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[Congressional Bills 108th Congress]
[From the U.S. Government Publishing Office]
[H.R. 269 Introduced in House (IH)]

108th CONGRESS
  1st Session
                                H. R. 269

 To amend the Internal Revenue Code of 1986 to restructure and replace 
the income tax system of the United States to meet national priorities, 
                        and for other purposes.

_______________________________________________________________________

                    IN THE HOUSE OF REPRESENTATIVES

                            January 8, 2003

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

_______________________________________________________________________

                                 A BILL

 
 To amend the Internal Revenue Code of 1986 to restructure and replace 
the income tax system of the United States to meet national priorities, 
                        and for other purposes.

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

SECTION 1. SHORT TITLE; AMENDMENT OF 1986 CODE; TABLE OF CONTENTS.

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

Sec. 1. Short title; amendment of 1986 Code; table of contents.
           TITLE I--FINDINGS; NEED TO REPLACE THE INCOME TAX

Sec. 101. Replacing the income tax of the United States.
              TITLE II--SIMPLIFIED USA TAX FOR INDIVIDUALS

Sec. 201. Simplified USA Tax for individuals.
Sec. 202. Reorganization of the Code.
              TITLE III--SIMPLIFIED USA TAX FOR BUSINESSES

Sec. 301. Repeal of present corporate income tax; new tax paid by 
                            corporations and other businesses.
Sec. 302. Repeal of chapter 6.
                 TITLE IV--DEFERRED COMPENSATION PLANS

Sec. 401. Provisions saved.
Sec. 402. Clerical Amendments.
Sec. 403. Clerical Amendments.
                TITLE V--REPEAL OF ESTATE AND GIFT TAXES

Sec. 501. Repeal of gratuitous transfer taxes.
Sec. 502. Effective Date.
    TITLE VI--TECHNICAL AND ADMINISTRATIVE CHANGES; EFFECTIVE DATES

Sec. 601. USA Tax Code.
Sec. 602. Revisions to the Code.
Sec. 603. Application of subtitle F.
Sec. 604. Clerical amendment.

           TITLE I--FINDINGS; NEED TO REPLACE THE INCOME TAX

SEC. 101. REPLACING THE INCOME TAX OF THE UNITED STATES.

    (a) Findings.--The Congress finds that--
            (1) the current Tax Code is irreparably flawed and must be 
        replaced;
            (2) to enhance the liberty and protect the privacy of 
        individuals, the Tax Code must be made simpler and 
        nonintrusive, and it must be applied evenhandedly to all;
            (3) to be fair and to provide for the prosperity of current 
        and future generation, the Tax Code must give all individuals 
        at all income levels an opportunity to save, invest and raise 
        their standard of living and that of their children; and
            (4) future economic growth requires a tax system that 
        facilitates successful competition in the global marketplace.
    (b) Main Features of Simplified USA Tax System.--
            (1) Replacement of old tax system.--Chapter 1 of subtitle A 
        (related to income taxes) of the Code is repealed and replaced 
        for years beginning after 2003.
            (2) Estate and gift tax repealed.
            (3) New tax system.--The Simplified USA Tax consists of--
                    (A) a simplified tax collected from individuals, 
                that for years after 2003 replaces the income tax 
                imposed on individuals by section 1 of the Code, and
                    (B) a simplified tax collected from corporations 
                and other businesses, that for years after 2003 
                replaces the income tax imposed on corporations by 
                section 11 of the Code.
            (4) Simplified usa tax on gross profits.--Corporations and 
        other businesses pay tax on their annual gross profits from 
        business conducted in the United States, except that--
                    (A) export revenues are excluded, and
                    (B) imports are taxed.
            (5) Simplified usa tax on income.--Individuals pay tax on 
        their annual income from wages, dividends, interest, and other 
        financial income (including sales of property), except that--
                    (A) investment earnings on previously taxed income 
                that is placed in a Roth IRA is exempt from further 
                taxation,
                    (B) a portion of each family's income is exempt 
                from tax, and
                    (C) deductions are allowed for--
                            (i) education costs,
                            (ii) religious, charitable, and other 
                        philanthropic donations,
                            (iii) home mortgage interest payments, and
                            (iv) contributions to qualified IRAs.
            (6) Credit for fica payroll taxes paid.--The amount of tax 
        due is reduced by the payroll tax that is--
                    (A) in the case of an employee, withheld from 
                wages, or
                    (B) in the case of a corporation or other business, 
                paid by the employer.
    (c) Concepts and Structure of New Tax System.--
            (1) Guiding principles of the simplified usa tax system.--
        The Simplified USA Tax is based on the following principles:
                    (A) National wealth and well-being depend on the 
                work, skill, and savings and investment of people.
                    (B) Businesses are people and their capital working 
                together.
                    (C) Capital makes people more productive.
                    (D) Everyone benefits from a growing stock of 
                national savings which in turn allows for a growing 
                stock of physical and human capital.
                    (E) Under the Simplified USA Tax, the deferral of 
                taxation on investments in human capital represents an 
                investment by the Federal government in the nation's 
                capital stock and the Federal government shares in the 
                return on its investment in the form of higher economic 
                output and revenues in the future.
            (2) Single tax in 2 parts.--The Simplified USA Tax is 
        composed of a business tax and an individual tax which are 2 
        parts of a single tax system that subjects all income produced 
        and received to taxation once and only once. The 2 parts are as 
        follows:
                    (A) Business tax at the source of income.--Tax is 
                paid by corporations and other businesses which produce 
                and sell goods and services that are--
                            (i) the source of nearly all the gross 
                        domestic product of the United States, and
                            (ii) the ultimate source of income received 
                        by individuals.
                    (B) Individual tax on income received.--Tax is paid 
                by individuals when they receive wages and salaries as 
                compensation for gross domestic product created by 
                their work.
            (3) Saving and investment.--The Simplified USA Tax allows 
        people to save and businesses to invest as follows:
                    (A) Fair opportunity for people to save.--
                            (i) Optional elimination of double 
                        taxation.--When an individual earns income and 
                        is taxed on that income, the individual can 
                        save that income in a Roth IRA and not pay 
                        income taxes on the investment earnings.
                            (ii) Deductible and excludable savings.--
                        The Simplified USA Tax continues provisions of 
                        present law that allow--
                                    (I) lower income individuals and 
                                certain others to make deductible 
                                contributions to individual retirement 
                                accounts, and
                                    (II) encourage employer sponsored 
                                savings and retirement plans that defer 
                                taxation of income through use of 
                                401(k) plans and other qualified 
                                retirement plans.
                    (B) Fair opportunity for businesses to invest.--
                            (i) No prepayment of tax.--When a business 
                        invests in plant and equipment--
                                    (I) a deduction is allowed for the 
                                cost, and
                                    (II) tax is deferred.
                            (ii) Tax on earnings and recovery of 
                        cost.--When recovered out of business revenues, 
                        both the cost of the investment and the 
                        earnings on the investment are included in 
                        gross profit subject to tax.
                            (iii) Expensing.--The deduction for 
                        investment is the equivalent of allowing the 
                        cost of plant and equipment to be expensed 
                        instead of depreciated.
            (4) Fair opportunity to compete in the global 
        marketplace.--The Simplified USA Tax serves the strategic 
        interests of the United States in international markets as 
        follows:
                    (A) Border adjustable tax.--
                            (i) American-made exports.--Goods and 
                        services produced in the United States can be 
                        sold into world markets free of tax.
                            (ii) Foreign-made imports.--Goods and 
                        services imported into the United States bear a 
                        fair and proportionate share of the tax burden 
                        in the United States.
                            (iii) Leveling the international playing 
                        field.--Border adjustments for exports and 
                        imports are consistent with international 
                        standards and practice.
            (5) A simple and understandable tax.--The Simplified USA 
        Tax for individuals--
                    (A) is written in a simple, understandable form,
                    (B) contains only a few exemptions, deductions, and 
                credits, and can be reported on a tax return only a 
                small fraction the size of Form 1040.
            (6) A nonintrusive, evenhanded tax.--
                    (A) Taxpayers are in control.--When the rules are 
                few and clear, taxpayers can calculate their own tax 
                correctly and file their own returns without fear of 
                mistake or of getting caught up in an argument with the 
                IRS.
                    (B) Limited role for irs.--When the rules are few 
                and clear, the IRS does not have the broad interpretive 
                power that puts taxpayers at risk of being treated 
                unfairly and unevenly.
                    (C) Restoring voluntary compliance.--When the rules 
                are few and clear, the IRS can concentrate on helping 
                taxpayers voluntarily pay their correct share of tax 
                revenues for public use and benefit under a tax system 
                that is understood and respected.
            (7) Maintaining tax progressivity for individuals.--
                    (A) Graduated tax.--Like the tax imposed by section 
                1 of the current Code, the Simplified USA Tax for 
                individuals is a graduated tax.
                    (B) Family living allowance.--The Simplified USA 
                Tax recognizes that every family's budget includes 
                necessities. The Simplified USA Tax provides a family 
                living allowance that exempts from taxation the first 
                dollars earned and spent to maintain a basic standard 
                of living.
            (8) Businesses and individual share the tax burden.--
                    (A) Business portion of tax burden.--Corporations 
                and other businesses pay about the same portion of the 
                total tax as under the current Code.
                    (B) Individual portion of tax burden.--Individuals 
                pay about the same portion of the total tax as under 
                the current Code.
            (9) Emphasizing personal independence and responsibility.--
                    (A) Reinforcing a culture of work and thrift.--
                Instead of being solely a calculation of how much they 
                must pay to the government, the Simplified USA Tax 
                converts the income tax into an annual calculation of 
                how much people produce and contribute to the economy.
                    (B) Greater control and responsibility.--Because 
                people are not double taxed on their saving, they 
                have--
                            (i) more control over their own income and 
                        taxes,
                            (ii) a greater ability to plan and provide 
                        for their own future, and
                            (iii) a fair opportunity to do so.
            (10) More opportunity for wage earners at lower income 
        levels.--
                    (A) Refundable credit for employee payroll tax.--
                The amount of the payroll tax paid or withheld under 
                the Code from an employee's wages (and paid into the 
                Social Security and Hospital Insurance Trust Funds) 
                is--
                            (i) credited against the employee's income 
                        tax, and
                            (ii) refunded to the employee to the extent 
                        in excess of the employee's income tax.
                    (B) No effect on trust fund or benefits.--The 
                income tax credit allowed for payroll taxes deposited 
                in the Social Security Trust Fund does not--
                            (i) reduce the amount in such fund, or
                            (ii) reduce the payment of any person's 
                        benefits from the fund.

