraph (6).
          (6) Member of family.--For purposes of paragraph 
        (2)(F), the family of any individual shall include [his 
        spouse] the individual's spouse , ancestor, lineal 
        descendant, and any spouse of a lineal descendant.
          (7) Employee stock ownership plan.--The term 
        ``employee stock ownership plan'' means a defined 
        contribution plan--
                  (A) which is a stock bonus plan which is 
                qualified, or a stock bonus and a money 
                purchase plan both of which are qualified under 
                section 401(a), and which are designed to 
                invest primarily in qualifying employer 
                securities; and
                  (B) which is otherwise defined in regulations 
                prescribed by the Secretary.
        A plan shall not be treated as an employee stock 
        ownership plan unless it meets the requirements of 
        section 409(h), section 409(o), and, if applicable, 
        section 409(n), section 409(p), and section 664(g) and, 
        if the employer has a registration-type class of 
        securities (as defined in section 409(e)(4)), it meets 
        the requirements of section 409(e).
          (8) Qualifying employer security.--The term 
        ``qualifying employer security'' means any employer 
        security within the meaning of section 409(l). If any 
        moneys or other property of a plan are invested in 
        shares of an investment company registered under the 
        Investment Company Act of 1940, the investment shall 
        not cause that investment company or that investment 
        company's investment adviser or principal underwriter 
        to be treated as a fiduciary or a disqualified person 
        for purposes of this section, except when an investment 
        company or its investment adviser or principal 
        underwriter acts in connection with a plan covering 
        employees of the investment company, its investment 
        adviser, or its principal underwriter.
          (9) Section made applicable to withdrawal liability 
        payment funds.--For purposes of this section--
                  (A) In general.--The term ``plan'' includes a 
                trust described in section 501(c)(22).
                  (B) Disqualified person.--In the case of any 
                trust to which this section applies by reason 
                of subparagraph (A), the term ``disqualified 
                person'' includes any person who is a 
                disqualified person with respect to any plan to 
                which such trust is permitted to make payments 
                under section 4223 of the Employee Retirement 
                Income Security Act of 1974.
  (f) Other definitions and special rules.--For purposes of 
this section--
          (1) Joint and several liability.--If more than one 
        person is liable under subsection (a) or (b) with 
        respect to any one prohibited transaction, all such 
        persons shall be jointly and severally liable under 
        such subsection with respect to such transaction.
          (2) Taxable period.--The term ``taxable period'' 
        means, with respect to any prohibited transaction, the 
        period beginning with the date on which the prohibited 
        transaction occurs and ending on the earliest of--
                  (A) the date of mailing a notice of 
                deficiency with respect to the tax imposed by 
                subsection (a) under section 6212,
                  (B) the date on which the tax imposed by 
                subsection (a) is assessed, or
                  (C) the date on which correction of the 
                prohibited transaction is completed.
          (3) Sale or exchange; encumbered property.--A 
        transfer or real or personal property by a disqualified 
        person to a plan shall be treated as a sale or exchange 
        if the property is subject to a mortgage or similar 
        lien which the plan assumes or if it is subject to a 
        mortgage or similar lien which a disqualified person 
        placed on the property within the 10-year period ending 
        on the date of the transfer.
          (4) Amount involved.--The term ``amount involved'' 
        means, with respect to a prohibited transaction, the 
        greater of the amount of money and the fair market 
        value of the other property given or the amount of 
        money and the fair market value of the other property 
        received; except that, in the case of services 
        described in paragraphs (2) and (10) of subsection (d) 
        the amount involved shall be only the excess 
        compensation. For purposes of the preceding sentence, 
        the fair market value--
                  (A) in the case of the tax imposed by 
                subsection (a), shall be determined as of the 
                date on which the prohibited transaction 
                occurs; and
                  (B) in the case of the tax imposed by 
                subsection (b), shall be the highest fair 
                market value during the taxable period.
          (5) Correction.--The terms ``correction'' and 
        ``correct'' mean, with respect to a prohibited 
        transaction, undoing the transaction to the extent 
        possible, but in any case placing the plan in a 
        financial position not worse than that in which it 
        would be if the disqualified person were acting under 
        the highest fiduciary standards.
          (6) Exemptions not to apply to certain 
        transactions.--
                  (A) In general.--In the case of a trust 
                described in section 401(a) which is part of a 
                plan providing contributions or benefits for 
                employees some or all of whom are owner-
                employees (as defined in section 401(c)(3)), 
                the exemptions provided by subsection (d) 
                (other than paragraphs (9) and (12)) shall not 
                apply to a transaction in which the plan 
                directly or indirectly--
                          (i) lends any part of the corpus or 
                        income of the plan to,
                          (ii) pays any compensation for 
                        personal services rendered to the plan 
                        to, or
                          (iii) acquires for the plan any 
                        property from, or sells any property 
                        to,
                any such owner-employee, a member of the family 
                (as defined in section 267(c)(4)) of any such 
                owner-employee, or any corporation in which any 
                such owner-employee owns, directly or 
                indirectly, 50 percent or more of the total 
                combined voting power of all classes of stock 
                entitled to vote or 50 percent or more of the 
                total value of shares of all classes of stock 
                of the corporation.
                  (B) Special rules for shareholder-employees, 
                etc..--
                          (i) In general.--For purposes of 
                        subparagraph (A), the following shall 
                        be treated as owner-employees:
                                  (I) A shareholder-employee.
                                  (II) A participant or 
                                beneficiary of an individual 
                                retirement plan (as defined in 
                                section 7701(a)(37)).
                                  (III) An employer or 
                                association of employees which 
                                establishes such an individual 
                                retirement plan under section 
                                408(c).
                          (ii) Exception for certain 
                        transactions involving shareholder-
                        employees.--Subparagraph (A)(iii) shall 
                        not apply to a transaction which 
                        consists of a sale of employer 
                        securities to an employee stock 
                        ownership plan (as defined in 
                        subsection (e)(7)) by a shareholder-
                        employee, a member of the family (as 
                        defined in section 267(c)(4)) of such 
                        shareholder-employee, or a corporation 
                        in which such a shareholder-employee 
                        owns stock representing a 50 percent or 
                        greater interest described in 
                        subparagraph (A).
                          (iii) Loan exception.--For purposes 
                        of subparagraph (A)(i), the term 
                        ``owner-employee'' shall only include a 
                        person described in subclause (II) or 
                        (III) of clause (i).
                  (C) Shareholder-employee.--For purposes of 
                subparagraph (B), the term ``shareholder-
                employee'' means an employee or officer of an S 
                corporation who owns (or is considered as 
                owning within the meaning of section 318(a)(1)) 
                more than 5 percent of the outstanding stock of 
                the corporation on any day during the taxable 
                year of such corporation.
          (7) S corporation repayment of loans for qualifying 
        employer securities.--A plan shall not be treated as 
        violating the requirements of section 401 or 409 or 
        subsection (e)(7), or as engaging in a prohibited 
        transaction for purposes of subsection (d)(3), merely 
        by reason of any distribution (as described in section 
        1368(a)) with respect to S corporation stock that 
        constitutes qualifying employer securities, which in 
        accordance with the plan provisions is used to make 
        payments on a loan described in subsection (d)(3) the 
        proceeds of which were used to acquire such qualifying 
        employer securities (whether or not allocated to 
        participants). The preceding sentence shall not apply 
        in the case of a distribution which is paid with 
        respect to any employer security which is allocated to 
        a participant unless the plan provides that employer 
        securities with a fair market value of not less than 
        the amount of such distribution are allocated to such 
        participant for the year which (but for the preceding 
        sentence) such distribution would have been allocated 
        to such participant.
          (8) Provision of investment advice to participant and 
        beneficiaries.--
                  (A) In general.--The prohibitions provided in 
                subsection (c) shall not apply to transactions 
                described in subsection (d)(17) if the 
                investment advice provided by a fiduciary 
                adviser is provided under an eligible 
                investment advice arrangement.
                  (B) Eligible investment advice arrangement.--
                For purposes of this paragraph, the term 
                ``eligible investment advice arrangement'' 
                means an arrangement--
                          (i) which either--
                                  (I) provides that any fees 
                                (including any commission or 
                                other compensation) received by 
                                the fiduciary adviser for 
                                investment advice or with 
                                respect to the sale, holding, 
                                or acquisition of any security 
                                or other property for purposes 
                                of investment of plan assets do 
                                not vary depending on the basis 
                                of any investment option 
                                selected, or
                                  (II) uses a computer model 
                                under an investment advice 
                                program meeting the 
                                requirements of subparagraph 
                                (C) in connection with the 
                                provision of investment advice 
                                by a fiduciary adviser to a 
                                participant or beneficiary, and
                          (ii) with respect to which the 
                        requirements of subparagraphs (D), (E), 
                        (F), (G), (H), and (I) are met.
                  (C) Investment advice program using computer 
                model.--
                          (i) In general.--An investment advice 
                        program meets the requirements of this 
                        subparagraph if the requirements of 
                        clauses (ii), (iii), and (iv) are met.
                          (ii) Computer model.--The 
                        requirements of this clause are met if 
                        the investment advice provided under 
                        the investment advice program is 
                        provided pursuant to a computer model 
                        that--
                                  (I) applies generally 
                                accepted investment theories 
                                that take into account the 
                                historic returns of different 
                                asset classes over defined 
                                periods of time,
                                  (II) utilizes relevant 
                                information about the 
                                participant, which may include 
                                age, life expectancy, 
                                retirement age, risk tolerance, 
                                other assets or sources of 
                                income, and preferences as to 
                                certain types of investments,
                                  (III) utilizes prescribed 
                                objective criteria to provide 
                                asset allocation portfolios 
                                comprised of investment options 
                                available under the plan,
                                  (IV) operates in a manner 
                                that is not biased in favor of 
                                investments offered by the 
                                fiduciary adviser or a person 
                                with a material affiliation or 
                                contractual relationship with 
                                the fiduciary adviser, and
                                  (V) takes into account all 
                                investment options under the 
                                plan in specifying how a 
                                participant's account balance 
                                should be invested and is not 
                                inappropriately weighted with 
                                respect to any investment 
                                option.
                          (iii) Certification.--
                                  (I) In general.--The 
                                requirements of this clause are 
                                met with respect to any 
                                investment advice program if an 
                                eligible investment expert 
                                certifies, prior to the 
                                utilization of the computer 
                                model and in accordance with 
                                rules prescribed by the 
                                Secretary of Labor, that the 
                                computer model meets the 
                                requirements of clause (ii).
                                  (II) Renewal of 
                                certifications.--If, as 
                                determined under regulations 
                                prescribed by the Secretary of 
                                Labor, there are material 
                                modifications to a computer 
                                model, the requirements of this 
                                clause are met only if a 
                                certification described in 
                                subclause (I) is obtained with 
                                respect to the computer model 
                                as so modified.
                                  (III) Eligible investment 
                                expert.--The term ``eligible 
                                investment expert'' means any 
                                person which meets such 
                                requirements as the Secretary 
                                of Labor may provide and which 
                                does not bear any material 
                                affiliation or contractual 
                                relationship with any 
                                investment adviser or a related 
                                person thereof (or any 
                                employee, agent, or registered 
                                representative of the 
                                investment adviser or related 
                                person).
                          (iv) Exclusivity of recommendation.--
                        The requirements of this clause are met 
                        with respect to any investment advice 
                        program if--
                                  (I) the only investment 
                                advice provided under the 
                                program is the advice generated 
                                by the computer model described 
                                in clause (ii), and
                                  (II) any transaction 
                                described in subsection 
                                (d)(17)(A)(ii) occurs solely at 
                                the direction of the 
                                participant or beneficiary.
                 Nothing in the preceding sentence shall 
                preclude the participant or beneficiary from 
                requesting investment advice other than that 
                described in clause (i), but only if such 
                request has not been solicited by any person 
                connected with carrying out the arrangement.
                  (D) Express authorization by separate 
                fiduciary.--The requirements of this 
                subparagraph are met with respect to an 
                arrangement if the arrangement is expressly 
                authorized by a plan fiduciary other than the 
                person offering the investment advice program, 
                any person providing investment options under 
                the plan, or any affiliate of either.
                  (E) Audits.--
                          (i) In general.--The requirements of 
                        this subparagraph are met if an 
                        independent auditor, who has 
                        appropriate technical training or 
                        experience and proficiency and so 
                        represents in writing--
                                  (I) conducts an annual audit 
                                of the arrangement for 
                                compliance with the 
                                requirements of this paragraph, 
                                and
                                  (II) following completion of 
                                the annual audit, issues a 
                                written report to the fiduciary 
                                who authorized use of the 
                                arrangement which presents its 
                                specific findings regarding 
                                compliance of the arrangement 
                                with the requirements of this 
                                paragraph.
                          (ii) Special rule for individual 
                        retirement and similar plans.--In the 
                        case of a plan described in 
                        subparagraphs (B) through (F) (and so 
                        much of subparagraph (G) as relates to 
                        such subparagraphs) of subsection 
                        (e)(1), in lieu of the requirements of 
                        clause (i), audits of the arrangement 
                        shall be conducted at such times and in 
                        such manner as the Secretary of Labor 
                        may prescribe.
                          (iii) Independent auditor.--For 
                        purposes of this subparagraph, an 
                        auditor is considered independent if it 
                        is not related to the person offering 
                        the arrangement to the plan and is not 
                        related to any person providing 
                        investment options under the plan.
                  (F) Disclosure.--The requirements of this 
                subparagraph are met if--
                          (i) the fiduciary adviser provides to 
                        a participant or a beneficiary before 
                        the initial provision of the investment 
                        advice with regard to any security or 
                        other property offered as an investment 
                        option, a written notification (which 
                        may consist of notification by means of 
                        electronic communication)--
                                  (I) of the role of any party 
                                that has a material affiliation 
                                or contractual relationship 
                                with the fiduciary adviser in 
                                the development of the 
                                investment advice program and 
                                in the selection of investment 
                                options available under the 
                                plan,
                                  (II) of the past performance 
                                and historical rates of return 
                                of the investment options 
                                available under the plan,
                                  (III) of all fees or other 
                                compensation relating to the 
                                advice that the fiduciary 
                                adviser or any affiliate 
                                thereof is to receive 
                                (including compensation 
                                provided by any third party) in 
                                connection with the provision 
                                of the advice or in connection 
                                with the sale, acquisition, or 
                                holding of the security or 
                                other property,
                                  (IV) of any material 
                                affiliation or contractual 
                                relationship of the fiduciary 
                                adviser or affiliates thereof 
                                in the security or other 
                                property,
                                  (V) of the manner, and under 
                                what circumstances, any 
                                participant or beneficiary 
                                information provided under the 
                                arrangement will be used or 
                                disclosed,
                                  (VI) of the types of services 
                                provided by the fiduciary 
                                adviser in connection with the 
                                provision of investment advice 
                                by the fiduciary adviser,
                                  (VII) that the adviser is 
                                acting as a fiduciary of the 
                                plan in connection with the 
                                provision of the advice, and
                                  (VIII) that a recipient of 
                                the advice may separately 
                                arrange for the provision of 
                                advice by another adviser, that 
                                could have no material 
                                affiliation with and receive no 
                                fees or other compensation in 
                                connection with the security or 
                                other property, and
                          (ii) at all times during the 
                        provision of advisory services to the 
                        participant or beneficiary, the 
                        fiduciary adviser--
                                  (I) maintains the information 
                                described in clause (i) in 
                                accurate form and in the manner 
                                described in subparagraph (H),
                                  (II) provides, without 
                                charge, accurate information to 
                                the recipient of the advice no 
                                less frequently than annually,
                                  (III) provides, without 
                                charge, accurate information to 
                                the recipient of the advice 
                                upon request of the recipient, 
                                and
                                  (IV) provides, without 
                                charge, accurate information to 
                                the recipient of the advice 
                                concerning any material change 
                                to the information required to 
                                be provided to the recipient of 
                                the advice at a time reasonably 
                                contemporaneous to the change 
                                in information.
                  (G) Other conditions.--The requirements of 
                this subparagraph are met if--
                          (i) the fiduciary adviser provides 
                        appropriate disclosure, in connection 
                        with the sale, acquisition, or holding 
                        of the security or other property, in 
                        accordance with all applicable 
                        securities laws,
                          (ii) the sale, acquisition, or 
                        holding occurs solely at the direction 
                        of the recipient of the advice,
                          (iii) the compensation received by 
                        the fiduciary adviser and affiliates 
                        thereof in connection with the sale, 
                        acquisition, or holding of the security 
                        or other property is reasonable, and
                          (iv) the terms of the sale, 
                        acquisition, or holding of the security 
                        or other property are at least as 
                        favorable to the plan as an arm's 
                        length transaction would be.
                  (H) Standards for presentation of 
                information.--
                          (i) In general.--The requirements of 
                        this subparagraph are met if the 
                        notification required to be provided to 
                        participants and beneficiaries under 
                        subparagraph (F)(i) is written in a 
                        clear and conspicuous manner and in a 
                        manner calculated to be understood by 
                        the average plan participant and is 
                        sufficiently accurate and comprehensive 
                        to reasonably apprise such participants 
                        and beneficiaries of the information 
                        required to be provided in the 
                        notification.
                          (ii) Model form for disclosure of 
                        fees and other compensation.--The 
                        Secretary of Labor shall issue a model 
                        form for the disclosure of fees and 
                        other compensation required in 
                        subparagraph (F)(i)(III) which meets 
                        the requirements of clause (i).
                  (I) Maintenance for 6 years of evidence of 
                compliance.--The requirements of this 
                subparagraph are met if a fiduciary adviser who 
                has provided advice referred to in subparagraph 
                (A) maintains, for a period of not less than 6 
                years after the provision of the advice, any 
                records necessary for determining whether the 
                requirements of the preceding provisions of 
                this paragraph and of subsection (d)(17) have 
                been met. A transaction prohibited under 
                subsection (c) shall not be considered to have 
                occurred solely because the records are lost or 
                destroyed prior to the end of the 6-year period 
                due to circumstances beyond the control of the 
                fiduciary adviser.
                  (J) Definitions.--For purposes of this 
                paragraph and subsection (d)(17)--
                          (i) Fiduciary adviser.--The term 
                        ``fiduciary adviser'' means, with 
                        respect to a plan, a person who is a 
                        fiduciary of the plan by reason of the 
                        provision of investment advice referred 
                        to in subsection (e)(3)(B) by the 
                        person to a participant or beneficiary 
                        of the plan and who is--
                                  (I) registered as an 
                                investment adviser under the 
                                Investment Advisers Act of 1940 
                                (15 U.S.C. 80b-1 et seq.) or 
                                under the laws of the State in 
                                which the fiduciary maintains 
                                its principal office and place 
                                of business,
                                  (II) a bank or similar 
                                financial institution referred 
                                to in subsection (d)(4) or a 
                                savings association (as defined 
                                in section 3(b)(1) of the 
                                Federal Deposit Insurance Act 
                                (12 U.S.C. 1813(b)(1)), but 
                                only if the advice is provided 
                                through a trust department of 
                                the bank or similar financial 
                                institution or savings 
                                association which is subject to 
                                periodic examination and review 
                                by Federal or State banking 
                                authorities,
                                  (III) an insurance company 
                                qualified to do business under 
                                the laws of a State,
                                  (IV) a person registered as a 
                                broker or dealer under the 
                                Securities Exchange Act of 1934 
                                (15 U.S.C. 78a et seq.),
                                  (V) an affiliate of a person 
                                described in any of subclauses 
                                (I) through (IV), or
                                  (VI) an employee, agent, or 
                                registered representative of a 
                                person described in subclauses 
                                (I) through (V) who satisfies 
                                the requirements of applicable 
                                insurance, banking, and 
                                securities laws relating to the 
                                provision of the advice.
                 For purposes of this title, a person who 
                develops the computer model described in 
                subparagraph (C)(ii) or markets the investment 
                advice program or computer model shall be 
                treated as a person who is a fiduciary of the 
                plan by reason of the provision of investment 
                advice referred to in subsection (e)(3)(B) to a 
                participant or beneficiary and shall be treated 
                as a fiduciary adviser for purposes of this 
                paragraph and subsection (d)(17), except that 
                the Secretary of Labor may prescribe rules 
                under which only 1 fiduciary adviser may elect 
                to be treated as a fiduciary with respect to 
                the plan.
                          (ii) Affiliate.--The term 
                        ``affiliate'' of another entity means 
                        an affiliated person of the entity (as 
                        defined in section 2(a)(3) of the 
                        Investment Company Act of 1940 (15 
                        U.S.C. 80a-2(a)(3))).
                          (iii) Registered representative.--The 
                        term ``registered representative'' of 
                        another entity means a person described 
                        in section 3(a)(18) of the Securities 
                        Exchange Act of 1934 (15 U.S.C. 
                        78c(a)(18)) (substituting the entity 
                        for the broker or dealer referred to in 
                        such section) or a person described in 
                        section 202(a)(17) of the Investment 
                        Advisers Act of 1940 (15 U.S.C. 80b-
                        2(a)(17)) (substituting the entity for 
                        the investment adviser referred to in 
                        such section).
          (9) Block trade.--The term ``block trade'' means any 
        trade of at least 10,000 shares or with a market value 
        of at least $200,000 which will be allocated across two 
        or more unrelated client accounts of a fiduciary.
          (10) Adequate consideration.--The term ``adequate 
        consideration'' means--
                  (A) in the case of a security for which there 
                is a generally recognized market--
                          (i) the price of the security 
                        prevailing on a national securities 
                        exchange which is registered under 
                        section 6 of the Securities Exchange 
                        Act of 1934, taking into account 
                        factors such as the size of the 
                        transaction and marketability of the 
                        security, or
                          (ii) if the security is not traded on 
                        such a national securities exchange, a 
                        price not less favorable to the plan 
                        than the offering price for the 
                        security as established by the current 
                        bid and asked prices quoted by persons 
                        independent of the issuer and of the 
                        party in interest, taking into account 
                        factors such as the size of the 
                        transaction and marketability of the 
                        security, and
                  (B) in the case of an asset other than a 
                security for which there is a generally 
                recognized market, the fair market value of the 
                asset as determined in good faith by a 
                fiduciary or fiduciaries in accordance with 
                regulations prescribed by the Secretary of 
                Labor.
          (11) Correction period.--
                  (A) In general.--For purposes of subsection 
                (d)(23), the term ``correction period'' means 
                the 14-day period beginning on the date on 
                which the disqualified person discovers, or 
                reasonably should have discovered, that the 
                transaction would (without regard to this 
                paragraph and subsection (d)(23)) constitute a 
                prohibited transaction.
                  (B) Exceptions.--
                          (i) Employer securities.--Subsection 
                        (d)(23) does not apply to any 
                        transaction between a plan and a plan 
                        sponsor or its affiliates that involves 
                        the acquisition or sale of an employer 
                        security (as defined in section 
                        407(d)(1) of the Employee Retirement 
                        Income Security Act of 1974) or the 
                        acquisition, sale, or lease of employer 
                        real property (as defined in section 
                        407(d)(2) of such Act).
                          (ii) Knowing prohibited 
                        transaction.--In the case of any 
                        disqualified person, subsection (d)(23) 
                        does not apply to a transaction if, at 
                        the time the transaction is entered 
                        into, the disqualified person knew (or 
                        reasonably should have known) that the 
                        transaction would (without regard to 
                        this paragraph) constitute a prohibited 
                        transaction.
                  (C) Abatement of tax where there is a 
                correction.--If a transaction is not treated as 
                a prohibited transaction by reason of 
                subsection (d)(23), then no tax under 
                subsections (a) and (b) shall be assessed with 
                respect to such transaction, and if assessed 
                the assessment shall be abated, and if 
                collected shall be credited or refunded as an 
                overpayment.
                  (D) Definitions.--For purposes of this 
                paragraph and subsection (d)(23)--
                          (i) Security.--The term ``security'' 
                        has the meaning given such term by 
                        section 475(c)(2) (without regard to 
                        subparagraph (F)(iii) and the last 
                        sentence thereof).
                          (ii) Commodity.--The term 
                        ``commodity'' has the meaning given 
                        such term by section 475(e)(2) (without 
                        regard to subparagraph (D)(iii) 
                        thereof).
                          (iii) Correct.--The term ``correct'' 
                        means, with respect to a transaction--
                                  (I) to undo the transaction 
                                to the extent possible and in 
                                any case to make good to the 
                                plan or affected account any 
                                losses resulting from the 
                                transaction, and
                                  (II) to restore to the plan 
                                or affected account any profits 
                                made through the use of assets 
                                of the plan.
  (g) Application of section.--This section shall not apply--
          (1) in the case of a plan to which a guaranteed 
        benefit policy (as defined in section 401(b)(2)(B) of 
        the Employee Retirement Income Security Act of 1974) is 
        issued, to any assets of the insurance company, 
        insurance service, or insurance organization merely 
        because of its issuance of such policy;
          (2) to a governmental plan (within the meaning of 
        section 414(d)); or
          (3) to a church plan (within the meaning of section 
        414(e)) with respect to which the election provided by 
        section 410(d) has not been made.
In the case of a plan which invests in any security issued by 
an investment company registered under the Investment Company 
Act of 1940, the assets of such plan shall be deemed to include 
such security but shall not, by reason of such investment, be 
deemed to include any assets of such company.
  (h) Notification of Secretary of Labor.--Before sending a 
notice of deficiency with respect to the tax imposed by 
subsection (a) or (b), the Secretary shall notify the Secretary 
of Labor and provide him a reasonable opportunity to obtain a 
correction of the prohibited transaction or to comment on the 
imposition of such tax.
  (i) Cross reference.--For provisions concerning coordination 
procedures between Secretary of Labor and Secretary of the 
Treasury with respect to application of tax imposed by this 
section and for authority to waive imposition of the tax 
imposed by subsection (b), see section 3003 of the Employee 
Retirement Income Security Act of 1974.

           *       *       *       *       *       *       *

Subtitle E--Alcohol, Tobacco, and Certain Other Excise Taxes

           *       *       *       *       *       *       *

CHAPTER 52--TOBACCO PRODUCTS AND CIGARETTE PAPERS AND TUBES

           *       *       *       *       *       *       *

Subchapter D--OCCUPATIONAL TAX

           *       *       *       *       *       *       *

SEC. 5733. PROVISIONS RELATING TO LIABILITY FOR OCCUPATIONAL TAXES.

  (a) Partners.--Any number of persons doing business in 
partnership at any one place shall be required to pay but one 
special tax.
  (b) Different businesses of same ownership and location.--
Whenever more than one of the pursuits or occupations described 
in this subchapter are carried on in the same place by the same 
person at the same time, except as otherwise provided in this 
subchapter, the tax shall be paid for each according to the 
rates severally prescribed.
  (c) Businesses in more than one location.--
          (1) Liability for tax.--The payment of a special tax 
        imposed by this subchapter shall not exempt from an 
        additional special tax the person carrying on a trade 
        or business in any other place than that stated in the 
        register kept in the office of the official in charge 
        of the internal revenue district.
          (2) Storage.--Nothing contained in paragraph (1) 
        shall require a special tax for the storage of tobacco 
        products and cigarette papers and tubes at a location 
        other than the place where tobacco products and 
        cigarette papers and tubes are sold or offered for 
        sale.
          (3) Definition of place.--The term ``place'' as used 
        in this section means the entire office, plant or area 
        of the business in any one location under the same 
        proprietorship; and passageways, streets, highways, 
        rail crossings, waterways, or partitions dividing the 
        premises, shall not be deemed sufficient separation to 
        require additional special tax, if the various 
        divisions are otherwise contiguous.
  (d) Death or change of location.--Certain persons, other than 
the person who has paid the special tax under this subchapter 
for the carrying on of any business at any place, may secure 
the right to carry on, without incurring additional special 
tax, the same business at the same place for the remainder of 
the taxable period for which the special tax was paid. The 
persons who may secure such right are:
          (1) the surviving spouse or child, or executor or 
        administrator or other legal representative, of a 
        deceased taxpayer;
          (2) a [husband or wife] married individual succeeding 
        to the business of his or her living spouse;
          (3) a receiver or trustee in bankruptcy, or an 
        assignee for benefit of creditors; and
          (4) the partner or partners remaining after death or 
        withdrawal of a member of a partnership.
When any person moves to any place other than the place for 
which special tax was paid for the carrying on of any business, 
he may secure the right to carry on, without incurring 
additional special tax, the same business at his new location 
for the remainder of the taxable period for which the special 
tax was paid. To secure the right to carry on the business 
without incurring additional special tax, the successor, or the 
person relocating his business, must register the succession or 
relocation with the Secretary in accordance with regulations 
prescribed by the Secretary.
  (e) Federal agencies or instrumentalities.--Any tax imposed 
by this subchapter shall apply to any agency or instrumentality 
of the United States unless such agency or instrumentality is 
granted by statute a specific exemption from such tax.

           *       *       *       *       *       *       *

Subtitle F--Procedure and Administration

           *       *       *       *       *       *       *

CHAPTER 61--INFORMATION AND RETURNS

           *       *       *       *       *       *       *

Subchapter A--RETURNS AND RECORDS

           *       *       *       *       *       *       *

PART II--TAX RETURNS OR STATEMENTS

           *       *       *       *       *       *       *

                     Subpart B--INCOME TAX RETURNS

Sec 6012. Persons required to make returns of income.
[Sec. 6013. Joint returns of income tax by husband and wife.]
Sec. 6013. Joint returns of income tax by a married couple.
     * * * * * * *

SEC. 6012. PERSONS REQUIRED TO MAKE RETURNS OF INCOME.

  (a) General rule.--Returns with respect to income taxes under 
subtitle A shall be made by the following:
          (1)(A) Every individual having for the taxable year 
        gross income which equals or exceeds the exemption 
        amount, except that a return shall not be required of 
        an individual--
                  (i) who is not married (determined by 
                applying section 7703), is not a surviving 
                spouse (as defined in section 2(a)), is not a 
                head of a household (as defined in section 
                2(b)), and for the taxable year has gross 
                income of less than the sum of the exemption 
                amount plus the basic standard deduction 
                applicable to such an individual,
                  (ii) who is a head of a household (as so 
                defined) and for the taxable year has gross 
                income of less than the sum of the exemption 
                amount plus the basic standard deduction 
                applicable to such an individual,
                  (iii) who is a surviving spouse (as so 
                defined) and for the taxable year has gross 
                income of less than the sum of the exemption 
                amount plus the basic standard deduction 
                applicable to such an individual, or
                  (iv) who is entitled to make a joint return 
                and whose gross income, when combined with the 
                gross income of [his spouse] the individual's 
                spouse , is, for the taxable year, less than 
                the sum of twice the exemption amount plus the 
                basic standard deduction applicable to a joint 
                return, but only if such individual and [his 
                spouse] the individual's spouse , at the close 
                of the taxable year, had the same household as 
                their home.
        Clause (iv) shall not apply if for the taxable year 
        such spouse makes a separate return or any other 
        taxpayer is entitled to an exemption for such spouse 
        under section 151(c).
          (B) The amount specified in clause (i), (ii), or 
        (iii) of subparagraph (A) shall be increased by the 
        amount of 1 additional standard deduction (within the 
        meaning of section 63(c)(3)) in the case of an 
        individual entitled to such deduction by reason of 
        section 63(f)(1)(A) (relating to individuals age 65 or 
        more), and the amount specified in clause (iv) of 
        subparagraph (A) shall be increased by the amount of 
        the additional standard deduction for each additional 
        standard deduction to which the individual or [his 
        spouse] the individual's spouse is entitled by reason 
        of section 63(f)(1).
          (C) The exception under subparagraph (A) shall not 
        apply to any individual--
                  (i) who is described in section 63(c)(5) and 
                who has--
                          (I) income (other than earned income) 
                        in excess of the sum of the amount in 
                        effect under section 63(c)(5)(A) plus 
                        the additional standard deduction (if 
                        any) to which the individual is 
                        entitled, or
                          (II) total gross income in excess of 
                        the standard deduction, or
                  (ii) for whom the standard deduction is zero 
                under section 63(c)(6).
          (D) For purposes of this subsection--
                  (i) The terms ``standard deduction'', ``basic 
                standard deduction'' and ``additional standard 
                deduction'' have the respective meanings given 
                such terms by section 63(c).
                  (ii) The term ``exemption amount'' has the 
                meaning given such term by section 151(d). In 
                the case of an individual described in section 
                151(d)(2), the exemption amount shall be zero.
          (2) Every corporation subject to taxation under 
        subtitle A;
          (3) Every estate the gross income of which for the 
        taxable year is $600 or more;
          (4) Every trust having for the taxable year any 
        taxable income, or having gross income of $600 or over, 
        regardless of the amount of taxable income;
          (5) Every estate or trust of which any beneficiary is 
        a nonresident alien;
          (6) Every political organization (within the meaning 
        of section 527(e)(1)), and every fund treated under 
        section 527(g) as if it constituted a political 
        organization, which has political organization taxable 
        income (within the meaning of section 527(c)(1)) for 
        the taxable year;
          (7) Every homeowners association (within the meaning 
        of section 528(c)(1)) which has homeowners association 
        taxable income (within the meaning of section 528(d)) 
        for the taxable year; and
          (8) Every estate of an individual under chapter 7 or 
        11 of title 11 of the United States Code (relating to 
        bankruptcy) the gross income of which for the taxable 
        year is not less than the sum of the exemption amount 
        plus the basic standard deduction under section 
        63(c)(2)(C);
except that subject to such conditions, limitations, and 
exceptions and under such regulations as may be prescribed by 
the Secretary, nonresident alien individuals subject to the tax 
imposed by section 871 and foreign corporations subject to the 
tax imposed by section 881 may be exempted from the requirement 
of making returns under this section.
  (b) Returns made by fiduciaries and receivers.--
          (1) Returns of decedents.--If an individual is 
        deceased, the return of such individual required under 
        subsection (a) shall be made by his executor, 
        administrator, or other person charged with the 
        property of such decedent.
          (2) Persons under a disability.--If an individual is 
        unable to make a return required under subsection (a), 
        the return of such individual shall be made by a duly 
        authorized agent, his committee, guardian, fiduciary or 
        other person charged with the care of the person or 
        property of such individual. The preceding sentence 
        shall not apply in the case of a receiver appointed by 
        authority of law in possession of only a part of the 
        property of an individual.
          (3) Receivers, trustees and assignees for 
        corporations.--In a case where a receiver, trustee in a 
        case under title 11 of the United States Code, or 
        assignee, by order of a court of competent 
        jurisdiction, by operation of law or otherwise, has 
        possession of or holds title to all or substantially 
        all the property or business of a corporation, whether 
        or not such property or business is being operated, 
        such receiver, trustee, or assignee shall make the 
        return of income for such corporation in the same 
        manner and form as corporations are required to make 
        such returns.
          (4) Returns of estates and trusts.--Returns of an 
        estate, a trust, or an estate of an individual under 
        chapter 7 or 11 of title 11 of the United States Code 
        shall be made by the fiduciary thereof.
          (5) Joint fiduciaries.--Under such regulations as the 
        Secretary may prescribe, a return made by one of two or 
        more joint fiduciaries shall be sufficient compliance 
        with the requirements of this section. A return made 
        pursuant to this paragraph shall contain a statement 
        that the fiduciary has sufficient knowledge of the 
        affairs of the person for whom the return is made to 
        enable him to make the return, and that the return is, 
        to the best of his knowledge and belief, true and 
        correct.
          (6) IRA share of partnership income.--In the case of 
        a trust which is exempt from taxation under section 
        408(e), for purposes of this section, the trust's 
        distributive share of items of gross income and gain of 
        any partnership to which subchapter C or D of chapter 
        63 applies shall be treated as equal to the trust's 
        distributive share of the taxable income of such 
        partnership.
  (c) Certain income earned abroad or from sale of residence.--
For purposes of this section, gross income shall be computed 
without regard to the exclusion provided for in section 121 
(relating to gain from sale of principal residence) and without 
regard to the exclusion provided for in section 911 (relating 
to citizens or residents of the United States living abroad).
  (d) Tax-exempt interest required to be shown on return.--
Every person required to file a return under this section for 
the taxable year shall include on such return the amount of 
interest received or accrued during the taxable year which is 
exempt from the tax imposed by chapter 1.
  (e) Consolidated returns.--For provisions relating to 
consolidated returns by affiliated corporations, see chapter 6.
  (f) Special rule for taxable years 2018 through 2025.--In the 
case of a taxable year beginning after December 31, 2017, and 
before January 1, 2026, subsection (a)(1) shall not apply, and 
every individual who has gross income for the taxable year 
shall be required to make returns with respect to income taxes 
under subtitle A, except that a return shall not be required 
of--
          (1) an individual who is not married (determined by 
        applying section 7703) and who has gross income for the 
        taxable year which does not exceed the standard 
        deduction applicable to such individual for such 
        taxable year under section 63, or
          (2) an individual entitled to make a joint return 
        if--
                  (A) the gross income of such individual, when 
                combined with the gross income of such 
                individual's spouse, for the taxable year does 
                not exceed the standard deduction which would 
                be applicable to the taxpayer for such taxable 
                year under section 63 if such individual and 
                such individual's spouse made a joint return,
                  (B) such individual and such individual's 
                spouse have the same household as their home at 
                the close of the taxable year,
                  (C) such individual's spouse does not make a 
                separate return, and
                  (D) neither such individual nor such 
                individual's spouse is an individual described 
                in section 63(c)(5) who has income (other than 
                earned income) in excess of the amount in 
                effect under section 63(c)(5)(A).

SEC. 6013. [JOINT RETURNS OF INCOME TAX BY HUSBAND AND WIFE]  JOINT 
                    RETURNS OF INCOME TAX BY A MARRIED COUPLE .