              TITLE II--SIMPLIFIED USA TAX FOR INDIVIDUALS

SEC. 201. SIMPLIFIED USA TAX FOR INDIVIDUALS.

    (a) In General.--Chapter 1 of the Code is amended to read as 
follows:

            ``CHAPTER 1--SIMPLIFIED USA TAX FOR INDIVIDUALS

``Subchapter A. Basic rules.
``Subchapter B. Roth IRA and other savings provisions.
``Subchapter C. Basis, business transactions, and nonrecognition 
                            transactions.
``Subchapter D. Rules for exclusions from gross income.
``Subchapter E. Rules relating to deductions.
``Subchapter F. Special business activities.
``Subchapter G. Accounting methods.
``Subchapter H. Nonresident aliens.
``Subchapter I. Trusts and estates.
``Subchapter J. Definitions and rules of application.

                      ``Subchapter A--Basic Rules

``Sec. 1. Simplified USA tax for individuals.
``Sec. 2. Persons liable for the Simplified USA for individuals.
``Sec. 3. Gross income.
``Sec. 4. Exclusions from gross income.
``Sec. 5. Alimony and child support deductions.
``Sec. 6. Personal and dependency deduction.
``Sec. 7. Family Living Allowance.
``Sec. 8. USA deductions.
``Sec. 9. Homeowner deduction.
``Sec. 10. Education deduction.
``Sec. 11. Philanthropic transfer deduction.
``Sec. 13. Limitation on deductions.
``Sec. 15. Tax rates.
``Sec. 16. Kiddie tax.
``Sec. 17. Rules for filing status and rate tables.
``Sec. 20. USA tax credits.
``Sec. 21. Payroll tax credit.
``Sec. 22. Taxes-paid tax credit.
``Sec. 23. Indexing for inflation.

``SEC. 1. SIMPLIFIED USA TAX FOR INDIVIDUALS.

    ``(a) Imposition of Tax.--An income tax is imposed on each 
individual described in section 2. The income tax shall equal the 
amount determined by applying the tax schedules in section 15 to the 
taxable income of the taxpayer for the taxable year and reducing the 
tax so determined by the USA tax credits for the taxable year.
    ``(b) Taxable Income.--`Taxable income' means adjusted gross 
income, reduced by--
            ``(1) the personal and dependency deduction,
            ``(2) the Family Living Allowance, and
            ``(3) the USA deductions, including--
                    ``(A) the homeowner deduction,
                    ``(B) the education deduction, and
                    ``(C) the philanthropic transfer deduction.
    ``(c) Adjusted Gross Income.--`Adjusted gross income' means gross 
income, reduced by--
            ``(1) the alimony and child support deductions, and
            ``(2) the qualified IRA deduction.
    ``(d) Name.--The tax imposed by this chapter shall be known as the 
`Simplified USA Tax for Individuals'.

``SEC. 2. PERSONS LIABLE FOR THE SIMPLIFIED USA TAX FOR INDIVIDUALS.

    ``(a) Individuals Only.--The Simplified USA Tax for Individuals 
shall apply only to individuals.
    ``(b) Citizens and Resident Aliens.--The Simplified USA Tax for 
Individuals shall apply to all citizens of the United States and to all 
resident aliens of the United States. Except as specifically provided 
in this chapter, the Simplified USA Tax for Individuals shall not apply 
to nonresident aliens.
    ``(c) Nonresident Aliens.--For rules applicable to the compensation 
income of nonresident aliens, see subchapter H (sections 131 and 132). 
For rules on the withholding of tax on nonresident aliens, see chapter 
5 (sections 1441-1464).
    ``(d) Taxpayer.--For purposes of this chapter, `taxpayer' means an 
individual, or, in the case of a joint return, the husband and the 
wife.