  (a) Joint returns.--A [husband and wife] married couple may 
make a single return jointly of income taxes under subtitle A, 
even though one of the spouses has neither gross income nor 
deductions, except as provided below:
          (1) no joint return shall be made if [either the 
        husband or wife] either spouse at any time during the 
        taxable year is a nonresident alien;
          (2) no joint return shall be made if the [husband and 
        wife] spouses have different taxable years; except that 
        if such taxable years begin on the same day and end on 
        different days because of the death of either or both, 
        then the joint return may be made with respect to the 
        taxable year of each. The above exception shall not 
        apply if the surviving spouse remarries before the 
        close of [his taxable year] such spouse's taxable year 
        , nor if the taxable year of either spouse is a 
        fractional part of a year under section 443(a)(1);
          (3) in the case of death of one spouse or both 
        spouses the joint return with respect to the decedent 
        may be made only by [his executor or administrator] the 
        decedent's executor or administrator ; except that in 
        the case of the death of one spouse the joint return 
        may be made by the surviving spouse [with respect to 
        both himself and the decedent] with respect to both the 
        surviving spouse and the decedent if no return for the 
        taxable year has been made by the decedent, no executor 
        or administrator has been appointed, and no executor or 
        administrator is appointed before the last day 
        prescribed by law for filing the return of the 
        surviving spouse. If an executor or administrator of 
        the decedent is appointed after the making of the joint 
        return by the surviving spouse, the executor or 
        administrator may disaffirm such joint return by 
        making, within 1 year after the last day prescribed by 
        law for filing the return of the surviving spouse, a 
        separate return for the taxable year of the decedent 
        with respect to which the joint return was made, in 
        which case the return made by the survivor shall 
        [constitute his separate return] constitute the 
        survivor's separate return .
  (b) Joint return after filing separate return.--
          [(1) In general.--Except as provided in paragraph 
        (2), if an individual has filed a separate return for a 
        taxable year for which a joint return could have been 
        made by him and his spouse under subsection (a) and the 
        time prescribed by law for filing the return for such 
        taxable year has expired, such individual and his 
        spouse may nevertheless make a joint return for such 
        taxable year. A joint return filed by the husband and 
        wife under this subsection shall constitute the return 
        of the husband and wife for such taxable year, and all 
        payments, credits, refunds, or other repayments made or 
        allowed with respect to the separate return of either 
        spouse for such taxable year shall be taken into 
        account in determining the extent to which the tax 
        based upon the joint return has been paid. If a joint 
        return is made under this subsection, any election 
        (other than the election to file a separate return) 
        made by either spouse in his separate return for such 
        taxable year with respect to the treatment of any 
        income, deduction, or credit of such spouse shall not 
        be changed in the making of the joint return where such 
        election would have been irrevocable if the joint 
        return had not been made. If a joint return is made 
        under this subsection after the death of either spouse, 
        such return with respect to the decedent can be made 
        only by his executor or administrator.]
          (1) In general.--Except as provided in paragraph (2), 
        if an individual has filed a separate return for a 
        taxable year for which a joint return could have been 
        made by the individual and the individual's spouse 
        under subsection (a) and the time prescribed by law for 
        filing the return for such taxable year has expired, 
        such individual and such spouse may nevertheless make a 
        joint return for such taxable year. A joint return 
        filed under this subsection shall constitute the return 
        of the individual and the individual's spouse for such 
        taxable year, and all payments, credits, refunds, or 
        other repayments made or allowed with respect to the 
        separate return of either spouse for such taxable year 
        shall be taken into account in determining the extent 
        to which the tax based upon the joint return has been 
        paid. If a joint return is made under this subsection, 
        any election (other than the election to file a 
        separate return) made by either spouse in a separate 
        return for such taxable year with respect to the 
        treatment of any income, deduction, or credit of such 
        spouse shall not be changed in the making of the joint 
        return where such election would have been irrevocable 
        if the joint return had not been made. If a joint 
        return is made under this subsection after the death of 
        either spouse, such return with respect to the decedent 
        can be made only by the decedent's executor or 
        administrator.
          (2) Limitations for making of election.--The election 
        provided for in paragraph (1) may not be made--
                  (A) after the expiration of 3 years from the 
                last date prescribed by law for filing the 
                return for such taxable year (determined 
                without regard to any extension of time granted 
                to either spouse); or
                  (B) after there has been mailed to either 
                spouse, with respect to such taxable year, a 
                notice of deficiency under section 6212, if the 
                spouse, as to such notice, files a petition 
                with the Tax Court within the time prescribed 
                in section 6213; or
                  (C) after either spouse has commenced a suit 
                in any court for the recovery of any part of 
                the tax for such taxable year; or
                  (D) after either spouse has entered into a 
                closing agreement under section 7121 with 
                respect to such taxable year, or after any 
                civil or criminal case arising against either 
                spouse with respect to such taxable year has 
                been compromised under section 7122.
          (3) When return deemed filed.--
                  (A) Assessment and collection.--For purposes 
                of section 6501 (relating to periods of 
                limitations on assessment and collection), and 
                for purposes of section 6651 (relating to 
                delinquent returns), a joint return made under 
                this subsection shall be deemed to have been 
                filed--
                          (i) Where both spouses filed separate 
                        returns prior to making the joint 
                        return--on the date the last separate 
                        return was filed (but not earlier than 
                        the last date prescribed by law for 
                        filing the return of either spouse);
                          (ii) Where only one spouse filed a 
                        separate return prior to the making of 
                        the joint return, and the other spouse 
                        had less than the exemption amount of 
                        gross income for such taxable year--on 
                        the date of the filing of such separate 
                        return (but not earlier than the last 
                        date prescribed by law for the filing 
                        of such separate return); or
                          (iii) Where only one spouse filed a 
                        separate return prior to the making of 
                        the joint return, and the other spouse 
                        had gross income of the exemption 
                        amount or more for such taxable year--
                        on the date of the filing of such joint 
                        return.
                For purposes of this subparagraph, the term 
                ``exemption amount'' has the meaning given to 
                such term by section 151(d). For purposes of 
                clauses (ii) and (iii), if the spouse whose 
                gross income is being compared to the exemption 
                amount is 65 or over, such clauses shall be 
                applied by substituting ``the sum of the 
                exemption amount and the additional standard 
                deduction under section 63(c)(2) by reason of 
                section 63(f)(1)(A)'' for ``the exemption 
                amount''.
                  (B) Credit or refund.--For purposes of 
                section 6511, a joint return made under this 
                subsection shall be deemed to have been filed 
                on the last date prescribed by law for filing 
                the return for such taxable year (determined 
                without regard to any extension of time granted 
                to either spouse).
          (4) Additional time for assessment.--If a joint 
        return is made under this subsection, the periods of 
        limitations provided in sections 6501 and 6502 on the 
        making of assessments and the beginning of levy or a 
        proceeding in court for collection shall with respect 
        to such return include one year immediately after the 
        date of the filing of such joint return (computed 
        without regard to the provisions of paragraph (3)).
          (5) Additions to the tax and penalties.--
                  (A) Coordination with part II of subchapter A 
                of chapter 68.--For purposes of part II of 
                subchapter A of chapter 68, where the sum of 
                the amounts shown as tax on the separate 
                returns of each spouse is less than the amount 
                shown as tax on the joint return made under 
                this subsection--
                          (i) such sum shall be treated as the 
                        amount shown on the joint return,
                          (ii) any negligence (or disregard of 
                        rules or regulations) on either 
                        separate return shall be treated as 
                        negligence (or such disregard) on the 
                        joint return, and
                          (iii) any fraud on either separate 
                        return shall be treated as fraud on the 
                        joint return.
                  (B) Criminal penalty.--For purposes of 
                section 7206(1) and (2) and section 7207 
                (relating to criminal penalties in the case of 
                fraudulent returns) the term ``return'' 
                includes a separate return filed by a spouse 
                with respect to a taxable year for which a 
                joint return is made under this subsection 
                after the filing of such separate return.
  (c) Treatment of joint return after death of either spouse.--
For purposes of sections 15, 443, and 7851(a)(1)(A), where the 
[husband and wife] spouses have different taxable years because 
of the death of either spouse, the joint return shall be 
treated as if the taxable years of both spouses ended on the 
date of the closing of the surviving spouse's taxable year.
  (d) Special rules.--For purposes of this section--
          (1) the [status as husband and wife] the marital 
        status with respect to each other of two individuals 
        having taxable years beginning on the same day shall be 
        determined--
                  (A) if both have the same taxable year--as of 
                the close of such year; or
                  (B) if one dies before the close of the 
                taxable year of the other--as of the time of 
                such death;
          (2) an individual who is legally separated from [his 
        spouse] the spouse of the individual under a decree of 
        divorce or of separate maintenance shall not be 
        considered as married; and
          (3) if a joint return is made, the tax shall be 
        computed on the aggregate income and the liability with 
        respect to the tax shall be joint and several.
  (f) Joint return where individual is in missing status.--For 
purposes of this section and subtitle A--
          (1) Election by spouse.--If--
                  (A) an individual is in a missing status 
                (within the meaning of paragraph (3)) as a 
                result of service in a combat zone (as 
                determined for purposes of section 112), and
                  (B) the spouse of such individual is 
                otherwise entitled to file a joint return for 
                any taxable year which begins on or before the 
                day which is 2 years after the date designated 
                under section 112 as the date of termination of 
                combatant activities in such zone,
        then such spouse may elect under subsection (a) to file 
        a joint return for such taxable year. With respect to 
        service in the combat zone designated for purposes of 
        the Vietnam conflict, such election may be made for any 
        taxable year while an individual is in missing status.
          (2) Effect of election.--If the spouse of an 
        individual described in paragraph (1)(A) elects to file 
        a joint return under subsection (a) for a taxable year, 
        then, until such election is revoked--
                  (A) such election shall be valid even if such 
                individual died before the beginning of such 
                year, and
                  (B) except for purposes of section 692 
                (relating to income taxes of members of the 
                Armed Forces, astronauts, and victims of 
                certain terrorist attacks on death), the income 
                tax liability of [such individual, his spouse, 
                and his estate shall be determined as if he 
                were alive] such individual, the individual's 
                spouse, and the individual's estate shall be 
                determined as if the individual were alive 
                throughout the taxable year.
          (3) Missing status.--For purposes of this 
        subsection--
                  (A) Uniformed services.--A member of a 
                uniformed service (within the meaning of 
                section 101(3) of title 37 of the United States 
                Code) is in a missing status for any period 
                [for which he is entitled] for which such 
                member is entitled to pay and allowances under 
                section 552 of such title 37.
                  (B) Civilian employees.--An employee (within 
                the meaning of section 5561(2) of title 5 of 
                the United States Code) is in a missing status 
                for any period [for which he is entitled] for 
                which such employee is entitled to pay and 
                allowances under section 5562 of such title 5.
          (4) Making of election; revocation.--An election 
        described in this subsection with respect to any 
        taxable year may be made by filing a joint return in 
        accordance with subsection (a) and under such 
        regulations as may be prescribed by the Secretary. Such 
        an election may be revoked by either spouse on or 
        before the due date (including extensions) for such 
        taxable year, and, in the case of an executor or 
        administrator, may be revoked by disaffirming as 
        provided in the last sentence of subsection (a)(3).
  (g) Election to treat nonresident alien individual as 
resident of the United States.--
          (1) In general.--A nonresident alien individual with 
        respect to whom this subsection is in effect for the 
        taxable year shall be treated as a resident of the 
        United States--
                  (A) for purposes of chapter 1 for all of such 
                taxable year, and
                  (B) for purposes of chapter 24 (relating to 
                wage withholding) for payments of wages made 
                during such taxable year.
          (2) Individuals with respect to whom this subsection 
        is in effect.--This subsection shall be in effect with 
        respect to any individual who, at the close of the 
        taxable year for which an election under this 
        subsection was made, was a nonresident alien individual 
        married to a citizen or resident of the United States, 
        if both of them made such election to have the benefits 
        of this subsection apply to them.
          (3) Duration of election.--An election under this 
        subsection shall apply to the taxable year for which 
        made and to all subsequent taxable years until 
        terminated under paragraph (4) or (5); except that any 
        such election shall not apply for any taxable year if 
        neither spouse is a citizen or resident of the United 
        States at any time during such year.
          (4) Termination of election.--An election under this 
        subsection shall terminate at the earliest of the 
        following times:
                  (A) Revocation by taxpayers.--If either 
                taxpayer revokes the election, as of the first 
                taxable year for which the last day prescribed 
                by law for filing the return of tax under 
                chapter 1 has not yet occurred.
                  (B) Death.--In the case of the death of 
                either spouse, as of the beginning of the first 
                taxable year of the spouse who survives 
                following the taxable year in which such death 
                occurred; except that if the spouse who 
                survives is a citizen or resident of the United 
                States who is a surviving spouse entitled to 
                the benefits of section 2, the time provided by 
                this subparagraph shall be as of the close of 
                the last taxable year for which such individual 
                is entitled to the benefits of section 2.
                  (C) Legal separation.--In the case of the 
                legal separation of the couple under a decree 
                of divorce or of separate maintenance, as of 
                the beginning of the taxable year in which such 
                legal separation occurs.
                  (D) Termination by Secretary.--At the time 
                provided in paragraph (5).
          (5) Termination by Secretary.--The Secretary may 
        terminate any election under this subsection for any 
        taxable year if he determines that either spouse has 
        failed--
                  (A) to keep such books and records,
                  (B) to grant such access to such books and 
                records, or
                  (C) to supply such other information,
        as may be reasonably necessary to ascertain the amount 
        of liability for taxes under chapter 1 of either spouse 
        for such taxable year.
          (6) Only one election.--If any election under this 
        subsection for any two individuals is terminated under 
        paragraph (4) or (5) for any taxable year, such two 
        individuals shall be ineligible to make an election 
        under this subsection for any subsequent taxable year.
  (h) Joint return, etc., for year in which nonresident alien 
becomes resident of United States.--
          (1) In general.--If--
                  (A) any individual is a nonresident alien 
                individual at the beginning of any taxable year 
                but is a resident of the United States at the 
                close of such taxable year,
                  (B) at the close of such taxable year, such 
                individual is married to a citizen or resident 
                of the United States, and
                  (C) both individuals elect the benefits of 
                this subsection at the time and in the manner 
                prescribed by the Secretary by regulation,
        then the individual referred to in subparagraph (A) 
        shall be treated as a resident of the United States for 
        purposes of chapter 1 for all of such taxable year, and 
        for purposes of chapter 24 (relating to wage 
        withholding) for payments of wages made during such 
        taxable year.
          (2) Only one election.--If any election under this 
        subsection applies for any 2 individuals for any 
        taxable year, such 2 individuals shall be ineligible to 
        make an election under this subsection for any 
        subsequent taxable year.

SEC. 6014. INCOME TAX RETURN--TAX NOT COMPUTED BY TAXPAYER.

  (a) Election by taxpayer.--An individual who does not itemize 
his deductions and who is not described in section 
6012(a)(1)(C)(i), whose gross income is less than $10,000 and 
includes no income other than remuneration for services 
performed by him as an employee, dividends or interest, and 
whose gross income other than wages, as defined in section 
3401(a), does not exceed $100, shall at his election not be 
required to show on the return the tax imposed by section 1. 
Such election shall be made by using the form prescribed for 
purposes of this section. In such case the tax shall be 
computed by the Secretary who shall mail to the taxpayer a 
notice stating the amount determined as payable.
  (b) Regulations.--The Secretary shall prescribe regulations 
for carrying out this section, and such regulations may provide 
for the application of the rules of this section--
          (1) to cases where the gross income includes items 
        other than those enumerated by subsection (a),
          (2) to cases where the gross income from sources 
        other than wages on which the tax has been withheld at 
        the source is more than $100,
          (3) to cases where the gross income is $10,000 or 
        more, or
          (4) to cases where the taxpayer itemizes his 
        deductions or where the taxpayer claims a reduced 
        standard deduction by reason of section 63(c)(5).
Such regulations shall provide for the application of this 
section in the case of [husband and wife] a married couple , 
including provisions determining when a joint return under this 
section may be permitted or required, whether the liability 
shall be joint and several, and whether one spouse may make 
return under this section and the other without regard to this 
section.

           *       *       *       *       *       *       *

SEC. 6017. SELF-EMPLOYMENT TAX RETURNS.

  Every individual (other than a nonresident alien individual) 
having net earnings from self-employment of $400 or more for 
the taxable year shall make a return with respect to the self-
employment tax imposed by chapter 2. In the case of a [husband 
and wife] married couple filing a joint return under section 
6013, the tax imposed by chapter 2 shall not be computed on the 
aggregate income but shall be the sum of the taxes computed 
under such chapter on the separate self-employment income of 
each spouse.

           *       *       *       *       *       *       *

PART III--INFORMATION RETURNS

           *       *       *       *       *       *       *

Subpart B--INFORMATION CONCERNING TRANSACTIONS WITH OTHER PERSONS

           *       *       *       *       *       *       *

SEC. 6046. RETURNS AS TO ORGANIZATION OR REORGANIZATION OF FOREIGN 
                    CORPORATIONS AND AS TO ACQUISITIONS OF THEIR STOCK.

  (a) Requirement of return.--
          (1) In general.--A return complying with the 
        requirements of subsection (b) shall be made by--
                  (A) each United States citizen or resident 
                who becomes an officer or director of a foreign 
                corporation if a United States person (as 
                defined in section 7701(a)(30)) meets the stock 
                ownership requirements of paragraph (2) with 
                respect to such corporation,
                  (B) each United States person--
                          (i) who acquires stock which, when 
                        added to any stock owned on the date of 
                        such acquisition, meets the stock 
                        ownership requirements of paragraph (2) 
                        with respect to a foreign corporation, 
                        or
                          (ii) who acquires stock which, 
                        without regard to stock owned on the 
                        date of such acquisition, meets the 
                        stock ownership requirements of 
                        paragraph (2) with respect to a foreign 
                        corporation,
                  (C) each person (not described in 
                subparagraph (B)) who is treated as a United 
                States shareholder under section 953(c) with 
                respect to a foreign corporation, and
                  (D) each person who becomes a United States 
                person while meeting the stock ownership 
                requirements of paragraph (2) with respect to 
                stock of a foreign corporation.
        In the case of a foreign corporation with respect to 
        which any person is treated as a United States 
        shareholder under section 953(c), subparagraph (A) 
        shall be treated as including a reference to each 
        United States person who is an officer or director of 
        such corporation.
          (2) Stock ownership requirements.--A person meets the 
        stock ownership requirements of this paragraph with 
        respect to any corporation if such person owns 10 
        percent or more of--
                  (A) the total combined voting power of all 
                classes of stock of such corporation entitled 
                to vote, or
                  (B) the total value of the stock of such 
                corporation.
  (b) Form and contents of returns.--The returns required by 
subsection (a) shall be in such form and shall set forth, in 
respect of the foreign corporation, such information as the 
Secretary prescribes by forms or regulations as necessary for 
carrying out the provisions of the income tax laws, except that 
in the case of persons described only in subsection (a)(1)(A) 
the information required shall be limited to the names and 
addresses of persons described in subparagraph (B) or (C) of 
subsection (a)(1).
  (c) Ownership of stock.--For purposes of subsection (a), 
stock owned directly or indirectly by a person (including, in 
the case of an individual, stock owned by members of [his] the 
individual's family) shall be taken into account. For purposes 
of the preceding sentence, the family of an individual shall be 
considered as including only [his] the individual's brothers 
and sisters (whether by the whole or half blood), spouse, 
ancestors, and lineal descendants.
  (d) Time for filing.--Any return required by subsection (a) 
shall be filed on or before the 90th day after the day on 
which, under any provision of subsection (a), the United States 
citizen, resident, or person becomes liable to file such return 
(or on or before such later day as the Secretary may by forms 
or regulations prescribe).
  (e) Limitation.--No information shall be required to be 
furnished under this section with respect to any foreign 
corporation unless such information was required to be 
furnished under regulations which have been in effect for at 
least 90 days before the date on which the United States 
citizen, resident, or person becomes liable to file a return 
required under subsection (a).
  (f) Cross reference.--For provisions relating to penalties 
for violations of this section, sections 6679 and 7203.

           *       *       *       *       *       *       *

PART VIII--DESIGNATION OF INCOME TAX PAYMENTS TO PRESIDENTIAL ELECTION 
CAMPAIGN FUND

           *       *       *       *       *       *       *

SEC. 6096. DESIGNATION BY INDIVIDUALS.

  (a) In general.--Every individual (other than a nonresident 
alien) whose income tax liability for the taxable year is $3 or 
more may designate that $3 shall be paid over to the 
Presidential Election Campaign Fund in accordance with the 
provisions of section 9006(a). In the case of a joint return 
[of husband and wife having] reporting an income tax liability 
of $6 or more, each spouse may designate that $3 shall be paid 
to the fund.
  (b) Income tax liability.--For purposes of subsection (a), 
the income tax liability of an individual for any taxable year 
is the amount of the tax imposed by chapter 1 on such 
individual for such taxable year (as shown on his return), 
reduced by the sum of the credits (as shown in his return) 
allowable under part IV of subchapter A of chapter 1 (other 
than subpart C thereof).
  (c) Manner and time of designation.--A designation under 
subsection (a) may be made with respect to any taxable year--
          (1) at the time of filing the return of the tax 
        imposed by chapter 1 for such taxable year, or
          (2) at any other time (after the time of filing the 
        return of the tax imposed by chapter 1 for such taxable 
        year) specified in regulations prescribed by the 
        Secretary.
Such designation shall be made in such manner as the Secretary 
prescribes by regulations except that, if such designation is 
made at the time of filing the return of the tax imposed by 
chapter 1 for such taxable year, such designation shall be made 
either on the first page of the return or on the page bearing 
the taxpayer's signature.

           *       *       *       *       *       *       *

Subchapter B--MISCELLANEOUS PROVISIONS

           *       *       *       *       *       *       *

SEC. 6103. CONFIDENTIALITY AND DISCLOSURE OF RETURNS AND RETURN 
                    INFORMATION.