``SEC. 3. GROSS INCOME.

    ``(a) General Definition.--Except as otherwise provided in this 
chapter, `gross income for the taxable year' means all income from 
whatever source derived by a taxpayer during the taxable year, 
including (but not limited to) the following items:
            ``(1) Compensation for services, including (but not limited 
        to)--
                    ``(A) salaries,
                    ``(B) wages,
                    ``(C) commissions,
                    ``(D) tips, and
                    ``(E) distributions from business entities (as 
                defined in section 171).
            ``(2) Fringe benefits (except as specifically excluded by 
        section 4(a)), including (but not limited to)--
                    ``(A) the cost of health, disability, life or other 
                similar insurance paid by an employer if the taxpayer 
                is indirectly or directly the beneficiary of the policy 
                or has the right to name the beneficiary of the policy,
                    ``(B) employer-paid parking (unless the employee 
                uses the automobile parked in the space regularly on 
                employer business),
                    ``(C) employer-paid educational benefits,
                    ``(D) employer-paid housing (other than housing 
                provided for the convenience of the employer),
                    ``(E) employer-paid meals (other than meals 
                provided for the convenience of the employer or 
                reimbursement for the reasonable cost of meals incurred 
                on overnight travel),
                    ``(F) amounts contributed by an employer on behalf 
                of an employee to a group legal services plan, and
                    ``(G) dependent care assistance received from an 
                employer.
            ``(3) Distributions from business entities (as defined in 
        section 171) constituting--
                    ``(A) compensation for use of capital, including 
                interest, or
                    ``(B) shares of profits (including dividends).
            ``(4) Interest not described in paragraph (3)(A).
            ``(5) Rents.
            ``(6) Royalties.
            ``(7) Alimony, child support, and separate maintenance 
        payments.
            ``(8) Includible social security benefits.
            ``(9) Income from the discharge of indebtedness.
            ``(10) Gains on the sale or disposition of assets.
            ``(11) Amounts stolen or embezzled.
            ``(12) Distributions from retirement plans and annuities 
        (other than USA Roth IRAs) to the extent not previously 
        included as income, as determined in accordance with section 
        33.
            ``(13) Amounts received through health, accident or 
        disability insurance to the extent that--
                    ``(A) the cost of such insurance was paid by an 
                employer and not included in the employee's taxable 
                income and
                    ``(B) such amounts exceed the actual medical 
                expenses incurred and not paid or treated as paid with 
                amounts otherwise excluded from income.
    ``(b) Definitions.--For purposes of subsection (a) and section 4--
            ``(1) Employer.--`Employer' includes--
                    ``(A) in the case of a partner who provides 
                services for a partnership, the partnership,
                    ``(B) in the case of a proprietor, the 
                proprietorship, and
                    ``(C) in the case of an independent contractor, any 
                business or individual that hires the independent 
                contractor.
            ``(2) Social security benefits.--
                    ``(A) In general.--`Social Security benefits' means 
                any amount received by the taxpayer by reason of 
                entitlement to--
                            ``(i) a monthly benefit under title II of 
                        the Social Security Act, or
                            ``(ii) a tier 1 railroad retirement 
                        benefit. The amount received by a taxpayer 
                        shall be determined as if the Social Security 
                        Act did not contain section 203(i) thereof.
                    ``(B) Tier 1 railroad retirement benefit.--`Tier 1 
                railroad retirement benefit' means--
                            ``(i) 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 
                        record the annuity is being paid) has been 
                        included in the term `employment' as defined in 
                        the Social Security Act, and
                            ``(ii) a monthly annuity amount under 
                        section 3(f)(3) of the Railroad Retirement Act 
                        of 1974.
                    ``(C) Workers' compensation substitutes.--If by 
                reason of section 224 of the Social Security Act or 
                section 3(a)(1) of the Railroad Retirement Act of 1974, 
                any social security benefit is reduced because of the 
                receipt of a benefit under a workers' compensation 
act, the term `social security benefit' includes that portion of such 
benefit which equals such reduction.
                    ``(D) Effect of early payment.--If social security 
                benefits checks are delivered before the end of the 
                calendar month for which they are issued and are not 
                deposited until the month for which they are issued, 
                they will be treated as received in the month for which 
                they are issued.
            ``(3) Includible social security benefits.--`Includible 
        social security benefits' means the portion of social security 
        benefits that would be included in gross income under section 
        86(a) of the Internal Revenue Code of 1986, except that for 
        purposes of applying such section, the term `modified adjusted 
        gross income' means adjusted gross income (as defined in 
        section 1(c)), determined without regard to the inclusion of 
        any social security benefits.
    ``(c) Property Received for Services.--
            ``(1) In general.--If, in connection with the performance 
        of services, property is transferred to any person other than 
        the person for whom such services are performed, the excess 
        of--
                    ``(A) the fair market value of such property 
                (determined without regard to any restriction other 
                than a restriction which by its terms will never lapse) 
                at the first time the rights of the person having the 
                beneficial interest in such property are transferable 
                or are not subject to a substantial risk of forfeiture, 
                whichever occurs earlier, over
                    ``(B) the amount (if any) paid for such property, 
                shall be included in the gross income of the person who 
                performed such services in the first taxable year in 
                which the rights of the person having the beneficial 
                interest in such property are transferable or are not 
                subject to a substantial risk of forfeiture, whichever 
                is applicable. The preceding sentence shall not apply 
                if such person sells or otherwise disposes of such 
                property in an arm's length transaction before his 
                rights in such property become transferable or not 
                subject to a substantial risk of forfeiture.
            ``(2) Rules and regulations.--The Secretary shall prescribe 
        rules and regulations similar to those applicable under section 
        83 of the Internal Revenue Code of 1986 for purposes of 
        implementing this subsection.

``SEC. 4. EXCLUSIONS FROM GROSS INCOME.

    ``(a) General Rule.--Gross income does not include:
            ``(1) Returns or benefits from previously taxed income.--
                    ``(A) Social security benefits (as defined in 
                section 3(b)(2)), other than includible social security 
                benefits (as defined in section 3(b)(3)).
                    ``(B) Amounts received under accident or health 
                benefit plans (except as provided in section 3(a)(13)).
                    ``(C) Value of services provided pursuant to a 
                group legal service plan (but only if the cost of such 
                services was paid by the employee or paid by the 
                employer and included in the gross income of the 
                employee).
                    ``(D) Amounts received under an insurance contract 
                for certain living expenses in the case of an 
                individual whose principal residence is damaged or 
                destroyed or who is denied access because of the threat 
                of such occurrence.
                    ``(E) Amounts treated as recovery of basis under 
                any other provision of chapter 1.
            ``(2) Compensation for special kinds of service.--
                    ``(A) In the case of a minister of the gospel--
                            ``(i) the rental value of a home furnished 
                        to him, or
                            ``(ii) the rental allowance paid to him as 
                        part of his compensation, to the extent used by 
                        him to rent or provide a home.
                    ``(B) Certain combat pay of members of the Armed 
                Forces of the United States (as provided in section 
                92).
                    ``(C) Certain reduced uniform services retirement 
                pay (as defined in section 122 of the Internal Revenue 
                Code of 1986).
                    ``(D) Qualified military benefits (as defined in 
                section 93).
                    ``(E) Moving allowances for active military 
                personnel (as defined in section 217(g) of the Internal 
                Revenue Code of 1986).
                    ``(F) Certain foster care payments (as defined in 
                section 94).
            ``(3) Gratuitous, charitable, and governmental transfers.--
                    ``(A) Gifts.
                    ``(B) Inheritances.
                    ``(C) Supplemental security income, aid to families 
                with dependent children, food stamps, section 8 low-
                income rental assistance, benefits under the low-income 
                home energy assistance program, and benefits under 
                other similar Federal and State assistance programs for 
                low-income individuals and families.
                    ``(D) Benefits or assistance received from a 
                charitable organization as the result of a disaster or 
                by reason of financial need.
            ``(4) Tax-exempt bond interest.--Interest on State and 
        local bonds (as provided in section 91);
            ``(5) Compensation for injury and sickness.--
                    ``(A) Amounts received as compensation for personal 
                injury or sickness (as provided in section 95).
                    ``(B) Reimbursement and direct payments under 
                Medicare and Medicaid.
            ``(6) Benefits primarily for the convenience of the 
        employer and certain fringe benefits.--
                    ``(A) Meals or lodging furnished for the 
                convenience of the employer (as provided in section 
                96).
                    ``(B) Value of a parking space if employee uses the 
                car parked in the space regularly on company business.
                    ``(C) A fringe benefit that is a no-additional-cost 
                service (as defined in section 97(b)), subject to rules 
                prohibiting discrimination in favor of the highly 
                compensated.
                    ``(D) A qualified employee discount (as defined in 
                section 97(c)), subject to rules prohibiting 
                discrimination in favor of the highly compensated.
                    ``(E) Any property or services provided to an 
                employee to the extent that if the employee were 
                treated as a business and the business paid for those 
                services, the employee could deduct the cost of such 
                property or services under the business tax.
                    ``(F) A de minimis fringe benefit (as defined in 
                section 97(d)).
                    ``(G) Transportation in a commuter highway vehicle 
                if such transportation is in connection with travel 
                between the employee's residence and place of 
                employment.
                    ``(H) Any amount received directly or indirectly by 
                an individual from an employer for moving expenses if--
                            ``(i) the move is associated with a change 
                        in job locations for the same employer, and
                            ``(ii) the expenses of such move would have 
                        been deductible under the rules under section 
                        217 of the Internal Revenue Code of 1986 if 
                        paid directly by the employee.
                    ``(I) Employer provided coverage under an accident 
                or health plan.
            ``(7) Repayable receipts.--The proceeds of borrowing or any 
        other amounts legally received that the taxpayer is legally 
        obligated to return (except that the imputed interest rules of 
        section 7872 may apply if there is inadequate stated interest).
            ``(8) Certain income earned abroad.--Certain income and 
        housing costs of citizens and residents of the United States 
        living outside the United States in accordance with the rules 
        under section 911 of the Internal Revenue Code of 1986.
            ``(9) Discharge of indebtedness.--The amount of 
        indebtedness discharged unless the discharge is for services, 
        property, or other valuable right.
            ``(10) Nonrecognition transactions.--Amounts to which the 
        nonrecognition transaction rules of section 77 apply.
            ``(11) Proceeds from sale of principal residence.--Amounts 
        excludable under section 76 (relating to certain proceeds from 
        the sale of the taxpayer's principal residence).
            ``(12) Taxable receipts of a business entity.--Amounts that 
        are treated as taxable receipts of a business entity under the 
        Simplified USA Tax for businesses and are not distributed to 
        the individual taxpayer.
            ``(13) Qualified retirement contributions.--Employer 
        contributions to retirement plans that are exempt from taxation 
        under chapter 3, including contributions pursuant to a cash or 
        deferred payment plan described in section 401(k).
    ``(b) Cross References.--
            ``(1) Roth iras.--For rules excluding from income earnings 
        on, and distributions from, Roth IRAs, see sections 30 and 
        408A.
            ``(2) Other retirement plans.--For rules excluding or 
        deferring from income earnings on other retirement plans, see 
        chapter 3.

``SEC. 5. ALIMONY AND CHILD SUPPORT DEDUCTIONS.

    ``(a) General Rule.--A taxpayer shall be allowed an alimony and 
child support deductions for an amount equal to the alimony, child 
support, or separate maintenance payments paid during the taxpayer's 
taxable year.
    ``(b) Definition of Alimony, Child Support, and Separate 
Maintenance Payments.--`Alimony, child support, and separate 
maintenance payments' means any alimony, child support, or separate 
maintenance payment which is includible in gross income of the 
recipient under section 3.

``SEC. 6. PERSONAL AND DEPENDENCY DEDUCTION.

    ``(a) Amount of Exemption.--The personal and dependency deduction 
for an individual shall equal the number of exemptions multiplied by 
$2,700.
    ``(b) Number of Exemptions.--
            ``(1) Taxpayer.--One exemption shall be allowed for the 
        taxpayer unless the taxpayer files a joint return with a 
        spouse, in which case 1 exemption shall be allowed for the 
husband and 1 for the wife.
            ``(2) Eligible dependent.--An exemption shall be allowed 
        for each eligible dependent.
    ``(c) Dependent.--
            ``(1) Definition.--`Dependent' means any of the following 
        individuals over half of whose support, for the calendar year 
        was received from the taxpayer or is treated as received from 
        the taxpayer:
                    ``(A) A son or daughter of the taxpayer, or a 
                descendant of either.
                    ``(B) A stepson, stepdaughter, stepfather, or 
                stepmother of the taxpayer.
                    ``(C) A brother, sister, stepbrother, or stepsister 
                of the taxpayer.
                    ``(D) The father or mother of the taxpayer, or an 
                ancestor of either.
                    ``(E) A son or daughter of a brother or sister of 
                the taxpayer.
                    ``(F) A brother or sister of the mother or father 
                of the taxpayer.
                    ``(G) A son-in-law, daughter-in-law, father-in-law, 
                mother-in-law, brother-in-law, or sister-in-law of the 
                taxpayer.
                    ``(H) An individual (other than an individual who 
                at any time during the taxable year was the spouse, 
                determined without regard to section 7703, of a 
taxpayer) who, for the taxable year of the taxpayer, has as his 
principal place of abode the home of the taxpayer and is a member of 
the taxpayer's household.
            ``(2) Rules relating to the general definition.--The 
        Secretary shall prescribe rules similar to the rules under 
        section 152 of the Internal Revenue Code of 1986 that shall 
        apply to the general definition of `dependent', including 
        definitional rules, rules relating to multiple support 
        agreements, and support tests in cases of children of divorced 
        parents.
    ``(d) Eligible Dependent.--
            ``(1) In general.--`Eligible dependent' means a dependent--
                    ``(A) whose gross income for the calendar year in 
                which the taxable year of the taxpayer begins is less 
                than the exemption amount, or
                    ``(B) who is a child of the taxpayer and who--
                            ``(i) has not attained the age of 19 at the 
                        close of the calendar year in which the taxable 
                        year of the taxpayer begins, or
                            ``(ii) is a student who has not attained 
                        the age of 24 at the close of such calendar 
                        year.
            ``(2) Exclusions.--A dependent who files a joint return 
        with a spouse for the calendar year is not an eligible 
        dependent.
            ``(3) Rules relating to definitions.--The Secretary shall 
        prescribe rules similar to those included in or applicable 
        under the Internal Revenue Code of 1986 relating to this 
        subsection, including rules defining `child' and `student' and 
        rules relating to the income of handicapped dependents.
    ``(e) Inflation Adjustment.--The dollar amount contained in 
subsection (a) shall be adjusted for inflation beginning with calendar 
year 2004 in accordance with the procedures of section 23.