  (a) General rule.--Returns and return information shall be 
confidential, and except as authorized by this title--
          (1) no officer or employee of the United States,
          (2) no officer or employee of any State, any local 
        law enforcement agency receiving information under 
        subsection (i)(1)(C) or (7)(A), any local child support 
        enforcement agency, or any local agency administering a 
        program listed in subsection (l)(7)(D) who has or had 
        access to returns or return information under this 
        section or section 6104(c), and
          (3) no other person (or officer or employee thereof) 
        who has or had access to returns or return information 
        under subsection (e)(1)(D)(iii), subsection (k)(10), 
        paragraph (6), (10), (12), (16), (19), (20), or (21) of 
        subsection (l), paragraph (2) or (4)(B) of subsection 
        (m), or subsection (n),
shall disclose any return or return information obtained by him 
in any manner in connection with his service as such an officer 
or an employee or otherwise or under the provisions of this 
section. For purposes of this subsection, the term ``officer or 
employee'' includes a former officer or employee.
  (b) Definitions.--For purposes of this section--
          (1) Return.--The term ``return'' means any tax or 
        information return, declaration of estimated tax, or 
        claim for refund required by, or provided for or 
        permitted under, the provisions of this title which is 
        filed with the Secretary by, on behalf of, or with 
        respect to any person, and any amendment or supplement 
        thereto, including supporting schedules, attachments, 
        or lists which are supplemental to, or part of, the 
        return so filed.
          (2) Return information.--The term ``return 
        information'' means--
                  (A) a taxpayer's identity, the nature, 
                source, or amount of his income, payments, 
                receipts, deductions, exemptions, credits, 
                assets, liabilities, net worth, tax liability, 
                tax withheld, deficiencies, overassessments, or 
                tax payments, whether the taxpayer's return 
                was, is being, or will be examined or subject 
                to other investigation or processing, or any 
                other data, received by, recorded by, prepared 
                by, furnished to, or collected by the Secretary 
                with respect to a return or with respect to the 
                determination of the existence, or possible 
                existence, of liability (or the amount thereof) 
                of any person under this title for any tax, 
                penalty, interest, fine, forfeiture, or other 
                imposition, or offense,
                  (B) any part of any written determination or 
                any background file document relating to such 
                written determination (as such terms are 
                defined in section 6110(b)) which is not open 
                to public inspection under section 6110,
                  (C) any advance pricing agreement entered 
                into by a taxpayer and the Secretary and any 
                background information related to such 
                agreement or any application for an advance 
                pricing agreement, and
                  (D) any agreement under section 7121, and any 
                similar agreement, and any background 
                information related to such an agreement or 
                request for such an agreement,
        but such term does not include data in a form which 
        cannot be associated with, or otherwise identify, 
        directly or indirectly, a particular taxpayer. Nothing 
        in the preceding sentence, or in any other provision of 
        law, shall be construed to require the disclosure of 
        standards used or to be used for the selection of 
        returns for examination, or data used or to be used for 
        determining such standards, if the Secretary determines 
        that such disclosure will seriously impair assessment, 
        collection, or enforcement under the internal revenue 
        laws.
          (3) Taxpayer return information.--The term ``taxpayer 
        return information'' means return information as 
        defined in paragraph (2) which is filed with, or 
        furnished to, the Secretary by or on behalf of the 
        taxpayer to whom such return information relates.
          (4) Tax administration.--The term ``tax 
        administration''--
                  (A) means--
                          (i) the administration, management, 
                        conduct, direction, and supervision of 
                        the execution and application of the 
                        internal revenue laws or related 
                        statutes (or equivalent laws and 
                        statutes of a State) and tax 
                        conventions to which the United States 
                        is a party, and
                          (ii) the development and formulation 
                        of Federal tax policy relating to 
                        existing or proposed internal revenue 
                        laws, related statutes, and tax 
                        conventions, and
                  (B) includes assessment, collection, 
                enforcement, litigation, publication, and 
                statistical gathering functions under such 
                laws, statutes, or conventions.
          (5) State.--
                  (A) In general.--The term ``State'' means--
                          (i) any of the 50 States, the 
                        District of Columbia, the Commonwealth 
                        of Puerto Rico, the Virgin Islands, 
                        Guam, American Samoa, and the 
                        Commonwealth of the Northern Mariana 
                        Islands,
                          (ii) for purposes of subsections 
                        (a)(2), (b)(4), (d)(1), (h)(4), and 
                        (p), any municipality--
                                  (I) with a population in 
                                excess of 250,000 (as 
                                determined under the most 
                                recent decennial United States 
                                census data available),
                                  (II) which imposes a tax on 
                                income or wages, and
                                  (III) with which the 
                                Secretary (in his sole 
                                discretion) has entered into an 
                                agreement regarding disclosure, 
                                and
                          (iii) for purposes of subsections 
                        (a)(2), (b)(4), (d)(1), (h)(4), and 
                        (p), any governmental entity--
                                  (I) which is formed and 
                                operated by a qualified group 
                                of municipalities, and
                                  (II) with which the Secretary 
                                (in his sole discretion) has 
                                entered into an agreement 
                                regarding disclosure.
                  (B) Regional income tax agencies.--For 
                purposes of subparagraph (A)(iii)--
                          (i) Qualified group of 
                        municipalities.--The term ``qualified 
                        group of municipalities'' means, with 
                        respect to any governmental entity, 2 
                        or more municipalities--
                                  (I) each of which imposes a 
                                tax on income or wages,
                                  (II) each of which, under the 
                                authority of a State statute, 
                                administers the laws relating 
                                to the imposition of such taxes 
                                through such entity, and
                                  (III) which collectively have 
                                a population in excess of 
                                250,000 (as determined under 
                                the most recent decennial 
                                United States census data 
                                available).
                          (ii) References to State law, etc..--
                        For purposes of applying subparagraph 
                        (A)(iii) to the subsections referred to 
                        in such subparagraph, any reference in 
                        such subsections to State law, 
                        proceedings, or tax returns shall be 
                        treated as references to the law, 
                        proceedings, or tax returns, as the 
                        case may be, of the municipalities 
                        which form and operate the governmental 
                        entity referred to in such 
                        subparagraph.
                          (iii) Disclosure to contractors and 
                        other agents.--Notwithstanding any 
                        other provision of this section, no 
                        return or return information shall be 
                        disclosed to any contractor or other 
                        agent of a governmental entity referred 
                        to in subparagraph (A)(iii) unless such 
                        entity, to the satisfaction of the 
                        Secretary--
                                  (I) has requirements in 
                                effect which require each such 
                                contractor or other agent which 
                                would have access to returns or 
                                return information to provide 
                                safeguards (within the meaning 
                                of subsection (p)(4)) to 
                                protect the confidentiality of 
                                such returns or return 
                                information,
                                  (II) agrees to conduct an on-
                                site review every 3 years (or a 
                                mid-point review in the case of 
                                contracts or agreements of less 
                                than 3 years in duration) of 
                                each contractor or other agent 
                                to determine compliance with 
                                such requirements,
                                  (III) submits the findings of 
                                the most recent review 
                                conducted under subclause (II) 
                                to the Secretary as part of the 
                                report required by subsection 
                                (p)(4)(E), and
                                  (IV) certifies to the 
                                Secretary for the most recent 
                                annual period that such 
                                contractor or other agent is in 
                                compliance with all such 
                                requirements.
                The certification required by subclause (IV) 
                shall include the name and address of each 
                contractor and other agent, a description of 
                the contract or agreement with such contractor 
                or other agent, and the duration of such 
                contract or agreement. The requirements of this 
                clause shall not apply to disclosures pursuant 
                to subsection (n) for purposes of Federal tax 
                administration and a rule similar to the rule 
                of subsection (p)(8)(B) shall apply for 
                purposes of this clause.
          (6) Taxpayer identity.--The term ``taxpayer 
        identity'' means the name of a person with respect to 
        whom a return is filed, his mailing address, his 
        taxpayer identifying number (as described in section 
        6109), or a combination thereof.
          (7) Inspection.--The terms ``inspected'' and 
        ``inspection'' mean any examination of a return or 
        return information.
          (8) Disclosure.--The term ``disclosure'' means the 
        making known to any person in any manner whatever a 
        return or return information.
          (9) Federal agency.--The term ``Federal agency'' 
        means an agency within the meaning of section 551(1) of 
        title 5, United States Code.
          (10) Chief executive officer.--The term ``chief 
        executive officer'' means, with respect to any 
        municipality, any elected official and the chief 
        official (even if not elected) of such municipality.
          (11) Terrorist incident, threat, or activity.--The 
        term ``terrorist incident, threat, or activity'' means 
        an incident, threat, or activity involving an act of 
        domestic terrorism (as defined in section 2331(5) of 
        title 18, United States Code) or international 
        terrorism (as defined in section 2331(1) of such 
        title).
  (c) Disclosure of returns and return information to designee 
of taxpayer.--The Secretary may, subject to such requirements 
and conditions as he may prescribe by regulations, disclose the 
return of any taxpayer, or return information with respect to 
such taxpayer, to such person or persons as the taxpayer may 
designate in a request for or consent to such disclosure, or to 
any other person at the taxpayer's request to the extent 
necessary to comply with a request for information or 
assistance made by the taxpayer to such other person. However, 
return information shall not be disclosed to such person or 
persons if the Secretary determines that such disclosure would 
seriously impair Federal tax administration.
  (d) Disclosure to State tax officials and State and local law 
enforcement agencies.--
          (1) In general.--Returns and return information with 
        respect to taxes imposed by chapters 1, 2, 6, 11, 12, 
        21, 23, 24, 31, 32, 44, 51, and 52 and subchapter D of 
        chapter 36 shall be open to inspection by, or 
        disclosure to, any State agency, body, or commission, 
        or its legal representative, which is charged under the 
        laws of such State with responsibility for the 
        administration of State tax laws for the purpose of, 
        and only to the extent necessary in, the administration 
        of such laws, including any procedures with respect to 
        locating any person who may be entitled to a refund. 
        Such inspection shall be permitted, or such disclosure 
        made, only upon written request by the head of such 
        agency, body, or commission, and only to the 
        representatives of such agency, body, or commission 
        designated in such written request as the individuals 
        who are to inspect or to receive the returns or return 
        information on behalf of such agency, body, or 
        commission. Such representatives shall not include any 
        individual who is the chief executive officer of such 
        State or who is neither an employee or legal 
        representative of such agency, body, or commission nor 
        a person described in subsection (n). However, such 
        return information shall not be disclosed to the extent 
        that the Secretary determines that such disclosure 
        would identify a confidential informant or seriously 
        impair any civil or criminal tax investigation.
          (2) Disclosure to State audit agencies.--
                  (A) In general.--Any returns or return 
                information obtained under paragraph (1) by any 
                State agency, body, or commission may be open 
                to inspection by, or disclosure to, officers 
                and employees of the State audit agency for the 
                purpose of, and only to the extent necessary 
                in, making an audit of the State agency, body, 
                or commission referred to in paragraph (1).
                  (B) State audit agency.--For purposes of 
                subparagraph (A), the term ``State audit 
                agency'' means any State agency, body, or 
                commission which is charged under the laws of 
                the State with the responsibility of auditing 
                State revenues and programs.
          (3) Exception for reimbursement under section 7624.--
        Nothing in this section shall be construed to prevent 
        the Secretary from disclosing to any State or local law 
        enforcement agency which may receive a payment under 
        section 7624 the amount of the recovered taxes with 
        respect to which such a payment may be made.
          (4) Availability and use of death information.--
                  (A) In general.--No returns or return 
                information may be disclosed under paragraph 
                (1) to any agency, body, or commission of any 
                State (or any legal representative thereof) 
                during any period during which a contract 
                meeting the requirements of subparagraph (B) is 
                not in effect between such State and the 
                Secretary of Health and Human Services.
                  (B) Contractual requirements.--A contract 
                meets the requirements of this subparagraph 
                if--
                          (i) such contract requires the State 
                        to furnish the Secretary of Health and 
                        Human Services information concerning 
                        individuals with respect to whom death 
                        certificates (or equivalent documents 
                        maintained by the State or any 
                        subdivision thereof) have been 
                        officially filed with it, and
                          (ii) such contract does not include 
                        any restriction on the use of 
                        information obtained by such Secretary 
                        pursuant to such contract, except that 
                        such contract may provide that such 
                        information is only to be used by the 
                        Secretary (or any other Federal agency) 
                        for purposes of ensuring that Federal 
                        benefits or other payments are not 
                        erroneously paid to deceased 
                        individuals.
                Any information obtained by the Secretary of 
                Health and Human Services under such a contract 
                shall be exempt from disclosure under section 
                552 of title 5, United States Code, and from 
                the requirements of section 552a of such title 
                5.
                  (C) Special exception.--The provisions of 
                subparagraph (A) shall not apply to any State 
                which on July 1, 1993, was not, pursuant to a 
                contract, furnishing the Secretary of Health 
                and Human Services information concerning 
                individuals with respect to whom death 
                certificates (or equivalent documents 
                maintained by the State or any subdivision 
                thereof) have been officially filed with it.
          (5) Disclosure for combined employment tax 
        reporting.--
                  (A) In general.--The Secretary may disclose 
                taxpayer identity information and signatures to 
                any agency, body, or commission of any State 
                for the purpose of carrying out with such 
                agency, body, or commission a combined Federal 
                and State employment tax reporting program 
                approved by the Secretary. Subsections (a)(2) 
                and (p)(4) and sections 7213 and 7213A shall 
                not apply with respect to disclosures or 
                inspections made pursuant to this paragraph.
                  (B) Termination.--The Secretary may not make 
                any disclosure under this paragraph after 
                December 31, 2007.
          (6) Limitation on disclosure regarding regional 
        income tax agencies treated as States.--For purposes of 
        paragraph (1), inspection by or disclosure to an entity 
        described in subsection (b)(5)(A)(iii) shall be for the 
        purpose of, and only to the extent necessary in, the 
        administration of the laws of the member municipalities 
        in such entity relating to the imposition of a tax on 
        income or wages. Such entity may not redisclose any 
        return or return information received pursuant to 
        paragraph (1) to any such member municipality.
  (e) Disclosure to persons having material interest.--
          (1) In general.--The return of a person shall, upon 
        written request, be open to inspection by or disclosure 
        to--
                  (A) in the case of the return of an 
                individual--
                          (i) that individual,
                          (ii) the spouse of that individual if 
                        the individual and such spouse have 
                        signified their consent to consider a 
                        gift reported on such return as made 
                        one-half by [him] the individual and 
                        one-half by the spouse pursuant to the 
                        provisions of section 2513; or
                          (iii) the child of that individual 
                        (or such child's legal representative) 
                        to the extent necessary to comply with 
                        the provisions of section 1(g);
                  (B) in the case of an income tax return filed 
                jointly, either of the individuals with respect 
                to whom the return is filed;
                  (C) in the case of the return of a 
                partnership, any person who was a member of 
                such partnership during any part of the period 
                covered by the return;
                  (D) in the case of the return of a 
                corporation or a subsidiary thereof--
                          (i) any person designated by 
                        resolution of its board of directors or 
                        other similar governing body,
                          (ii) any officer or employee of such 
                        corporation upon written request signed 
                        by any principal officer and attested 
                        to by the secretary or other officer,
                          (iii) any bona fide shareholder of 
                        record owning 1 percent or more of the 
                        outstanding stock of such corporation,
                          (iv) if the corporation was an S 
                        corporation, any person who was a 
                        shareholder during any part of the 
                        period covered by such return during 
                        which an election under section 1362(a) 
                        was in effect, or
                          (v) if the corporation has been 
                        dissolved, any person authorized by 
                        applicable State law to act for the 
                        corporation or any person who the 
                        Secretary finds to have a material 
                        interest which will be affected by 
                        information contained therein;
                  (E) in the case of the return of an estate--
                          (i) the administrator, executor, or 
                        trustee of such estate, and
                          (ii) any heir at law, next of kin, or 
                        beneficiary under the will, of the 
                        decedent, but only if the Secretary 
                        finds that such heir at law, next of 
                        kin, or beneficiary has a material 
                        interest which will be affected by 
                        information contained therein; and
                  (F) in the case of the return of a trust--
                          (i) the trustee or trustees, jointly 
                        or separately, and
                          (ii) any beneficiary of such trust, 
                        but only if the Secretary finds that 
                        such beneficiary has a material 
                        interest which will be affected by 
                        information contained therein.
          (2) Incompetency.--If an individual described in 
        paragraph (1) is legally incompetent, the applicable 
        return shall, upon written request, be open to 
        inspection by or disclosure to the committee, trustee, 
        or guardian of his estate.
          (3) Deceased individuals.--The return of a decedent 
        shall, upon written request, be open to inspection by 
        or disclosure to--
                  (A) the administrator, executor, or trustee 
                of his estate, and
                  (B) any heir at law, next of kin, or 
                beneficiary under the will, of such decedent, 
                or a donee of property, but only if the 
                Secretary finds that such heir at law, next of 
                kin, beneficiary, or donee has a material 
                interest which will be affected by information 
                contained therein.
          (4) Title 11 cases and receivership proceedings.--
        If--
                  (A) there is a trustee in a title 11 case in 
                which the debtor is the person with respect to 
                whom the return is filed, or
                  (B) substantially all of the property of the 
                person with respect to whom the return is filed 
                is in the hands of a receiver,
        such return or returns for prior years of such person 
        shall, upon written request, be open to inspection by 
        or disclosure to such trustee or receiver, but only if 
        the Secretary finds that such trustee or receiver, in 
        his fiduciary capacity, has a material interest which 
        will be affected by information contained therein.
          (5) Individual's title 11 case.--
                  (A) In general.--In any case to which section 
                1398 applies (determined without regard to 
                section 1398(b)(1)), any return of the debtor 
                for the taxable year in which the case 
                commenced or any preceding taxable year shall, 
                upon written request, be open to inspection by 
                or disclosure to the trustee in such case.
                  (B) Return of estate available to debtor.--
                Any return of an estate in a case to which 
                section 1398 applies shall, upon written 
                request, be open to inspection by or disclosure 
                to the debtor in such case.
                  (C) Special rule for involuntary cases.--In 
                an involuntary case, no disclosure shall be 
                made under subparagraph (A) until the order for 
                relief has been entered by the court having 
                jurisdiction of such case unless such court 
                finds that such disclosure is appropriate for 
                purposes of determining whether an order for 
                relief should be entered.
          (6) Attorney in fact.--Any return to which this 
        subsection applies shall, upon written request, also be 
        open to inspection by or disclosure to the attorney in 
        fact duly authorized in writing by any of the persons 
        described in paragraph (1), (2), (3), (4), (5), (8), or 
        (9) to inspect the return or receive the information on 
        his behalf, subject to the conditions provided in such 
        paragraphs.
          (7) Return information.--Return information with 
        respect to any taxpayer may be open to inspection by or 
        disclosure to any person authorized by this subsection 
        to inspect any return of such taxpayer if the Secretary 
        determines that such disclosure would not seriously 
        impair Federal tax administration.
          (8) Disclosure of collection activities with respect 
        to joint return.--If any deficiency of tax with respect 
        to a joint return is assessed and the individuals 
        filing such return are no longer married or no longer 
        reside in the same household, upon request in writing 
        by either of such individuals, the Secretary shall 
        disclose in writing to the individual making the 
        request whether the Secretary has attempted to collect 
        such deficiency from such other individual, the general 
        nature of such collection activities, and the amount 
        collected. The preceding sentence shall not apply to 
        any deficiency which may not be collected by reason of 
        section 6502.
          (9) Disclosure of certain information where more than 
        1 person subject to penalty under section 6672.--If the 
        Secretary determines that a person is liable for a 
        penalty under section 6672(a) with respect to any 
        failure, upon request in writing of such person, the 
        Secretary shall disclose in writing to such person--
                  (A) the name of any other person whom the 
                Secretary has determined to be liable for such 
                penalty with respect to such failure, and
                  (B) whether the Secretary has attempted to 
                collect such penalty from such other person, 
                the general nature of such collection 
                activities, and the amount collected.
          (10) Limitation on certain disclosures under this 
        subsection.--In the case of an inspection or disclosure 
        under this subsection relating to the return of a 
        partnership, S corporation, trust, or an estate, the 
        information inspected or disclosed shall not include 
        any supporting schedule, attachment, or list which 
        includes the taxpayer identity information of a person 
        other than the entity making the return or the person 
        conducting the inspection or to whom the disclosure is 
        made.
          (11) Disclosure of information regarding status of 
        investigation of violation of this section.--In the 
        case of a person who provides to the Secretary 
        information indicating a violation of section 7213, 
        7213A, or 7214 with respect to any return or return 
        information of such person, the Secretary may disclose 
        to such person (or such person's designee)--
                  (A) whether an investigation based on the 
                person's provision of such information has been 
                initiated and whether it is open or closed,
                  (B) whether any such investigation 
                substantiated such a violation by any 
                individual, and
                  (C) whether any action has been taken with 
                respect to such individual (including whether a 
                referral has been made for prosecution of such 
                individual).
  (f) Disclosure to Committees of Congress.--
          (1) Committee on Ways and Means, Committee on 
        Finance, and Joint Committee on Taxation.--Upon written 
        request from the chairman of the Committee on Ways and 
        Means of the House of Representatives, the chairman of 
        the Committee on Finance of the Senate, or the chairman 
        of the Joint Committee on Taxation, the Secretary shall 
        furnish such committee with any return or return 
        information specified in such request, except that any 
        return or return information which can be associated 
        with, or otherwise identify, directly or indirectly, a 
        particular taxpayer shall be furnished to such 
        committee only when sitting in closed executive session 
        unless such taxpayer otherwise consents in writing to 
        such disclosure.
          (2) Chief of Staff of Joint Committee on Taxation.--
        Upon written request by the Chief of Staff of the Joint 
        Committee on Taxation, the Secretary shall furnish him 
        with any return or return information specified in such 
        request. Such Chief of Staff may submit such return or 
        return information to any committee described in 
        paragraph (1), except that any return or return 
        information which can be associated with, or otherwise 
        identify, directly or indirectly, a particular taxpayer 
        shall be furnished to such committee only when sitting 
        in closed executive session unless such taxpayer 
        otherwise consents in writing to such disclosure.
          (3) Other committees.--Pursuant to an action by, and 
        upon written request by the chairman of, a committee of 
        the Senate or the House of Representatives (other than 
        a committee specified in paragraph (1)) specially 
        authorized to inspect any return or return information 
        by a resolution of the Senate or the House of 
        Representatives or, in the case of a joint committee 
        (other than the joint committee specified in paragraph 
        (1)) by concurrent resolution, the Secretary shall 
        furnish such committee, or a duly authorized and 
        designated subcommittee thereof, sitting in closed 
        executive session, with any return or return 
        information which such resolution authorizes the 
        committee or subcommittee to inspect. Any resolution 
        described in this paragraph shall specify the purpose 
        for which the return or return information is to be 
        furnished and that such information cannot reasonably 
        be obtained from any other source.
          (4) Agents of committees and submission of 
        information to Senate or House of Representatives.--
                  (A) Committees described in paragraph (1).--
                Any committee described in paragraph (1) or the 
                Chief of Staff of the Joint Committee on 
                Taxation shall have the authority, acting 
                directly, or by or through such examiners or 
                agents as the chairman of such committee or 
                such chief of staff may designate or appoint, 
                to inspect returns and return information at 
                such time and in such manner as may be 
                determined by such chairman or chief of staff. 
                Any return or return information obtained by or 
                on behalf of such committee pursuant to the 
                provisions of this subsection may be submitted 
                by the committee to the Senate or the House of 
                Representatives, or to both. The Joint 
                Committee on Taxation may also submit such 
                return or return information to any other 
                committee described in paragraph (1), except 
                that any return or return information which can 
                be associated with, or otherwise identify, 
                directly or indirectly, a particular taxpayer 
                shall be furnished to such committee only when 
                sitting in closed executive session unless such 
                taxpayer otherwise consents in writing to such 
                disclosure.
                  (B) Other committees.--Any committee or 
                subcommittee described in paragraph (3) shall 
                have the right, acting directly, or by or 
                through no more than four examiners or agents, 
                designated or appointed in writing in equal 
                numbers by the chairman and ranking minority 
                member of such committee or subcommittee, to 
                inspect returns and return information at such 
                time and in such manner as may be determined by 
                such chairman and ranking minority member. Any 
                return or return information obtained by or on 
                behalf of such committee or subcommittee 
                pursuant to the provisions of this subsection 
                may be submitted by the committee to the Senate 
                or the House of Representatives, or to both, 
                except that any return or return information 
                which can be associated with, or otherwise 
                identify, directly or indirectly, a particular 
                taxpayer, shall be furnished to the Senate or 
                the House of Representatives only when sitting 
                in closed executive session unless such 
                taxpayer otherwise consents in writing to such 
                disclosure.
          (5) Disclosure by whistleblower.--Any person who 
        otherwise has or had access to any return or return 
        information under this section may disclose such return 
        or return information to a committee referred to in 
        paragraph (1) or any individual authorized to receive 
        or inspect information under paragraph (4)(A) if such 
        person believes such return or return information may 
        relate to possible misconduct, maladministration, or 
        taxpayer abuse.
  (g) Disclosure to President and certain other persons.--
          (1) In general.--Upon written request by the 
        President, signed by him personally, the Secretary 
        shall furnish to the President, or to such employee or 
        employees of the White House Office as the President 
        may designate by name in such request, a return or 
        return information with respect to any taxpayer named 
        in such request. Any such request shall state--
                  (A) the name and address of the taxpayer 
                whose return or return information is to be 
                disclosed,
                  (B) the kind of return or return information 
                which is to be disclosed,
                  (C) the taxable period or periods covered by 
                such return or return information, and
                  (D) the specific reason why the inspection or 
                disclosure is requested.
          (2) Disclosure of return information as to 
        Presidential appointees and certain other Federal 
        Government appointees.--The Secretary may disclose to a 
        duly authorized representative of the Executive Office 
        of the President or to the head of any Federal agency, 
        upon written request by the President or head of such 
        agency, or to the Federal Bureau of Investigation on 
        behalf of and upon written request by the President or 
        such head, return information with respect to an 
        individual who is designated as being under 
        consideration for appointment to a position in the 
        executive or judicial branch of the Federal Government. 
        Such return information shall be limited to whether 
        such individual--
                  (A) has filed returns with respect to the 
                taxes imposed under chapter 1 for not more than 
                the immediately preceding 3 years;
                  (B) has failed to pay any tax within 10 days 
                after notice and demand, or has been assessed 
                any penalty under this title for negligence, in 
                the current year or immediately preceding 3 
                years;
                  (C) has been or is under investigation for 
                possible criminal offenses under the internal 
                revenue laws and the results of any such 
                investigation; or
                  (D) has been assessed any civil penalty under 
                this title for fraud.
        Within 3 days of the receipt of any request for any 
        return information with respect to any individual under 
        this paragraph, the Secretary shall notify such 
        individual in writing that such information has been 
        requested under the provisions of this paragraph.
          (3) Restriction on disclosure.--The employees to whom 
        returns and return information are disclosed under this 
        subsection shall not disclose such returns and return 
        information to any other person except the President or 
        the head of such agency without the personal written 
        direction of the President or the head of such agency.
          (4) Restriction on disclosure to certain employees.--
        Disclosure of returns and return information under this 
        subsection shall not be made to any employee whose 
        annual rate of basic pay is less than the annual rate 
        of basic pay specified for positions subject to section 
        5316 of title 5, United States Code.
          (5) Reporting requirements.--Within 30 days after the 
        close of each calendar quarter, the President and the 
        head of any agency requesting returns and return 
        information under this subsection shall each file a 
        report with the Joint Committee on Taxation setting 
        forth the taxpayers with respect to whom such requests 
        were made during such quarter under this subsection, 
        the returns or return information involved, and the 
        reasons for such requests. The President shall not be 
        required to report on any request for returns and 
        return information pertaining to an individual who was 
        an officer or employee of the executive branch of the 
        Federal Government at the time such request was made. 
        Reports filed pursuant to this paragraph shall not be 
        disclosed unless the Joint Committee on Taxation 
        determines that disclosure thereof (including 
        identifying details) would be in the national interest. 
        Such reports shall be maintained by the Joint Committee 
        on Taxation for a period not exceeding 2 years unless, 
        within such period, the Joint Committee on Taxation 
        determines that a disclosure to the Congress is 
        necessary.
  (h) Disclosure to certain Federal officers and employees for 
purposes of tax administration, etc..--
          (1) Department of the Treasury.--Returns and return 
        information shall, without written request, be open to 
        inspection by or disclosure to officers and employees 
        of the Department of the Treasury whose official duties 
        require such inspection or disclosure for tax 
        administration purposes.
          (2) Department of Justice.--In a matter involving tax 
        administration, a return or return information shall be 
        open to inspection by or disclosure to officers and 
        employees of the Department of Justice (including 
        United States attorneys) personally and directly 
        engaged in, and solely for their use in, any proceeding 
        before a Federal grand jury or preparation for any 
        proceeding (or investigation which may result in such a 
        proceeding) before a Federal grand jury or any Federal 
        or State court, but only if--
                  (A) the taxpayer is or may be a party to the 
                proceeding, or the proceeding arose out of, or 
                in connection with, determining the taxpayer's 
                civil or criminal liability, or the collection 
                of such civil liability in respect of any tax 
                imposed under this title;
                  (B) the treatment of an item reflected on 
                such return is or may be related to the 
                resolution of an issue in the proceeding or 
                investigation; or
                  (C) such return or return information relates 
                or may relate to a transactional relationship 
                between a person who is or may be a party to 
                the proceeding and the taxpayer which affects, 
                or may affect, the resolution of an issue in 
                such proceeding or investigation.
          (3) Form of request.--In any case in which the 
        Secretary is authorized to disclose a return or return 
        information to the Department of Justice pursuant to 
        the provisions of this subsection--
                  (A) if the Secretary has referred the case to 
                the Department of Justice, or if the proceeding 
                is authorized by subchapter B of chapter 76, 
                the Secretary may make such disclosure on his 
                own motion, or
                  (B) if the Secretary receives a written 
                request from the Attorney General, the Deputy 
                Attorney General, or an Assistant Attorney 
                General for a return of, or return information 
                relating to, a person named in such request and 
                setting forth the need for the disclosure, the 
                Secretary shall disclose return or return the 
                information so requested.
          (4) Disclosure in judicial and administrative tax 
        proceedings.--A return or return information may be 
        disclosed in a Federal or State judicial or 
        administrative proceeding pertaining to tax 
        administration, but only--
                  (A) if the taxpayer is a party to the 
                proceeding, or the proceeding arose out of, or 
                in connection with, determining the taxpayer's 
                civil or criminal liability, or the collection 
                of such civil liability, in respect of any tax 
                imposed under this title;
                  (B) if the treatment of an item reflected on 
                such return is directly related to the 
                resolution of an issue in the proceeding;
                  (C) if such return or return information 
                directly relates to a transactional 
                relationship between a person who is a party to 
                the proceeding and the taxpayer which directly 
                affects the resolution of an issue in the 
                proceeding; or
                  (D) to the extent required by order of a 
                court pursuant to section 3500 of title 18, 
                United States Code, or rule 16 of the Federal 
                Rules of Criminal Procedure, such court being 
                authorized in the issuance of such order to 
                give due consideration to congressional policy 
                favoring the confidentiality of returns and 
                return information as set forth in this title.
        However, such return or return information shall not be 
        disclosed as provided in subparagraph (A), (B), or (C) 
        if the Secretary determines that such disclosure would 
        identify a confidential informant or seriously impair a 
        civil or criminal tax investigation.
          (5) Withholding of tax from social security 
        benefits.--Upon written request of the payor agency, 
        the Secretary may disclose available return information 
        from the master files of the Internal Revenue Service 
        with respect to the address and status of an individual 
        as a nonresident alien or as a citizen or resident of 
        the United States to the Social Security Administration 
        or the Railroad Retirement Board (whichever is 
        appropriate) for purposes of carrying out its 
        responsibilities for withholding tax under section 1441 
        from social security benefits (as defined in section 
        86(d)).
          (6) Internal Revenue Service Oversight Board.--
                  (A) In general.--Notwithstanding paragraph 
                (1), and except as provided in subparagraph 
                (B), no return or return information may be 
                disclosed to any member of the Oversight Board 
                described in subparagraph (A) or (D) of section 
                7802(b)(1) or to any employee or detailee of 
                such Board by reason of their service with the 
                Board. Any request for information not 
                permitted to be disclosed under the preceding 
                sentence, and any contact relating to a 
                specific taxpayer, made by any such individual 
                to an officer or employee of the Internal 
                Revenue Service shall be reported by such 
                officer or employee to the Secretary, the 
                Treasury Inspector General for Tax 
                Administration, and the Joint Committee on 
                Taxation.
                  (B) Exception for reports to the Board.--If--
                          (i) the Commissioner or the Treasury 
                        Inspector General for Tax 
                        Administration prepares any report or 
                        other matter for the Oversight Board in 
                        order to assist the Board in carrying 
                        out its duties; and
                          (ii) the Commissioner or such 
                        Inspector General determines it is 
                        necessary to include any return or 
                        return information in such report or 
                        other matter to enable the Board to 
                        carry out such duties,
                such return or return information (other than 
                information regarding taxpayer identity) may be 
                disclosed to members, employees, or detailees 
                of the Board solely for the purpose of carrying 
                out such duties.
  (i) Disclosure to Federal officers or employees for 
administration of Federal laws not relating to tax 
administration.--
          (1) Disclosure of returns and return information for 
        use in criminal investigations.--
                  (A) In general.--Except as provided in 
                paragraph (6), any return or return information 
                with respect to any specified taxable period or 
                periods shall, pursuant to and upon the grant 
                of an ex parte order by a Federal district 
                court judge or magistrate judge under 
                subparagraph (B), be open (but only to the 
                extent necessary as provided in such order) to 
                inspection by, or disclosure to, officers and 
                employees of any Federal agency who are 
                personally and directly engaged in--
                          (i) preparation for any judicial or 
                        administrative proceeding pertaining to 
                        the enforcement of a specifically 
                        designated Federal criminal statute 
                        (not involving tax administration) to 
                        which the United States or such agency 
                        is or may be a party, or pertaining to 
                        the case of a missing or exploited 
                        child,
                          (ii) any investigation which may 
                        result in such a proceeding, or
                          (iii) any Federal grand jury 
                        proceeding pertaining to enforcement of 
                        such a criminal statute to which the 
                        United States or such agency is or may 
                        be a party, or to such a case of a 
                        missing or exploited child,
                solely for the use of such officers and 
                employees in such preparation, investigation, 
                or grand jury proceeding.
                  (B) Application for order.--The Attorney 
                General, the Deputy Attorney General, the 
                Associate Attorney General, any Assistant 
                Attorney General, any United States attorney, 
                any special prosecutor appointed under section 
                593 of title 28, United States Code, or any 
                attorney in charge of a criminal division 
                organized crime strike force established 
                pursuant to section 510 of title 28, United 
                States Code, may authorize an application to a 
                Federal district court judge or magistrate 
                judge for the order referred to in subparagraph 
                (A). Upon such application, such judge or 
                magistrate judge may grant such order if he 
                determines on the basis of the facts submitted 
                by the applicant that--
                          (i) there is reasonable cause to 
                        believe, based upon information 
                        believed to be reliable, that a 
                        specific criminal act has been 
                        committed,
                          (ii) there is reasonable cause to 
                        believe that the return or return 
                        information is or may be relevant to a 
                        matter relating to the commission of 
                        such act, and
                          (iii) the return or return 
                        information is sought exclusively for 
                        use in a Federal criminal investigation 
                        or proceeding concerning such act (or 
                        any criminal investigation or 
                        proceeding, in the case of a matter 
                        relating to a missing or exploited 
                        child), and the information sought to 
                        be disclosed cannot reasonably be 
                        obtained, under the circumstances, from 
                        another source.
                  (C) Disclosure to state and local law 
                enforcement agencies in the case of matters 
                pertaining to a missing or exploited child.--
                          (i) In general.--In the case of an 
                        investigation pertaining to a missing 
                        or exploited child, the head of any 
                        Federal agency, or his designee, may 
                        disclose any return or return 
                        information obtained under subparagraph 
                        (A) to officers and employees of any 
                        State or local law enforcement agency, 
                        but only if--
                                  (I) such State or local law 
                                enforcement agency is part of a 
                                team with the Federal agency in 
                                such investigation, and
                                  (II) such information is 
                                disclosed only to such officers 
                                and employees who are 
                                personally and directly engaged 
                                in such investigation.
                          (ii) Limitation on use of 
                        information.--Information disclosed 
                        under this subparagraph shall be solely 
                        for the use of such officers and 
                        employees in locating the missing 
                        child, in a grand jury proceeding, or 
                        in any preparation for, or 
                        investigation which may result in, a 
                        judicial or administrative proceeding.
                          (iii) Missing child.--For purposes of 
                        this subparagraph, the term ``missing 
                        child'' shall have the meaning given 
                        such term by section 403 of the Missing 
                        Children's Assistance Act (42 U.S.C. 
                        5772).
                          (iv) Exploited child.--For purposes 
                        of this subparagraph, the term 
                        ``exploited child'' means a minor with 
                        respect to whom there is reason to 
                        believe that a specified offense 
                        against a minor (as defined by section 
                        111(7) of the Sex Offender Registration 
                        and Notification Act (42 U.S.C. 
                        16911(7))) has or is occurring.
          (2) Disclosure of return information other than 
        taxpayer return information for use in criminal 
        investigations.--
                  (A) In general.--Except as provided in 
                paragraph (6), upon receipt by the Secretary of 
                a request which meets the requirements of 
                subparagraph (B) from the head of any Federal 
                agency or the Inspector General thereof, or, in 
                the case of the Department of Justice, the 
                Attorney General, the Deputy Attorney General, 
                the Associate Attorney General, any Assistant 
                Attorney General, the Director of the Federal 
                Bureau of Investigation, the Administrator of 
                the Drug Enforcement Administration, any United 
                States attorney, any special prosecutor 
                appointed under section 593 of title 28, United 
                States Code, or any attorney in charge of a 
                criminal division organized crime strike force 
                established pursuant to section 510 of title 
                28, United States Code, the Secretary shall 
                disclose return information (other than 
                taxpayer return information) to officers and 
                employees of such agency who are personally and 
                directly engaged in--
                          (i) preparation for any judicial or 
                        administrative proceeding described in 
                        paragraph (1)(A)(i),
                          (ii) any investigation which may 
                        result in such a proceeding, or
                          (iii) any grand jury proceeding 
                        described in paragraph (1)(A)(iii),
                solely for the use of such officers and 
                employees in such preparation, investigation, 
                or grand jury proceeding.
                  (B) Requirements.--A request meets the 
                requirements of this subparagraph if the 
                request is in writing and sets forth--
                          (i) the name and address of the 
                        taxpayer with respect to whom the 
                        requested return information relates;
                          (ii) the taxable period or periods to 
                        which such return information relates;
                          (iii) the statutory authority under 
                        which the proceeding or investigation 
                        described in subparagraph (A) is being 
                        conducted; and
                          (iv) the specific reason or reasons 
                        why such disclosure is, or may be, 
                        relevant to such proceeding or 
                        investigation.
                  (C) Taxpayer identity.--For purposes of this 
                paragraph, a taxpayer's identity shall not be 
                treated as taxpayer return information.
          (3) Disclosure of return information to apprise 
        appropriate officials of criminal or terrorist 
        activities or emergency circumstances.--
                  (A) Possible violations of Federal criminal 
                law.--
                          (i) In general.--Except as provided 
                        in paragraph (6), the Secretary may 
                        disclose in writing return information 
                        (other than taxpayer return 
                        information) which may constitute 
                        evidence of a violation of any Federal 
                        criminal law (not involving tax 
                        administration) to the extent necessary 
                        to apprise the head of the appropriate 
                        Federal agency charged with the 
                        responsibility of enforcing such law. 
                        The head of such agency may disclose 
                        such return information to officers and 
                        employees of such agency to the extent 
                        necessary to enforce such law.
                          (ii) Taxpayer identity.--If there is 
                        return information (other than taxpayer 
                        return information) which may 
                        constitute evidence of a violation by 
                        any taxpayer of any Federal criminal 
                        law (not involving tax administration), 
                        such taxpayer's identity may also be 
                        disclosed under clause (i).
                  (B) Emergency circumstances.--
                          (i) Danger of death or physical 
                        injury.--Under circumstances involving 
                        an imminent danger of death or physical 
                        injury to any individual, the Secretary 
                        may disclose return information to the 
                        extent necessary to apprise appropriate 
                        officers or employees of any Federal or 
                        State law enforcement agency of such 
                        circumstances.
                          (ii) Flight from Federal 
                        prosecution.--Under circumstances 
                        involving the imminent flight of any 
                        individual from Federal prosecution, 
                        the Secretary may disclose return 
                        information to the extent necessary to 
                        apprise appropriate officers or 
                        employees of any Federal law 
                        enforcement agency of such 
                        circumstances.
                  (C) Terrorist activities, etc..--
                          (i) In general.--Except as provided 
                        in paragraph (6), the Secretary may 
                        disclose in writing return information 
                        (other than taxpayer return 
                        information) that may be related to a 
                        terrorist incident, threat, or activity 
                        to the extent necessary to apprise the 
                        head of the appropriate Federal law 
                        enforcement agency responsible for 
                        investigating or responding to such 
                        terrorist incident, threat, or 
                        activity. The head of the agency may 
                        disclose such return information to 
                        officers and employees of such agency 
                        to the extent necessary to investigate 
                        or respond to such terrorist incident, 
                        threat, or activity.
                          (ii) Disclosure to the Department of 
                        Justice.--Returns and taxpayer return 
                        information may also be disclosed to 
                        the Attorney General under clause (i) 
                        to the extent necessary for, and solely 
                        for use in preparing, an application 
                        under paragraph (7)(D).
                          (iii) Taxpayer identity.--For 
                        purposes of this subparagraph, a 
                        taxpayer's identity shall not be 
                        treated as taxpayer return information.
          (4) Use of certain disclosed returns and return 
        information in judicial or administrative 
        proceedings.--
                  (A) Returns and taxpayer return 
                information.--Except as provided in 
                subparagraph (C), any return or taxpayer return 
                information obtained under paragraph (1) or 
                (7)(C) may be disclosed in any judicial or 
                administrative proceeding pertaining to 
                enforcement of a specifically designated 
                Federal criminal statute or related civil 
                forfeiture (not involving tax administration) 
                to which the United States or a Federal agency 
                is a party--
                          (i) if the court finds that such 
                        return or taxpayer return information 
                        is probative of a matter in issue 
                        relevant in establishing the commission 
                        of a crime or the guilt or liability of 
                        a party, or
                          (ii) to the extent required by order 
                        of the court pursuant to section 3500 
                        of title 18, United States Code, or 
                        rule 16 of the Federal Rules of 
                        Criminal Procedure.
                  (B) Return information (other than taxpayer 
                return information).--Except as provided in 
                subparagraph (C), any return information (other 
                than taxpayer return information) obtained 
                under paragraph (1), (2), (3)(A) or (C), or (7) 
                may be disclosed in any judicial or 
                administrative proceeding pertaining to 
                enforcement of a specifically designated 
                Federal criminal statute or related civil 
                forfeiture (not involving tax administration) 
                to which the United States or a Federal agency 
                is a party.
                  (C) Confidential informant; impairment of 
                investigations.--No return or return 
                information shall be admitted into evidence 
                under subparagraph (A)(i) or (B) if the 
                Secretary determines and notifies the Attorney 
                General or his delegate or the head of the 
                Federal agency that such admission would 
                identify a confidential informant or seriously 
                impair a civil or criminal tax investigation.
                  (D) Consideration of confidentiality 
                policy.--In ruling upon the admissibility of 
                returns or return information, and in the 
                issuance of an order under subparagraph 
                (A)(ii), the court shall give due consideration 
                to congressional policy favoring the 
                confidentiality of returns and return 
                information as set forth in this title.
                  (E) Reversible error.--The admission into 
                evidence of any return or return information 
                contrary to the provisions of this paragraph 
                shall not, as such, constitute reversible error 
                upon appeal of a judgment in the proceeding.
          (5) Disclosure to locate fugitives from justice.--
                  (A) In general.--Except as provided in 
                paragraph (6), the return of an individual or 
                return information with respect to such 
                individual shall, pursuant to and upon the 
                grant of an ex parte order by a Federal 
                district court judge or magistrate judge under 
                subparagraph (B), be open (but only to the 
                extent necessary as provided in such order) to 
                inspection by, or disclosure to, officers and 
                employees of any Federal agency exclusively for 
                use in locating such individual.
                  (B) Application for order.--Any person 
                described in paragraph (1)(B) may authorize an 
                application to a Federal district court judge 
                or magistrate judge for an order referred to in 
                subparagraph (A). Upon such application, such 
                judge or magistrate judge may grant such order 
                if he determines on the basis of the facts 
                submitted by the applicant that--
                          (i) a Federal arrest warrant relating 
                        to the commission of a Federal felony 
                        offense has been issued for an 
                        individual who is a fugitive from 
                        justice,
                          (ii) the return of such individual or 
                        return information with respect to such 
                        individual is sought exclusively for 
                        use in locating such individual, and
                          (iii) there is reasonable cause to 
                        believe that such return or return 
                        information may be relevant in 
                        determining the location of such 
                        individual.
          (6) Confidential informants; impairment of 
        investigations.--The Secretary shall not disclose any 
        return or return information under paragraph (1), (2), 
        (3)(A) or (C), (5), (7), or (8) if the Secretary 
        determines (and, in the case of a request for 
        disclosure pursuant to a court order described in 
        paragraph (1)(B) or (5)(B), certifies to the court) 
        that such disclosure would identify a confidential 
        informant or seriously impair a civil or criminal tax 
        investigation.
          (7) Disclosure upon request of information relating 
        to terrorist activities, etc..--
                  (A) Disclosure to law enforcement agencies.--
                          (i) In general.--Except as provided 
                        in paragraph (6), upon receipt by the 
                        Secretary of a written request which 
                        meets the requirements of clause (iii), 
                        the Secretary may disclose return 
                        information (other than taxpayer return 
                        information) to officers and employees 
                        of any Federal law enforcement agency 
                        who are personally and directly engaged 
                        in the response to or investigation of 
                        any terrorist incident, threat, or 
                        activity.
                          (ii) Disclosure to State and local 
                        law enforcement agencies.--The head of 
                        any Federal law enforcement agency may 
                        disclose return information obtained 
                        under clause (i) to officers and 
                        employees of any State or local law 
                        enforcement agency but only if such 
                        agency is part of a team with the 
                        Federal law enforcement agency in such 
                        response or investigation and such 
                        information is disclosed only to 
                        officers and employees who are 
                        personally and directly engaged in such 
                        response or investigation.
                          (iii) Requirements.--A request meets 
                        the requirements of this clause if--
                                  (I) the request is made by 
                                the head of any Federal law 
                                enforcement agency (or his 
                                delegate) involved in the 
                                response to or investigation of 
                                any terrorist incident, threat, 
                                or activity, and
                                  (II) the request sets forth 
                                the specific reason or reasons 
                                why such disclosure may be 
                                relevant to a terrorist 
                                incident, threat, or activity.
                          (iv) Limitation on use of 
                        information.--Information disclosed 
                        under this subparagraph shall be solely 
                        for the use of the officers and 
                        employees to whom such information is 
                        disclosed in such response or 
                        investigation.
                          (v) Taxpayer identity.--For purposes 
                        of this subparagraph, a taxpayer's 
                        identity shall not be treated as 
                        taxpayer return information.
                  (B) Disclosure to intelligence agencies.--
                          (i) In general.--Except as provided 
                        in paragraph (6), upon receipt by the 
                        Secretary of a written request which 
                        meets the requirements of clause (ii), 
                        the Secretary may disclose return 
                        information (other than taxpayer return 
                        information) to those officers and 
                        employees of the Department of Justice, 
                        the Department of the Treasury, and 
                        other Federal intelligence agencies who 
                        are personally and directly engaged in 
                        the collection or analysis of 
                        intelligence and counterintelligence 
                        information or investigation concerning 
                        any terrorist incident, threat, or 
                        activity. For purposes of the preceding 
                        sentence, the information disclosed 
                        under the preceding sentence shall be 
                        solely for the use of such officers and 
                        employees in such investigation, 
                        collection, or analysis.
                          (ii) Requirements.--A request meets 
                        the requirements of this subparagraph 
                        if the request--
                                  (I) is made by an individual 
                                described in clause (iii), and
                                  (II) sets forth the specific 
                                reason or reasons why such 
                                disclosure may be relevant to a 
                                terrorist incident, threat, or 
                                activity.
                          (iii) Requesting individuals.--An 
                        individual described in this 
                        subparagraph is an individual--
                                  (I) who is an officer or 
                                employee of the Department of 
                                Justice or the Department of 
                                the Treasury who is appointed 
                                by the President with the 
                                advice and consent of the 
                                Senate or who is the Director 
                                of the United States Secret 
                                Service, and
                                  (II) who is responsible for 
                                the collection and analysis of 
                                intelligence and 
                                counterintelligence information 
                                concerning any terrorist 
                                incident, threat, or activity.
                          (iv) Taxpayer identity.--For purposes 
                        of this subparagraph, a taxpayer's 
                        identity shall not be treated as 
                        taxpayer return information.
                  (C) Disclosure under ex parte orders.--
                          (i) In general.--Except as provided 
                        in paragraph (6), any return or return 
                        information with respect to any 
                        specified taxable period or periods 
                        shall, pursuant to and upon the grant 
                        of an ex parte order by a Federal 
                        district court judge or magistrate 
                        under clause (ii), be open (but only to 
                        the extent necessary as provided in 
                        such order) to inspection by, or 
                        disclosure to, officers and employees 
                        of any Federal law enforcement agency 
                        or Federal intelligence agency who are 
                        personally and directly engaged in any 
                        investigation, response to, or analysis 
                        of intelligence and counterintelligence 
                        information concerning any terrorist 
                        incident, threat, or activity. Return 
                        or return information opened to 
                        inspection or disclosure pursuant to 
                        the preceding sentence shall be solely 
                        for the use of such officers and 
                        employees in the investigation, 
                        response, or analysis, and in any 
                        judicial, administrative, or grand jury 
                        proceedings, pertaining to such 
                        terrorist incident, threat, or 
                        activity.
                          (ii) Application for order.--The 
                        Attorney General, the Deputy Attorney 
                        General, the Associate Attorney 
                        General, any Assistant Attorney 
                        General, or any United States attorney 
                        may authorize an application to a 
                        Federal district court judge or 
                        magistrate for the order referred to in 
                        clause (i). Upon such application, such 
                        judge or magistrate may grant such 
                        order if he determines on the basis of 
                        the facts submitted by the applicant 
                        that--
                                  (I) there is reasonable cause 
                                to believe, based upon 
                                information believed to be 
                                reliable, that the return or 
                                return information may be 
                                relevant to a matter relating 
                                to such terrorist incident, 
                                threat, or activity, and
                                  (II) the return or return 
                                information is sought 
                                exclusively for use in a 
                                Federal investigation, 
                                analysis, or proceeding 
                                concerning any terrorist 
                                incident, threat, or activity.
                  (D) Special rule for ex parte disclosure by 
                the IRS.--
                          (i) In general.--Except as provided 
                        in paragraph (6), the Secretary may 
                        authorize an application to a Federal 
                        district court judge or magistrate for 
                        the order referred to in subparagraph 
                        (C)(i). Upon such application, such 
                        judge or magistrate may grant such 
                        order if he determines on the basis of 
                        the facts submitted by the applicant 
                        that the requirements of subparagraph 
                        (C)(ii)(I) are met.
                          (ii) Limitation on use of 
                        information.--Information disclosed 
                        under clause (i)--
                                  (I) may be disclosed only to 
                                the extent necessary to apprise 
                                the head of the appropriate 
                                Federal law enforcement agency 
                                responsible for investigating 
                                or responding to a terrorist 
                                incident, threat, or activity, 
                                and
                                  (II) shall be solely for use 
                                in a Federal investigation, 
                                analysis, or proceeding 
                                concerning any terrorist 
                                incident, threat, or activity.
                 The head of such Federal agency may disclose 
                such information to officers and employees of 
                such agency to the extent necessary to 
                investigate or respond to such terrorist 
                incident, threat, or activity.
          (8) Comptroller General.--
                  (A) Returns available for inspection.--Except 
                as provided in subparagraph (C), upon written 
                request by the Comptroller General of the 
                United States, returns and return information 
                shall be open to inspection by, or disclosure 
                to, officers and employees of the Government 
                Accountability Office for the purpose of, and 
                to the extent necessary in, making--
                          (i) an audit of the Internal Revenue 
                        Service, the Bureau of Alcohol, 
                        Tobacco, Firearms, and Explosives, 
                        Department of Justice, or the Tax and 
                        Trade Bureau, Department of the 
                        Treasury, which may be required by 
                        section 713 of title 31, United States 
                        Code, or
                          (ii) any audit authorized by 
                        subsection (p)(6),
                except that no such officer or employee shall, 
                except to the extent authorized by subsection 
                (f) or (p)(6), disclose to any person, other 
                than another officer or employee of such office 
                whose official duties require such disclosure, 
                any return or return information described in 
                section 4424(a) in a form which can be 
                associated with, or otherwise identify, 
                directly or indirectly, a particular taxpayer, 
                nor shall such officer or employee disclose any 
                other return or return information, except as 
                otherwise expressly provided by law, to any 
                person other than such other officer or 
                employee of such office in a form which can be 
                associated with, or otherwise identify, 
                directly or indirectly, a particular taxpayer.
                  (B) Audits of other agencies.--
                          (i) In general.--Nothing in this 
                        section shall prohibit any return or 
                        return information obtained under this 
                        title by any Federal agency (other than 
                        an agency referred to in subparagraph 
                        (A)) or by a Trustee as defined in the 
                        District of Columbia Retirement 
                        Protection Act of 1997, for use in any 
                        program or activity from being open to 
                        inspection by, or disclosure to, 
                        officers and employees of the 
                        Government Accountability Office if 
                        such inspection or disclosure is--
                                  (I) for purposes of, and to 
                                the extent necessary in, making 
                                an audit authorized by law of 
                                such program or activity, and
                                  (II) pursuant to a written 
                                request by the Comptroller 
                                General of the United States to 
                                the head of such Federal 
                                agency.
                          (ii) Information from Secretary.--If 
                        the Comptroller General of the United 
                        States determines that the returns or 
                        return information available under 
                        clause (i) are not sufficient for 
                        purposes of making an audit of any 
                        program or activity of a Federal agency 
                        (other than an agency referred to in 
                        subparagraph (A)), upon written request 
                        by the Comptroller General to the 
                        Secretary, returns and return 
                        information (of the type authorized by 
                        subsection (l) or (m) to be made 
                        available to the Federal agency for use 
                        in such program or activity) shall be 
                        open to inspection by, or disclosure 
                        to, officers and employees of the 
                        Government Accountability Office for 
                        the purpose of, and to the extent 
                        necessary in, making such audit.
                          (iii) Requirement of notification 
                        upon completion of audit.--Within 90 
                        days after the completion of an audit 
                        with respect to which returns or return 
                        information were opened to inspection 
                        or disclosed under clause (i) or (ii), 
                        the Comptroller General of the United 
                        States shall notify in writing the 
                        Joint Committee on Taxation of such 
                        completion. Such notice shall include--
                                  (I) a description of the use 
                                of the returns and return 
                                information by the Federal 
                                agency involved,
                                  (II) such recommendations 
                                with respect to the use of 
                                returns and return information 
                                by such Federal agency as the 
                                Comptroller General deems 
                                appropriate, and
                                  (III) a statement on the 
                                impact of any such 
                                recommendations on 
                                confidentiality of returns and 
                                return information and the 
                                administration of this title.
                          (iv) Certain restrictions made 
                        applicable.--The restrictions contained 
                        in subparagraph (A) on the disclosure 
                        of any returns or return information 
                        open to inspection or disclosed under 
                        such subparagraph shall also apply to 
                        returns and return information open to 
                        inspection or disclosed under this 
                        subparagraph.
                  (C) Disapproval by Joint Committee on 
                Taxation.--Returns and return information shall 
                not be open to inspection or disclosed under 
                subparagraph (A) or (B) with respect to an 
                audit--
                          (i) unless the Comptroller General of 
                        the United States notifies in writing 
                        the Joint Committee on Taxation of such 
                        audit, and
                          (ii) if the Joint Committee on 
                        Taxation disapproves such audit by a 
                        vote of at least two-thirds of its 
                        members within the 30-day period 
                        beginning on the day the Joint 
                        Committee on Taxation receives such 
                        notice.
  (j) Statistical use.--
          (1) Department of Commerce.--Upon request in writing 
        by the Secretary of Commerce, the Secretary shall 
        furnish--
                  (A) such returns, or return information 
                reflected thereon, to officers and employees of 
                the Bureau of the Census, and
                  (B) such return information reflected on 
                returns of corporations to officers and 
                employees of the Bureau of Economic Analysis,
        as the Secretary may prescribe by regulation for the 
        purpose of, but only to the extent necessary in, the 
        structuring of censuses and national economic accounts 
        and conducting related statistical activities 
        authorized by law.
          (2) Federal Trade Commission.--Upon request in 
        writing by the Chairman of the Federal Trade 
        Commission, the Secretary shall furnish such return 
        information reflected on any return of a corporation 
        with respect to the tax imposed by chapter 1 to 
        officers and employees of the Division of Financial 
        Statistics of the Bureau of Economics of such 
        commission as the Secretary may prescribe by regulation 
        for the purpose of, but only to the extent necessary 
        in, administration by such division of legally 
        authorized economic surveys of corporations.
          (3) Department of Treasury.--Returns and return 
        information shall be open to inspection by or 
        disclosure to officers and employees of the Department 
        of the Treasury whose official duties require such 
        inspection or disclosure for the purpose of, but only 
        to the extent necessary in, preparing economic or 
        financial forecasts, projections, analyses, and 
        statistical studies and conducting related activities. 
        Such inspection or disclosure shall be permitted only 
        upon written request which sets forth the specific 
        reason or reasons why such inspection or disclosure is 
        necessary and which is signed by the head of the bureau 
        or office of the Department of the Treasury requesting 
        the inspection or disclosure.
          (4) Anonymous form.--No person who receives a return 
        or return information under this subsection shall 
        disclose such return or return information to any 
        person other than the taxpayer to whom it relates 
        except in a form which cannot be associated with, or 
        otherwise identify, directly or indirectly, a 
        particular taxpayer.
          (5) Department of Agriculture.--Upon request in 
        writing by the Secretary of Agriculture, the Secretary 
        shall furnish such returns, or return information 
        reflected thereon, as the Secretary may prescribe by 
        regulation to officers and employees of the Department 
        of Agriculture whose official duties require access to 
        such returns or information for the purpose of, but 
        only to the extent necessary in, structuring, 
        preparing, and conducting the census of agriculture 
        pursuant to the Census of Agriculture Act of 1997 
        (Public Law 105-113).
          (6) Congressional Budget Office.--Upon written 
        request by the Director of the Congressional Budget 
        Office, the Secretary shall furnish to officers and 
        employees of the Congressional Budget Office return 
        information for the purpose of, but only to the extent 
        necessary for, long-term models of the social security 
        and medicare programs.
  (k) Disclosure of certain returns and return information for 
tax administration purposes.--
          (1) Disclosure of accepted offers-in-compromise.--
        Return information shall be disclosed to members of the 
        general public to the extent necessary to permit 
        inspection of any accepted offer-in-compromise under 
        section 7122 relating to the liability for a tax 
        imposed by this title.
          (2) Disclosure of amount of outstanding lien.--If a 
        notice of lien has been filed pursuant to section 
        6323(f), the amount of the outstanding obligation 
        secured by such lien may be disclosed to any person who 
        furnishes satisfactory written evidence that he has a 
        right in the property subject to such lien or intends 
        to obtain a right in such property.
          (3) Disclosure of return information to correct 
        misstatements of fact.--The Secretary may, but only 
        following approval by the Joint Committee on Taxation, 
        disclose such return information or any other 
        information with respect to any specific taxpayer to 
        the extent necessary for tax administration purposes to 
        correct a misstatement of fact published or disclosed 
        with respect to such taxpayer's return or any 
        transaction of the taxpayer with the Internal Revenue 
        Service.
          (4) Disclosure to competent authority under tax 