``SEC. 7. FAMILY LIVING ALLOWANCE.

    ``(a) Amount of Allowance.--The Family Living Allowance for a 
taxpayer shall be determined in accordance with the following schedule:

``Form of Return:                   Family Living Allowance:
    Taxpayers filing joint return..
                                        $8,140.
    Surviving spouse...............
                                        $8,140.
    Head of household..............
                                        $5,940.
    Individual who is not married 
        or a head of household.
                                        $4,840.
    Married filing separate return.
                                        $4,070.

    ``(b) Limitation in the Case of Certain Dependents.--In the case of 
an individual for whom another taxpayer can claim an exemption under 
section 6, the Family Living Allowance for such individual shall not 
exceed the greater of $700 or such individual's earned income (as 
defined in section 171(a)(6)).
    ``(c) Adjustments for Inflation.--The dollar amounts contained in 
subsections (a) and (b) shall be adjusted for inflation beginning with 
calendar year 2004 in accordance with the procedures of section 23.

``SEC. 8. USA DEDUCTIONS.

    ``In computing taxable income, an individual shall be entitled to 
the following deductions:
            ``(1) The homeowner deduction described in section 9.
            ``(2) The education deduction described in section 10.
            ``(3) The philanthropic transfer deduction described in 
        section 11.

``SEC. 9. HOMEOWNER DEDUCTION.

    ``(a) In General.--The homeowner deduction shall equal the amount 
of interest paid by the taxpayer during the taxable year on acquisition 
indebtedness with respect to any qualified residence of the taxpayer.
    ``(b) Definitions.--
            ``(1) Acquisition indebtedness.--`Acquisition indebtedness' 
        means any indebtedness that is secured by a qualified residence 
        and that--
                    ``(A) was incurred in acquiring, constructing, or 
                substantially improving the qualified residence, or
                    ``(B) was incurred to refinance any indebtedness 
                that is described in subparagraph (A) or this 
                subparagraph (B) but only to the extent that the 
                refinancing does not exceed the amount refinanced.
        The aggregate amount treated as acquisition indebtedness shall 
        not exceed $1,000,000 ($500,000 in the case of a married 
        individual filing separately).
            ``(2) Qualified residence.--`Qualified residence' means the 
        principal residence of the taxpayer and 1 other residence of 
        the taxpayer that is designated by the taxpayer and which--
                    ``(A) is used by the taxpayer as a residence for 
                more than 14 days during such year for which such unit 
                is rented, and
                    ``(B) is not rented for more than 14 days during 
                such year.
    ``(c) Cooperative Housing Corporation Tenant.--Any indebtedness 
secured by stock held by a taxpayer as a tenant-stockholder in a 
cooperative housing corporation shall be treated as secured by the 
house or apartment which the taxpayer is entitled to occupy as a 
tenant-stockholder. If such stock cannot be used to secure 
indebtedness, the indebtedness will be treated as so secured if the 
taxpayer establishes that such indebtedness was incurred to acquire 
stock.

``SEC. 10. EDUCATION DEDUCTION.

    ``(a) In General.--The education deduction shall equal the sum of 
the qualified educational expenses for each eligible student.
    ``(b) Qualified Education Expenses.--
            ``(1) In general.--`Qualified education expenses' means 
        with respect to an eligible student the lesser of--
                    ``(A) $4,000, or
                    ``(B) the qualified higher education expenses of 
                the eligible student paid by the taxpayer during the 
                taxable year.
            ``(2) Qualified higher education expenses.--
                    ``(A) In general.--`Qualified higher education 
                expenses' means tuition and fees required for the 
                enrollment of an eligible student at an eligible 
                education institution. 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.
                    ``(B) Eligible educational institution.--`Eligible 
                educational institution' means--
                            ``(i) an institution which is described in 
                        section 481 of the Higher Education Act of 1965 
                        (as in effect on May 15, 1998), and which is 
                        eligible to participate in a program under 
                        title IV of such Act, and
                            ``(ii) in the case of a student who has 
                        attained the age of 18 before the beginning of 
                        the taxable year, and not graduated from high 
                        school before the beginning of the taxable 
                        year, an accredited school providing remedial 
                        education.
            ``(3) Eligible student.--`Eligible student' means--
                    ``(A) the taxpayer, but only if no other taxpayer 
                treats the taxpayer as a dependent for which an 
                exemption is allowed in computing the dependency 
                deduction under section 6,
                    ``(B) the taxpayer's spouse if a joint return is 
                filed, and
                    ``(C) any dependent of the taxpayer for whom the 
                taxpayer is allowed an exemption in computing the 
                dependency deduction under section 6.
    ``(c) Limitation.--The maximum education deduction in a taxable 
year is $12,000 ($6,000 in the case of married individuals filing 
separate returns).
    ``(d) Inflation Adjustments.--The dollar amounts contained in 
subsections (b)(1)(A) and (c) shall be adjusted for inflation beginning 
with calendar year 2004 in accordance with section 23.

``SEC. 11. PHILANTHROPIC TRANSFER DEDUCTION.