        convention.--A return or return information may be 
        disclosed to a competent authority of a foreign 
        government which has an income tax or gift and estate 
        tax convention, or other convention or bilateral 
        agreement relating to the exchange of tax information, 
        with the United States but only to the extent provided 
        in, and subject to the terms and conditions of, such 
        convention or bilateral agreement.
          (5) State agencies regulating tax return preparers.--
        Taxpayer identity information with respect to any tax 
        return preparer, and information as to whether or not 
        any penalty has been assessed against such tax return 
        preparer under section 6694, 6695, or 7216, may be 
        furnished to any agency, body, or commission lawfully 
        charged under any State or local law with the 
        licensing, registration, or regulation of tax return 
        preparers. Such information may be furnished only upon 
        written request by the head of such agency, body, or 
        commission designating the officers or employees to 
        whom such information is to be furnished. Information 
        may be furnished and used under this paragraph only for 
        purposes of the licensing, registration, or regulation 
        of tax return preparers.
          (6) Disclosure by certain officers and employees for 
        investigative purposes.--An internal revenue officer or 
        employee and an officer or employee of the Office of 
        Treasury Inspector General for Tax Administration may, 
        in connection with his official duties relating to any 
        audit, collection activity, or civil or criminal tax 
        investigation or any other offense under the internal 
        revenue laws, disclose return information to the extent 
        that such disclosure is necessary in obtaining 
        information, which is not otherwise reasonably 
        available, with respect to the correct determination of 
        tax, liability for tax, or the amount to be collected 
        or with respect to the enforcement of any other 
        provision of this title. Such disclosures shall be made 
        only in such situations and under such conditions as 
        the Secretary may prescribe by regulation.
          (7) Disclosure of excise tax registration 
        information.--To the extent the Secretary determines 
        that disclosure is necessary to permit the effective 
        administration of subtitle D, the Secretary may 
        disclose--
                  (A) the name, address, and registration 
                number of each person who is registered under 
                any provision of subtitle D (and, in the case 
                of a registered terminal operator, the address 
                of each terminal operated by such operator), 
                and
                  (B) the registration status of any person.
          (8) Levies on certain government payments.--
                  (A) Disclosure of return information in 
                levies on Financial Management Service.--In 
                serving a notice of levy, or release of such 
                levy, with respect to any applicable government 
                payment, the Secretary may disclose to officers 
                and employees of the Financial Management 
                Service--
                          (i) return information, including 
                        taxpayer identity information,
                          (ii) the amount of any unpaid 
                        liability under this title (including 
                        penalties and interest), and
                          (iii) the type of tax and tax period 
                        to which such unpaid liability relates.
                  (B) Restriction on use of disclosed 
                information.--Return information disclosed 
                under subparagraph (A) may be used by officers 
                and employees of the Financial Management 
                Service only for the purpose of, and to the 
                extent necessary in, transferring levied funds 
                in satisfaction of the levy, maintaining 
                appropriate agency records in regard to such 
                levy or the release thereof, notifying the 
                taxpayer and the agency certifying such payment 
                that the levy has been honored, or in the 
                defense of any litigation ensuing from the 
                honor of such levy.
                  (C) Applicable government payment.--For 
                purposes of this paragraph, the term 
                ``applicable government payment'' means--
                          (i) any Federal payment (other than a 
                        payment for which eligibility is based 
                        on the income or assets (or both) of a 
                        payee) certified to the Financial 
                        Management Service for disbursement, 
                        and
                          (ii) any other payment which is 
                        certified to the Financial Management 
                        Service for disbursement and which the 
                        Secretary designates by published 
                        notice.
          (9) Disclosure of information to administer section 
        6311.--The Secretary may disclose returns or return 
        information to financial institutions and others to the 
        extent the Secretary deems necessary for the 
        administration of section 6311. Disclosures of 
        information for purposes other than to accept payments 
        by checks or money orders shall be made only to the 
        extent authorized by written procedures promulgated by 
        the Secretary.
          (10) Disclosure of certain returns and return 
        information to certain prison officials.--
                  (A) In general.--Under such procedures as the 
                Secretary may prescribe, the Secretary may 
                disclose to officers and employees of the 
                Federal Bureau of Prisons and of any State 
                agency charged with the responsibility for 
                administration of prisons any returns or return 
                information with respect to individuals 
                incarcerated in Federal or State prison systems 
                whom the Secretary has determined may have 
                filed or facilitated the filing of a false or 
                fraudulent return to the extent that the 
                Secretary determines that such disclosure is 
                necessary to permit effective Federal tax 
                administration.
                  (B) Disclosure to contractor-run prisons.--
                Under such procedures as the Secretary may 
                prescribe, the disclosures authorized by 
                subparagraph (A) may be made to contractors 
                responsible for the operation of a Federal or 
                State prison on behalf of such Bureau or 
                agency.
                  (C) Restrictions on use of disclosed 
                information.--Any return or return information 
                received under this paragraph shall be used 
                only for the purposes of and to the extent 
                necessary in taking administrative action to 
                prevent the filing of false and fraudulent 
                returns, including administrative actions to 
                address possible violations of administrative 
                rules and regulations of the prison facility 
                and in administrative and judicial proceedings 
                arising from such administrative actions.
                  (D) Restrictions on redisclosure and 
                disclosure to legal representatives.--
                Notwithstanding subsection (h)--
                          (i) Restrictions on redisclosure.--
                        Except as provided in clause (ii), any 
                        officer, employee, or contractor of the 
                        Federal Bureau of Prisons or of any 
                        State agency charged with the 
                        responsibility for administration of 
                        prisons shall not disclose any 
                        information obtained under this 
                        paragraph to any person other than an 
                        officer or employee or contractor of 
                        such Bureau or agency personally and 
                        directly engaged in the administration 
                        of prison facilities on behalf of such 
                        Bureau or agency.
                          (ii) Disclosure to legal 
                        representatives.--The returns and 
                        return information disclosed under this 
                        paragraph may be disclosed to the duly 
                        authorized legal representative of the 
                        Federal Bureau of Prisons, State 
                        agency, or contractor charged with the 
                        responsibility for administration of 
                        prisons, or of the incarcerated 
                        individual accused of filing the false 
                        or fraudulent return who is a party to 
                        an action or proceeding described in 
                        subparagraph (C), solely in preparation 
                        for, or for use in, such action or 
                        proceeding.
          (11) Disclosure of return information to Department 
        of State for purposes of passport revocation under 
        section 7345.--
                  (A) In general.--The Secretary shall, upon 
                receiving a certification described in section 
                7345, disclose to the Secretary of State return 
                information with respect to a taxpayer who has 
                a seriously delinquent tax debt described in 
                such section. Such return information shall be 
                limited to--
                          (i) the taxpayer identity information 
                        with respect to such taxpayer, and
                          (ii) the amount of such seriously 
                        delinquent tax debt.
                  (B) Restriction on disclosure.--Return 
                information disclosed under subparagraph (A) 
                may be used by officers and employees of the 
                Department of State for the purposes of, and to 
                the extent necessary in, carrying out the 
                requirements of section 32101 of the FAST Act.
          (12) Qualified tax collection contractors.--Persons 
        providing services pursuant to a qualified tax 
        collection contract under section 6306 may, if speaking 
        to a person who has identified himself or herself as 
        having the name of the taxpayer to which a tax 
        receivable (within the meaning of such section) 
        relates, identify themselves as contractors of the 
        Internal Revenue Service and disclose the business name 
        of the contractor, and the nature, subject, and reason 
        for the contact. Disclosures under this paragraph shall 
        be made only in such situations and under such 
        conditions as have been approved by the Secretary.
  (l) Disclosure of returns and return information for purposes 
other than tax administration.--
          (1) Disclosure of certain returns and return 
        information to Social Security Administration and 
        Railroad Retirement Board.--The Secretary may, upon 
        written request, disclose returns and return 
        information with respect to--
                  (A) taxes imposed by chapters 2, 21, and 24, 
                to the Social Security Administration for 
                purposes of its administration of the Social 
                Security Act;
                  (B) a plan to which part I of subchapter D of 
                chapter 1 applies, to the Social Security 
                Administration for purposes of carrying out its 
                responsibility under section 1131 of the Social 
                Security Act, limited, however to return 
                information described in section 6057(d); and
                  (C) taxes imposed by chapter 22, to the 
                Railroad Retirement Board for purposes of its 
                administration of the Railroad Retirement Act.
          (2) Disclosure of returns and return information to 
        the Department of Labor and Pension Benefit Guaranty 
        Corporation.--The Secretary may, upon written request, 
        furnish returns and return information to the proper 
        officers and employees of the Department of Labor and 
        the Pension Benefit Guaranty Corporation for purposes 
        of, but only to the extent necessary in, the 
        administration of titles I and IV of the Employee 
        Retirement Income Security Act of 1974.
          (3) Disclosure that applicant for Federal loan has 
        tax delinquent account.--
                  (A) In general.--Upon written request, the 
                Secretary may disclose to the head of the 
                Federal agency administering any included 
                Federal loan program whether or not an 
                applicant for a loan under such program has a 
                tax delinquent account.
                  (B) Restriction on disclosure.--Any 
                disclosure under subparagraph (A) shall be made 
                only for the purpose of, and to the extent 
                necessary in, determining the creditworthiness 
                of the applicant for the loan in question.
                  (C) Included Federal loan program defined.--
                For purposes of this paragraph, the term 
                ``included Federal loan program'' means any 
                program under which the United States or a 
                Federal agency makes, guarantees, or insures 
                loans.
          (4) Disclosure of returns and return information for 
        use in personnel or claimant representative matters.--
        The Secretary may disclose returns and return 
        information--
                  (A) upon written request--
                          (i) to an employee or former employee 
                        of the Department of the Treasury, or 
                        to the duly authorized legal 
                        representative of such employee or 
                        former employee, who is or may be a 
                        party to any administrative action or 
                        proceeding affecting the personnel 
                        rights of such employee or former 
                        employee; or
                          (ii) to any person, or to the duly 
                        authorized legal representative of such 
                        person, whose rights are or may be 
                        affected by an administrative action or 
                        proceeding under section 330 of title 
                        31, United States Code,
                solely for use in the action or proceeding, or 
                in preparation for the action or proceeding, 
                but only to the extent that the Secretary 
                determines that such returns or return 
                information is or may be relevant and material 
                to the action or proceeding; or
                  (B) to officers and employees of the 
                Department of the Treasury for use in any 
                action or proceeding described in subparagraph 
                (A), or in preparation for such action or 
                proceeding, to the extent necessary to advance 
                or protect the interests of the United States.
          (5) Social Security Administration.--Upon written 
        request by the Commissioner of Social Security, the 
        Secretary may disclose information returns filed 
        pursuant to part III of subchapter A of chapter 61 of 
        this subtitle for the purpose of--
                  (A) carrying out, in accordance with an 
                agreement entered into pursuant to section 232 
                of the Social Security Act, an effective return 
                processing program; or
                  (B) providing information regarding the 
                mortality status of individuals for 
                epidemiological and similar research in 
                accordance with section 1106(d) of the Social 
                Security Act.
          (6) Disclosure of return information to Federal, 
        State, and local child support enforcement agencies.--
                  (A) Return information from Internal Revenue 
                Service.--The Secretary may, upon written 
                request, disclose to the appropriate Federal, 
                State, or local child support enforcement 
                agency--
                          (i) available return information from 
                        the master files of the Internal 
                        Revenue Service relating to the social 
                        security account number (or numbers, if 
                        the individual involved has more than 
                        one such number), address, filing 
                        status, amounts and nature of income, 
                        and the number of dependents reported 
                        on any return filed by, or with respect 
                        to, any individual with respect to whom 
                        child support obligations are sought to 
                        be established or enforced pursuant to 
                        the provisions of part D of title IV of 
                        the Social Security Act and with 
                        respect to any individual to whom such 
                        support obligations are owing, and
                          (ii) available return information 
                        reflected on any return filed by, or 
                        with respect to, any individual 
                        described in clause (i) relating to the 
                        amount of such individual's gross 
                        income (as defined in section 61) or 
                        consisting of the names and addresses 
                        of payors of such income and the names 
                        of any dependents reported on such 
                        return, but only if such return 
                        information is not reasonably available 
                        from any other source.
                  (B) Disclosure to certain agents.--The 
                following information disclosed to any child 
                support enforcement agency under subparagraph 
                (A) with respect to any individual with respect 
                to whom child support obligations are sought to 
                be established or enforced may be disclosed by 
                such agency to any agent of such agency which 
                is under contract with such agency to carry out 
                the purposes described in subparagraph (C):
                          (i) The address and social security 
                        account number (or numbers) of such 
                        individual.
                          (ii) The amount of any reduction 
                        under section 6402(c) (relating to 
                        offset of past-due support against 
                        overpayments) in any overpayment 
                        otherwise payable to such individual.
                  (C) Restriction on disclosure.--Information 
                may be disclosed under this paragraph only for 
                purposes of, and to the extent necessary in, 
                establishing and collecting child support 
                obligations from, and locating, individuals 
                owing such obligations.
          (7) Disclosure of return information to Federal, 
        State, and local agencies administering certain 
        programs under the Social Security Act, the Food and 
        Nutrition Act of 2008, or title 38, United States Code, 
        or certain housing assistance programs.--
                  (A) Return information from Social Security 
                Administration.--The Commissioner of Social 
                Security shall, upon written request, disclose 
                return information from returns with respect to 
                net earnings from self-employment (as defined 
                in section 1402), wages (as defined in section 
                3121(a) or 3401(a)), and payments of retirement 
                income, which have been disclosed to the Social 
                Security Administration as provided by 
                paragraph (1) or (5) of this subsection, to any 
                Federal, State, or local agency administering a 
                program listed in subparagraph (D).
                  (B) Return information from Internal Revenue 
                Service.--The Secretary shall, upon written 
                request, disclose current return information 
                from returns with respect to unearned income 
                from the Internal Revenue Service files to any 
                Federal, State, or local agency administering a 
                program listed in subparagraph (D).
                  (C) Restriction on disclosure.--The 
                Commissioner of Social Security and the 
                Secretary shall disclose return information 
                under subparagraphs (A) and (B) only for 
                purposes of, and to the extent necessary in, 
                determining eligibility for, or the correct 
                amount of, benefits under a program listed in 
                subparagraph (D).
                  (D) Programs to which rule applies.--The 
                programs to which this paragraph applies are:
                          (i) a State program funded under part 
                        A of title IV of the Social Security 
                        Act;
                          (ii) medical assistance provided 
                        under a State plan approved under title 
                        XIX of the Social Security Act or 
                        subsidies provided under section 1860D-
                        14 of such Act;
                          (iii) supplemental security income 
                        benefits provided under title XVI of 
                        the Social Security Act, and federally 
                        administered supplementary payments of 
                        the type described in section 1616(a) 
                        of such Act (including payments 
                        pursuant to an agreement entered into 
                        under section 212(a) of Public Law 93-
                        66);
                          (iv) any benefits provided under a 
                        State plan approved under title I, X, 
                        XIV, or XVI of the Social Security Act 
                        (as those titles apply to Puerto Rico, 
                        Guam, and the Virgin Islands);
                          (v) unemployment compensation 
                        provided under a State law described in 
                        section 3304 of this title;
                          (vi) assistance provided under the 
                        Food and Nutrition Act of 2008;
                          (vii) State-administered 
                        supplementary payments of the type 
                        described in section 1616(a) of the 
                        Social Security Act (including payments 
                        pursuant to an agreement entered into 
                        under section 212(a) of Public Law 93-
                        66);
                          (viii)(I) any needs-based pension 
                        provided under chapter 15 of title 38, 
                        United States Code, or under any other 
                        law administered by the Secretary of 
                        Veterans Affairs;
                          (II) parents' dependency and 
                        indemnity compensation provided under 
                        section 1315 of title 38, United States 
                        Code;
                          (III) health-care services furnished 
                        under sections 1710(a)(2)(G), 
                        1710(a)(3), and 1710(b) of such title; 
                        and
                          (IV) compensation paid under chapter 
                        11 of title 38, United States Code, at 
                        the 100 percent rate based solely on 
                        unemployability and without regard to 
                        the fact that the disability or 
                        disabilities are not rated as 100 
                        percent disabling under the rating 
                        schedule; and
                          (ix) any housing assistance program 
                        administered by the Department of 
                        Housing and Urban Development that 
                        involves initial and periodic review of 
                        an applicant's or participant's income, 
                        except that return information may be 
                        disclosed under this clause only on 
                        written request by the Secretary of 
                        Housing and Urban Development and only 
                        for use by officers and employees of 
                        the Department of Housing and Urban 
                        Development with respect to applicants 
                        for and participants in such programs.
                Only return information from returns with 
                respect to net earnings from self-employment 
                and wages may be disclosed under this paragraph 
                for use with respect to any program described 
                in clause (viii)(IV).
          (8) Disclosure of certain return information by 
        Social Security Administration to Federal, State, and 
        local child support enforcement agencies.--
                  (A) In general.--Upon written request, the 
                Commissioner of Social Security shall disclose 
                directly to officers and employees of a Federal 
                or State or local child support enforcement 
                agency return information from returns with 
                respect to social security account numbers, net 
                earnings from self-employment (as defined in 
                section 1402), wages (as defined in section 
                3121(a) or 3401(a)), and payments of retirement 
                income which have been disclosed to the Social 
                Security Administration as provided by 
                paragraph (1) or (5) of this subsection.
                  (B) Restriction on disclosure.--The 
                Commissioner of Social Security shall disclose 
                return information under subparagraph (A) only 
                for purposes of, and to the extent necessary 
                in, establishing and collecting child support 
                obligations from, and locating, individuals 
                owing such obligations. For purposes of the 
                preceding sentence, the term ``child support 
                obligations'' only includes obligations which 
                are being enforced pursuant to a plan described 
                in section 454 of the Social Security Act which 
                has been approved by the Secretary of Health 
                and Human Services under part D of title IV of 
                such Act.
                  (C) State or local child support enforcement 
                agency.--For purposes of this paragraph, the 
                term ``State or local child support enforcement 
                agency'' means any agency of a State or 
                political subdivision thereof operating 
                pursuant to a plan described in subparagraph 
                (B).
          (9) Disclosure of alcohol fuel producers to 
        administrators of State alcohol laws.--Notwithstanding 
        any other provision of this section, the Secretary may 
        disclose--
                  (A) the name and address of any person who is 
                qualified to produce alcohol for fuel use under 
                section 5181, and
                  (B) the location of any premises to be used 
                by such person in producing alcohol for fuel,
        to any State agency, body, or commission, or its legal 
        representative, which is charged under the laws of such 
        State with responsibility for administration of State 
        alcohol laws solely for use in the administration of 
        such laws.
          (10) Disclosure of certain information to agencies 
        requesting a reduction under subsection (c), (d), (e), 
        or (f) of section 6402.--
                  (A) Return information from Internal Revenue 
                Service.--The Secretary may, upon receiving a 
                written request, disclose to officers and 
                employees of any agency seeking a reduction 
                under subsection (c), (d), (e), or (f) of 
                section 6402, to officers and employees of the 
                Department of Labor for purposes of 
                facilitating the exchange of data in connection 
                with a notice submitted under subsection 
                (f)(5)(C) of section 6402, and to officers and 
                employees of the Department of the Treasury in 
                connection with such reduction--
                          (i) taxpayer identity information 
                        with respect to the taxpayer against 
                        whom such a reduction was made or not 
                        made and with respect to any other 
                        person filing a joint return with such 
                        taxpayer,
                          (ii) the fact that a reduction has 
                        been made or has not been made under 
                        such subsection with respect to such 
                        taxpayer,
                          (iii) the amount of such reduction,
                          (iv) whether such taxpayer filed a 
                        joint return, and
                          (v) the fact that a payment was made 
                        (and the amount of the payment) to the 
                        spouse of the taxpayer on the basis of 
                        a joint return.
                  (B) Restriction on use of disclosed 
                information.--(i) Any officers and employees of 
                an agency receiving return information under 
                subparagraph (A) shall use such information 
                only for the purposes of, and to the extent 
                necessary in, establishing appropriate agency 
                records, locating any person with respect to 
                whom a reduction under subsection (c), (d), 
                (e), or (f) of section 6402 is sought for 
                purposes of collecting the debt with respect to 
                which the reduction is sought, or in the 
                defense of any litigation or administrative 
                procedure ensuing from a reduction made under 
                subsection (c), (d), (e), or (f) of section 
                6402.
                  (ii) Notwithstanding clause (i), return 
                information disclosed to officers and employees 
                of the Department of Labor may be accessed by 
                agents who maintain and provide technological 
                support to the Department of Labor's Interstate 
                Connection Network (ICON) solely for the 
                purpose of providing such maintenance and 
                support.
          (11) Disclosure of return information to carry out 
        Federal Employees' Retirement System.--
                  (A) In general.--The Commissioner of Social 
                Security shall, on written request, disclose to 
                the Office of Personnel Management return 
                information from returns with respect to net 
                earnings from self-employment (as defined in 
                section 1402), wages (as defined in section 
                3121(a) or 3401(a)), and payments of retirement 
                income, which have been disclosed to the Social 
                Security Administration as provided by 
                paragraph (1) or (5).
                  (B) Restriction on disclosure.--The 
                Commissioner of Social Security shall disclose 
                return information under subparagraph (A) only 
                for purposes of, and to the extent necessary 
                in, the administration of chapters 83 and 84 of 
                title 5, United States Code.
          (12) Disclosure of certain taxpayer identity 
        information for verification of employment status of 
        medicare beneficiary and spouse of medicare 
        beneficiary.--
                  (A) Return information from Internal Revenue 
                Service.--The Secretary shall, upon written 
                request from the Commissioner of Social 
                Security, disclose to the Commissioner 
                available filing status and taxpayer identity 
                information from the individual master files of 
                the Internal Revenue Service relating to 
                whether any medicare beneficiary identified by 
                the Commissioner was a married individual (as 
                defined in section 7703) for any specified year 
                after 1986, and, if so, the name of the spouse 
                of such individual and such spouse's TIN.
                  (B) Return information from Social Security 
                Administration.--The Commissioner of Social 
                Security shall, upon written request from the 
                Administrator of the Centers for Medicare & 
                Medicaid Services, disclose to the 
                Administrator the following information:
                          (i) The name and TIN of each medicare 
                        beneficiary who is identified as having 
                        received wages (as defined in section 
                        3401(a)), above an amount (if any) 
                        specified by the Secretary of Health 
                        and Human Services, from a qualified 
                        employer in a previous year.
                          (ii) For each medicare beneficiary 
                        who was identified as married under 
                        subparagraph (A) and whose spouse is 
                        identified as having received wages, 
                        above an amount (if any) specified by 
                        the Secretary of Health and Human 
                        Services, from a qualified employer in 
                        a previous year--
                                  (I) the name and TIN of the 
                                medicare beneficiary, and
                                  (II) the name and TIN of the 
                                spouse.
                          (iii) With respect to each such 
                        qualified employer, the name, address, 
                        and TIN of the employer and the number 
                        of individuals with respect to whom 
                        written statements were furnished under 
                        section 6051 by the employer with 
                        respect to such previous year.
                  (C) Disclosure by Centers for Medicare & 
                Medicaid Services.--With respect to the 
                information disclosed under subparagraph (B), 
                the Administrator of the Centers for Medicare & 
                Medicaid Services may disclose--
                          (i) to the qualified employer 
                        referred to in such subparagraph the 
                        name and TIN of each individual 
                        identified under such subparagraph as 
                        having received wages from the employer 
                        (hereinafter in this subparagraph 
                        referred to as the ``employee'') for 
                        purposes of determining during what 
                        period such employee or the employee's 
                        spouse may be (or have been) covered 
                        under a group health plan of the 
                        employer and what benefits are or were 
                        covered under the plan (including the 
                        name, address, and identifying number 
                        of the plan),
                          (ii) to any group health plan which 
                        provides or provided coverage to such 
                        an employee or spouse, the name of such 
                        employee and the employee's spouse (if 
                        the spouse is a medicare beneficiary) 
                        and the name and address of the 
                        employer, and, for the purpose of 
                        presenting a claim to the plan--
                                  (I) the TIN of such employee 
                                if benefits were paid under 
                                title XVIII of the Social 
                                Security Act with respect to 
                                the employee during a period in 
                                which the plan was a primary 
                                plan (as defined in section 
                                1862(b)(2)(A) of the Social 
                                Security Act), and
                                  (II) the TIN of such spouse 
                                if benefits were paid under 
                                such title with respect to the 
                                spouse during such period, and
                          (iii) to any agent of such 
                        Administrator the information referred 
                        to in subparagraph (B) for purposes of 
                        carrying out clauses (i) and (ii) on 
                        behalf of such Administrator.
                  (D) Special rules.--
                          (i) Restrictions on disclosure.--
                        Information may be disclosed under this 
                        paragraph only for purposes of, and to 
                        the extent necessary in, determining 
                        the extent to which any medicare 
                        beneficiary is covered under any group 
                        health plan.
                          (ii) Timely response to requests.--
                        Any request made under subparagraph (A) 
                        or (B) shall be complied with as soon 
                        as possible but in no event later than 
                        120 days after the date the request was 
                        made.
                  (E) Definitions.--For purposes of this 
                paragraph--
                          (i) Medicare beneficiary.--The term 
                        ``medicare beneficiary'' means an 
                        individual entitled to benefits under 
                        part A, or enrolled under part B, of 
                        title XVIII of the Social Security Act, 
                        but does not include such an individual 
                        enrolled in part A under section 1818.
                          (ii) Group health plan.--The term 
                        ``group health plan'' means any group 
                        health plan (as defined in section 
                        5000(b)(1)).
                          (iii) Qualified employer.--The term 
                        ``qualified employer'' means, for a 
                        calendar year, an employer which has 
                        furnished written statements under 
                        section 6051 with respect to at least 
                        20 individuals for wages paid in the 
                        year.
          (13) Disclosure of return information to carry out 
        income contingent repayment of student loans.--
                  (A) In general.--The Secretary may, upon 
                written request from the Secretary of 
                Education, disclose to officers and employees 
                of the Department of Education return 
                information with respect to a taxpayer who has 
                received an applicable student loan and whose 
                loan repayment amounts are based in whole or in 
                part on the taxpayer's income. Such return 
                information shall be limited to--
                          (i) taxpayer identity information 
                        with respect to such taxpayer,
                          (ii) the filing status of such 
                        taxpayer, and
                          (iii) the adjusted gross income of 
                        such taxpayer.
                  (B) Restriction on use of disclosed 
                information.--Return information disclosed 
                under subparagraph (A) may be used by officers 
                and employees of the Department of Education 
                only for the purposes of, and to the extent 
                necessary in, establishing the appropriate 
                income contingent repayment amount for an 
                applicable student loan.
                  (C) Applicable student loan.--For purposes of 
                this paragraph, the term ``applicable student 
                loan'' means--
                          (i) any loan made under the program 
                        authorized under part D of title IV of 
                        the Higher Education Act of 1965, and
                          (ii) any loan made under part B or E 
                        of title IV of the Higher Education Act 
                        of 1965 which is in default and has 
                        been assigned to the Department of 
                        Education.
                  (D) Termination.--This paragraph shall not 
                apply to any request made after December 31, 
                2007.
          (14) Disclosure of return information to United 
        States Customs Service.--The Secretary may, upon 
        written request from the Commissioner of the United 
        States Customs Service, disclose to officers and 
        employees of the Department of the Treasury such return 
        information with respect to taxes imposed by chapters 1 
        and 6 as the Secretary may prescribe by regulations, 
        solely for the purpose of, and only to the extent 
        necessary in--
                  (A) ascertaining the correctness of any entry 
                in audits as provided for in section 509 of the 
                Tariff Act of 1930 (19 U.S.C. 1509), or
                  (B) other actions to recover any loss of 
                revenue, or to collect duties, taxes, and fees, 
                determined to be due and owing pursuant to such 
                audits.
          (15) Disclosure of returns filed under section 
        6050I.--The Secretary may, upon written request, 
        disclose to officers and employees of--
                  (A) any Federal agency,
                  (B) any agency of a State or local 
                government, or
                  (C) any agency of the government of a foreign 
                country,
        information contained on returns filed under section 
        6050I. Any such disclosure shall be made on the same 
        basis, and subject to the same conditions, as apply to 
        disclosures of information on reports filed under 
        section 5313 of title 31, United States Code; except 
        that no disclosure under this paragraph shall be made 
        for purposes of the administration of any tax law.
          (16) Disclosure of return information for purposes of 
        administering the District of Columbia Retirement 
        Protection Act of 1997.--
                  (A) In general.--Upon written request 
                available return information (including such 
                information disclosed to the Social Security 
                Administration under paragraph (1) or (5) of 
                this subsection), relating to the amount of 
                wage income (as defined in section 3121(a) or 
                3401(a)), the name, address, and identifying 
                number assigned under section 6109, of payors 
                of wage income, taxpayer identity (as defined 
                in section 6103(b)(6)), and the occupational 
                status reflected on any return filed by, or 
                with respect to, any individual with respect to 
                whom eligibility for, or the correct amount of, 
                benefits under the District of Columbia 
                Retirement Protection Act of 1997, is sought to 
                be determined, shall be disclosed by the 
                Commissioner of Social Security, or to the 
                extent not available from the Social Security 
                Administration, by the Secretary, to any duly 
                authorized officer or employee of the 
                Department of the Treasury, or a Trustee or any 
                designated officer or employee of a Trustee (as 
                defined in the District of Columbia Retirement 
                Protection Act of 1997), or any actuary engaged 
                by a Trustee under the terms of the District of 
                Columbia Retirement Protection Act of 1997, 
                whose official duties require such disclosure, 
                solely for the purpose of, and to the extent 
                necessary in, determining an individual's 
                eligibility for, or the correct amount of, 
                benefits under the District of Columbia 
                Retirement Protection Act of 1997.
                  (B) Disclosure for use in judicial or 
                administrative proceedings.--Return information 
                disclosed to any person under this paragraph 
                may be disclosed in a judicial or 
                administrative proceeding relating to the 
                determination of an individual's eligibility 
                for, or the correct amount of, benefits under 
                the District of Columbia Retirement Protection 
                Act of 1997.
          (17) Disclosure to National Archives and Records 
        Administration.--The Secretary shall, upon written 
        request from the Archivist of the United States, 
        disclose or authorize the disclosure of returns and 
        return information to officers and employees of the 
        National Archives and Records Administration for 
        purposes of, and only to the extent necessary in, the 
        appraisal of records for destruction or retention. No 
        such officer or employee shall, except to the extent 
        authorized by subsection (f), (i)(8), or (p), disclose 
        any return or return information disclosed under the 
        preceding sentence to any person other than to the 
        Secretary, or to another officer or employee of the 
        National Archives and Records Administration whose 
        official duties require such disclosure for purposes of 
        such appraisal.
          (18) Disclosure of return information for purposes of 
        carrying out a program for advance payment of credit 
        for health insurance costs of eligible individuals.--
        The Secretary may disclose to providers of health 
        insurance for any certified individual (as defined in 
        section 7527(c)) return information with respect to 
        such certified individual only to the extent necessary 
        to carry out the program established by section 7527 
        (relating to advance payment of credit for health 
        insurance costs of eligible individuals).
          (19) Disclosure of return information for purposes of 
        providing transitional assistance under medicare 
        discount card program.--
                  (A) In general.--The Secretary, upon written 
                request from the Secretary of Health and Human 
                Services pursuant to carrying out section 
                1860D-31 of the Social Security Act, shall 
                disclose to officers, employees, and 
                contractors of the Department of Health and 
                Human Services with respect to a taxpayer for 
                the applicable year--
                          (i)(I) whether the adjusted gross 
                        income, as modified in accordance with 
                        specifications of the Secretary of 
                        Health and Human Services for purposes 
                        of carrying out such section, of such 
                        taxpayer and, if applicable, such 
                        taxpayer's spouse, for the applicable 
                        year, exceeds the amounts specified by 
                        the Secretary of Health and Human 
                        Services in order to apply the 100 and 
                        135 percent of the poverty lines under 
                        such section, (II) whether the return 
                        was a joint return, and (III) the 
                        applicable year, or
                          (ii) if applicable, the fact that 
                        there is no return filed for such 
                        taxpayer for the applicable year.
                  (B) Definition of applicable year.--For the 
                purposes of this subsection, the term 
                ``applicable year'' means the most recent 
                taxable year for which information is available 
                in the Internal Revenue Service's taxpayer data 
                information systems, or, if there is no return 
                filed for such taxpayer for such year, the 
                prior taxable year.
                  (C) Restriction on use of disclosed 
                information.--Return information disclosed 
                under this paragraph may be used only for the 
                purposes of determining eligibility for and 
                administering transitional assistance under 
                section 1860D-31 of the Social Security Act.
          (20) Disclosure of return information to carry out 
        Medicare part B premium subsidy adjustment and part D 
        base beneficiary premium increase.--
                  (A) In general.--The Secretary shall, upon 
                written request from the Commissioner of Social 
                Security, disclose to officers, employees, and 
                contractors of the Social Security 
                Administration return information of a taxpayer 
                whose premium (according to the records of the 
                Secretary) may be subject to adjustment under 
                section 1839(i) or increase under section 
                1860D-13(a)(7) of the Social Security Act. Such 
                return information shall be limited to--
                          (i) taxpayer identity information 
                        with respect to such taxpayer,
                          (ii) the filing status of such 
                        taxpayer,
                          (iii) the adjusted gross income of 
                        such taxpayer,
                          (iv) the amounts excluded from such 
                        taxpayer's gross income under sections 
                        135 and 911 to the extent such 
                        information is available,
                          (v) the interest received or accrued 
                        during the taxable year which is exempt 
                        from the tax imposed by chapter 1 to 
                        the extent such information is 
                        available,
                          (vi) the amounts excluded from such 
                        taxpayer's gross income by sections 931 
                        and 933 to the extent such information 
                        is available,
                          (vii) such other information relating 
                        to the liability of the taxpayer as is 
                        prescribed by the Secretary by 
                        regulation as might indicate in the 
                        case of a taxpayer who is an individual 
                        described in subsection (i)(4)(B)(iii) 
                        of section 1839 of the Social Security 
                        Act that the amount of the premium of 
                        the taxpayer under such section may be 
                        subject to adjustment under subsection 
                        (i) of such section or increase under 
                        section 1860D-13(a)(7) of such Act and 
                        the amount of such adjustment, and
                          (viii) the taxable year with respect 
                        to which the preceding information 
                        relates.
                  (B) Restriction on use of disclosed 
                information.--
                          (i) In general.--Return information 
                        disclosed under subparagraph (A) may be 
                        used by officers, employees, and 
                        contractors of the Social Security 
                        Administration only for the purposes 
                        of, and to the extent necessary in, 
                        establishing the appropriate amount of 
                        any premium adjustment under such 
                        section 1839(i) or increase under such 
                        section 1860D-13(a)(7) or for the 
                        purpose of resolving taxpayer appeals 
                        with respect to any such premium 
                        adjustment or increase.
                          (ii) Disclosure to other agencies.--
                        Officers, employees, and contractors of 
                        the Social Security Administration may 
                        disclose--
                                  (I) the taxpayer identity 
                                information and the amount of 
                                the premium subsidy adjustment 
                                or premium increase with 
                                respect to a taxpayer described 
                                in subparagraph (A) to 
                                officers, employees, and 
                                contractors of the Centers for 
                                Medicare and Medicaid Services, 
                                to the extent that such 
                                disclosure is necessary for the 
                                collection of the premium 
                                subsidy amount or the increased 
                                premium amount,
                                  (II) the taxpayer identity 
                                information and the amount of 
                                the premium subsidy adjustment 
                                or the increased premium amount 
                                with respect to a taxpayer 
                                described in subparagraph (A) 
                                to officers and employees of 
                                the Office of Personnel 
                                Management and the Railroad 
                                Retirement Board, to the extent 
                                that such disclosure is 
                                necessary for the collection of 
                                the premium subsidy amount or 
                                the increased premium amount,
                                  (III) return information with 
                                respect to a taxpayer described 
                                in subparagraph (A) to officers 
                                and employees of the Department 
                                of Health and Human Services to 
                                the extent necessary to resolve 
                                administrative appeals of such 
                                premium subsidy adjustment or 
                                increased premium, and
                                  (IV) return information with 
                                respect to a taxpayer described 
                                in subparagraph (A) to officers 
                                and employees of the Department 
                                of Justice for use in judicial 
                                proceedings to the extent 
                                necessary to carry out the 
                                purposes described in clause 
                                (i).
          (21) Disclosure of return information to carry out 
        eligibility requirements for certain programs.--
                  (A) In general.--The Secretary, upon written 
                request from the Secretary of Health and Human 
                Services, shall disclose to officers, 
                employees, and contractors of the Department of 
                Health and Human Services return information of 
                any taxpayer whose income is relevant in 
                determining any premium tax credit under 
                section 36B or any cost-sharing reduction under 
                section 1402 of the Patient Protection and 
                Affordable Care Act or eligibility for 
                participation in a State medicaid program under 
                title XIX of the Social Security Act, a State's 
                children's health insurance program under title 
                XXI of the Social Security Act, or a basic 
                health program under section 1331 of Patient 
                Protection and Affordable Care Act. Such return 
                information shall be limited to--
                          (i) taxpayer identity information 
                        with respect to such taxpayer,
                          (ii) the filing status of such 
                        taxpayer,
                          (iii) the number of individuals for 
                        whom a deduction is allowed under 
                        section 151 with respect to the 
                        taxpayer (including the taxpayer and 
                        the taxpayer's spouse),
                          (iv) the modified adjusted gross 
                        income (as defined in section 36B) of 
                        such taxpayer and each of the other 
                        individuals included under clause (iii) 
                        who are required to file a return of 
                        tax imposed by chapter 1 for the 
                        taxable year,
                          (v) such other information as is 
                        prescribed by the Secretary by 
                        regulation as might indicate whether 
                        the taxpayer is eligible for such 
                        credit or reduction (and the amount 
                        thereof), and
                          (vi) the taxable year with respect to 
                        which the preceding information relates 
                        or, if applicable, the fact that such 
                        information is not available.
                  (B) Information to exchange and State 
                agencies.--The Secretary of Health and Human 
                Services may disclose to an Exchange 
                established under the Patient Protection and 
                Affordable Care Act or its contractors, or to a 
                State agency administering a State program 
                described in subparagraph (A) or its 
                contractors, any inconsistency between the 
                information provided by the Exchange or State 
                agency to the Secretary and the information 
                provided to the Secretary under subparagraph 
                (A).
                  (C) Restriction on use of disclosed 
                information.--Return information disclosed 
                under subparagraph (A) or (B) may be used by 
                officers, employees, and contractors of the 
                Department of Health and Human Services, an 
                Exchange, or a State agency only for the 
                purposes of, and to the extent necessary in--
                          (i) establishing eligibility for 
                        participation in the Exchange, and 
                        verifying the appropriate amount of, 
                        any credit or reduction described in 
                        subparagraph (A),
                          (ii) determining eligibility for 
                        participation in the State programs 
                        described in subparagraph (A).
          (22) Disclosure of return information to Department 
        of Health and Human Services for purposes of enhancing 
        Medicare program integrity.--
                  (A) In general.--The Secretary shall, upon 
                written request from the Secretary of Health 
                and Human Services, disclose to officers and 
                employees of the Department of Health and Human 
                Services return information with respect to a 
                taxpayer who has applied to enroll, or 
                reenroll, as a provider of services or supplier 
                under the Medicare program under title XVIII of 
                the Social Security Act. Such return 
                information shall be limited to--
                          (i) the taxpayer identity information 
                        with respect to such taxpayer;
                          (ii) the amount of the delinquent tax 
                        debt owed by that taxpayer; and
                          (iii) the taxable year to which the 
                        delinquent tax debt pertains.
                  (B) Restriction on disclosure.--Return 
                information disclosed under subparagraph (A) 
                may be used by officers and employees of the 
                Department of Health and Human Services for the 
                purposes of, and to the extent necessary in, 
                establishing the taxpayer's eligibility for 
                enrollment or reenrollment in the Medicare 
                program, or in any administrative or judicial 
                proceeding relating to, or arising from, a 
                denial of such enrollment or reenrollment, or 
                in determining the level of enhanced oversight 
                to be applied with respect to such taxpayer 
                pursuant to section 1866(j)(3) of the Social 
                Security Act.
                  (C) Delinquent tax debt.--For purposes of 
                this paragraph, the term ``delinquent tax 
                debt'' means an outstanding debt under this 
                title for which a notice of lien has been filed 
                pursuant to section 6323, but the term does not 
                include a debt that is being paid in a timely 
                manner pursuant to an agreement under section 
                6159 or 7122, or a debt with respect to which a 
                collection due process hearing under section 
                6330 is requested, pending, or completed and no 
                payment is required.
  (m) Disclosure of taxpayer identity information.--
          (1) Tax refunds.--The Secretary may disclose taxpayer 
        identity information to the press and other media for 
        purposes of notifying persons entitled to tax refunds 
        when the Secretary, after reasonable effort and lapse 
        of time, has been unable to locate such persons.
          (2) Federal claims.--
                  (A) In general.--Except as provided in 
                subparagraph (B), the Secretary may, upon 
                written request, disclose the mailing address 
                of a taxpayer for use by officers, employees, 
                or agents of a Federal agency for purposes of 
                locating such taxpayer to collect or compromise 
                a Federal claim against the taxpayer in 
                accordance with sections 3711, 3717, and 3718 
                of title 31.
                  (B) Special rule for consumer reporting 
                agency.--In the case of an agent of a Federal 
                agency which is a consumer reporting agency 
                (within the meaning of section 603(f) of the 
                Fair Credit Reporting Act (15 U.S.C. 
                1681a(f))), the mailing address of a taxpayer 
                may be disclosed to such agent under 
                subparagraph (A) only for the purpose of 
                allowing such agent to prepare a commercial 
                credit report on the taxpayer for use by such 
                Federal agency in accordance with sections 
                3711, 3717, and 3718 of title 31.
          (3) National Institute for Occupational Safety and 
        Health.--Upon written request, the Secretary may 
        disclose the mailing address of taxpayers to officers 
        and employees of the National Institute for 
        Occupational Safety and Health solely for the purpose 
        of locating individuals who are, or may have been, 
        exposed to occupational hazards in order to determine 
        the status of their health or to inform them of the 
        possible need for medical care and treatment.
          (4) Individuals who owe an overpayment of Federal 
        Pell Grants or who have defaulted on student loans 
        administered by the Department of Education.--
                  (A) In general.--Upon written request by the 
                Secretary of Education, the Secretary may 
                disclose the mailing address of any taxpayer--
                          (i) who owes an overpayment of a 
                        grant awarded to such taxpayer under 
                        subpart 1 of part A of title IV of the 
                        Higher Education Act of 1965, or
                          (ii) who has defaulted on a loan--
                                  (I) made under part B, D, or 
                                E of title IV of the Higher 
                                Education Act of 1965, or
                                  (II) made pursuant to section 
                                3(a)(1) of the Migration and 
                                Refugee Assistance Act of 1962 
                                to a student at an institution 
                                of higher education,
                for use only by officers, employees, or agents 
                of the Department of Education for purposes of 
                locating such taxpayer for purposes of 
                collecting such overpayment or loan.
                  (B) Disclosure to educational institutions, 
                etc..--Any mailing address disclosed under 
                subparagraph (A)(i) may be disclosed by the 
                Secretary of Education to--
                          (i) any lender, or any State or 
                        nonprofit guarantee agency, which is 
                        participating under part B or D of 
                        title IV of the Higher Education Act of 
                        1965, or
                          (ii) any educational institution with 
                        which the Secretary of Education has an 
                        agreement under subpart 1 of part A, or 
                        part D or E, of title IV of such Act,
                for use only by officers, employees, or agents 
                of such lender, guarantee agency, or 
                institution whose duties relate to the 
                collection of student loans for purposes of 
                locating individuals who have defaulted on 
                student loans made under such loan programs for 
                purposes of collecting such loans.
          (5) Individuals who have defaulted on student loans 
        administered by the Department of Health and Human 
        Services.--
                  (A) In general.--Upon written request by the 
                Secretary of Health and Human Services, the 
                Secretary may disclose the mailing address of 
                any taxpayer who has defaulted on a loan made 
                under part C of title VII of the Public Health 
                Service Act or under subpart II of part B of 
                title VIII of such Act, for use only by 
                officers, employees, or agents of the 
                Department of Health and Human Services for 
                purposes of locating such taxpayer for purposes 
                of collecting such loan.
                  (B) Disclosure to schools and eligible 
                lenders.--Any mailing address disclosed under 
                subparagraph (A) may be disclosed by the 
                Secretary of Health and Human Services to--
                          (i) any school with which the 
                        Secretary of Health and Human Services 
                        has an agreement under subpart II   of 
                        part C of title VII of the Public 
                        Health Service Act or subpart II of 
                        part B of title VIII of such Act, or
                          (ii) any eligible lender (within the 
                        meaning of section 737(4) of such Act) 
                        participating under subpart I of part C 
                        of title VII of such Act,
                for use only by officers, employees, or agents 
                of such school or eligible lender whose duties 
                relate to the collection of student loans for 
                purposes of locating individuals who have 
                defaulted on student loans made under such 
                subparts for the purposes of collecting such 
                loans.
          (6) Blood Donor Locator Service.--
                  (A) In general.--Upon written request 
                pursuant to section 1141 of the Social Security 
                Act, the Secretary shall disclose the mailing 
                address of taxpayers to officers and employees 
                of the Blood Donor Locator Service in the 
                Department of Health and Human Services.
                  (B) Restriction on disclosure.--The Secretary 
                shall disclose return information under 
                subparagraph (A) only for purposes of, and to 
                the extent necessary in, assisting under the 
                Blood Donor Locator Service authorized persons 
                (as defined in section 1141(h)(1) of the Social 
                Security Act) in locating blood donors who, as 
                indicated by donated blood or products derived 
                therefrom or by the history of the subsequent 
                use of such blood or blood products, have or 
                may have the virus for acquired immune 
                deficiency syndrome, in order to inform such 
                donors of the possible need for medical care 
                and treatment.
                  (C) Safeguards.--The Secretary shall destroy 
                all related blood donor records (as defined in 
                section 1141(h)(2) of the Social Security Act) 
                in the possession of the Department of the 
                Treasury upon completion of their use in making 
                the disclosure required under subparagraph (A), 
                so as to make such records undisclosable.
          (7) Social security account statement furnished by 
        Social Security Administration.--Upon written request 
        by the Commissioner of Social Security, the Secretary 
        may disclose the mailing address of any taxpayer who is 
        entitled to receive a social security account statement 
        pursuant to section 1143(c) of the Social Security Act, 
        for use only by officers, employees or agents of the 
        Social Security Administration for purposes of mailing 
        such statement to such taxpayer.
  (n) Certain other persons.--Pursuant to regulations 
prescribed by the Secretary, returns and return information may 
be disclosed to any person, including any person described in 
section 7513(a), to the extent necessary in connection with the 
processing, storage, transmission, and reproduction of such 
returns and return information, the programming, maintenance, 
repair, testing, and procurement of equipment, and the 
providing of other services, for purposes of tax 
administration.
  (o) Disclosure of returns and return information with respect 
to certain taxes.--
          (1) Taxes imposed by subtitle E.--
                  (A) In general.--Returns and return 
                information with respect to taxes imposed by 
                subtitle E (relating to taxes on alcohol, 
                tobacco, and firearms) shall be open to 
                inspection by or disclosure to officers and 
                employees of a Federal agency whose official 
                duties require such inspection or disclosure.
                  (B) Use in certain proceedings.--Returns and 
                return information disclosed to a Federal 
                agency under subparagraph (A) may be used in an 
                action or proceeding (or in preparation for 
                such action or proceeding) brought under 
                section 625 of the American Jobs Creation Act 
                of 2004 for the collection of any unpaid 
                assessment or penalty arising under such Act.
          (2) Taxes imposed by chapter 35.--Returns and return 
        information with respect to taxes imposed by chapter 35 
        (relating to taxes on wagering) shall, notwithstanding 
        any other provision of this section, be open to 
        inspection by or disclosure only to such person or 
        persons and for such purpose or purposes as are 
        prescribed by section 4424.
  (p) Procedure and recordkeeping.--
          (1) Manner, time, and place of inspections.--Requests 
        for the inspection or disclosure of a return or return 
        information and such inspection or disclosure shall be 
        made in such manner and at such time and place as shall 
        be prescribed by the Secretary.
          (2) Procedure.--
                  (A) Reproduction of returns.--A reproduction 
                or certified reproduction of a return shall, 
                upon written request, be furnished to any 
                person to whom disclosure or inspection of such 
                return is authorized under this section. A 
                reasonable fee may be prescribed for furnishing 
                such reproduction or certified reproduction.
                  (B) Disclosure of return information.--Return 
                information disclosed to any person under the 
                provisions of this title may be provided in the 
                form of written documents, reproductions of 
                such documents, films or photoimpressions, or 
                electronically produced tapes, disks, or 
                records, or by any other mode or means which 
                the Secretary determines necessary or 
                appropriate. A reasonable fee may be prescribed 
                for furnishing such return information.
                  (C) Use of reproductions.--Any reproduction 
                of any return, document, or other matter made 
                in accordance with this paragraph shall have 
                the same legal status as the original, and any 
                such reproduction shall, if properly 
                authenticated, be admissible in evidence in any 
                judicial or administrative proceeding as if it 
                were the original, whether or not the original 
                is in existence.
          (3) Records of inspection and disclosure.--
                  (A) System of recordkeeping.--Except as 
                otherwise provided by this paragraph, the 
                Secretary shall maintain a permanent system of 
                standardized records or accountings of all 
                requests for inspection or disclosure of 
                returns and return information (including the 
                reasons for and dates of such requests) and of 
                returns and return information inspected or 
                disclosed under this section and section 
                6104(c). Notwithstanding the provisions of 
                section 552a(c) of title 5, United States Code, 
                the Secretary shall not be required to maintain 
                a record or accounting of requests for 
                inspection or disclosure of returns and return 
                information, or of returns and return 
                information inspected or disclosed, under the 
                authority of subsection (c), (e), (f)(5), 
                (h)(1), (3)(A), or (4), (i)(4), or (8)(A)(ii), 
                (k)(1), (2), (6), (8), or (9), (l)(1), (4)(B), 
                (5), (7), (8), (9), (10), (11), (12), (13), 
                (14), (15), (16), (17), or (18), (m), or (n). 
                The records or accountings required to be 
                maintained under this paragraph shall be 
                available for examination by the Joint 
                Committee on Taxation or the Chief of Staff of 
                such joint committee. Such record or accounting 
                shall also be available for examination by such 
                person or persons as may be, but only to the 
                extent, authorized to make such examination 
                under section 552a(c)(3) of title 5, United 
                States Code.
                  (B) Report by the Secretary.--The Secretary 
                shall, within 90 days after the close of each 
                calendar year, furnish to the Joint Committee 
                on Taxation a report with respect to, or 
                summary of, the records or accountings 
                described in subparagraph (A) in such form and 
                containing such information as such joint 
                committee or the Chief of Staff of such joint 
                committee may designate. Such report or summary 
                shall not, however, include a record or 
                accounting of any request by the President 
                under subsection (g) for, or the disclosure in 
                response to such request of, any return or 
                return information with respect to any 
                individual who, at the time of such request, 
                was an officer or employee of the executive 
                branch of the Federal Government. Such report 
                or summary, or any part thereof, may be 
                disclosed by such joint committee to such 
                persons and for such purposes as the joint 
                committee may, by record vote of a majority of 
                the members of the joint committee, determine.
                  (C) Public report on disclosures.--The 
                Secretary shall, within 90 days after the close 
                of each calendar year, furnish to the Joint 
                Committee on Taxation for disclosure to the 
                public a report with respect to the records or 
                accountings described in subparagraph (A) 
                which--
                          (i) provides with respect to each 
                        Federal agency, each agency, body, or 
                        commission described in subsection (d), 
                        (i)(3)(B)(i) or (7)(A)(ii), or (l)(6), 
                        and the Government Accountability 
                        Office the number of--
                                  (I) requests for disclosure 
                                of returns and return 
                                information,
                                  (II) instances in which 
                                returns and return information 
                                were disclosed pursuant to such 
                                requests or otherwise,
                                  (III) taxpayers whose 
                                returns, or return information 
                                with respect to whom, were 
                                disclosed pursuant to such 
                                requests, and
                          (ii) describes the general purposes 
                        for which such requests were made.
          (4) Safeguards.--Any Federal agency described in 
        subsection (h)(2), (h)(5), (i)(1), (2), (3), (5), or 
        (7), (j)(1), (2), or (5), (k)(8), (10), or (11), 
        (l)(1), (2), (3), (5), (10), (11), (13), (14), (17), or 
        (22) or (o)(1)(A), the Government Accountability 
        Office, the Congressional Budget Office, or any agency, 
        body, or commission described in subsection (d), 
        (i)(1)(C), (3)(B)(i), or (7)(A)(ii), or (k)(10), 
        (l)(6), (7), (8), (9), (12), (15), or (16), any 
        appropriate State officer (as defined in section 
        6104(c)), or any other person described in subsection 
        (k)(10), subsection (l)(10), (16), (18), (19), or (20), 
        or any entity described in subsection (l)(21), shall, 
        as a condition for receiving returns or return 
        information--
                  (A) establish and maintain, to the 
                satisfaction of the Secretary, a permanent 
                system of standardized records with respect to 
                any request, the reason for such request, and 
                the date of such request made by or of it and 
                any disclosure of return or return information 
                made by or to it;
                  (B) establish and maintain, to the 
                satisfaction of the Secretary, a secure area or 
                place in which such returns or return 
                information shall be stored;
                  (C) restrict, to the satisfaction of the 
                Secretary, access to the returns or return 
                information only to persons whose duties or 
                responsibilities require access and to whom 
                disclosure may be made under the provisions of 
                this title;
                  (D) provide such other safeguards which the 
                Secretary determines (and which he prescribes 
                in regulations) to be necessary or appropriate 
                to protect the confidentiality of the returns 
                or return information;
                  (E) furnish a report to the Secretary, at 
                such time and containing such information as 
                the Secretary may prescribe, which describes 
                the procedures established and utilized by such 
                agency, body, or commission, the Government 
                Accountability Office, or the Congressional 
                Budget Office for ensuring the confidentiality 
                of returns and return information required by 
                this paragraph; and
                  (F) upon completion of use of such returns or 
                return information--
                          (i) in the case of an agency, body, 
                        or commission described in subsection 
                        (d), (i)(3)(B)(i), (k)(10), or (l)(6), 
                        (7), (8), (9), or (16), any appropriate 
                        State officer (as defined in section 
                        6104(c)), or any other person described 
                        in subsection (k)(10) or subsection 
                        (l)(10), (16), (18), (19), or (20) 
                        return to the Secretary such returns or 
                        return information (along with any 
                        copies made therefrom) or make such 
                        returns or return information 
                        undisclosable in any manner and furnish 
                        a written report to the Secretary 
                        describing such manner,
                          (ii) in the case of an agency 
                        described in subsection (h)(2), (h)(5), 
                        (i)(1), (2), (3), (5) or (7), (j)(1), 
                        (2), or (5), (k)(8), (10), or (11), 
                        (l)(1), (2), (3), (5), (10), (11), 
                        (12), (13), (14), (15), (17), or (22), 
                        or (o)(1)(A) or any entity described in 
                        subsection (l)(21), the Government 
                        Accountability Office, or the 
                        Congressional Budget Office, either--
                                  (I) return to the Secretary 
                                such returns or return 
                                information (along with any 
                                copies made therefrom),
                                  (II) otherwise make such 
                                returns or return information 
                                undisclosable, or
                                  (III) to the extent not so 
                                returned or made undisclosable, 
                                ensure that the conditions of 
                                subparagraphs (A), (B), (C), 
                                (D), and (E) of this paragraph 
                                continue to be met with respect 
                                to such returns or return 
                                information, and
                          (iii) in the case of the Department 
                        of Health and Human Services for 
                        purposes of subsection (m)(6), destroy 
                        all such return information upon 
                        completion of its use in providing the 
                        notification for which the information 
                        was obtained, so as to make such 
                        information undisclosable;
        except that the conditions of subparagraphs (A), (B), 
        (C), (D), and (E) shall cease to apply with respect to 
        any return or return information if, and to the extent 
        that, such return or return information is disclosed in 
        the course of any judicial or administrative proceeding 
        and made a part of the public record thereof. If the 
        Secretary determines that any such agency, body, or 
        commission, including an agency, an appropriate State 
        officer (as defined in section 6104(c)), or any other 
        person described in subsection (k)(10) or subsection 
        (l)(10), (16), (18), (19), or (20) or any entity 
        described in subsection (l)(21), or the Government 
        Accountability Office or the Congressional Budget 
        Office, has failed to, or does not, meet the 
        requirements of this paragraph, he may, after any 
        proceedings for review established under paragraph (7), 
        take such actions as are necessary to ensure such 
        requirements are met, including refusing to disclose 
        returns or return information to such agency, body, or 
        commission, including an agency, an appropriate State 
        officer (as defined in section 6104(c)), or any other 
        person described in subsection (k)(10) or subsection 
        (l)(10), (16), (18), (19), or (20) or any entity 
        described in subsection (l)(21), or the Government 
        Accountability Office or the Congressional Budget 
        Office, until he determines that such requirements have 
        been or will be met. In the case of any agency which 
        receives any mailing address under paragraph (2), (4), 
        (6), or (7) of subsection (m) and which discloses any 
        such mailing address to any agent or which receives any 
        information under paragraph (6)(A), (10), (12)(B), or 
        (16) of subsection (l) and which discloses any such 
        information to any agent, or any person including an 
        agent described in subsection (l)(10) or (16), this 
        paragraph shall apply to such agency and each such 
        agent or other person (except that, in the case of an 
        agent, or any person including an agent described in 
        subsection (l)(10) or (16), any report to the Secretary 
        or other action with respect to the Secretary shall be 
        made or taken through such agency). For purposes of 
        applying this paragraph in any case to which subsection 
        (m)(6) applies, the term ``return information'' 
        includes related blood donor records (as defined in 
        section 1141(h)(2) of the Social Security Act).
          (5) Report on procedures and safeguards.--After the 
        close of each calendar year, the Secretary shall 
        furnish to each committee described in subsection 
        (f)(1) a report which describes the procedures and 
        safeguards established and utilized by such agencies, 
        bodies, or commissions, the Government Accountability 
        Office, and the Congressional Budget Office for 
        ensuring the confidentiality of returns and return 
        information as required by this subsection. Such report 
        shall also describe instances of deficiencies in, and 
        failure to establish or utilize, such procedures.
          (6) Audit of procedures and safeguards.--
                  (A) Audit by Comptroller General.--The 
                Comptroller General may audit the procedures 
                and safeguards established by such agencies, 
                bodies, or commissions and the Congressional 
                Budget Office pursuant to this subsection to 
                determine whether such safeguards and 
                procedures meet the requirements of this 
                subsection and ensure the confidentiality of 
                returns and return information. The Comptroller 
                General shall notify the Secretary before any 
                such audit is conducted.
                  (B) Records of inspection and reports by the 
                Comptroller General.--The Comptroller General 
                shall--
                          (i) maintain a permanent system of 
                        standardized records and accountings of 
                        returns and return information 
                        inspected by officers and employees of 
                        the Government Accountability Office 
                        under subsection (i)(8)(A)(ii) and 
                        shall, within 90 days after the close 
                        of each calendar year, furnish to the 
                        Secretary a report with respect to, or 
                        summary of, such records or accountings 
                        in such form and containing such 
                        information as the Secretary may 
                        prescribe, and
                          (ii) furnish an annual report to each 
                        committee described in subsection (f) 
                        and to the Secretary setting forth his 
                        findings with respect to any audit 
                        conducted pursuant to subparagraph (A).
                The Secretary may disclose to the Joint 
                Committee any report furnished to him under 
                clause (i).
          (7) Administrative review.--The Secretary shall by 
        regulations prescribe procedures which provide for 
        administrative review of any determination under 
        paragraph (4) that any agency, body, or commission 
        described in subsection (d) has failed to meet the 
        requirements of such paragraph.
          (8) State law requirements.--
                  (A) Safeguards.--Notwithstanding any other 
                provision of this section, no return or return 
                information shall be disclosed after December 
                31, 1978, to any officer or employee of any 
                State which requires a taxpayer to attach to, 
                or include in, any State tax return a copy of 
                any portion of his Federal return, or 
                information reflected on such Federal return, 
                unless such State adopts provisions of law 
                which protect the confidentiality of the copy 
                of the Federal return (or portion thereof) 
                attached to, or the Federal return information 
                reflected on, such State tax return.
                  (B) Disclosure of returns or return 
                information in State returns.--Nothing in 
                subparagraph (A) shall be construed to prohibit 
                the disclosure by an officer or employee of any 
                State of any copy of any portion of a Federal 
                return or any information on a Federal return 
                which is required to be attached or included in 
                a State return to another officer or employee 
                of such State (or political subdivision of such 
                State) if such disclosure is specifically 
                authorized by State law.
  (q) Regulations.--The Secretary is authorized to prescribe 
such other regulations as are necessary to carry out the 
provisions of this section.

           *       *       *       *       *       *       *

CHAPTER 62--TIME AND PLACE FOR PAYING TAX

           *       *       *       *       *       *       *

Subchapter B--EXTENSIONS OF TIME FOR PAYMENT

           *       *       *       *       *       *       *

SEC. 6166. EXTENSION OF TIME FOR PAYMENT OF ESTATE TAX WHERE ESTATE 
                    CONSISTS LARGELY OF INTEREST IN CLOSELY HELD 
                    BUSINESS.

  (a) 5-year deferral; 10-year installment payment.--
          (1) In general.--If the value of an interest in a 
        closely held business which is included in determining 
        the gross estate of a decedent who was (at the date of 
        his death) a citizen or resident of the United States 
        exceeds 35 percent of the adjusted gross estate, the 
        executor may elect to pay part or all of the tax 
        imposed by section 2001 in 2 or more (but not exceeding 
        10) equal installments.
          (2) Limitation.--The maximum amount of tax which may 
        be paid in installments under this subsection shall be 
        an amount which bears the same ratio to the tax imposed 
        by section 2001 (reduced by the credits against such 
        tax) as--
                  (A) the closely held business amount, bears 
                to
                  (B) the amount of the adjusted gross estate.
          (3) Date for payment of installments.--If an election 
        is made under paragraph (1), the first installment 
        shall be paid on or before the date selected by the 
        executor which is not more than 5 years after the date 
        prescribed by section 6151(a) for payment of the tax, 
        and each succeeding installment shall be paid on or 
        before the date which is 1 year after the date 
        prescribed by this paragraph for payment of the 
        preceding installment.
  (b) Definitions and special rules.--
          (1) Interest in closely held business.--For purposes 
        of this section, the term ``interest in a closely held 
        business'' means--
                  (A) an interest as a proprietor in a trade or 
                business carried on as a proprietorship;
                  (B) an interest as a partner in a partnership 
                carrying on a trade or business, if--
                          (i) 20 percent or more of the total 
                        capital interest in such partnership is 
                        included in determining the gross 
                        estate of the decedent, or
                          (ii) such partnership had 45 or fewer 
                        partners; or
                  (C) stock in a corporation carrying on a 
                trade or business if--
                          (i) 20 percent or more in value of 
                        the voting stock of such corporation is 
                        included in determining the gross 
                        estate of the decedent, or
                          (ii) such corporation had 45 or fewer 
                        shareholders.
          (2) Rules for applying paragraph (1).--For purposes 
        of paragraph (1)--
                  (A) Time for testing.--Determinations shall 
                be made as of the time immediately before the 
                decedent's death.
                  [(B) Certain interests held by husband and 
                wife.--Stock or a partnership interest which--
                          [(i) is community property of a 
                        husband and wife (or the income from 
                        which is community income) under the 
                        applicable community property law of a 
                        State, or
                          [(ii) is held by a husband and wife 
                        as joint tenants, tenants by the 
                        entirety, or tenants in common,
                shall be treated as owned by one shareholder or 
                one partner, as the case may be.]
                  (B) Certain interests held by married 
                couple.--Stock or a partnership interest 
                which--
                          (i) is community property of a 
                        married couple (or the income from 
                        which is community income) under the 
                        applicable community property law of a 
                        State, or
                          (ii) is held by a married couple as 
                        joint tenants, tenants by the entirety, 
                        or tenants in common,
                shall be treated as owned by 1 shareholder or 1 
                partner, as the case may be.
                  (C) Indirect ownership.--Property owned, 
                directly or indirectly, by or for a 
                corporation, partnership, estate, or trust 
                shall be considered as being owned 
                proportionately by or for its shareholders, 
                partners, or beneficiaries. For purposes of the 
                preceding sentence, a person shall be treated 
                as a beneficiary of any trust only if such 
                person has a present interest in the trust.
                  (D) Certain interests held by members of 
                decedent's family.--All stock and all 
                partnership interests held by the decedent or 
                by any member of his family (within the meaning 
                of section 267(c)(4)) shall be treated as owned 
                by the decedent.
          (3) Farmhouses and certain other structures taken 
        into account.--For purposes of the 35-percent 
        requirement of subsection (a)(1), an interest in a 
        closely held business which is the business of farming 
        includes an interest in residential buildings and 
        related improvements on the farm which are occupied on 
        a regular basis by the owner or lessee of the farm or 
        by persons employed by such owner or lessee for 
        purposes of operating or maintaining the farm.
          (4) Value.--For purposes of this section, value shall 
        be value determined for purposes of chapter 11 
        (relating to estate tax).
          (5) Closely held business amount.--For purposes of 
        this section, the term ``closely held business amount'' 
        means the value of the interest in a closely held 
        business which qualifies under subsection (a)(1).
          (6) Adjusted gross estate.--For purposes of this 
        section, the term, ``adjusted gross estate'' means the 
        value of the gross estate reduced by the sum of the 
        amounts allowable as a deduction under section 2053 or 
        2054. Such sum shall be determined on the basis of the 
        facts and circumstances in existence on the date 
        (including extensions) for filing the return of tax 
        imposed by section 2001 (or, if earlier, the date on 
        which such return is filed).
          (7) Partnership interests and stock which is not 
        readily tradable.--
                  (A) In general.--If the executor elects the 
                benefits of this paragraph (at such time and in 
                such manner as the Secretary shall by 
                regulations prescribe), then--
                          (i) for purposes of paragraph 
                        (1)(B)(i) or (1)(C)(i) (whichever is 
                        appropriate) and for purposes of 
                        subsection (c), any capital interest in 
                        a partnership and any non-readily-
                        tradable stock which (after the 
                        application of paragraph (2)) is 
                        treated as owned by the decedent shall 
                        be treated as included in determining 
                        the value of the decedent's gross 
                        estate,
                          (ii) the executor shall be treated as 
                        having selected under subsection (a)(3) 
                        the date prescribed by section 6151(a), 
                        and
                          (iii) for purposes of applying 
                        section 6601(j), the 2-percent portion 
                        (as defined in such section) shall be 
                        treated as being zero.
                  (B) Non-readily-tradable stock defined.--For 
                purposes of this paragraph, the term ``non-
                readily-tradable stock'' means stock for which, 
                at the time of the decedent's death, there was 
                no market on a stock exchange or in an over-
                the-counter market.
          (8) Stock in holding company treated as business 
        company stock in certain cases.--
                  (A) In general.--If the executor elects the 
                benefits of this paragraph, then--
                          (i) Holding company stock treated as 
                        business company stock.--For purposes 
                        of this section, the portion of the 
                        stock of any holding company which 
                        represents direct ownership (or 
                        indirect ownership through 1 or more 
                        other holding companies) by such 
                        company in a business company shall be 
                        deemed to be stock in such business 
                        company.
                          (ii) 5-year deferral for principal 
                        not to apply.--The executor shall be 
                        treated as having selected under 
                        subsection (a)(3) the date prescribed 
                        by section 6151(a).
                          (iii) 2-percent interest rate not to 
                        apply.--For purposes of applying 
                        section 6601(j), the 2-percent portion 
                        (as defined in such section) shall be 
                        treated as being zero.
                  (B) All stock must be non-readily-tradable 
                stock.--
                          (i) In general.--No stock shall be 
                        taken into account for purposes of 
                        applying this paragraph unless it is 
                        non-readily-tradable stock (within the 
                        meaning of paragraph (7)(B)).
                          (ii) Special application where only 
                        holding company stock is non-readily-
                        tradable stock.--If the requirements of 
                        clause (i) are not met, but all of the 
                        stock of each holding company taken 
                        into account is non-readily-tradable, 
                        then this paragraph shall apply, but 
                        subsection (a)(1) shall be applied by 
                        substituting ``5'' for ``10''.
                  (C) Application of voting stock requirement 
                of paragraph (1)(C)(i).--For purposes of clause 
                (i) of paragraph (1)(C), the deemed stock 
                resulting from the application of subparagraph 
                (A) shall be treated as voting stock to the 
                extent that voting stock in the holding company 
                owns directly (or through the voting stock of 1 
                or more other holding companies) voting stock 
                in the business company.
                  (D) Definitions.--For purposes of this 
                paragraph--
                          (i) Holding company.--The term 
                        ``holding company'' means any 
                        corporation holding stock in another 
                        corporation.
                          (ii) Business company.--The term 
                        ``business company'' means any 
                        corporation carrying on a trade or 
                        business.
          (9) Deferral not available for passive assets.--
                  (A) In general.--For purposes of subsection 
                (a)(1) and determining the closely held 
                business amount (but not for purposes of 
                subsection (g)), the value of any interest in a 
                closely held business shall not include the 
                value of that portion of such interest which is 
                attributable to passive assets held by the 
                business.
                  (B) Passive asset defined.--For purposes of 
                this paragraph--
                          (i) In general.--The term ``passive 
                        asset'' means any asset other than an 
                        asset used in carrying on a trade or 
                        business.
                          (ii) Stock treated as passive 
                        asset.--The term ``passive asset'' 
                        includes any stock in another 
                        corporation unless--
                                  (I) such stock is treated as 
                                held by the decedent by reason 
                                of an election under paragraph 
                                (8), and
                                  (II) such stock qualified 
                                under subsection (a)(1).
                          (iii) Exception for active 
                        corporations.--If--
                                  (I) a corporation owns 20 
                                percent or more in value of the 
                                voting stock of another 
                                corporation, or such other 
                                corporation has 45 or fewer 
                                shareholders, and
                                  (II) 80 percent or more of 
                                the value of the assets of each 
                                such corporation is 
                                attributable to assets used in 
                                carrying on a trade or 
                                business,
                 then such corporations shall be treated as 1 
                corporation for purposes of clause (ii). For 
                purposes of applying subclause (II) to the 
                corporation holding the stock of the other 
                corporation, such stock shall not be taken into 
                account.
          (10) Stock in qualifying lending and finance business 
        treated as stock in an active trade or business 
        company.--
                  (A) In general.--If the executor elects the 
                benefits of this paragraph, then--
                          (i) Stock in qualifying lending and 
                        finance business treated as stock in an 
                        active trade or business company.--For 
                        purposes of this section, any asset 
                        used in a qualifying lending and 
                        finance business shall be treated as an 
                        asset which is used in carrying on a 
                        trade or business.
                          (ii) 5-year deferral for principal 
                        not to apply.--The executor shall be 
                        treated as having selected under 
                        subsection (a)(3) the date prescribed 
                        by section 6151(a).
                          (iii) 5 equal installments allowed.--
                        For purposes of applying subsection 
                        (a)(1), ``5'' shall be substituted for 
                        ``10''.
                  (B) Definitions.--For purposes of this 
                paragraph--
                          (i) Qualifying lending and finance 
                        business.--The term ``qualifying 
                        lending and finance business'' means a 
                        lending and finance business, if--
                                  (I) based on all the facts 
                                and circumstances immediately 
                                before the date of the 
                                decedent's death, there was 
                                substantial activity with 
                                respect to the lending and 
                                finance business, or
                                  (II) during at least 3 of the 
                                5 taxable years ending before 
                                the date of the decedent's 
                                death, such business had at 
                                least 1 full-time employee 
                                substantially all of whose 
                                services were the active 
                                management of such business, 10 
                                full-time, nonowner employees 
                                substantially all of whose 
                                services were directly related 
                                to such business, and 
                                $5,000,000 in gross receipts 
                                from activities described in 
                                clause (ii).
                          (ii) Lending and finance business.--
                        The term ``lending and finance 
                        business'' means a trade or business 
                        of--
                                  (I) making loans,
                                  (II) purchasing or 
                                discounting accounts 
                                receivable, notes, or 
                                installment obligations,
                                  (III) engaging in rental and 
                                leasing of real and tangible 
                                personal property, including 
                                entering into leases and 
                                purchasing, servicing, and 
                                disposing of leases and leased 
                                assets,
                                  (IV) rendering services or 
                                making facilities available in 
                                the ordinary course of a 
                                lending or finance business, 
                                and
                                  (V) rendering services or 
                                making facilities available in 
                                connection with activities 
                                described in subclauses (I) 
                                through (IV) carried on by the 
                                corporation rendering services 
                                or making facilities available, 
                                or another corporation which is 
                                a member of the same affiliated 
                                group (as defined in section 
                                1504 without regard to section 
                                1504(b)(3)).
                          (iii) Limitation.--The term 
                        ``qualifying lending and finance 
                        business'' shall not include any 
                        interest in an entity, if the stock or 
                        debt of such entity or a controlled 
                        group (as defined in section 267(f)(1)) 
                        of which such entity was a member was 
                        readily tradable on an established 
                        securities market or secondary market 
                        (as defined by the Secretary) at any 
                        time within 3 years before the date of 
                        the decedent's death.
  (c) Special rule for interest in 2 or more closely held 
businesses.--For purposes of this section, interest in 2 or 
more closely held businesses, with respect to each of which 
there is included in determining the value of the decedent's 
gross estate 20 percent or more of the total value of each such 
business, shall be treated as an interest in a single closely 
held business. For purposes of the 20-percent requirement of 
the preceding sentence, an interest in a closely held business 
which represents the surviving spouse's interest in property 
held by the decedent and the surviving spouse as community 
property or as joint tenants, tenants by the entirety, or 
tenants in common shall be treated as having been included in 
determining the value of the decedent's gross estate.
  (d) Election.--Any election under subsection (a) shall be 
made not later than the time prescribed by section 6075(a) for 
filing the return of tax imposed by section 2001 (including 
extensions thereof), and shall be made in such manner as the 
Secretary shall by regulations prescribe. If an election under 
subsection (a) is made, the provisions of this subtitle shall 
apply as though the Secretary were extending the time for 
payment of the tax.
  (e) Proration of deficiency to installments.--If an election 
is made under subsection (a) to pay any part of the tax imposed 
by section 2001 in installments and a deficiency has been 
assessed, the deficiency shall (subject to the limitation 
provided by subsection (a)(2)) be prorated to the installments 
payable under subsection (a). The part of the deficiency so 
prorated to any installment the date for payment of which has 
not arrived shall be collected at the same time as, and as a 
part of, such installment. The part of the deficiency so 
prorated to any installment the date for payment of which has 
arrived shall be paid upon notice and demand from the 
Secretary. This subsection shall not apply if the deficiency is 
due to negligence, to intentional disregard of rules and 
regulations, or to fraud with intent to evade tax.
  (f) Time for payment of interest.--If the time for payment of 
any amount of tax has been extended under this section--
          (1) Interest for first 5 years.--Interest payable 
        under section 6601 of any unpaid portion of such amount 
        attributable to the first 5 years after the date 
        prescribed by section 6151(a) for payment of the tax 
        shall be paid annually.
          (2) Interest for periods after first 5 years.--
        Interest payable under section 6601 on any unpaid 
        portion of such amount attributable to any period after 
        the 5-year period referred to in paragraph (1) shall be 
        paid annually at the same time as, and as a part of, 
        each installment payment of the tax.
          (3) Interest in the case of certain deficiencies.--In 
        the case of a deficiency to which subsection (e) 
        applies which is assessed after the close of the 5-year 
        period referred to in paragraph (1), interest 
        attributable to such 5-year period, and interest 
        assigned under paragraph (2) to any installment the 
        date for payment of which has arrived on or before the 
        date of the assessment of the deficiency, shall be paid 
        upon notice and demand from the Secretary.
          (4) Selection of shorter period.--If the executor has 
        selected a period shorter than 5 years under subsection 
        (a)(3), such shorter period shall be substituted for 5 
        years in paragraphs (1), (2), and (3) of this 
        subsection.
  (g) Acceleration of payment.--
          (1) Disposition of interest; withdrawal of funds from 
        business.--
                  (A) If--
                          (i)(I) any portion of an interest in 
                        a closely held business which qualifies 
                        under subsection (a)(1) is distributed, 
                        sold, exchanged, or otherwise disposed 
                        of, or
                          (II) money and other property 
                        attributable to such an interest is 
                        withdrawn from such trade or business, 
                        and
                          (ii) the aggregate of such 
                        distributions, sales, exchanges, or 
                        other dispositions and withdrawals 
                        equals or exceeds 50 percent of the 
                        value of such interest,
                then the extension of time for payment of tax 
                provided in subsection (a) shall cease to 
                apply, and the unpaid portion of the tax 
                payable in installments shall be paid upon 
                notice and demand from the Secretary.
                  (B) In the case of a distribution in 
                redemption of stock to which section 303 (or so 
                much of section 304 as relates to section 303) 
                applies--
                          (i) the redemption of such stock, and 
                        the withdrawal of money and other 
                        property distributed in such 
                        redemption, shall not be treated as a 
                        distribution or withdrawal for purposes 
                        of subparagraph (A), and
                          (ii) for purposes of subparagraph 
                        (A), the value of the interest in the 
                        closely held business shall be 
                        considered to be such value reduced by 
                        the value of the stock redeemed.
                This subparagraph shall apply only if, on or 
                before the date prescribed by subsection (a)(3) 
                for the payment of the first installment which 
                becomes due after the date of the distribution 
                (or, if earlier, on or before the day which is 
                1 year after the date of the distribution), 
                there is paid an amount of the tax imposed by 
                section 2001 not less than the amount of money 
                and other property distributed.
                  (C) Subparagraph (A)(i) does not apply to an 
                exchange of stock pursuant to a plan of 
                reorganization described in subparagraph (D), 
                (E), or (F) of section 368(a)(1) nor to an 
                exchange to which section 355 (or so much of 
                section 356 as relates to section 355) applies; 
                but any stock received in such an exchange 
                shall be treated for purposes of subparagraph 
                (A)(i) as an interest qualifying under 
                subsection (a)(1).
                  (D) Subparagraph (A)(i) does not apply to a 
                transfer of property of the decedent to a 
                person entitled by reason of the decedent's 
                death to receive such property under the 
                decedent's will, the applicable law of descent 
                and distribution, or a trust created by the 
                decedent. A similar rule shall apply in the 
                case of a series of subsequent transfers of the 
                property by reason of death so long as each 
                transfer is to a member of the family (within 
                the meaning of section 267(c)(4)) of the 
                transferor in such transfer.
                  (E) Changes in interest in holding company.--
                If any stock in a holding company is treated as 
                stock in a business company by reason of 
                subsection (b)(8)(A)--
                          (i) any disposition of any interest 
                        in such stock in such holding company 
                        which was included in determining the 
                        gross estate of the decedent, or
                          (ii) any withdrawal of any money or 
                        other property from such holding 
                        company attributable to any interest 
                        included in determining the gross 
                        estate of the decedent,
                shall be treated for purposes of subparagraph 
                (A) as a disposition of (or a withdrawal with 
                respect to) the stock qualifying under 
                subsection (a)(1).
                  (F) Changes in interest in business 
                company.--If any stock in a holding company is 
                treated as stock in a business company by 
                reason of subsection (b)(8)(A)--
                          (i) any disposition of any interest 
                        in such stock in the business company 
                        by such holding company, or
                          (ii) any withdrawal of any money or 
                        other property from such business 
                        company attributable to such stock by 
                        such holding company owning such stock,
                shall be treated for purposes of subparagraph 
                (A) as a disposition of (or a withdrawal with 
                respect to) the stock qualifying under 
                subsection (a)(1).
          (2) Undistributed income of estate.--
                  (A) If an election is made under this section 
                and the estate has undistributed net income for 
                any taxable year ending on or after the due 
                date for the first installment, the executor 
                shall, on or before the date prescribed by law 
                for filing the income tax return for such 
                taxable year (including extensions thereof), 
                pay an amount equal to such undistributed net 
                income in liquidation of the unpaid portion of 
                the tax payable in installments.
                  (B) For purposes of subparagraph (A), the 
                undistributed net income of the estate for any 
                taxable year is the amount by which the 
                distributable net income of the estate for such 
                taxable year (as defined in section 643) 
                exceeds the sum of--
                          (i) the amounts for such taxable year 
                        specified in paragraphs (1) and (2) of 
                        section 661(a) (relating to deductions 
                        for distributions, etc.);
                          (ii) the amount of tax imposed for 
                        the taxable year on the estate under 
                        chapter 1; and
                          (iii) the amount of the tax imposed 
                        by section 2001 (including interest) 
                        paid by the executor during the taxable 
                        year (other than any amount paid 
                        pursuant to this paragraph).
                  (C) For purposes of this paragraph, if any 
                stock in a corporation is treated as stock in 
                another corporation by reason of subsection 
                (b)(8)(A), any dividends paid by such other 
                corporation to the corporation shall be treated 
                as paid to the estate of the decedent to the 
                extent attributable to the stock qualifying 
                under subsection (a)(1).
          (3) Failure to make payment of principal or 
        interest.--
                  (A) In general.--Except as provided in 
                subparagraph (B), if any payment of principal 
                or interest under this section is not paid on 
                or before the date fixed for its payment by 
                this section (including any extension of time), 
                the unpaid portion of the tax payable in 
                installments shall be paid upon notice and 
                demand from the Secretary.
                  (B) Payment within 6 months.--If any payment 
                of principal or interest under this section is 
                not paid on or before the date determined under 
                subparagraph (A) but is paid within 6 months of 
                such date--
                          (i) the provisions of subparagraph 
                        (A) shall not apply with respect to 
                        such payment,
                          (ii) the provisions of section 
                        6601(j) shall not apply with respect to 
                        the determination of interest on such 
                        payment, and
                          (iii) there is imposed a penalty in 
                        an amount equal to the product of--
                                  (I) 5 percent of the amount 
                                of such payment, multiplied by
                                  (II) the number of months (or 
                                fractions thereof) after such 
                                date and before payment is 
                                made.
                The penalty imposed under clause (iii) shall be 
                treated in the same manner as a penalty imposed 
                under subchapter B of chapter 68.
  (h) Election in case of certain deficiencies.--
          (1) In general.--If--
                  (A) a deficiency in the tax imposed by 
                section 2001 is assessed,
                  (B) the estate qualifies under subsection 
                (a)(1), and
                  (C) the executor has not made an election 
                under subsection (a),
        the executor may elect to pay the deficiency in 
        installments. This subsection shall not apply if the 
        deficiency is due to negligence, to intentional 
        disregard of rules and regulations, or to fraud with 
        intent to evade tax.
          (2) Time of election.--An election under this 
        subsection shall be made not later than 60 days after 
        issuance of notice and demand by the Secretary for the 
        payment of the deficiency, and shall be made in such 
        manner as the Secretary shall by regulations prescribe.
          (3) Effect of election on payment.--If an election is 
        made under this subsection, the deficiency shall 
        (subject to the limitation provided by subsection 
        (a)(2)) be prorated to the installments which would 
        have been due if an election had been timely made under 
        subsection (a) at the time the estate tax return was 
        filed. The part of the deficiency so prorated to any 
        installment the date for payment of which would have 
        arrived shall be paid at the time of the making of the 
        election under this subsection. The portion of the 
        deficiency so prorated to installments the date for 
        payment of which would not have so arrived shall be 
        paid at the time such installments would have been due 
        if such an election had been made.
  (i) Special rule for certain direct skips.--To the extent 
that an interest in a closely held business is the subject of a 
direct skip (within the meaning of section 2612(c)) occurring 
at the same time as and as a result of the decedent's death, 
then for purposes of this section any tax imposed by section 
2601 on the transfer of such interest shall be treated as if it 
were additional tax imposed by section 2001.
  (j) Regulations.--The Secretary shall prescribe such 
regulations as may be necessary to the application of this 
section.
  (k) Cross references.--
          (1) Security.--For authority of the Secretary to 
        require security in the case of an extension under this 
        section, see section 6165.
          (2) Lien.--For special lien (in lieu of bond) in the 
        case of an extension under this section, see section 
        6324A.
          (3) Period of limitation.--For extension of the 
        period of limitation in the case of an extension under 
        this section, see section 6503(d).
          (4) Interest.--For provisions relating to interest on 
        tax payable in installments under this section, see 
        subsection (j) of section 6601.
          (5) Transfers within 3 years of death.--For special 
        rule for qualifying an estate under this section where 
        property has been transferred within 3 years of 
        decedent's death, see section 2035(c)(2).