    ``(a) In General.--The philanthropic transfer deduction shall equal 
the amount of charitable contributions made by the taxpayer in the 
taxable year, subject to the limitations in subsection (b). A deduction 
shall be allowable as a deduction only if verified under regulations 
prescribed by the Secretary.
    ``(b) Limitation on Amount.--
            ``(1) General rule.--A deduction for contributions to 
        regular charities in any taxable year shall be allowed only to 
        the extent that such contributions do not exceed 50 percent of 
        the taxpayer's adjusted gross income. Other charitable 
        contributions shall be allowed only to the extent that such 
        contributions do not exceed the lesser of--
                    ``(A) 30 percent of the taxpayer's adjusted gross 
                income, or
                    ``(B) the excess, if any, of 50 percent of the 
                taxpayer's adjusted gross income over the amount of 
                charitable contributions to regular charities.
            ``(2) Carryover.--If the amount of charitable contributions 
        made in a taxable year exceeds the amount which can be deducted 
        in such year, the excess shall be carried over for a period of 
        up to 5 years in accordance with rules to be prescribed by the 
        Secretary.
            ``(3) Regular charity.--For purposes of this subsection, 
        `regular charity' means an organization described in section 
        101, that is not a private foundation (other than a private 
        operating foundation) (as such terms are defined in section 
        102).
    ``(c) Charitable Contribution.--`Charitable contribution' means a 
contribution or gift to or for the use of a governmental or charitable 
recipient (as defined in section 101).
    ``(d) Contributions of Property.--
            ``(1) General rule.--In the case of a charitable 
        contribution of property, the amount of the contribution shall 
        equal the lesser of the fair market value of the property or 
        the taxpayer's basis in the property.
            ``(2) Fair market value deductions in certain cases.--
        Notwithstanding paragraph (1), in the case of a charitable 
        contribution (other than a contribution to a private foundation 
        that is not a private operating foundation) of--
                    ``(A) real property,
                    ``(B) tangible property if the use by the donee is 
                related to its purpose or function constituting the 
                basis for its exemption from the business tax or in the 
                case of a governmental unit, to any governmental unit, 
                and
                    ``(C) stocks, bonds, or other securities held for 
                more than one year,
        the amount of the charitable contribution shall equal the fair 
        market value of the property.
            ``(3) Contributions of stock for which market quotations 
        are readily available.--
                    ``(A) In general.--In the case of contributions of 
                qualified appreciated stock, paragraph (2) shall apply 
                without regard to whether the stock is contributed to a 
                private foundation.
                    ``(B) Qualified appreciated stock.--`Qualified 
                appreciated stock' means any stock of a corporation for 
                which (as of the date of the contribution) market 
                quotations are readily available on an established 
                securities market, except that in the case of a donor 
                to a private foundation, the term does not include 
                stock to the extent that the amount so contributed, 
                when increased by prior contributions by the donor of 
                stock in the same corporation, exceeds 10 percent in 
                value of the outstanding stock of such corporation.
    ``(e) Other Rules.--The Secretary shall prescribe rules limiting 
the availability of the philanthropic transfer deduction in certain 
cases, including rules for--
            ``(1) contributions of property placed in trust,
            ``(2) contributions of partial interests in property,
            ``(3) contributions subject to liabilities that are 
        assumed,
            ``(4) out-of-pocket expenditures on behalf of a charity to 
        influence legislation,
            ``(5) substantiation of contributions in excess of $250,
            ``(6) contributions designated for lobbying activity,
            ``(7) amounts paid to maintain certain students as members 
        of taxpayer's household,
            ``(8) qualified conservation contributions, and
            ``(9) deductions for travel expenses on behalf of a charity 
        where there is a significant element of personal pleasure.

``SEC. 13. LIMITATION ON DEDUCTIONS.

    ``(a) In General.--A taxpayer's deductions shall not reduce the 
taxpayer's taxable income below zero. Except as provided in section 
11(b) (relating to the limitation on the philanthropic transfer 
deduction), a taxpayer shall not be entitled to carry over any unused 
deductions.
    ``(b) Deductions.--For purposes of this section, `deductions' 
means--
            ``(1) the alimony and child support deductions,
            ``(2) the personal and dependency deduction,
            ``(3) the Family Living Allowance,
            ``(4) the USA deductions, and
            ``(5) the qualified IRA deduction.

``SEC. 15. TAX RATES.

    ``(a) Married Individuals Filing Joint Returns and Surviving 
Spouses.--The tax schedule for every married individual who files a 
joint return with a spouse and for every surviving spouse (as defined 
in section 17(a)) is--

``If taxable income is:             The tax is:
    Not over $40,000...............
                                        15% of taxable income.
    Over $40,000, but not over 
        $80,000.
                                        $6,000, plus 25% of the excess 
                                                over $40,000.
    Over $80,000...................
                                        $16,000, plus 30% of the excess 
                                                over $80,000.
    ``(b) Heads of Households.--The tax schedule for every head of 
household (as defined in section 17(b)) is--

``If taxable income is:             The tax is:
    Not over $35,000...............
                                        15% of taxable income.
    Over $35,000, but not over 
        $70,000.
                                        $5,250, plus 25% of the excess 
                                                over $35,000.
    Over $70,000...................
                                        $14,000, plus 30% of the excess 
                                                over $70,000.
    ``(c) Unmarried Individuals.--The tax schedule for an unmarried 
individual who is not a head of a household or a surviving spouse is--

``If taxable income is:             The tax is:
    Not over $24,000...............
                                        15% of taxable income.
    Over $24,000, but not over 
        $48,000.
                                        $3,600, plus 25% of the excess 
                                                over $24,000.
    Over $48,000...................
                                        $9,600, plus 30% of the excess 
                                                over $48,000.
    ``(d) Married Individuals Filing Separate Returns.--The tax 
schedule for a married individual filing a separate return is--

``If taxable income is:             The tax is:
    Not over $20,000...............
                                        15% of taxable income.
    Over $20,000, but not over 
        $40,000.
                                        $3,000, plus 25% of the excess 
                                                over $20,000.
    Over $40,000...................
                                        $8,000, plus 30% of the excess 
                                                over $40,000.
    ``(e) Adjustments for Inflation.--Beginning with calendar year 
2004, the tax schedules in subsections (a) through (d) shall be 
adjusted so that inflation will not result in tax increases in 
accordance with the procedures under section 23.
    ``(f) Definitions.--See section 17 for rules on filing status.

``SEC. 16. KIDDIE TAX.

    ``(a) General Rule.--If a child has a living parent and net 
unearned income and the child has not attained the age of 14 before the 
close of the taxable year--
            ``(1) the net unearned income of the child shall be 
        included in the taxable income of the eligible parent for 
        purposes of determining the parent's tax liability, or
            ``(2) the tax calculated under the tax rate schedules for 
        the child as a separate taxpayer shall not be less than the sum 
        of--
                    ``(A) the tax which would have been determined 
                under the rate schedule if the taxable income of the 
                child were reduced by the net unearned income of the 
                child, plus
                    ``(B) such child's share of the allocable parental 
                tax.
    ``(b) Child's Share of Allocable Parental Tax.--
            ``(1) Allocable parental tax.--`Allocable parental tax' 
        means the excess of--
                    ``(A) the tax that would have been determined under 
                the rate schedules on the eligible parent's taxable 
                income if such income included the net unearned income 
                of all of the eligible parent's children to which this 
                section applies, over
                    ``(B) the tax actually determined under the rate 
                schedules without regard to this section.
            ``(2) Child's share.--A child's share of the allocable 
        parental tax is equal to the amount that 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 to whom this section applies for whom the eligible 
        parent is the eligible parent.
    ``(c) Eligible Parent.--`Eligible parent' means--
            ``(1) both parents of the child if the parents file a joint 
        return,
            ``(2) the surviving parent of a child if the child has only 
        1 surviving parent,
            ``(3) the custodial parent if the child's parents are not 
        married, or
            ``(4) the parent with the greater taxable income if the 
        parents are married and filing separate returns.
    ``(d) Net Unearned Income.--`Net unearned income' means the excess, 
if any, of--
            ``(1) the adjusted gross income of the child, over
            ``(2) the sum of--
                    ``(A) the earned income (as defined in section 
                171(a)(6)) of the child, and
                    ``(B) an amount equal to the Family Living 
                Allowance for a dependent child.