           *       *       *       *       *       *       *

CHAPTER 63--ASSESSMENT

           *       *       *       *       *       *       *

  Subchapter B--DEFICIENCY PROCEDURES IN THE CASE OF INCOME, ESTATE, 
GIFT, AND CERTAIN EXCISE TAXES

           *       *       *       *       *       *       *

SEC. 6212. NOTICE OF DEFICIENCY.

  (a) In general.--If the Secretary determines that there is a 
deficiency in respect of any tax imposed by subtitles A or B or 
chapter 41, 42, 43, or 44 he is authorized to send notice of 
such deficiency to the taxpayer by certified mail or registered 
mail. Such notice shall include a notice to the taxpayer of the 
taxpayer's right to contact a local office of the taxpayer 
advocate and the location and phone number of the appropriate 
office.
  (b) Address for notice of deficiency.--
          (1) Income and gift taxes and certain excise taxes.--
        In the absence of notice to the Secretary under section 
        6903 of the existence of a fiduciary relationship, 
        notice of a deficiency in respect of a tax imposed by 
        subtitle A, chapter 12, chapter 41, chapter 42, chapter 
        43, or chapter 44 if mailed to the taxpayer at his last 
        known address, shall be sufficient for purposes of 
        subtitle A, chapter 12, chapter 41, chapter 42, chapter 
        43, chapter 44, and this chapter even if such taxpayer 
        is deceased, or is under a legal disability, or, in the 
        case of a corporation, has terminated its existence.
          (2) Joint income tax return.--In the case of a joint 
        income tax [return filed by husband and wife] return , 
        such notice of deficiency may be a single joint notice, 
        except that if the Secretary has been notified by 
        either spouse that separate residences have been 
        established, then, in lieu of the single joint notice, 
        a duplicate original of the joint notice shall be sent 
        by certified mail or registered mail to each spouse at 
        [his last known address] the last known address of such 
        spouse .
          (3) Estate tax.--In the absence of notice to the 
        Secretary under section 6903 of the existence of a 
        fiduciary relationship, notice of a deficiency in 
        respect of a tax imposed by chapter 11, if addressed in 
        the name of the decedent or other person subject to 
        liability and mailed to his last known address, shall 
        be sufficient for purposes of chapter 11 and of this 
        chapter.
  (c) Further deficiency letters restricted.--
          (1) General rule.--If the Secretary has mailed to the 
        taxpayer a notice of deficiency as provided in 
        subsection (a), and the taxpayer files a petition with 
        the Tax Court within the time prescribed in section 
        6213(a), the Secretary shall have no right to determine 
        any additional deficiency of income tax for the same 
        taxable year, of gift tax for the same calendar year, 
        of estate tax in respect of the taxable estate of the 
        same decedent, of chapter 41 tax for the same taxable 
        year, of chapter 43 tax for the same taxable year, of 
        chapter 44 tax for the same taxable year, of section 
        4940 tax for the same taxable year, or of chapter 42 
        tax, (other than under section 4940) with respect to 
        any act (or failure to act) to which such petition 
        relates, except in the case of fraud, and except as 
        provided in section 6214(a) (relating to assertion of 
        greater deficiencies before the Tax Court), in section 
        6213(b)(1) (relating to mathematical or clerical 
        errors), in section 6851 or 6852 (relating to 
        termination assessments), or in section 6861(c) 
        (relating to the making of jeopardy assessments).
          (2) Cross references.--For assessment as a deficiency 
        notwithstanding the prohibition of further deficiency 
        letters, in the case of--
                          (A) Deficiency attributable to change 
                        of treatment with respect to itemized 
                        deductions, see section 63(e)(3).
                          (B) Deficiency attributable to gain 
                        on involuntary conversion, see section 
                        1033(a)(2)(C) and (D).
                          (C) Deficiency attributable to 
                        activities not engaged in for profit, 
                        see section 183(e)(4).
        For provisions allowing determination of tax in title 
        11 cases, see section 505(a) of title 11 of the United 
        States Code.
  (d) Authority to rescind notice of deficiency with taxpayer's 
consent.--The Secretary may, with the consent of the taxpayer, 
rescind any notice of deficiency mailed to the taxpayer. Any 
notice so rescinded shall not be treated as a notice of 
deficiency for purposes of subsection (c)(1) (relating to 
further deficiency letters restricted), section 6213(a) 
(relating to restrictions applicable to deficiencies; petition 
to Tax Court), and section 6512(a) (relating to limitations in 
case of petition to Tax Court), and the taxpayer shall have no 
right to file a petition with the Tax Court based on such 
notice. Nothing in this subsection shall affect any suspension 
of the running of any period of limitations during any period 
during which the rescinded notice was outstanding.

           *       *       *       *       *       *       *

CHAPTER 66--LIMITATIONS

           *       *       *       *       *       *       *

Subchapter A--LIMITATIONS ON ASSESSMENT AND COLLECTION

           *       *       *       *       *       *       *

SEC. 6504. CROSS REFERENCES.

  For limitation period in case of--
          (1) Adjustments to accrued foreign taxes, see section 
        905(c).
          (2) Change of treatment with respect to itemized 
        deductions where taxpayer and [his spouse] the 
        taxpayer's spouse make separate returns, see section 
        63(e)(3).
          (3) Involuntary conversion of property, see section 
        1033(a)(2)(C) and (D).
          (4) Application by fiduciary for discharge from 
        personal liability for estate tax, see section 2204.
          (5) Insolvent banks and trust companies, see section 
        7507.
          (6) Service in a combat zone, etc., see section 7508.
          (7) Claims against transferees and fiduciaries, see 
        chapter 71.
          (8) Assessments to recover excessive amounts paid 
        under section 6420 (relating to gasoline used on 
        farms), 6421 (relating to gasoline used for certain 
        nonhighway purposes or by local transit systems), or 
        6427 (relating to fuels not used for taxable purposes) 
        and assessments of civil penalties under section 6675 
        for excessive claims under section 6420, 6421, or 6427, 
        see section 6206.
          (9) Assessment and collection of interest, see 
        section 6601(g).
          (10) Assessment of civil penalties under section 6694 
        or 6695, see section 6696(d)(1).

           *       *       *       *       *       *       *

CHAPTER 76--JUDICIAL PROCEEDINGS

           *       *       *       *       *       *       *

Subchapter B--PROCEEDINGS BY TAXPAYERS AND THIRD PARTIES

           *       *       *       *       *       *       *

SEC. 7428. DECLARATORY JUDGMENTS RELATING TO STATUS AND CLASSIFICATION 
                    OF ORGANIZATIONS UNDER SECTION 501(C)(3), ETC.

  (a) Creation of remedy.--In a case of actual controversy 
involving--
          (1) a determination by the Secretary--
                  (A) with respect to the initial qualification 
                or continuing qualification of an organization 
                as an organization described in section 
                501(c)(3) which is exempt from tax under 
                section 501(a) or as an organization described 
                in section 170(c)(2),
                  (B) with respect to the initial 
                classification or continuing classification of 
                an organization as a private foundation (as 
                defined in section 509(a)),
                  (C) with respect to the initial 
                classification or continuing classification of 
                an organization as a private operating 
                foundation (as defined in section 4942(j)(3)),
                  (D) with respect to the initial 
                classification or continuing classification of 
                a cooperative as an organization described in 
                section 521(b) which is exempt from tax under 
                section 521(a), or
                  (E) with respect to the initial qualification 
                or continuing qualification of an organization 
                as an organization described in section 501(c) 
                (other than paragraph (3)) or 501(d) and exempt 
                from tax under section 501(a), or
          (2) a failure by the Secretary to make a 
        determination with respect to an issue referred to in 
        paragraph (1),
upon the filing of an appropriate pleading, the United States 
Tax Court, the United States Court of Federal Claims, or the 
district court of the United States for the District of 
Columbia may make a declaration with respect to such initial 
qualification or continuing qualification or with respect to 
such initial classification or continuing classification. Any 
such declaration shall have the force and effect of a decision 
of the Tax Court or a final judgment or decree of the district 
court or the Court of Federal Claims, as the case may be, and 
shall be reviewable as such. For purposes of this section, a 
determination with respect to a continuing qualification or 
continuing classification includes any revocation of or other 
change in a qualification or classification.
  (b) Limitations.--
          (1) Petitioner.--A pleading may be filed under this 
        section only by the organization the qualification or 
        classification of which is at issue.
          (2) Exhaustion of administrative remedies.--A 
        declaratory judgment or decree under this section shall 
        not be issued in any proceeding unless the Tax Court, 
        the Court of Federal Claims, or the district court of 
        the United States for the District of Columbia 
        determines that the organization involved has exhausted 
        administrative remedies available to it within the 
        Internal Revenue Service. An organization requesting 
        the determination of an issue referred to in subsection 
        (a)(1) shall be deemed to have exhausted its 
        administrative remedies with respect to a failure by 
        the Secretary to make a determination with respect to 
        such issue at the expiration of 270 days after the date 
        on which the request for such determination was made if 
        the organization has taken, in a timely manner, all 
        reasonable steps to secure such determination.
          (3) Time for bringing action.--If the Secretary sends 
        by certified or registered mail notice of his 
        determination with respect to an issue referred to in 
        subsection (a)(1) to the organization referred to in 
        paragraph (1), no proceeding may be initiated under 
        this section by such organization unless the pleading 
        is filed before the 91st day after the date of such 
        mailing.
          (4) Nonapplication for certain revocations.--No 
        action may be brought under this section with respect 
        to any revocation of status described in section 
        6033(j)(1).
  (c) Validation of certain contributions made during pendency 
of proceedings.--
          (1) In general.--If--
                  (A) the issue referred to in subsection 
                (a)(1) involves the revocation of a 
                determination that the organization is 
                described in section 170(c)(2),
                  (B) a proceeding under this section is 
                initiated within the time provided by 
                subsection (b)(3), and
                  (C) either--
                          (i) a decision of the Tax Court has 
                        become final (within the meaning of 
                        section 7481), or
                          (ii) a judgment of the district court 
                        of the United States for the District 
                        of Columbia has been entered, or
                          (iii) a judgment of the Court of 
                        Federal Claims has been entered,
                and such decision or judgment, as the case may 
                be, determines that the organization was not 
                described in section 170(c)(2),
        then, notwithstanding such decision or judgment, such 
        organization shall be treated as having been described 
        in section 170(c)(2) for purposes of section 170 for 
        the period beginning on the date on which the notice of 
        the revocation was published and ending on the date on 
        which the court first determined in such proceeding 
        that the organization was not described in section 
        170(c)(2).
          (2) Limitation.--Paragraph (1) shall apply only--
                  (A) with respect to individuals, and only to 
                the extent that the aggregate of the 
                contributions made by any individual to or for 
                the use of the organization during the period 
                specified in paragraph (1) does not exceed 
                $1,000 (for this purpose treating a [husband 
                and wife] married couple as one contributor), 
                and
                  (B) with respect to organizations described 
                in section 170(c)(2) which are exempt from tax 
                under section 501(a) (for this purpose 
                excluding any such organization with respect to 
                which there is pending a proceeding to revoke 
                the determination under section 170(c)(2)).
          (3) Exception.--This subsection shall not apply to 
        any individual who was responsible, in whole or in 
        part, for the activities (or failures to act) on the 
        part of the organization which were the basis for the 
        revocation.
  (d) Subpoena power for district court for District of 
Columbia.--In any action brought under this section in the 
district court of the United States for the District of 
Columbia, a subpoena requiring the attendance of a witness at a 
trial or hearing may be served at any place in the United 
States.

           *       *       *       *       *       *       *

Subchapter C--THE TAX COURT

           *       *       *       *       *       *       *

PART I--ORGANIZATION AND JURISDICTION

           *       *       *       *       *       *       *

SEC. 7448. ANNUITIES TO SURVIVING SPOUSES AND DEPENDENT CHILDREN OF 
                    JUDGES AND SPECIAL TRIAL JUDGES.

  (a) Definitions.--For purposes of this section--
          (1) The term ``Tax Court'' means the United States 
        Tax Court.
          (2) The term ``judge'' means the chief judge or a 
        judge of the Tax Court, including any individual 
        receiving retired pay (or compensation in lieu of 
        retired pay) under section 7447 whether or not 
        performing judicial duties pursuant to section 7447(c).
          (3) The term ``chief judge'' means the chief judge of 
        the Tax Court.
          (4) The term ``judge's salary'' means the salary of a 
        judge received under section 7443(c), retired pay 
        received under section 7447(d), and compensation (in 
        lieu of retired pay) received under section 7447(c).
          (5) The term ``special trial judge'' means a judicial 
        officer appointed pursuant to section 7443A, including 
        any individual receiving an annuity under chapter 83 or 
        84 of title 5, United States Code.
          (6) The term ``special trial judge's salary'' means 
        the salary of a special trial judge received under 
        section 7443A(d), any amount received as an annuity 
        under chapter 83 or 84 of title 5, United States Code.
          (7) The term ``survivors annuity fund'' means the Tax 
        Court judges survivors annuity fund established by this 
        section.
          (8) The term ``surviving spouse'' means a surviving 
        spouse of an individual, who either (A) shall have been 
        married to such individual for at least 2 years 
        immediately preceding [his death] the individual's 
        death or (B) is a parent of issue by such marriage, and 
        who has not remarried.
          (9) The term ``dependent child'' means an unmarried 
        child, including a dependent stepchild or an adopted 
        child, who is under the age of 18 years or who because 
        of physical or mental disability is incapable of self-
        support.
  (b) Election.--
          (1) Judges.--Any judge may by written election filed 
        while he is a judge (except that in the case of an 
        individual who is not reappointed following expiration 
        of his term of office, it may be made at any time 
        before the day after the day on which his successor 
        takes office) bring himself within the purview of this 
        section. In the case of any judge other than the chief 
        judge the election shall be filed with the chief judge; 
        in the case of the chief judge the election shall be 
        filed as prescribed by the Tax Court.
          (2) Special trial judges.--Any special trial judge 
        may by written election filed with the chief judge 
        bring himself or herself within the purview of this 
        section. Such election shall be filed not later than 
        the later of 6 months after--
                  (A) 6 months after the date of the enactment 
                of this paragraph,
                  (B) the date the judge takes office, or
                  (C) the date the judge marries.
  (c) Survivors annuity fund.--
          (1) Salary deductions.--There shall be deducted and 
        withheld from the salary of each judge or special trial 
        judge electing under subsection (b) a sum equal to 3.5 
        percent of such judge's or special trial judge's 
        salary. The amounts so deducted and withheld from such 
        judge's or special trial judge's salary shall, in 
        accordance with such procedure as may be prescribed by 
        the Comptroller General of the United States, be 
        deposited in the Treasury of the United States to the 
        credit of a fund to be known as the ``Tax Court 
        judicial officers survivors annuity fund'' and said 
        fund is appropriated for the payment of annuities, 
        refunds, and allowances as provided by this section. 
        Each judge or special trial judge electing under 
        subsection (b) shall be deemed thereby to consent and 
        agree to the deductions from his salary as provided in 
        this subsection, and payment less such deductions shall 
        be a full and complete discharge and acquittance of all 
        claims and demands whatsoever for all judicial services 
        rendered by such judge or special trial judge during 
        the period covered by such payment, except the right to 
        the benefits to which he or his survivors shall be 
        entitled under the provisions of this section.
          (2) Appropriations where unfunded liability.--
                  (A) In general.--Not later than the close of 
                each fiscal year, there shall be deposited in 
                the Treasury of the United States to the credit 
                of the survivors annuity fund, in accordance 
                with such procedures as may be prescribed by 
                the Comptroller General of the United States, 
                amounts required to reduce to zero the unfunded 
                liability (if any) of such fund. Subject to 
                appropriation Acts, such deposits shall be 
                taken from sums available for such fiscal year 
                for the payment of amounts described in 
                subsection (a)(4) and section 7443A(d), and 
                shall immediately become an integrated part of 
                such fund.
                  (B) Exception.--The amount required by 
                subparagraph (A) to be deposited in any fiscal 
                year shall not exceed an amount equal to 11 
                percent of the aggregate amounts described in 
                subsection (a)(4) and (a)(6) paid during such 
                fiscal year.
                  (C) Unfunded liability defined.--For purposes 
                of subparagraph (A), the term ``unfunded 
                liability'' means the amount estimated by the 
                Secretary to be equal to the excess (as of the 
                close of the fiscal year involved) of--
                          (i) the present value of all benefits 
                        payable from the survivors annuity fund 
                        (determined on an annual basis in 
                        accordance with section 9503 of title 
                        31, United States Code), over
                          (ii) the sum of--
                                  (I) the present values of 
                                future deductions under 
                                subsection (c) and future 
                                deposits under subsection (d), 
                                plus
                                  (II) the balance in such fund 
                                as of the close of such fiscal 
                                year.
                  (D) Amounts not credited to individual 
                accounts.--Amounts appropriated pursuant to 
                this paragraph shall not be credited to the 
                account of any individual for purposes of 
                subsection (g).
  (d) Deposits in survivors annuity fund.--Each judge or 
special trial judge electing under subsection (b) shall 
deposit, with interest at 3 percent per annum, compounded on 
December 31 of each year, to the credit of the survivors 
annuity fund, a sum equal to 3.5 percent of [his] the 
individual's judge's or special trial judge's salary and of 
[his] the individual's basic salary, pay, or compensation for 
service as a Senator, Representative, Delegate, or Resident 
Commissioner in Congress, and for any other civilian service 
within the purview of section 8332 of title 5 of the United 
States Code. Each such judge or special trial judge may elect 
to make such deposits in installments during the continuance of 
[his] the individual's service as a judge or special trial 
judge in such amount and under such conditions as may be 
determined in each instance by the chief judge. Notwithstanding 
the failure of a judge or special trial judge to make such 
deposit, credit shall be allowed for the service rendered, but 
the annuity of the surviving spouse of such judge or special 
trial judge shall be reduced by an amount equal to 10 percent 
of the amount of such deposit, computed as of the date of the 
death of such judge or special trial judge, unless such 
surviving spouse shall elect to eliminate such service entirely 
from credit under subsection (n), except that no deposit shall 
be required from a judge or special trial judge for any year 
with respect to which deductions from [his] the individual's 
salary were actually made under the civil service retirement 
laws and no deposit shall be required for any honorable service 
in the Army, Navy, Air Force, Marine Corps, or Coast Guard of 
the United States.
  (e) Investment of survivors annuity fund.--The Secretary of 
the Treasury shall invest from time to time, in interest-
bearing securities of the United States or Federal farm loan 
bonds, such portions of the survivors annuity fund as in his 
judgment may not be immediately required for the payment of the 
annuities, refunds, and allowances as provided in this section. 
The income derived from such investments shall constitute a 
part of said fund for the purpose of paying annuities and of 
carrying out the provisions of subsections (g), (h), and (j).
  (f) Crediting of deposits.--The amount deposited by or 
deducted and withheld from the salary of each judge or special 
trial judge electing to bring himself within the purview of 
this section for credit to the survivors annuity fund shall be 
credited to an individual account of such judge or special 
trial judge.
  (g) Termination.--If the service of any judge or special 
trial judge electing under subsection (b) terminates other than 
pursuant to the provisions of section 7447 or if any judge or 
special trial judge ceases to be married after making the 
election under subsection (b) and revokes (in a writing filed 
as provided in subsection (b)) such election, the amount 
credited to his individual account, together with interest at 3 
percent per annum, compounded on December 31 of each year, to 
the date of his relinquishment of office, shall be returned to 
him. For the purpose of this section, the service of any judge 
or special trial judge electing under subsection (b) who is not 
reappointed following expiration of his term but who, at the 
time of such expiration, is eligible for and elects to receive 
retired pay under section 7447 shall be deemed to have 
terminated pursuant to said section.
  (h) Entitlement to annuity.--In case any judge or special 
trial judge electing under subsection (b) shall die while a 
judge or special trial judge after having rendered at least 5 
years of civilian service computed as prescribed in subsection 
(n), for the last 5 years of which the salary deductions 
provided for by subsection (c)(1) or the deposits required by 
subsection (d) have actually been made or the salary deductions 
required by the civil service retirement laws have actually 
been made--
          (1) if such judge or special trial judge is survived 
        by a surviving spouse but not by a dependent child, 
        there shall be paid to such surviving spouse an annuity 
        beginning with the day of the death of the judge or 
        special trial judge or following the surviving spouse's 
        attainment of the age of 50 years, whichever is the 
        later, in an amount computed as provided in subsection 
        (m); or
          (2) if such judge or special trial judge is survived 
        by a surviving spouse and a dependent child or 
        children, there shall be paid to such surviving spouse 
        an immediate annuity in an amount computed as provided 
        in subsection (m), and there shall also be paid to or 
        on behalf of each such child an immediate annuity equal 
        to the lesser of--
                  (A) 10 percent of the average annual salary 
                of such judge or special trial judge 
                (determined in accordance with subsection (m)), 
                or
                  (B) 20 percent of such average annual salary, 
                divided by the number of such children; or
          (3) if such judge or special trial judge leaves no 
        surviving spouse but leaves a surviving dependent child 
        or children, there shall be paid to or on behalf of 
        each such child an immediate annuity equal to the 
        lesser of--
                  (A) 20 percent of the average annual salary 
                of such judge or special trial judge 
                (determined in accordance with subsection (m)), 
                or
                  (B) 40 percent of such average annual salary, 
                divided by the number of such children.
The annuity payable to a surviving spouse under this subsection 
shall be terminable upon such surviving spouse's death or such 
surviving spouse's remarriage before attaining age 55. The 
annuity payable to a child under this subsection shall be 
terminable upon (A) his attaining the age of 18 years, (B) his 
marriage, or (C) his death, whichever first occurs, except that 
if such child is incapable of self-support by reason of mental 
or physical disability his annuity shall be terminable only 
upon death, marriage, or recovery from such disability. In case 
of the death of a surviving spouse of a judge or special trial 
judge leaving a dependent child or children of the judge or 
special trial judge surviving such spouse, the annuity of such 
child or children shall be recomputed and paid as provided in 
paragraph (3) of this subsection. In any case in which the 
annuity of a dependent child is terminated under this 
subsection, the annuities of any remaining dependent child or 
children, based upon the service of the same judge or special 
trial judge, shall be recomputed and paid as though the child 
whose annuity was so terminated had not survived such judge or 
special trial judge.
  (i) Determination of dependency and disability.--Questions of 
dependency and disability arising under this section shall be 
determined by the chief judge subject to review only by the Tax 
Court, the decision of which shall be final and conclusive. The 
chief judge may order or direct at any time such medical or 
other examinations as he shall deem necessary to determine the 
facts relative to the nature and degree of disability of any 
dependent child who is an annuitant or applicant for annuity 
under this section, and may suspend or deny any such annuity 
for failure to submit to any examination so ordered or 
directed.
  (j) Payments in certain cases.--(1) In any case in which--
          (A) a judge or special trial judge electing under 
        subsection (b) shall die while in office (whether in 
        regular active service, retired from such service under 
        section 7447, or receiving any annuity under chapter 83 
        or 84 of title 5, United States Code), before having 
        rendered 5 years of civilian service computed as 
        prescribed in subsection (n), or after having rendered 
        5 years of such civilian service but without a survivor 
        or survivors entitled to annuity benefits provided by 
        subsection (h), or
          (B) the right of all persons entitled to annuity 
        under subsection (h) based on the service of such judge 
        or special trial judge shall terminate before a valid 
        claim therefor shall have been established,
the total amount credited to the individual account of such 
judge or special trial judge, with interest at 3 percent per 
annum, compounded on December 31 of each year, to the date of 
the death of such judge or special trial judge, shall be paid, 
upon the establishment of a valid claim therefor, to the person 
or persons surviving at the date title to the payment arises, 
in the following order of precedence, and such payment shall be 
a bar to recovery by any other person:
          (i) to the beneficiary or beneficiaries whom the 
        judge or special trial judge may have designated by a 
        writing filed prior to his death with the chief judge, 
        except that in the case of the chief judge such 
        designation shall be by a writing filed by him, prior 
        to his death, as prescribed by the Tax Court;
          (ii) if there be no such beneficiary, to the 
        surviving spouse of such judge or special trial judge;
          (iii) if none of the above, to the child or children 
        of such judge or special trial judge and the 
        descendants of any deceased children by representation;
          (iv) if none of the above, to the parents of such 
        judge or special trial judge or the survivor of them;
          (v) if none of the above, to the duly appointed 
        executor or administrator of the estate of such judge 
        or special trial judge; and
          (vi) if none of the above, to such other next of kin 
        of such judge or special trial judge as may be 
        determined by the chief judge to be entitled under the 
        laws of the domicile of such judge or special trial 
        judge at the time of his death.
Determination as to the surviving spouse, child, or parent of a 
judge or special trial judge for the purposes of this paragraph 
shall be made by the chief judge without regard to the 
definitions in paragraphs (8) and (9) of subsection (a).
  (2) In any case in which the annuities of all persons 
entitled to annuity based upon the service of a judge or 
special trial judge shall terminate before the aggregate amount 
of annuity paid equals the total amount credited to the 
individual account of such judge or special trial judge, with 
interest at 3 percent per annum, compounded on December 31 of 
each year, to the date of the death of such judge or special 
trial judge, the difference shall be paid, upon establishment 
of a valid claim therefor, in the order of precedence 
prescribed in paragraph (1).
  (3) Any accrued annuity remaining unpaid upon the termination 
(other than by death) of the annuity of any person based upon 
the service of a judge or special trial judge shall be paid to 
such person. Any accrued annuity remaining unpaid upon the 
death of any person receiving annuity based upon the service of 
a judge or special trial judge shall be paid, upon the 
establishment of a valid claim therefor, in the following order 
of precedence:
          (A) to the duly appointed executor or administrator 
        of the estate of such person;
          (B) if there is no such executor or administrator 
        payment may be made, after the expiration of thirty 
        days from the date of the death of such person, to such 
        individual or individuals as may appear in the judgment 
        of the chief judge to be legally entitled thereto, and 
        such payment shall be a bar to recovery by any other 
        individual.
  (k) Payments to persons under legal disability.--Where any 
payment under this section is to be made to a minor, or to a 
person mentally incompetent or under other legal disability 
adjudged by a court of competent jurisdiction, such payment may 
be made to the person who is constituted guardian or other 
fiduciary by the law of the State of residence of such claimant 
or is otherwise legally vested with the care of the claimant or 
his estate. Where no guardian or other fiduciary of the person 
under legal disability has been appointed under the laws of the 
State of residence of the claimant, the chief judge shall 
determine the person who is otherwise legally vested with the 
care of the claimant or his estate.
  (l) Method of payment of annuities.--Annuities granted under 
the terms of this section shall accrue monthly and shall be due 
and payable in monthly installments on the first business day 
of the month following the month or other period for which the 
annuity shall have accrued. None of the moneys mentioned in 
this section shall be assignable, either in law or in equity, 
or subject to execution, levy, attachment, garnishment, or 
other legal process.
  (m) Computation of annuities.--The annuity of the surviving 
spouse of a judge or special trial judge electing under 
subsection (b) shall be an amount equal to the sum of (1) 1.5 
percent of the average annual salary (whether judge's or 
special trial judge's salary or compensation for other 
allowable service) received by such judge or special trial 
judge for judicial service (including periods in which [he] 
such judge or special trial judge received retired pay under 
section 7447(d) or any annuity under chapter 83 or 84 of title 
5, United States Code) or for any other prior allowable service 
during the period of 3 consecutive years in which [he] such 
judge or special trial judge received the largest such average 
annual salary, multiplied by the sum of [his] the individual's 
years of such judicial service, [his] the individual's years of 
prior allowable service as a Senator, Representative, Delegate, 
or Resident Commissioner in Congress, [his] the individual's 
years of prior allowable service performed as a member of the 
Armed Forces of the United States, and [his] the individual's 
years, not exceeding 15, of prior allowable service performed 
as a congressional employee (as defined in section 2107 of 
title 5 of the United States Code), and (2) three-fourths of 1 
percent of such average annual salary multiplied by [his] the 
individual's years of any other prior allowable service, except 
that such annuity shall not exceed an amount equal to 50 
percent of such average annual salary, nor be less than an 
amount equal to 25 percent of such average annual salary, and 
shall be further reduced in accordance with subsection (d) (if 
applicable). In determining the period of 3 consecutive years 
referred to in the preceding sentence, there may not be taken 
into account any period for which an election under section 
7447(f)(4) is in effect.
  (n) Includible service.--Subject to the provisions of 
subsection (d), the years of service of a judge or special 
trial judge which are allowable as the basis for calculating 
the amount of the annuity of [his] the individual's surviving 
spouse shall include [his] the individual's years of service as 
a member of the United States Board of Tax Appeals, as a judge 
or special trial judge of the Tax Court of the United States, 
and as a judge or special trial judge of the Tax Court, [his] 
the individual's years of service pursuant to any appointment 
under section 7443A, [his] the individual's years of service as 
a Senator, Representative, Delegate, or Resident Commissioner 
in Congress, [his] the individual's years of active service as 
a member of the Armed Forces of the United States not exceeding 
5 years in the aggregate and not including any such service for 
which credit is allowed for the purposes of retirement or 
retired pay under any other provision of law, and [his] the 
individual's years of any other civilian service within the 
purview of section 8332 of title 5 of the United States Code.
  (o) Simultaneous entitlement.--Nothing contained in this 
section shall be construed to prevent a surviving spouse 
eligible therefor from simultaneously receiving an annuity 
under this section and any annuity to which such spouse would 
otherwise be entitled under any other law without regard to 
this section, but in computing such other annuity service used 
in the computation of such spouse's annuity under this section 
shall not be credited.
  (p) Estimates of expenditures.--The chief judge shall submit 
to the President annual estimates of the expenditures and 
appropriations necessary for the maintenance and operation of 
the survivors annuity fund, and such supplemental and 
deficiency estimates as may be required from time to time for 
the same purposes, according to law. The chief judge shall 
cause periodic examinations of the survivors annuity fund to be 
made by an actuary, who may be an actuary employed by another 
department of the Government temporarily assigned for the 
purpose, and whose findings and recommendations shall be 
transmitted by the chief judge to the Tax Court.
  (q) Transitional provision.--In the case of a judge who dies 
within 6 months after the date of enactment of this section 
after having rendered at least 5 years of civilian service 
computed as prescribed in subsection (n), but without having 
made an election as provided in subsection (b), an annuity 
shall be paid to [his] such judge's surviving spouse and 
surviving dependents as is provided in this section, as if such 
judge had elected on the day of [his] such judge's death [to 
bring himself] to come within the purview of this section but 
had not made the deposit provided for by subsection (d). An 
annuity shall be payable under this section computed upon the 
basis of the actual length of service as a judge and other 
allowable service of the judge and subject to the reduction 
required by subsection (d) even though no deposit has been 
made, as required by subsection (h) with respect to any of such 
service.
  (r) Waiver of civil service benefits.--Any judge electing 
under subsection (b) shall, at the time of such election, waive 
all benefits under the civil service retirement laws. Such a 
waiver shall be made in the same manner and shall have the same 
force and effect as an election filed under section 7447(e).
  (s) Increases in survivor annuities.--Each time that an 
increase is made under section 8340(b) of title 5, United 
States Code, in annuities payable under subchapter III of 
chapter 83 of that title, each annuity payable from the 
survivors annuity fund under this section shall be increased at 
the same time by the same percentage by which annuities are 
increased under such section 8340(b).
  (t) Authorization of appropriation.--Funds necessary to carry 
out the provisions of this section may be appropriated out of 
any money in the Treasury not otherwise appropriated.

           *       *       *       *       *       *       *

CHAPTER 79--DEFINITIONS

           *       *       *       *       *       *       *

SEC. 7701. DEFINITIONS.

  (a) When used in this title, where not otherwise distinctly 
expressed or manifestly incompatible with the intent thereof--
          (1) Person.--The term ``person'' shall be construed 
        to mean and include an individual, a trust, estate, 
        partnership, association, company or corporation.
          (2) Partnership and partner.--The term 
        ``partnership'' includes a syndicate, group, pool, 
        joint venture, or other unincorporated organization, 
        through or by means of which any business, financial 
        operation, or venture is carried on, and which is not, 
        within the meaning of this title, a trust or estate or 
        a corporation; and the term ``partner'' includes a 
        member in such a syndicate, group, pool, joint venture, 
        or organization.
          (3) Corporation.--The term ``corporation'' includes 
        associations, joint-stock companies, and insurance 
        companies.
          (4) Domestic.--The term ``domestic'' when applied to 
        a corporation or partnership means created or organized 
        in the United States or under the law of the United 
        States or of any State unless, in the case of a 
        partnership, the Secretary provides otherwise by 
        regulations.
          (5) Foreign.--The term ``foreign'' when applied to a 
        corporation or partnership means a corporation or 
        partnership which is not domestic.
          (6) Fiduciary.--The term ``fiduciary'' means a 
        guardian, trustee, executor, administrator, receiver, 
        conservator, or any person acting in any fiduciary 
        capacity for any person.
          (7) Stock.--The term ``stock'' includes shares in an 
        association, joint-stock company, or insurance company.
          (8) Shareholder.--The term ``shareholder'' includes a 
        member in an association, joint-stock company, or 
        insurance company.
          (9) United States.--The term ``United States'' when 
        used in a geographical sense includes only the States 
        and the District of Columbia.
          (10) State.--The term ``State'' shall be construed to 
        include the District of Columbia, where such 
        construction is necessary to carry out provisions of 
        this title.
          (11) Secretary of the Treasury and Secretary.--
                  (A) Secretary of the Treasury.--The term 
                ``Secretary of the Treasury'' means the 
                Secretary of the Treasury, personally, and 
                shall not include any delegate of his.
                  (B) Secretary.--The term ``Secretary'' means 
                the Secretary of the Treasury or his delegate.
          (12) Delegate.--
                  (A) In general.--The term ``or his 
                delegate''--
                          (i) when used with reference to the 
                        Secretary of the Treasury, means any 
                        officer, employee, or agency of the 
                        Treasury Department duly authorized by 
                        the Secretary of the Treasury directly, 
                        or indirectly by one or more 
                        redelegations of authority, to perform 
                        the function mentioned or described in 
                        the context; and
                          (ii) when used with reference to any 
                        other official of the United States, 
                        shall be similarly construed.
                  (B) Performance of certain functions in Guam 
                or American Samoa.--The term ``delegate,'' in 
                relation to the performance of functions in 
                Guam or American Samoa with respect to the 
                taxes imposed by chapters 1, 2, and 21, also 
                includes any officer or employee of any other 
                department or agency of the United States, or 
                of any possession thereof, duly authorized by 
                the Secretary (directly, or indirectly by one 
                or more redelegations of authority) to perform 
                such functions.
          (13) Commissioner.--The term ``Commissioner'' means 
        the Commissioner of Internal Revenue.
          (14) Taxpayer.--The term ``taxpayer'' means any 
        person subject to any internal revenue tax.
          (15) Military or naval forces and armed forces of the 
        United States.--The term ``military or naval forces of 
        the United States'' and the term ``Armed Forces of the 
        United States'' each includes all regular and reserve 
        components of the uniformed services which are subject 
        to the jurisdiction of the Secretary of Defense, the 
        Secretary of the Army, the Secretary of the Navy, or 
        the Secretary of the Air Force, and each term also 
        includes the Coast Guard. The members of such forces 
        include commissioned officers and personnel below the 
        grade of commissioned officers in such forces.
          (16) Withholding agent.--The term ``withholding 
        agent'' means any person required to deduct and 
        withhold any tax under the provisions of section 1441, 
        1442, 1443, or 1461.
          [(17) Husband and wife.--As used in section 2516, if 
        the husband and wife therein referred to are divorced, 
        wherever appropriate to the meaning of such section, 
        the term ``wife'' shall be read ``former wife'' and the 
        term ``husband'' shall be read ``former husband''; and, 
        if the payments described in such section are made by 
        or on behalf of the wife or former wife to the husband 
        or former husband instead of vice versa, wherever 
        appropriate to the meaning of such section, the term 
        ``husband'' shall be read ``wife'' and the term 
        ``wife'' shall be read ``husband.'']
          (18) International organization.--The term 
        ``international organization'' means a public 
        international organization entitled to enjoy 
        privileges, exemptions, and immunities as an 
        international organization under the International 
        Organizations Immunities Act (22 U.S.C. 288-288f).
          (19) Domestic building and loan association.--The 
        term ``domestic building and loan association'' means a 
        domestic building and loan association, a domestic 
        savings and loan association, and a Federal savings and 
        loan association--
                  (A) which is subject by law to supervision 
                and examination by State or Federal authority 
                having supervision over such associations;
                  (B) the business of which consists 
                principally of acquiring the savings of the 
                public and investing in loans; and
                  (C) at least 60 percent of the amount of the 
                total assets of which (at the close of the 
                taxable year) consists of--
                          (i) cash,
                          (ii) obligations of the United States 
                        or of a State or political subdivision 
                        thereof, and stock or obligations of a 
                        corporation which is an instrumentality 
                        of the United States or of a State or 
                        political subdivision thereof, but not 
                        including obligations the interest on 
                        which is excludable from gross income 
                        under section 103,
                          (iii) certificates of deposit in, or 
                        obligations of, a corporation organized 
                        under a State law which specifically 
                        authorizes such corporation to insure 
                        the deposits or share accounts of 
                        member associations,
                          (iv) loans secured by a deposit or 
                        share of a member,
                          (v) loans (including redeemable 
                        ground rents, as defined in section 
                        1055) secured by an interest in real 
                        property which is (or, from the 
                        proceeds of the loan, will become) 
                        residential real property or real 
                        property used primarily for church 
                        purposes, loans made for the 
                        improvement of residential real 
                        property or real property used 
                        primarily for church purposes, provided 
                        that for purposes of this clause, 
                        residential real property shall include 
                        single or multifamily dwellings, 
                        facilities in residential developments 
                        dedicated to public use or property 
                        used on a nonprofit basis for 
                        residents, and mobile homes not used on 
                        a transient basis,
                          (vi) loans secured by an interest in 
                        real property located within an urban 
                        renewal area to be developed for 
                        predominantly residential use under an 
                        urban renewal plan approved by the 
                        Secretary of Housing and Urban 
                        Development under part A or part B of 
                        title I of the Housing Act of 1949, as 
                        amended, or located within any area 
                        covered by a program eligible for 
                        assistance under section 103 of the 
                        Demonstration Cities and Metropolitan 
                        Development Act of 1966, as amended, 
                        and loans made for the improvement of 
                        any such real property,
                          (vii) loans secured by an interest in 
                        educational, health, or welfare 
                        institutions or facilities, including 
                        structures designed or used primarily 
                        for residential purposes for students, 
                        residents, and persons under care, 
                        employees, or members of the staff of 
                        such institutions or facilities,
                          (viii) property acquired through the 
                        liquidation of defaulted loans 
                        described in clause (v), (vi), or 
                        (vii),
                          (ix) loans made for the payment of 
                        expenses of college or university 
                        education or vocational training, in 
                        accordance with such regulations as may 
                        be prescribed by the Secretary,
                          (x) property used by the association 
                        in the conduct of the business 
                        described in subparagraph (B), and
                          (xi) any regular or residual interest 
                        in a REMIC, but only in the proportion 
                        which the assets of such REMIC consist 
                        of property described in any of the 
                        preceding clauses of this subparagraph; 
                        except that if 95 percent or more of 
                        the assets of such REMIC are assets 
                        described in clauses (i) through (x), 
                        the entire interest in the REMIC shall 
                        qualify.
                At the election of the taxpayer, the percentage 
                specified in this subparagraph shall be applied 
                on the basis of the average assets outstanding 
                during the taxable year, in lieu of the close 
                of the taxable year, computed under regulations 
                prescribed by the Secretary. For purposes of 
                clause (v), if a multifamily structure securing 
                a loan is used in part for nonresidential 
                purposes, the entire loan is deemed a 
                residential real property loan if the planned 
                residential use exceeds 80 percent of the 
                property's planned use (determined as of the 
                time the loan is made). For purposes of clause 
                (v), loans made to finance the acquisition or 
                development of land shall be deemed to be loans 
                secured by an interest in residential real 
                property if, under regulations prescribed by 
                the Secretary, there is reasonable assurance 
                that the property will become residential real 
                property within a period of 3 years from the 
                date of acquisition of such land; but this 
                sentence shall not apply for any taxable year 
                unless, within such 3-year period, such land 
                becomes residential real property. For purposes 
                of determining whether any interest in a REMIC 
                qualifies under clause (xi), any regular 
                interest in another REMIC held by such REMIC 
                shall be treated as a loan described in a 
                preceding clause under principles similar to 
                the principles of clause (xi); except that, if 
                such REMIC's are part of a tiered structure, 
                they shall be treated as 1 REMIC for purposes 
                of clause (xi).
          (20) Employee.--For the purpose of applying the 
        provisions of section 79 with respect to group-term 
        life insurance purchased for employees, for the purpose 
        of applying the provisions of sections 104, 105, and 
        106 with respect to accident and health insurance or 
        accident and health plans, and for the purpose of 
        applying the provisions of subtitle A with respect to 
        contributions to or under a stock bonus, pension, 
        profit-sharing, or annuity plan, and with respect to 
        distributions under such a plan, or by a trust forming 
        part of such a plan, and for purposes of applying 
        section 125 with respect to cafeteria plans, the term 
        ``employee'' shall include a full-time life insurance 
        salesman who is considered an employee for the purpose 
        of chapter 21.
          (21) Levy.--The term ``levy'' includes the power of 
        distraint and seizure by any means.
          (22) Attorney General.--The term ``Attorney General'' 
        means the Attorney General of the United States.
          (23) Taxable year.--The term ``taxable year'' means 
        the calendar year, or the fiscal year ending during 
        such calendar year, upon the basis of which the taxable 
        income is computed under subtitle A. ``Taxable year'' 
        means, in the case of a return made for a fractional 
        part of a year under the provisions of subtitle A or 
        under regulations prescribed by the Secretary, the 
        period for which such return is made.
          (24) Fiscal year.--The term ``fiscal year'' means an 
        accounting period of 12 months ending on the last day 
        of any month other than December.
          (25) Paid or incurred, paid or accrued.--The terms 
        ``paid or incurred'' and ``paid or accrued'' shall be 
        construed according to the method of accounting upon 
        the basis of which the taxable income is computed under 
        subtitle A.
          (26) Trade or business.--The term ``trade or 
        business'' includes the performance of the functions of 
        a public office.
          (27) Tax Court.--The term ``Tax Court'' means the 
        United States Tax Court.
          (28) Other terms.--Any term used in this subtitle 
        with respect to the application of, or in connection 
        with, the provisions of any other subtitle of this 
        title shall have the same meaning as in such 
        provisions.
          (29) Internal Revenue Code.--The term ``Internal 
        Revenue Code of 1986'' means this title, and the term 
        ``Internal Revenue Code of 1939'' means the Internal 
        Revenue Code enacted February 10, 1939, as amended.
          (30) United States person.--The term ``United States 
        person'' means--
                  (A) a citizen or resident of the United 
                States,
                  (B) a domestic partnership,
                  (C) a domestic corporation,
                  (D) any estate (other than a foreign estate, 
                within the meaning of paragraph (31)), and
                  (E) any trust if--
                          (i) a court within the United States 
                        is able to exercise primary supervision 
                        over the administration of the trust, 
                        and
                          (ii) one or more United States 
                        persons have the authority to control 
                        all substantial decisions of the trust.
          (31) Foreign estate or trust.--
                  (A) Foreign estate.--The term ``foreign 
                estate'' means an estate the income of which, 
                from sources without the United States which is 
                not effectively connected with the conduct of a 
                trade or business within the United States, is 
                not includible in gross income under subtitle 
                A.
                  (B) Foreign trust.--The term ``foreign 
                trust'' means any trust other than a trust 
                described in subparagraph (E) of paragraph 
                (30).
          (32) Cooperative bank.--The term ``cooperative bank'' 
        means an institution without capital stock organized 
        and operated for mutual purposes and without profit, 
        which--
                  (A) is subject by law to supervision and 
                examination by State or Federal authority 
                having supervision over such institutions, and
                  (B) meets the requirements of subparagraphs 
                (B) and (C) of paragraph (19) of this 
                subsection (relating to definition of domestic 
                building and loan association).
        In determining whether an institution meets the 
        requirements referred to in subparagraph (B) of this 
        paragraph, any reference to an association or to a 
        domestic building and loan association contained in 
        paragraph (19) shall be deemed to be a reference to 
        such institution.
          (33) Regulated public utility.--The term ``regulated 
        public utility'' means--
                  (A) A corporation engaged in the furnishing 
                or sale of--
                          (i) electric energy, gas, water, or 
                        sewerage disposal services, or
                          (ii) transportation (not included in 
                        subparagraph (C)) on an intrastate, 
                        suburban, municipal, or interurban 
                        electric railroad, on an intrastate, 
                        municipal, or suburban trackless 
                        trolley system, or on a municipal or 
                        suburban bus system, or
                          (iii) transportation (not included in 
                        clause (ii)) by motor vehicle--
                if the rates for such furnishing or sale, as 
                the case may be, have been established or 
                approved by a State or political subdivision 
                thereof, by an agency or instrumentality of the 
                United States, by a public service or public 
                utility commission or other similar body of the 
                District of Columbia or of any State or 
                political subdivision thereof, or by a foreign 
                country or an agency or instrumentality or 
                political subdivision thereof.
                  (B) A corporation engaged as a common carrier 
                in the furnishing or sale of transportation of 
                gas by pipe line, if subject to the 
                jurisdiction of the Federal Energy Regulatory 
                Commission.
                  (C) A corporation engaged as a common carrier 
                (i) in the furnishing or sale of transportation 
                by railroad, if subject to the jurisdiction of 
                the Surface Transportation Board, or (ii) in 
                the furnishing or sale of transportation of oil 
                or other petroleum products (including shale 
                oil) by pipe line, if subject to the 
                jurisdiction of the Federal Energy Regulatory 
                Commission or if the rates for such furnishing 
                or sale are subject to the jurisdiction of a 
                public service or public utility commission or 
                other similar body of the District of Columbia 
                or of any State.
                  (D) A corporation engaged in the furnishing 
                or sale of telephone or telegraph service, if 
                the rates for such furnishing or sale meet the 
                requirements of subparagraph (A).
                  (E) A corporation engaged in the furnishing 
                or sale of transportation as a common carrier 
                by air, subject to the jurisdiction of the 
                Secretary of Transportation.
                  (F) A corporation engaged in the furnishing 
                or sale of transportation by a water carrier 
                subject to jurisdiction under subchapter II of 
                chapter 135 of title 49.
                  (G) A rail carrier subject to part A of 
                subtitle IV of title 49, if (i) substantially 
                all of its railroad properties have been leased 
                to another such railroad corporation or 
                corporations by an agreement or agreements 
                entered into before January 1, 1954, (ii) each 
                lease is for a term of more than 20 years, and 
                (iii) at least 80 percent or more of its gross 
                income (computed without regard to dividends 
                and capital gains and losses) for the taxable 
                year is derived from such leases and from 
                sources described in subparagraphs (A) through 
                (F), inclusive. For purposes of the preceding 
                sentence, an agreement for lease of railroad 
                properties entered into before January 1, 1954, 
                shall be considered to be a lease including 
                such term as the total number of years of such 
                agreement may, unless sooner terminated, be 
                renewed or continued under the terms of the 
                agreement, and any such renewal or continuance 
                under such agreement shall be considered part 
                of the lease entered into before January 1, 
                1954.
                  (H) A common parent corporation which is a 
                common carrier by railroad subject to part A of 
                subtitle IV of title 49 if at least 80 percent 
                of its gross income (computed without regard to 
                capital gains or losses) is derived directly or 
                indirectly from sources described in 
                subparagraphs (A) through (F), inclusive. For 
                purposes of the preceding sentence, dividends 
                and interest, and income from leases described 
                in subparagraph (G), received from a regulated 
                public utility shall be considered as derived 
                from sources described in subparagraphs (A) 
                through (F), inclusive, if the regulated public 
                utility is a member of an affiliated group (as 
                defined in section 1504) which includes the 
                common parent corporation.
        The term ``regulated public utility'' does not (except 
        as provided in subparagraphs (G) and (H)) include a 
        corporation described in subparagraphs (A) through (F), 
        inclusive, unless 80 percent or more of its gross 
        income (computed without regard to dividends and 
        capital gains and losses) for the taxable year is 
        derived from sources described in subparagraphs (A) 
        through (F), inclusive. If the taxpayer establishes to 
        the satisfaction of the Secretary that (i) its revenue 
        from regulated rates described in subparagraph (A) or 
        (D) and its revenue derived from unregulated rates are 
        derived from the operation of a single interconnected 
        and coordinated system or from the operation of more 
        than one such system, and (ii) the unregulated rates 
        have been and are substantially as favorable to users 
        and consumers as are the regulated rates, then such 
        revenue from such unregulated rates shall be 
        considered, for purposes of the preceding sentence, as 
        income derived from sources described in subparagraph 
        (A) or (D).
          (35) Enrolled actuary.--The term ``enrolled actuary'' 
        means a person who is enrolled by the Joint Board for 
        the Enrollment of Actuaries established under subtitle 
        C of the title III of the Employee Retirement Income 
        Security Act of 1974.
          (36) Tax return preparer.--
                  (A) In general.--The term ``tax return 
                preparer'' means any person who prepares for 
                compensation, or who employs one or more 
                persons to prepare for compensation, any return 
                of tax imposed by this title or any claim for 
                refund of tax imposed by this title. For 
                purposes of the preceding sentence, the 
                preparation of a substantial portion of a 
                return or claim for refund shall be treated as 
                if it were the preparation of such return or 
                claim for refund.
                  (B) Exceptions.--A person shall not be a 
                ``tax return preparer'' merely because such 
                person--
                          (i) furnishes typing, reproducing, or 
                        other mechanical assistance,
                          (ii) prepares a return or claim for 
                        refund of the employer (or of an 
                        officer or employee of the employer) by 
                        whom he is regularly and continuously 
                        employed,
                          (iii) prepares as a fiduciary a 
                        return or claim for refund for any 
                        person, or
                          (iv) prepares a claim for refund for 
                        a taxpayer in response to any notice of 
                        deficiency issued to such taxpayer or 
                        in response to any waiver of 
                        restriction after the commencement of 
                        an audit of such taxpayer or another 
                        taxpayer if a determination in such 
                        audit of such other taxpayer directly 
                        or indirectly affects the tax liability 
                        of such taxpayer.
          (37) Individual retirement plan.--The term 
        ``individual retirement plan'' means--
                  (A) an individual retirement account 
                described in section 408(a), and
                  (B) an individual retirement annuity 
                described in section 408(b).
          (38) Joint return.--The term ``joint return'' means a 
        single return made jointly under section 6013 by a 
        [husband and wife] married couple .
          (39) Persons residing outside United States.--If any 
        citizen or resident of the United States does not 
        reside in (and is not found in) any United States 
        judicial district, such citizen or resident shall be 
        treated as residing in the District of Columbia for 
        purposes of any provision of this title relating to--
                  (A) jurisdiction of courts, or
                  (B) enforcement of summons.
          (40) Indian tribal government.--
                  (A) In general.--The term ``Indian tribal 
                government'' means the governing body of any 
                tribe, band, community, village, or group of 
                Indians, or (if applicable) Alaska Natives, 
                which is determined by the Secretary, after 
                consultation with the Secretary of the 
                Interior, to exercise governmental functions.
                  (B) Special rule for Alaska Natives.--No 
                determination under subparagraph (A) with 
                respect to Alaska Natives shall grant or defer 
                any status or powers other than those 
                enumerated in section 7871. Nothing in the 
                Indian Tribal Governmental Tax Status Act of 
                1982, or in the amendments made thereby, shall 
                validate or invalidate any claim by Alaska 
                Natives of sovereign authority over lands or 
                people.
          (41) TIN.--The term ``TIN'' means the identifying 
        number assigned to a person under section 6109.
          (42) Substituted basis property.--The term 
        ``substituted basis property'' means property which 
        is--
                  (A) transferred basis property, or
                  (B) exchanged basis property.
          (43) Transferred basis property.--The term 
        ``transferred basis property'' means property having a 
        basis determined under any provision of subtitle A (or 
        under any corresponding provision of prior income tax 
        law) providing that the basis shall be determined in 
        whole or in part by reference to the basis in the hands 
        of the donor, grantor, or other transferor.
          (44) Exchanged basis property.--The term ``exchanged 
        basis property'' means property having a basis 
        determined under any provision of subtitle A (or under 
        any corresponding provision of prior income tax law) 
        providing that the basis shall be determined in whole 
        or in part by reference to other property held at any 
        time by the person for whom the basis is to be 
        determined.
          (45) Nonrecognition transaction.--The term 
        ``nonrecognition transaction'' means any disposition of 
        property in a transaction in which gain or loss is not 
        recognized in whole or in part for purposes of subtitle 
        A.
          (46) Determination of whether there is a collective 
        bargaining agreement.--In determining whether there is 
        a collective bargaining agreement between employee 
        representatives and 1 or more employers, the term 
        ``employee representatives'' shall not include any 
        organization more than one-half of the members of which 
        are employees who are owners, officers, or executives 
        of the employer. An agreement shall not be treated as a 
        collective bargaining agreement unless it is a bona 
        fide agreement between bona fide employee 
        representatives and 1 or more employers.
          (48) Off-highway vehicles.--
                  (A) Off-highway transportation vehicles.--
                          (i) In general.--A vehicle shall not 
                        be treated as a highway vehicle if such 
                        vehicle is specially designed for the 
                        primary function of transporting a 
                        particular type of load other than over 
                        the public highway and because of this 
                        special design such vehicle's 
                        capability to transport a load over the 
                        public highway is substantially limited 
                        or impaired.
                          (ii) Determination of vehicle's 
                        design.--For purposes of clause (i), a 
                        vehicle's design is determined solely 
                        on the basis of its physical 
                        characteristics.
                          (iii) Determination of substantial 
                        limitation or impairment.--For purposes 
                        of clause (i), in determining whether 
                        substantial limitation or impairment 
                        exists, account may be taken of factors 
                        such as the size of the vehicle, 
                        whether such vehicle is subject to the 
                        licensing, safety, and other 
                        requirements applicable to highway 
                        vehicles, and whether such vehicle can 
                        transport a load at a sustained speed 
                        of at least 25 miles per hour. It is 
                        immaterial that a vehicle can transport 
                        a greater load off the public highway 
                        than such vehicle is permitted to 
                        transport over the public highway.
                  (B) Nontransportation trailers and 
                semitrailers.--A trailer or semitrailer shall 
                not be treated as a highway vehicle if it is 
                specially designed to function only as an 
                enclosed stationary shelter for the carrying on 
                of an off-highway function at an off-highway 
                site.
          (49) Qualified blood collector organization.--The 
        term ``qualified blood collector organization'' means 
        an organization which is--
                  (A) described in section 501(c)(3) and exempt 
                from tax under section 501(a),
                  (B) primarily engaged in the activity of the 
                collection of human blood,
                  (C) registered with the Secretary for 
                purposes of excise tax exemptions, and
                  (D) registered by the Food and Drug 
                Administration to collect blood.
          (50) Termination of United States citizenship.--
                  (A) In general.--An individual shall not 
                cease to be treated as a United States citizen 
                before the date on which the individual's 
                citizenship is treated as relinquished under 
                section 877A(g)(4).
                  (B) Dual citizens.--Under regulations 
                prescribed by the Secretary, subparagraph (A) 
                shall not apply to an individual who became at 
                birth a citizen of the United States and a 
                citizen of another country.
  (b) Definition of resident alien and nonresident alien.--
          (1) In general.--For purposes of this title (other 
        than subtitle B)--
                  (A) Resident alien.--An alien individual 
                shall be treated as a resident of the United 
                States with respect to any calendar year if 
                (and only if) such individual meets the 
                requirements of clause (i), (ii), or (iii):
                          (i) Lawfully admitted for permanent 
                        residence.--Such individual is a lawful 
                        permanent resident of the United States 
                        at any time during such calendar year.
                          (ii) Substantial presence test.--Such 
                        individual meets the substantial 
                        presence test of paragraph (3).
                          (iii) First year election.--Such 
                        individual makes the election provided 
                        in paragraph (4).
                  (B) Nonresident alien.--An individual is a 
                nonresident alien if such individual is neither 
                a citizen of the United States nor a resident 
                of the United States (within the meaning of 
                subparagraph (A)).
          (2) Special rules for first and last year of 
        residency.--
                  (A) First year of residency.--
                          (i) In general.--If an alien 
                        individual is a resident of the United 
                        States under paragraph (1)(A) with 
                        respect to any calendar year, but was 
                        not a resident of the United States at 
                        any time during the preceding calendar 
                        year, such alien individual shall be 
                        treated as a resident of the United 
                        States only for the portion of such 
                        calendar year which begins on the 
                        residency starting date.
                          (ii) Residency starting date for 
                        individuals lawfully admitted for 
                        permanent residence.--In the case of an 
                        individual who is a lawfully permanent 
                        resident of the United States at any 
                        time during the calendar year, but does 
                        not meet the substantial presence test 
                        of paragraph (3), the residency 
                        starting date shall be the first day in 
                        such calendar year on which he was 
                        present in the United States while a 
                        lawful permanent resident of the United 
                        States.
                          (iii) Residency starting date for 
                        individuals meeting substantial 
                        presence test.--In the case of an 
                        individual who meets the substantial 
                        presence test of paragraph (3) with 
                        respect to any calendar year, the 
                        residency starting date shall be the 
                        first day during such calendar year on 
                        which the individual is present in the 
                        United States.
                          (iv) Residency starting date for 
                        individuals making first year 
                        election.--In the case of an individual 
                        who makes the election provided by 
                        paragraph (4) with respect to any 
                        calendar year, the residency starting 
                        date shall be the 1st day during such 
                        calendar year on which the individual 
                        is treated as a resident of the United 
                        States under that paragraph.
                  (B) Last year of residency.--An alien 
                individual shall not be treated as a resident 
                of the United States during a portion of any 
                calendar year if--
                          (i) such portion is after the last 
                        day in such calendar year on which the 
                        individual was present in the United 
                        States (or, in the case of an 
                        individual described in paragraph 
                        (1)(A)(i), the last day on which he was 
                        so described),
                          (ii) during such portion the 
                        individual has a closer connection to a 
                        foreign country than to the United 
                        States, and
                          (iii) the individual is not a 
                        resident of the United States at any 
                        time during the next calendar year.
                  (C) Certain nominal presence disregarded.--
                          (i) In general.--For purposes of 
                        subparagraphs (A)(iii) and (B), an 
                        individual shall not be treated as 
                        present in the United States during any 
                        period for which the individual 
                        establishes that he has a closer 
                        connection to a foreign country than to 
                        the United States.
                          (ii) Not more than 10 days 
                        disregarded.--Clause (i) shall not 
                        apply to more than 10 days on which the 
                        individual is present in the United 
                        States.
          (3) Substantial presence test.--
                  (A) In general.--Except as otherwise provided 
                in this paragraph, an individual meets the 
                substantial presence test of this paragraph 
                with respect to any calendar year (hereinafter 
                in this subsection referred to as the ``current 
                year'') if--
                          (i) such individual was present in 
                        the United States on at least 31 days 
                        during the calendar year, and
                          (ii) the sum of the number of days on 
                        which such individual was present in 
                        the United States during the current 
                        year and the 2 preceding calendar years 
                        (when multiplied by the applicable 
                        multiplier determined under the 
                        following table) equals or exceeds 183 
                        days:
                  (B) Exception where individual is present in 
                the United States during less than one-half of 
                current year and closer connection to foreign 
                country is established.--An individual shall 
                not be treated as meeting the substantial 
                presence test of this paragraph with respect to 
                any current year if--
                          (i) such individual is present in the 
                        United States on fewer than 183 days 
                        during the current year, and
                          (ii) it is established that for the 
                        current year such individual has a tax 
                        home (as defined in section 911(d)(3) 
                        without regard to the second sentence 
                        thereof) in a foreign country and has a 
                        closer connection to such foreign 
                        country than to the United States.
                  (C) Subparagraph (B) not to apply in certain 
                cases.--Subparagraph (B) shall not apply to any 
                individual with respect to any current year if 
                at any time during such year--
                          (i) such individual had an 
                        application for adjustment of status 
                        pending, or
                          (ii) such individual took other steps 
                        to apply for status as a lawful 
                        permanent resident of the United 
                        States.
                  (D) Exception for exempt individuals or for 
                certain medical conditions.--An individual 
                shall not be treated as being present in the 
                United States on any day if--
                          (i) such individual is an exempt 
                        individual for such day, or
                          (ii) such individual was unable to 
                        leave the United States on such day 
                        because of a medical condition which 
                        arose while such individual was present 
                        in the United States.
          (4) First-year election.--(A) An alien individual 
        shall be deemed to meet the requirements of this 
        subparagraph if such individual--
                  (i) is not a resident of the United States 
                under clause (i) or (ii) of paragraph (1)(A) 
                with respect to a calendar year (hereinafter 
                referred to as the ``election year''),
                  (ii) was not a resident of the United States 
                under paragraph (1)(A) with respect to the 
                calendar year immediately preceding the 
                election year,
                  (iii) is a resident of the United States 
                under clause (ii) of paragraph (1)(A) with 
                respect to the calendar year immediately 
                following the election year, and
                  (iv) is both--
                          (I) present in the United States for 
                        a period of at least 31 consecutive 
                        days in the election year, and
                          (II) present in the United States 
                        during the period beginning with the 
                        first day of such 31-day period and 
                        ending with the last day of the 
                        election year (hereinafter referred to 
                        as the ``testing period'') for a number 
                        of days equal to or exceeding 75 
                        percent of the number of days in the 
                        testing period (provided that an 
                        individual shall be treated for 
                        purposes of this subclause as present 
                        in the United States for a number of 
                        days during the testing period not 
                        exceeding 5 days in the aggregate, 
                        notwithstanding his absence from the 
                        United States on such days).
          (B) An alien individual who meets the requirements of 
        subparagraph (A) shall, if he so elects, be treated as 
        a resident of the United States with respect to the 
        election year.
          (C) An alien individual who makes the election 
        provided by subparagraph (B) shall be treated as a 
        resident of the United States for the portion of the 
        election year which begins on the 1st day of the 
        earliest testing period during such year with respect 
        to which the individual meets the requirements of 
        clause (iv) of subparagraph (A).
          (D) The rules of subparagraph (D)(i) of paragraph (3) 
        shall apply for purposes of determining an individual's 
        presence in the United States under this paragraph.
          (E) An election under subparagraph (B) shall be made 
        on the individual's tax return for the election year, 
        provided that such election may not be made before the 
        individual has met the substantial presence test of 
        paragraph (3) with respect to the calendar year 
        immediately following the election year.
          (F) An election once made under subparagraph (B) 
        remains in effect for the election year, unless revoked 
        with the consent of the Secretary.
          (5) Exempt individual defined.--For purposes of this 
        subsection--
                  (A) In general.--An individual is an exempt 
                individual for any day if, for such day, such 
                individual is--
                          (i) a foreign government-related 
                        individual,
                          (ii) a teacher or trainee,
                          (iii) a student, or
                          (iv) a professional athlete who is 
                        temporarily in the United States to 
                        compete in a sports event--
                                  (I) which is organized for 
                                the primary purpose of 
                                benefiting an organization 
                                which is described in section 
                                501(c)(3) and exempt from tax 
                                under section 501(a),
                                  (II) all of the net proceeds 
                                of which are contributed to 
                                such organization, and,
                                  (III) which utilizes 
                                volunteers for substantially 
                                all of the work performed in 
                                carrying out such event.
                  (B) Foreign government-related individual.--
                The term ``foreign government-related 
                individual'' means any individual temporarily 
                present in the United States by reason of--
                          (i) diplomatic status, or a visa 
                        which the Secretary (after consultation 
                        with the Secretary of State) determines 
                        represents full-time diplomatic or 
                        consular status for purposes of this 
                        subsection,
                          (ii) being a full-time employee of an 
                        international organization, or
                          (iii) being a member of the immediate 
                        family of an individual described in 
                        clause (i) or (ii).
                  (C) Teacher or trainee.--The term ``teacher 
                or trainee'' means any individual--
                          (i) who is temporarily present in the 
                        United States under subparagraph (J) or 
                        (Q) of section 101(15) of the 
                        Immigration and Nationality Act (other 
                        than as a student), and
                          (ii) who substantially complies with 
                        the requirements for being so present.
                  (D) Student.--The term ``student'' means any 
                individual--
                          (i) who is temporarily present in the 
                        United States--
                                  (I) under subparagraph (F) or 
                                (M) of section 101(15) of the 
                                Immigration and Nationality 
                                Act, or
                                  (II) as a student under 
                                subparagraph (J) or (Q) of such 
                                section 101(15), and
                          (ii) who substantially complies with 
                        the requirements for being so present.
                  (E) Special rules for teachers, trainees, and 
                students.--
                          (i) Limitation on teachers and 
                        trainees.--An individual shall not be 
                        treated as an exempt individual by 
                        reason of clause (ii) of subparagraph 
                        (A) for the current year if, for any 2 
                        calendar years during the preceding 6 
                        calendar years, such person was an 
                        exempt person under clause (ii) or 
                        (iii) of subparagraph (A). In the case 
                        of an individual all of whose 
                        compensation is described in section 
                        872(b)(3), the preceding sentence shall 
                        be applied by substituting ``4 calendar 
                        years'' for ``2 calendar years''.
                          (ii) Limitation on students.--For any 
                        calendar year after the 5th calendar 
                        year for which an individual was an 
                        exempt individual under clause (ii) or 
                        (iii) of subparagraph (A), such 
                        individual shall not be treated as an 
                        exempt individual by reason of clause 
                        (iii) of subparagraph (A), unless such 
                        individual establishes to the 
                        satisfaction of the Secretary that such 
                        individual does not intend to 
                        permanently reside in the United States 
                        and that such individual meets the 
                        requirements of subparagraph (D)(ii).
          (6) Lawful permanent resident.--For purposes of this 
        subsection, an individual is a lawful permanent 
        resident of the United States at any time if--
                  (A) such individual has the status of having 
                been lawfully accorded the privilege of 
                residing permanently in the United States as an 
                immigrant in accordance with the immigration 
                laws, and
                  (B) such status has not been revoked (and has 
                not been administratively or judicially 
                determined to have been abandoned).
        An individual shall cease to be treated as a lawful 
        permanent resident of the United States if such 
        individual commences to be treated as a resident of a 
        foreign country under the provisions of a tax treaty 
        between the United States and the foreign country, does 
        not waive the benefits of such treaty applicable to 
        residents of the foreign country, and notifies the 
        Secretary of the commencement of such treatment.
          (7) Presence in the United States.--For purposes of 
        this subsection--
                  (A) In general.--Except as provided in 
                subparagraph (B), (C), or (D), an individual 
                shall be treated as present in the United 
                States on any day if such individual is 
                physically present in the United States at any 
                time during such day.
                  (B) Commuters from Canada or Mexico.--If an 
                individual regularly commutes to employment (or 
                self-employment) in the United States from a 
                place of residence in Canada or Mexico, such 
                individual shall not be treated as present in 
                the United States on any day during which he so 
                commutes.
                  (C) Transit between 2 foreign points.--If an 
                individual, who is in transit between 2 points 
                outside the United States, is physically 
                present in the United States for less than 24 
                hours, such individual shall not be treated as 
                present in the United States on any day during 
                such transit.
                  (D) Crew members temporarily present.--An 
                individual who is temporarily present in the 
                United States on any day as a regular member of 
                the crew of a foreign vessel engaged in 
                transportation between the United States and a 
                foreign country or a possession of the United 
                States shall not be treated as present in the 
                United States on such day unless such 
                individual otherwise engages in any trade or 
                business in the United States on such day.
          (8) Annual statements.--The Secretary may prescribe 
        regulations under which an individual who (but for 
        subparagraph (B) or (D) of paragraph (3)) would meet 
        the substantial presence test of paragraph (3) is 
        required to submit an annual statement setting forth 
        the basis on which such individual claims the benefits 
        of subparagraph (B) or (D) of paragraph (3), as the 
        case may be.
          (9) Taxable year.--
                  (A) In general.--For purposes of this title, 
                an alien individual who has not established a 
                taxable year for any prior period shall be 
                treated as having a taxable year which is the 
                calendar year.
                  (B) Fiscal year taxpayer.--If--
                          (i) an individual is treated under 
                        paragraph (1) as a resident of the 
                        United States for any calendar year, 
                        and
                          (ii) after the application of 
                        subparagraph (A), such individual has a 
                        taxable year other than a calendar 
                        year,
                he shall be treated as a resident of the United 
                States with respect to any portion of a taxable 
                year which is within such calendar year.
          (10) Coordination with section 877.--If--
                  (A) an alien individual was treated as a 
                resident of the United States during any period 
                which includes at least 3 consecutive calendar 
                years (hereinafter referred to as the ``initial 
                residency period''), and
                  (B) such individual ceases to be treated as a 
                resident of the United States but subsequently 
                becomes a resident of the United States before 
                the close of the 3rd calendar year beginning 
                after the close of the initial residency 
                period,
        such individual shall be taxable for the period after 
        the close of the initial residency period and before 
        the day on which he subsequently became a resident of 
        the United States in the manner provided in section 
        877(b). The preceding sentence shall apply only if the 
        tax imposed pursuant to section 877(b) exceeds the tax 
        which, without regard to this paragraph, is imposed 
        pursuant to section 871.
          (11) Regulations.--The Secretary shall prescribe such 
        regulations as may be necessary or appropriate to carry 
        out the purposes of this subsection.
  (c) Includes and including.--The terms ``includes'' and 
``including'' when used in a definition contained in this title 
shall not be deemed to exclude other things otherwise within 
the meaning of the term defined.
  (d) Commonwealth of Puerto Rico.--Where not otherwise 
distinctly expressed or manifestly incompatible with the intent 
thereof, references in this title to possessions of the United 
States shall be treated as also referring to the Commonwealth 
of Puerto Rico.
  (e) Treatment of certain contracts for providing services, 
etc..--For purposes of chapter 1--
          (1) In general.--A contract which purports to be a 
        service contract shall be treated as a lease of 
        property if such contract is properly treated as a 
        lease of property, taking into account all relevant 
        factors including whether or not--
                  (A) the service recipient is in physical 
                possession of the property,
                  (B) the service recipient controls the 
                property,
                  (C) the service recipient has a significant 
                economic or possessory interest in the 
                property,
                  (D) the service provider does not bear any 
                risk of substantially diminished receipts or 
                substantially increased expenditures if there 
                is nonperformance under the contract,
                  (E) the service provider does not use the 
                property concurrently to provide significant 
                services to entities unrelated to the service 
                recipient, and
                  (F) the total contract price does not 
                substantially exceed the rental value of the 
                property for the contract period.
          (2) Other arrangements.--An arrangement (including a 
        partnership or other pass-thru entity) which is not 
        described in paragraph (1) shall be treated as a lease 
        if such arrangement is properly treated as a lease, 
        taking into account all relevant factors including 
        factors similar to those set forth in paragraph (1).
          (3) Special rules for contracts or arrangements 
        involving solid waste disposal, energy, and clean water 
        facilities.--
                  (A) In general.--Notwithstanding paragraphs 
                (1) and (2), and except as provided in 
                paragraph (4), any contract or arrangement 
                between a service provider and a service 
                recipient--
                          (i) with respect to--
                                  (I) the operation of a 
                                qualified solid waste disposal 
                                facility,
                                  (II) the sale to the service 
                                recipient of electrical or 
                                thermal energy produced at a 
                                cogeneration or alternative 
                                energy facility, or
                                  (III) the operation of a 
                                water treatment works facility, 
                                and
                          (ii) which purports to be a service 
                        contract,
                shall be treated as a service contract.
                  (B) Qualified solid waste disposal 
                facility.--For purposes of subparagraph (A), 
                the term ``qualified solid waste disposal 
                facility'' means any facility if such facility 
                provides solid waste disposal services for 
                residents of part or all of 1 or more 
                governmental units and substantially all of the 
                solid waste processed at such facility is 
                collected from the general public.
                  (C) Cogeneration facility.--For purposes of 
                subparagraph (A), the term ``cogeneration 
                facility'' means a facility which uses the same 
                energy source for the sequential generation of 
                electrical or mechanical power in combination 
                with steam, heat, or other forms of useful 
                energy.
                  (D) Alternative energy facility.--For 
                purposes of subparagraph (A), the term 
                ``alternative energy facility'' means a 
                facility for producing electrical or thermal 
                energy if the primary energy source for the 
                facility is not oil, natural gas, coal, or 
                nuclear power.
                  (E) Water treatment works facility.--For 
                purposes of subparagraph (A), the term ``water 
                treatment works facility'' means any treatment 
                works within the meaning of section 212(2) of 
                the Federal Water Pollution Control Act.
          (4) Paragraph (3) not to apply in certain cases.--
                  (A) In general.--Paragraph (3) shall not 
                apply to any qualified solid waste disposal 
                facility, cogeneration facility, alternative 
                energy facility, or water treatment works 
                facility used under a contract or arrangement 
                if--
                          (i) the service recipient (or a 
                        related entity) operates such facility,
                          (ii) the service recipient (or a 
                        related entity) bears any significant 
                        financial burden if there is 
                        nonperformance under the contract or 
                        arrangement (other than for reasons 
                        beyond the control of the service 
                        provider),
                          (iii) the service recipient (or a 
                        related entity) receives any 
                        significant financial benefit if the 
                        operating costs of such facility are 
                        less than the standards of performance 
                        or operation under the contract or 
                        arrangement, or
                          (iv) the service recipient (or a 
                        related entity) has an option to 
                        purchase, or may be required to 
                        purchase, all or a part of such 
                        facility at a fixed and determinable 
                        price (other than for fair market 
                        value).
                For purposes of this paragraph, the term 
                ``related entity'' has the same meaning as when 
                used in section 168(h).
                  (B) Special rules for application of 
                subparagraph (A) with respect to certain rights 
                and allocations under the contract.--For 
                purposes of subparagraph (A), there shall not 
                be taken into account--
                          (i) any right of a service recipient 
                        to inspect any facility, to exercise 
                        any sovereign power the service 
                        recipient may possess, or to act in the 
                        event of a breach of contract by the 
                        service provider, or
                          (ii) any allocation of any financial 
                        burden or benefits in the event of any 
                        change in any law.
                  (C) Special rules for application of 
                subparagraph (A) in the case of certain 
                events.--
                          (i) Temporary shut-downs, etc..--For 
                        purposes of clause (ii) of subparagraph 
                        (A), there shall not be taken into 
                        account any temporary shut-down of the 
                        facility for repairs, maintenance, or 
                        capital improvements, or any financial 
                        burden caused by the bankruptcy or 
                        similar financial difficulty of the 
                        service provider.
                          (ii) Reduced costs.--For purposes of 
                        clause (iii) of subparagraph (A), there 
                        shall not be taken into account any 
                        significant financial benefit merely 
                        because payments by the service 
                        recipient under the contract or 
                        arrangement are decreased by reason of 
                        increased production or efficiency or 
                        the recovery of energy or other 
                        products.
          (5) Exception for certain low-income housing.--This 
        subsection shall not apply to any property described in 
        clause (i), (ii), (iii), or (iv) of section 
        1250(a)(1)(B) (relating to low-income housing) if--
                  (A) such property is operated by or for an 
                organization described in paragraph (3) or (4) 
                of section 501(c), and
                  (B) at least 80 percent of the units in such 
                property are leased to low-income tenants 
                (within the meaning of section 167(k)(3)(B)) 
                (as in effect on the day before the date of the 
                enactment of the Revenue Reconciliation Act of 
                1990).
          (6) Regulations.--The Secretary may prescribe such 
        regulations as may be necessary or appropriate to carry 
        out the provisions of this subsection.
  (f) Use of related persons or pass-thru entities.--The 
Secretary shall prescribe such regulations as may be necessary 
or appropriate to prevent the avoidance of those provisions of 
this title which deal with--
          (1) the linking of borrowing to investment, or
          (2) diminishing risks,
through the use of related persons, pass-thru entities, or 
other intermediaries.
  (g) Clarification of fair market value in the case of 
nonrecourse indebtedness.--For purposes of subtitle A, in 
determining the amount of gain or loss (or deemed gain or loss) 
with respect to any property, the fair market value of such 
property shall be treated as being not less than the amount of 
any nonrecourse indebtedness to which such property is subject.
  (h) Motor vehicle operating leases.--
          (1) In general.--For purposes of this title, in the 
        case of a qualified motor vehicle operating agreement 
        which contains a terminal rental adjustment clause--
                  (A) such agreement shall be treated as a 
                lease if (but for such terminal rental 
                adjustment clause) such agreement would be 
                treated as a lease under this title, and
                  (B) the lessee shall not be treated as the 
                owner of the property subject to an agreement 
                during any period such agreement is in effect.
          (2) Qualified motor vehicle operating agreement 
        defined.--For purposes of this subsection--
                  (A) In general.--The term ``qualified motor 
                vehicle operating agreement'' means any 
                agreement with respect to a motor vehicle 
                (including a trailer) which meets the 
                requirements of subparagraphs (B), (C), and (D) 
                of this paragraph.
                  (B) Minimum liability of lessor.--An 
                agreement meets the requirements of this 
                subparagraph if under such agreement the sum 
                of--
                          (i) the amount the lessor is 
                        personally liable to repay, and
                          (ii) the net fair market value of the 
                        lessor's interest in any property 
                        pledged as security for property 
                        subject to the agreement,
                equals or exceeds all amounts borrowed to 
                finance the acquisition of property subject to 
                the agreement. There shall not be taken into 
                account under clause (ii) any property pledged 
                which is property subject to the agreement or 
                property directly or indirectly financed by 
                indebtedness secured by property subject to the 
                agreement.
                  (C) Certification by lessee; notice of tax 
                ownership.--An agreement meets the requirements 
                of this subparagraph if such agreement contains 
                a separate written statement separately signed 
                by the lessee--
                          (i) under which the lessee certifies, 
                        under penalty of perjury, that it 
                        intends that more than 50 percent of 
                        the use of the property subject to such 
                        agreement is to be in a trade or 
                        business of the lessee, and
                          (ii) which clearly and legibly states 
                        that the lessee has been advised that 
                        it will not be treated as the owner of 
                        the property subject to the agreement 
                        for Federal income tax purposes.
                  (D) Lessor must have no knowledge that 
                certification is false.--An agreement meets the 
                requirements of this subparagraph if the lessor 
                does not know that the certification described 
                in subparagraph (C)(i) is false.
          (3) Terminal rental adjustment clause defined.--
                  (A) In general.--For purposes of this 
                subsection, the term ``terminal rental 
                adjustment clause'' means a provision of an 
                agreement which permits or requires the rental 
                price to be adjusted upward or downward by 
                reference to the amount realized by the lessor 
                under the agreement upon sale or other 
                disposition of such property.
                  (B) Special rule for lessee dealers.--The 
                term ``terminal rental adjustment clause'' also 
                includes a provision of an agreement which 
                requires a lessee who is a dealer in motor 
                vehicles to purchase the motor vehicle for a 
                predetermined price and then resell such 
                vehicle where such provision achieves 
                substantially the same results as a provision 
                described in subparagraph (A).
  (i) Taxable mortgage pools.--
          (1) Treated as separate corporations.--A taxable 
        mortgage pool shall be treated as a separate 
        corporation which may not be treated as an includible 
        corporation with any other corporation for purposes of 
        section 1501.
          (2) Taxable mortgage pool defined.--For purposes of 
        this title--
                  (A) In general.--Except as otherwise provided 
                in this paragraph, a taxable mortgage pool is 
                any entity (other than a REMIC) if--
                          (i) substantially all of the assets 
                        of such entity consists of debt 
                        obligations (or interests therein) and 
                        more than 50 percent of such debt 
                        obligations (or interests) consists of 
                        real estate mortgages (or interests 
                        therein),
                          (ii) such entity is the obligor under 
                        debt obligations with 2 or more 
                        maturities, and
                          (iii) under the terms of the debt 
                        obligations referred to in clause (ii) 
                        (or underlying arrangement), payments 
                        on such debt obligations bear a 
                        relationship to payments on the debt 
                        obligations (or interests) referred to 
                        in clause (i).
                  (B) Portion of entities treated as pools.--
                Any portion of an entity which meets the 
                definition of subparagraph (A) shall be treated 
                as a taxable mortgage pool.
                  (C) Exception for domestic building and 
                loan.--Nothing in this subsection shall be 
                construed to treat any domestic building and 
                loan association (or portion thereof) as a 
                taxable mortgage pool.
                  (D) Treatment of certain equity interests.--
                To the extent provided in regulations, equity 
                interest of varying classes which correspond to 
                maturity classes of debt shall be treated as 
                debt for purposes of this subsection.
          (3) Treatment of certain REIT's.--If--
                  (A) a real estate investment trust is a 
                taxable mortgage pool, or
                  (B) a qualified REIT subsidiary (as defined 
                in section 856(i)(2)) of a real estate 
                investment trust is a taxable mortgage pool,
        under regulations prescribed by the Secretary, 
        adjustments similar to the adjustments provided in 
        section 860E(d) shall apply to the shareholders of such 
        real estate investment trust.
  (j) Tax treatment of Federal Thrift Savings Fund.--
          (1) In general.--For purposes of this title--
                  (A) the Thrift Savings Fund shall be treated 
                as a trust described in section 401(a) which is 
                exempt from taxation under section 501(a);
                  (B) any contribution to, or distribution 
                from, the Thrift Savings Fund shall be treated 
                in the same manner as contributions to or 
                distributions from such a trust; and
                  (C) subject to section 401(k)(4)(B) and any 
                dollar limitation on the application of section 
                402(e)(3), contributions to the Thrift Savings 
                Fund shall not be treated as distributed or 
                made available to an employee or Member nor as 
                a contribution made to the Fund by an employee 
                or Member merely because the employee or Member 
                has, under the provisions of subchapter III of 
                chapter 84 of title 5, United States Code, and 
                section 8351 of such title 5, an election 
                whether the contribution will be made to the 
                Thrift Savings Fund or received by the employee 
                or Member in cash.
          (2) Nondiscrimination requirements.--Notwithstanding 
        any other provision of law, the Thrift Savings Fund is 
        not subject to the nondiscrimination requirements 
        applicable to arrangements described in section 401(k) 
        or to matching contributions (as described in section 
        401(m)), so long as it meets the requirements of this 
        section.
          (3) Coordination with Social Security Act.--Paragraph 
        (1) shall not be construed to provide that any amount 
        of the employee's or Member's basic pay which is 
        contributed to the Thrift Savings Fund shall not be 
        included in the term ``wages'' for the purposes of 
        section 209 of the Social Security Act or section 
        3121(a) of this title.
          (4) Definitions.--For purposes of this subsection, 
        the terms ``Member'', ``employee'', and ``Thrift 
        Savings Fund'' shall have the same respective meanings 
        as when used in subchapter III of chapter 84 of title 
        5, United States Code.
          (5) Coordination with other provisions of law.--No 
        provision of law not contained in this title shall 
        apply for purposes of determining the treatment under 
        this title of the Thrift Savings Fund or any 
        contribution to, or distribution from, such Fund.
  (k) Treatment of certain amounts paid to charity.--In the 
case of any payment which, except for section 501(b) of the 
Ethics in Government Act of 1978, might be made to any officer 
or employee of the Federal Government but which is made instead 
on behalf of such officer or employee to an organization 
described in section 170(c)--
          (1) such payment shall not be treated as received by 
        such officer or employee for all purposes of this title 
        and for all purposes of any tax law of a State or 
        political subdivision thereof, and
          (2) no deduction shall be allowed under any provision 
        of this title (or of any tax law of a State or 
        political subdivision thereof) to such officer or 
        employee by reason of having such payment made to such 
        organization.
For purposes of this subsection, a Senator, a Representative 
in, or a Delegate or Resident Commissioner to, the Congress 
shall be treated as an officer or employee of the Federal 
Government.
  (l) Regulations relating to conduit arrangements.--The 
Secretary may prescribe regulations recharacterizing any 
multiple-party financing transaction as a transaction directly 
among any 2 or more of such parties where the Secretary 
determines that such recharacterization is appropriate to 
prevent avoidance of any tax imposed by this title.
  (m) Designation of contract markets.--Any designation by the 
Commodity Futures Trading Commission of a contract market which 
could not have been made under the law in effect on the day 
before the date of the enactment of the Commodity Futures 
Modernization Act of 2000 shall apply for purposes of this 
title except to the extent provided in regulations prescribed 
by the Secretary.
  (n) Convention or association of churches.--For purposes of 
this title, any organization which is otherwise a convention or 
association of churches shall not fail to so qualify merely 
because the membership of such organization includes 
individuals as well as churches or because individuals have 
voting rights in such organization.
  (o) Clarification of economic substance doctrine.--
          (1) Application of doctrine.--In the case of any 
        transaction to which the economic substance doctrine is 
        relevant, such transaction shall be treated as having 
        economic substance only if--
                  (A) the transaction changes in a meaningful 
                way (apart from Federal income tax effects) the 
                taxpayer's economic position, and
                  (B) the taxpayer has a substantial purpose 
                (apart from Federal income tax effects) for 
                entering into such transaction.
          (2) Special rule where taxpayer relies on profit 
        potential.--
                  (A) In general.--The potential for profit of 
                a transaction shall be taken into account in 
                determining whether the requirements of 
                subparagraphs (A) and (B) of paragraph (1) are 
                met with respect to the transaction only if the 
                present value of the reasonably expected pre-
                tax profit from the transaction is substantial 
                in relation to the present value of the 
                expected net tax benefits that would be allowed 
                if the transaction were respected.
                  (B) Treatment of fees and foreign taxes.--
                Fees and other transaction expenses shall be 
                taken into account as expenses in determining 
                pre-tax profit under subparagraph (A). The 
                Secretary shall issue regulations requiring 
                foreign taxes to be treated as expenses in 
                determining pre-tax profit in appropriate 
                cases.
          (3) State and local tax benefits.--For purposes of 
        paragraph (1), any State or local income tax effect 
        which is related to a Federal income tax effect shall 
        be treated in the same manner as a Federal income tax 
        effect.
          (4) Financial accounting benefits.--For purposes of 
        paragraph (1)(B), achieving a financial accounting 
        benefit shall not be taken into account as a purpose 
        for entering into a transaction if the origin of such 
        financial accounting benefit is a reduction of Federal 
        income tax.
          (5) Definitions and special rules.--For purposes of 
        this subsection--
                  (A) Economic substance doctrine.--The term 
                ``economic substance doctrine'' means the 
                common law doctrine under which tax benefits 
                under subtitle A with respect to a transaction 
                are not allowable if the transaction does not 
                have economic substance or lacks a business 
                purpose.
                  (B) Exception for personal transactions of 
                individuals.--In the case of an individual, 
                paragraph (1) shall apply only to transactions 
                entered into in connection with a trade or 
                business or an activity engaged in for the 
                production of income.
                  (C) Determination of application of doctrine 
                not affected.--The determination of whether the 
                economic substance doctrine is relevant to a 
                transaction shall be made in the same manner as 
                if this subsection had never been enacted.
                  (D) Transaction.--The term ``transaction'' 
                includes a series of transactions.
  (p) Cross references.--
          (1) Other definitions.--For other definitions, see 
        the following sections of Title 1 of the United States 
        Code:
                          (1) Singular as including plural, 
                        section 1.
                          (2) Plural as including singular, 
                        section 1.
                          (3) Masculine as including feminine, 
                        section 1.
                          (4) Officer, section 1.
                          (5) Oath as including affirmation, 
                        section 1.
                          (6) County as including parish, 
                        section 2.
                          (7) Vessel as including all means of 
                        water transportation, section 3.
                          (8) Vehicle as including all means of 
                        land transportation, section 4.
                          (9) Company or association as 
                        including successors and assigns, 
                        section 5.
          (2) Effect of cross references.--For effect of cross 
        references in this title, see section 7806(a).