``SEC. 17. RULES FOR FILING STATUS AND RATE TABLES.

    ``(a) Definition of Surviving Spouse.--
            ``(1) In general.--`Surviving spouse' means an individual--
                    ``(A) whose spouse died during either of his 2 
                calendar years immediately preceding the calendar year, 
                and
                    ``(B) who maintains as his 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 6) 
                        is a son, stepson, daughter, or stepdaughter of 
                        the taxpayer, and
                            ``(ii) who the taxpayer is entitled to 
                        treat as an exemption for purposes of computing 
                        the personal dependency deduction for the 
                        taxable year under section 6.
        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 15, an individual shall not be considered 
        to be a surviving spouse--
                    ``(A) if the individual has remarried at any time 
                before the close of the taxable year, or
                    ``(B) unless, for the individual's taxable year 
                during which his 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 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) the date which is 2 years after the date 
                designated under section 92 (relating to exemption for 
                combat zones) as the date of termination of combatant 
                activities in that zone.
    ``(b) Definition of Head of Household.--
            ``(1) In general.--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 son, stepson, daughter, or 
                        stepdaughter of the taxpayer, or a descendant 
                        of a son or daughter of the taxpayer, but if 
                        such son, stepson, daughter, stepdaughter, or 
                        descendant is married at the close of the 
                        taxpayer's taxable year, only if the taxpayer 
                        is entitled to claim such person as an 
                        exemption for the taxable year for purposes of 
                        computing the dependency deduction under 
                        section 6 (or would be so entitled but for the 
                        release of a claim to such exemption by the 
                        custodial parent),
                            ``(ii) any other person who is a dependent 
                        of the taxpayer, if the taxpayer is entitled to 
                        claim such person as an exemption in 
                        determining the personal dependency deduction 
                        for the taxable year, 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 personal dependency deduction for the 
                taxable year for such father or mother.
        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) a legally adopted child of a person shall be 
                considered a child of such person by blood;
                    ``(B) an individual who is legally separated from 
                his spouse under a decree of divorce or of separate 
                maintenance shall not be considered as married;
                    ``(C) a taxpayer shall be considered as not married 
                at the close of his taxable year if at any time during 
                the taxable year his spouse is a nonresident alien; and
                    ``(D) a taxpayer shall be considered as married at 
                the close of his taxable year if his spouse (other than 
                a spouse described in subparagraph (C)) died during the 
                taxable year.
            ``(3) Limitations.--Notwithstanding paragraph (1), for 
        purposes of this chapter, 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 6(c)(1), 
                        or
                            ``(ii) multiple support rules prescribed by 
                        the Secretary.
    ``(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 section 1 shall not apply.

``SEC. 20. USA TAX CREDITS.

    ``(a) In General.--The USA tax credits are and shall be applied in 
the following order:
            ``(1) The foreign tax credit as prescribed by the Secretary 
        under rules similar to the rules of subpart A of part III of 
        subchapter N of chapter 1 of the Internal Revenue Code of 1986, 
        but only with respect to foreign taxes on amounts that are 
        included in the gross income of the taxpayer.
            ``(2) The payroll tax credit under section 21.
            ``(3) The taxes-paid tax credit under section 22.
    ``(b) Refundable Credits.--If a taxpayer's USA tax credits (other 
than the foreign tax credit) for a taxable year exceed the taxpayer's 
tax liability for the taxable year (after application of the foreign 
tax credit but before application of the other USA tax credits), the 
taxpayer shall be entitled to a refund for such excess. The taxpayer 
may elect in lieu of a refund to apply such excess as a tax paid for 
the following taxable year.

``SEC. 21. PAYROLL TAX CREDIT.

    ``(a) In General.--A taxpayer shall be allowed a payroll tax credit 
in an amount equal to the sum of--
            ``(1) the employee's share of the basic FICA tax,
            ``(2) the employee's share of the basic Tier 1 railroad 
        retirement tax, and
            ``(3) one-half of the basic SECA tax payable with respect 
        to the taxpayer's compensation or earnings during the taxable 
        year.
    ``(b) Definitions.--
            ``(1) Employee's share of the basic fica tax.--`Employee's 
        share of the basic FICA tax' means the old-age, survivors and 
        disability insurance tax imposed by section 3101(a) and the 
        portion of the hospital insurance tax imposed by section 
        3101(b) that is attributable to the wage base on which the 
        section 3101(a) tax is imposed.
            ``(2) Employee's share of the basic tier 1 railroad 
        retirement tax.--Employee's share of the basic Tier 1 railroad 
        retirement tax' means--
                    ``(A) the portion of the tax imposed by section 
                3201 with respect to compensation below the applicable 
                base (as defined in section 3231(e)(2)); and
                    ``(B) the portion of the tax imposed by section 
                3211(a)(1) on railroad employee representatives 
                attributable to the tax imposed by section 3101(a) and 
                the portion of the hospital insurance tax imposed by 
                section 3101(b) that is attributable to the wage base 
                on which the section 3101(a) tax is imposed.
            ``(3) Basic seca tax.--`Basic SECA tax' means the old-age, 
        survivors and disability insurance tax imposed by section 
1401(a) on self-employment income and the portion of the hospital 
insurance tax imposed by section 1401(b) on self-employment income that 
is attributable to the amount of self-employment income (as determined 
under section 1402(b)) on which the section 1401(a) tax is imposed.
    ``(c) No Credit for Refundable Tax.--No credit shall be allowed 
with respect to any FICA tax or railroad retirement tax for which a 
taxpayer is entitled to a refund because of overpayment of tax on the 
applicable wage base.

``SEC. 22. TAXES-PAID TAX CREDIT.

    ``The taxes-paid tax credit shall equal the sum of:
            ``(1) Wage withholding.--The amount withheld as tax under 
        chapter 24.
            ``(2) Special refunds of social security tax when wages 
        earned from more than 1 employer.--The amount allowable under 
        section 6413(c) as a special refund of taxes imposed on wages.
            ``(3) Overpayments of prior-year tax.--Any overpayment of a 
        prior tax obligation that the taxpayer or the Secretary applies 
        to the tax for the taxable year.
            ``(4) Estimated taxes.--Any estimated taxes paid by the 
        taxpayer with respect to the taxpayer's tax liability for the 
        taxable year which are treated as payment on account of income 
        tax for purposes of section 6315 (relating to estimated taxes).

``SEC. 23. INDEXING FOR INFLATION.