           *       *       *       *       *       *       *

SEC. 7703. DETERMINATION OF MARITAL STATUS.

  (a) General rule.--For purposes of part V of subchapter B of 
chapter 1 and those provisions of this title which refer to 
this subsection--
          (1) the determination of whether an individual is 
        married shall be made as of the close of [his taxable 
        year] the individual's taxable year ; except that if 
        [his spouse] the individual's spouse dies during [his 
        taxable year] the individual's taxable year such 
        determination shall be made as of the time of such 
        death; and
          (2) an individual legally separated from [his spouse] 
        the individual's spouse under a decree of divorce or of 
        separate maintenance shall not be considered as 
        married.
  (b) Certain married individuals living apart.--For purposes 
of those provisions of this title which refer to this 
subsection, if--
          (1) an individual who is married (within the meaning 
        of subsection (a)) and who files a separate return 
        maintains as [his home] the individual's home a 
        household which constitutes for more than one-half of 
        the taxable year the principal place of abode of a 
        child (within the meaning of section 152(f)(1)) with 
        respect to whom such individual is entitled to a 
        deduction for the taxable year under section 151 (or 
        would be so entitled but for section 152(e)),
          (2) such individual furnishes over one-half of the 
        cost of maintaining such household during the taxable 
        year, and
          (3) during the last 6 months of the taxable year, 
        such individual's spouse is not a member of such 
        household,
such individual shall not be considered as married.

           *       *       *       *       *       *       *

CHAPTER 80--GENERAL RULES

           *       *       *       *       *       *       *

Subchapter C--PROVISIONS AFFECTING MORE THAN ONE SUBTITLE

           *       *       *       *       *       *       *

SEC. 7872. TREATMENT OF LOANS WITH BELOW-MARKET INTEREST RATES.

  (a) Treatment of gift loans and demand loans.--
          (1) In general.--For purposes of this title, in the 
        case of any below-market loan to which this section 
        applies and which is a gift loan or a demand loan, the 
        forgone interest shall be treated as--
                  (A) transferred from the lender to the 
                borrower, and
                  (B) retransferred by the borrower to the 
                lender as interest.
          (2) Time when transfers made.--Except as otherwise 
        provided in regulations prescribed by the Secretary, 
        any forgone interest attributable to periods during any 
        calendar year shall be treated as transferred (and 
        retransferred) under paragraph (1) on the last day of 
        such calendar year.
  (b) Treatment of other below-market loans.--
          (1) In general.--For purposes of this title, in the 
        case of any below-market loan to which this section 
        applies and to which subsection (a)(1) does not apply, 
        the lender shall be treated as having transferred on 
        the date the loan was made (or, if later, on the first 
        day on which this section applies to such loan), and 
        the borrower shall be treated as having received on 
        such date, cash in an amount equal to the excess of--
                  (A) the amount loaned, over
                  (B) the present value of all payments which 
                are required to be made under the terms of the 
                loan.
          (2) Obligation treated as having original issue 
        discount.--For purposes of this title--
                  (A) In general.--Any below-market loan to 
                which paragraph (1) applies shall be treated as 
                having original issue discount in an amount 
                equal to the excess described in paragraph (1).
                  (B) Amount in addition to other original 
                issue discount.--Any original issue discount 
                which a loan is treated as having by reason of 
                subparagraph (A) shall be in addition to any 
                other original issue discount on such loan 
                (determined without regard to subparagraph 
                (A)).
  (c) Below-market loans to which section applies.--
          (1) In general.--Except as otherwise provided in this 
        subsection and subsection (g), this section shall apply 
        to--
                  (A) Gifts.--Any below-market loan which is a 
                gift loan.
                  (B) Compensation-related loans.--Any below-
                market loan directly or indirectly between--
                          (i) an employer and an employee, or
                          (ii) an independent contractor and a 
                        person for whom such independent 
                        contractor provides services.
                  (C) Corporation-shareholder loans.--Any 
                below-market loan directly or indirectly 
                between a corporation and any shareholder of 
                such corporation.
                  (D) Tax avoidance loans.--Any below-market 
                loan 1 of the principal purposes of the 
                interest arrangements of which is the avoidance 
                of any Federal tax.
                  (E) Other below-market loans.--To the extent 
                provided in regulations, any below-market loan 
                which is not described in subparagraph (A), 
                (B), (C), or (F) if the interest arrangements 
                of such loan have a significant effect on any 
                Federal tax liability of the lender or the 
                borrower.
                  (F) Loans to qualified continuing care 
                facilities.--Any loan to any qualified 
                continuing care facility pursuant to a 
                continuing care contract.
          (2) $10,000 de minimis exception for gift loans 
        between individuals.--
                  (A) In general.--In the case of any gift loan 
                directly between individuals, this section 
                shall not apply to any day on which the 
                aggregate outstanding amount of loans between 
                such individuals does not exceed $10,000.
                  (B) De minimis exception not to apply to 
                loans attributable to acquisition of income-
                producing assets.--Subparagraph (A) shall not 
                apply to any gift loan directly attributable to 
                the purchase or carrying of income-producing 
                assets.
                  (C) Cross reference.--For limitation on 
                amount treated as interest where loans do not 
                exceed $100,000, see subsection (d)(1).
          (3) $10,000 de minimis exception for compensation-
        related and corporate-shareholder loans.--
                  (A) In general.--In the case of any loan 
                described in subparagraph (B) or (C) of 
                paragraph (1), this section shall not apply to 
                any day on which the aggregate outstanding 
                amount of loans between the borrower and lender 
                does not exceed $10,000.
                  (B) Exception not to apply where 1 of 
                principal purposes is tax avoidance.--
                Subparagraph (A) shall not apply to any loan 
                the interest arrangements of which have as 1 of 
                their principal purposes the avoidance of any 
                Federal tax.
  (d) Special rules for gift loans.--
          (1) Limitation on interest accrual for purposes of 
        income taxes where loans do not exceed $100,000.--
                  (A) In general.--For purposes of subtitle A, 
                in the case of a gift loan directly between 
                individuals, the amount treated as 
                retransferred by the borrower to the lender as 
                of the close of any year shall not exceed the 
                borrower's net investment income for such year.
                  (B) Limitation not to apply where 1 of 
                principal purposes is tax avoidance.--
                Subparagraph (A) shall not apply to any loan 
                the interest arrangements of which have as 1 of 
                their principal purposes the avoidance of any 
                Federal tax.
                  (C) Special rule where more than 1 gift loan 
                outstanding.--For purposes of subparagraph (A), 
                in any case in which a borrower has outstanding 
                more than 1 gift loan, the net investment 
                income of such borrower shall be allocated 
                among such loans in proportion to the 
                respective amounts which would be treated as 
                retransferred by the borrower without regard to 
                this paragraph.
                  (D) Limitation not to apply where aggregate 
                amount of loans exceed $100,000.--This 
                paragraph shall not apply to any loan made by a 
                lender to a borrower for any day on which the 
                aggregate outstanding amount of loans between 
                the borrower and lender exceeds $100,000.
                  (E) Net investment income.--For purposes of 
                this paragraph--
                          (i) In general.--The term ``net 
                        investment income'' has the meaning 
                        given such term by section 163(d)(4).
                          (ii) De minimis rule.--If the net 
                        investment income of any borrower for 
                        any year does not exceed $1,000, the 
                        net investment income of such borrower 
                        for such year shall be treated as zero.
                          (iii) Additional amounts treated as 
                        interest.--In determining the net 
                        investment income of a person for any 
                        year, any amount which would be 
                        included in the gross income of such 
                        person for such year by reason of 
                        section 1272 if such section applied to 
                        all deferred payment obligations shall 
                        be treated as interest received by such 
                        person for such year.
                          (iv) Deferred payment obligations.--
                        The term ``deferred payment 
                        obligation'' includes any market 
                        discount bond, short-term obligation, 
                        United States savings bond, annuity, or 
                        similar obligation.
          (2) Special rule for gift tax.--In the case of any 
        gift loan which is a term loan, subsection (b)(1) (and 
        not subsection (a)) shall apply for purposes of chapter 
        12.
  (e) Definitions of below-market loan and forgone interest.--
For purposes of this section--
          (1) Below-market loan.--The term ``below-market 
        loan'' means any loan if--
                  (A) in the case of a demand loan, interest is 
                payable on the loan at a rate less than the 
                applicable Federal rate, or
                  (B) in the case of a term loan, the amount 
                loaned exceeds the present value of all 
                payments due under the loan.
          (2) Forgone interest.--The term ``forgone interest'' 
        means, with respect to any period during which the loan 
        is outstanding, the excess of--
                  (A) the amount of interest which would have 
                been payable on the loan for the period if 
                interest accrued on the loan at the applicable 
                Federal rate and were payable annually on the 
                day referred to in subsection (a)(2), over
                  (B) any interest payable on the loan properly 
                allocable to such period.
  (f) Other definitions and special rules.--For purposes of 
this section--
          (1) Present value.--The present value of any payment 
        shall be determined in the manner provided by 
        regulations prescribed by the Secretary--
                  (A) as of the date of the loan, and
                  (B) by using a discount rate equal to the 
                applicable Federal rate.
          (2) Applicable Federal rate.--
                  (A) Term loans.--In the case of any term 
                loan, the applicable Federal rate shall be the 
                applicable Federal rate in effect under section 
                1274(d) (as of the day on which the loan was 
                made), compounded semiannually.
                  (B) Demand loans.--In the case of a demand 
                loan, the applicable Federal rate shall be the 
                Federal short-term rate in effect under section 
                1274(d) for the period for which the amount of 
                forgone interest is being determined, 
                compounded semiannually.
          (3) Gift loan.--The term ``gift loan'' means any 
        below-market loan where the forgoing of interest is in 
        the nature of a gift.
          (4) Amount loaned.--The term ``amount loaned'' means 
        the amount received by the borrower.
          (5) Demand loan.--The term ``demand loan'' means any 
        loan which is payable in full at any time on the demand 
        of the lender. Such term also includes (for purposes 
        other than determining the applicable Federal rate 
        under paragraph (2)) any loan if the benefits of the 
        interest arrangements of such loan are not transferable 
        and are conditioned on the future performance of 
        substantial services by an individual. To the extent 
        provided in regulations, such term also includes any 
        loan with an indefinite maturity.
          (6) Term loan.--The term ``term loan'' means any loan 
        which is not a demand loan.
          [(7) Husband and wife treated as 1 person.--A husband 
        and wife shall be treated as 1 person.]
          (7) Married couple treated as 1 person.--A married 
        couple shall be treated as 1 person.
          (8) Loans to which section 483, 643(i), or 1274 
        applies.--This section shall not apply to any loan to 
        which section 483, 643(i), or 1274 applies.
          (9) No withholding.--No amount shall be withheld 
        under chapter 24 with respect to--
                  (A) any amount treated as transferred or 
                retransferred under subsection (a), and
                  (B) any amount treated as received under 
                subsection (b).
          (10) Special rule for term loans.--If this section 
        applies to any term loan on any day, this section shall 
        continue to apply to such loan notwithstanding 
        paragraphs (2) and (3) of subsection (c). In the case 
        of a gift loan, the preceding sentence shall only apply 
        for purposes of chapter 12.
          (11) Time for determining rate applicable to employee 
        relocation loans.--
                  (A) In general.--In the case of any term loan 
                made by an employer to an employee the proceeds 
                of which are used by the employee to purchase a 
                principal residence (within the meaning of 
                section 121), the determination of the 
                applicable Federal rate shall be made as of the 
                date the written contract to purchase such 
                residence was entered into.
                  (B) Paragraph only to apply to cases to which 
                section 217 applies.--Subparagraph (A) shall 
                only apply to the purchase of a principal 
                residence in connection with the commencement 
                of work by an employee or a change in the 
                principal place of work of an employee to which 
                section 217 applies.
  (g) Exception for certain loans to qualified continuing care 
facilities.--
          (1) In general.--This section shall not apply for any 
        calendar year to any below-market loan made by a lender 
        to a qualified continuing care facility pursuant to a 
        continuing care contract if the lender (or the lender's 
        spouse) attains age 65 before the close of such year.
          (2) $90,000 limit.--Paragraph (1) shall apply only to 
        the extent that the aggregate outstanding amount of any 
        loan to which such paragraph applies (determined 
        without regard to this paragraph), when added to the 
        aggregate outstanding amount of all other previous 
        loans between the lender (or the lender's spouse) and 
        any qualified continuing care facility to which 
        paragraph (1) applies, does not exceed $90,000.
          (3) Continuing care contract.--For purposes of this 
        section, the term ``continuing care contract'' means a 
        written contract between an individual and a qualified 
        continuing care facility under which--
                  (A) the individual or individual's spouse may 
                use a qualified continuing care facility for 
                their life or lives,
                  (B) the individual or individual's spouse--
                          (i) will first--
                                  (I) reside in a separate, 
                                independent living unit with 
                                additional facilities outside 
                                such unit for the providing of 
                                meals and other personal care, 
                                and
                                  (II) not require long-term 
                                nursing care, and
                          (ii) then will be provided long-term 
                        and skilled nursing care as the health 
                        of such individual or individual's 
                        spouse requires, and
                  (C) no additional substantial payment is 
                required if such individual or individual's 
                spouse requires increased personal care 
                services or long-term and skilled nursing care.
          (4) Qualified continuing care facility.--
                  (A) In general.--For purposes of this 
                section, the term ``qualified continuing care 
                facility'' means 1 or more facilities--
                          (i) which are designed to provide 
                        services under continuing care 
                        contracts, and
                          (ii) substantially all of the 
                        residents of which are covered by 
                        continuing care contracts.
                  (B) Substantially all facilities must be 
                owned or operated by borrower.--A facility 
                shall not be treated as a qualified continuing 
                care facility unless substantially all 
                facilities which are used to provide services 
                which are required to be provided under a 
                continuing care contract are owned or operated 
                by the borrower.
                  (C) Nursing homes excluded.--The term 
                ``qualified continuing care facility'' shall 
                not include any facility which is of a type 
                which is traditionally considered a nursing 
                home.
          (5) Adjustment of limit for inflation.--In the case 
        of any loan made during any calendar year after 1986, 
        the dollar amount in paragraph (2) shall be increased 
        by an amount equal to--
                  (A) such amount, multiplied by
                  (B) the cost-of-living adjustment determined 
                under section 1(f)(3) for the calendar year in 
                which the taxable year begins, by substituting 
                ``calendar year 1985'' for ``calendar year 
                2016'' in subparagraph (A)(ii) thereof.
        Any increase under the preceding sentence shall be 
        rounded to the nearest multiple of $100 (or, if such 
        increase is a multiple of $50, such increase shall be 
        increased to the nearest multiple of $100).
          (6) Suspension of application.--Paragraph (1) shall 
        not apply for any calendar year to which subsection (h) 
        applies.
  (h) Exception for loans to qualified continuing care 
facilities.--
          (1) In general.--This section shall not apply for any 
        calendar year to any below-market loan owed by a 
        facility which on the last day of such year is a 
        qualified continuing care facility, if such loan was 
        made pursuant to a continuing care contract and if the 
        lender (or the lender's spouse) attains age 62 before 
        the close of such year.
          (2) Continuing care contract.--For purposes of this 
        section, the term ``continuing care contract'' means a 
        written contract between an individual and a qualified 
        continuing care facility under which--
                  (A) the individual or individual's spouse may 
                use a qualified continuing care facility for 
                their life or lives,
                  (B) the individual or individual's spouse 
                will be provided with housing, as appropriate 
                for the health of such individual or 
                individual's spouse--
                          (i) in an independent living unit 
                        (which has additional available 
                        facilities outside such unit for the 
                        provision of meals and other personal 
                        care), and
                          (ii) in an assisted living facility 
                        or a nursing facility, as is available 
                        in the continuing care facility, and
                  (C) the individual or individual's spouse 
                will be provided assisted living or nursing 
                care as the health of such individual or 
                individual's spouse requires, and as is 
                available in the continuing care facility.
        The Secretary shall issue guidance which limits such 
        term to contracts which provide only facilities, care, 
        and services described in this paragraph.
          (3) Qualified continuing care facility.--
                  (A) In general.--For purposes of this 
                section, the term ``qualified continuing care 
                facility'' means 1 or more facilities--
                          (i) which are designed to provide 
                        services under continuing care 
                        contracts,
                          (ii) which include an independent 
                        living unit, plus an assisted living or 
                        nursing facility, or both, and
                          (iii) substantially all of the 
                        independent living unit residents of 
                        which are covered by continuing care 
                        contracts.
                  (B) Nursing homes excluded.--The term 
                ``qualified continuing care facility'' shall 
                not include any facility which is of a type 
                which is traditionally considered a nursing 
                home.
  (i) Regulations.--
          (1) In general.--The Secretary shall prescribe such 
        regulations as may be necessary or appropriate to carry 
        out the purposes of this section, including--
                  (A) regulations providing that where, by 
                reason of varying rates of interest, 
                conditional interest payments, waivers of 
                interest, disposition of the lender's or 
                borrower's interest in the loan, or other 
                circumstances, the provisions of this section 
                do not carry out the purposes of this section, 
                adjustments to the provisions of this section 
                will be made to the extent necessary to carry 
                out the purposes of this section,
                  (B) regulations for the purpose of assuring 
                that the positions of the borrower and lender 
                are consistent as to the application (or 
                nonapplication) of this section, and
                  (C) regulations exempting from the 
                application of this section any class of 
                transactions the interest arrangements of which 
                have no significant effect on any Federal tax 
                liability of the lender or the borrower.
          (2) Estate tax coordination.--Under regulations 
        prescribed by the Secretary, any loan which is made 
        with donative intent and which is a term loan shall be 
        taken into account for purposes of chapter 11 in a 
        manner consistent with the provisions of subsection 
        (b).

           *       *       *       *       *       *       *

                          VII. MINORITY VIEWS

    Committee Republicans would like to point out a few 
administrative concerns with this legislation in its current 
form.
    In 2013, the Supreme Court in United States v. Windsor, 570 
U.S. 744 (2013) ruled that same-sex married couples cannot be 
denied Federal benefits, including tax benefits, available to 
other married couples. Previously, the Defense of Marriage Act 
had prohibited Government entities, including the Internal 
Revenue Service (the ``IRS''), from recognizing or extending 
Federal benefits based on a same-sex marriage. After the 
Windsor holding, the Obama Treasury Department issued guidance 
in 2013 that clarified that the IRS will recognize same-sex 
marriage for federal tax purposes and allowed taxpayers to file 
amended returns to claim credits or refunds based on marital 
status. The Internal Revenue Code, however, generally limits 
the time period for filing amended returns to three years after 
the original return was filed. Generally, at the time this 
allowed taxpayers to file amended returns based on marital 
status back to the 2010 tax year, as long as the couple was 
married in a State that recognized the marriage.
    There are sound policy reasons for the current three-year 
limitation for filing amended returns. In particular, as time 
passes, it becomes increasingly difficult for both taxpayers 
and the IRS to locate all the records that can substantiate a 
taxpayer's claims. This challenge is only exacerbated by the 
IRS's policy of routinely destroying taxpayer information. This 
legislation would allow certain taxpayers to file amended 
returns dating back to the 2004 tax year. These amended returns 
filed by taxpayers under this legislation would be subject to 
IRS audits; however, the ability of the IRS to conduct 
accurate, thorough audits of amended returns for taxable years 
of more than 10 years ago is questionable.
    Additionally, the IRS would find calculating credit 
interest a challenge under the legislation in its current form. 
The legislation does not specify which date should be used for 
the purposes of calculating interest--the date of the original 
filing, the date of enactment, etc.--nor does it specify which 
date from the two original tax returns should be used under 
that calculation method.
    Unfortunately, this bill does not adequately address these 
significant administrative concerns.
                                   Kevin Brady,
                                           Republican Leader, Committee 
                                               on Ways and Means.
```