    ``(a) Publication of Tables and Numbers.--Not later than December 
15 of 2003, and each subsequent calendar year, the Secretary shall 
prescribe tables and dollar amounts which shall apply in the 
immediately following calendar year in lieu of the tables and dollar 
amounts that are required to be adjusted for inflation in accordance 
with this section.
    ``(b) Method of Adjustment.--
            ``(1) In general.--The dollar amounts which are required to 
        be adjusted pursuant to this section for a calendar year shall 
        be the dollar amounts as stated in this chapter multiplied by 
        the cost of living adjustment for such calendar year, rounded 
        as provided in subsection (d).
            ``(2) Tax rate tables.--In the case of a tax rate table, 
        the dollar amounts to be adjusted in accordance with paragraph 
        (1) are the minimum and maximum dollar amounts for each rate 
        bracket for which a tax is imposed. The amounts setting forth 
        the bottom tax for each bracket shall be adjusted to the extent 
        necessary to reflect the adjustments in the rate brackets.
    ``(c) Cost-of-Living Adjustment.--
            ``(1) In general.--The cost-of-living adjustment for any 
        calendar year is the percentage (if any) by which--
                    ``(A) the CPI for the preceding calendar year, 
                exceeds
                    ``(B) the CPI for the calendar year 2002.
            ``(2) CPI for any calendar year.--For purposes of paragraph 
        (1), 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.
            ``(3) Consumer price index.--For purposes of paragraph (2), 
        `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 2003 shall be used.
    ``(d) Rounding.--
            ``(1) In general.--If any increase determined under 
        subsection (b) is not a multiple of $50, such increase shall be 
        rounded to the next lowest multiple of $50.
            ``(2) Multiples of $25.--Paragraph (1) shall be applied by 
        substituting `$25' for `$50' in the case of--
                    ``(A) amounts for married individuals filing 
                separately, and
                    ``(B) any other dollar amount that is to be 
                adjusted for inflation if that dollar amount is less 
                than $1,000.

         ``Subchapter B--Roth IRA and Other Savings Provisions

``Sec. 30. Roth IRAs.
``Sec. 31. Deductible IRAs.
``Sec. 32. Effect of repeal of special savings provisions.

``SEC. 30. ROTH IRAS.

    ``(a) General Rule.--Except as provided in this section, a Roth IRA 
shall be treated for purposes of this title in the same manner as an 
individual retirement plan.
    ``(b) Roth IRA.--`Roth IRA' means an individual retirement plan (as 
defined in section 7701(a)(37)) which is designated (in such manner as 
the Secretary may prescribe) at the time of establishment of the plan 
as a Roth IRA. Such designation shall be made in such manner as the 
Secretary may prescribe.
    ``(c) Treatment of Contributions.--
            ``(1) No deduction allowed.--No deduction shall be allowed 
        for a contribution to a Roth IRA.
            ``(2) Contribution limit.--The aggregate amount of 
        contributions for any taxable year to all Roth IRAs maintained 
        for the benefit of an individual (or, in the case of 
        individuals filing a joint return, either spouse) shall not 
        exceed the taxpayer's adjusted gross income for the taxable 
        year.
            ``(3) Rollover from ira.--
                    ``(A) Rollover contributions.--No rollover 
                contribution may be made to a Roth IRA unless it is a 
                qualified rollover contribution.
                    ``(B) Limits.--A taxpayer shall not be allowed to 
                make a qualified rollover contribution to a Roth IRA 
                from an individual retirement plan other than a Roth 
                IRA during any taxable year if--
                            ``(i) the taxpayer's adjusted gross income 
                        for such taxable year exceeds $100,000, or
                            ``(ii) the taxpayer is a married individual 
                        filing a separate return.
                    ``(C) Marital status.--Section 31(g)(4) shall apply 
                for purposes of this paragraph.
            ``(4) Contributions permitted after age 70\1/2\.--
        Contributions to a Roth IRA may be made even after the 
        individual for whom the account is maintained has attained age 
        70\1/2\.
            ``(5) Mandatory distribution rules not to apply before 
        death.--Notwithstanding subsections (a)(6) and (b)(3) of 
        section 408 (relating to required distributions), the following 
        provisions shall not apply to any Roth IRA:
                    ``(A) Section 401(a)(9)(A).
                    ``(B) The incidental death benefit requirements of 
                section 401(a).
            ``(6) Time when contributions made.--A taxpayer shall be 
        deemed to have made a contribution to a Roth IRA during a year 
        if the contribution is made on account of such year and is made 
        not later than April 15 of the following year.
    ``(d) Exclusion From Income.--For purposes of this chapter--
            ``(1) General rules.--A distribution from a Roth IRA shall 
        not be includible in gross income.
            ``(2) Nonqualified distribution.--The automatic exclusion 
        from gross income under paragraph (1) shall not apply to any 
        distribution, other than a qualified special purpose 
        distribution if--
                    ``(A) it is made within the 5-taxable year period 
                beginning with the 1st taxable year for which the 
                individual made a contribution to a Roth IRA (or such 
                individual's spouse made a contribution to a Roth IRA) 
                established for such individual, or
                    ``(B) in the case of a payment or distribution 
                properly allocable (as determined in the manner 
                prescribed by the Secretary) to a qualified rollover 
                contribution from an individual retirement plan other 
                than a Roth IRA (or income allocable thereto), it is 
                made within the 5-taxable year period beginning with 
                the taxable year in which the rollover contribution was 
                made.
            ``(3) Nonqualified distributions.--In applying section 33 
        to any distribution from a Roth IRA described in paragraph (2), 
        such distribution shall be treated as made from contributions 
        to the Roth IRA to the extent that such distribution, when 
        added to all previous distributions from the Roth IRA, does not 
exceed the aggregate amount of contributions to the Roth IRA. Only 
distributions attributable to earnings on accounts (as opposed to 
distributions of contributions) shall be included in gross income.
            ``(4) Rollovers from an ira other than a roth ira.--
                    ``(A) In general.--Notwithstanding section 
                408(d)(3), in the case of any distribution to which 
                this paragraph applies there shall be included in gross 
                income any amount which would be includible were it not 
                part of a qualified rollover contribution.
                    ``(B) Distributions to which paragraph applies.--
                This paragraph shall apply to a distribution from an 
                individual retirement plan (other than a Roth IRA) 
                maintained for the benefit of an individual which is 
                contributed to a Roth IRA maintained for the benefit of 
                such individual in a qualified rollover contribution.
                    ``(C) Conversions.--The conversion of an individual 
                retirement plan (other than a Roth IRA) to a Roth IRA 
                shall be treated for purposes of this paragraph as a 
                distribution to which this paragraph applies.
                    ``(D) Conversion of excess contributions.--If, no 
                later than the due date for filing the return of tax 
for any taxable year (without regard to extensions), an individual 
transfers, from an individual retirement plan (other than a Roth IRA), 
contributions for such taxable year (and any earnings allocable 
thereto) to a Roth IRA, no such amount shall be includible in gross 
income to the extent no deduction was allowed with respect to such 
amount.
                    ``(E) Additional reporting requirements.--Trustees 
                of Roth IRAs, trustees of individual retirement plans, 
                or both, whichever is appropriate, shall include such 
                additional information in reports required under 
                section 408(i) as the Secretary may require to ensure 
                that amounts required to be included in gross income 
                under subparagraph (A) are so included.
            ``(5) Coordination with individual retirement accounts.--
        Section 408(d)(2) shall be applied separately with respect to 
        Roth IRAs and other individual retirement plans.
            ``(6) Qualified special purpose distribution.--`Qualified 
        special purpose distribution' means--
                            ``(i) Distributions upon death.--
                        Distributions made to a beneficiary (or to the 
                        estate of the individual) on or after the death 
                        of the individual.
                            ``(ii) Distributions upon disability.--
                        Distributions attributable to the individual's 
                        being disabled.
                            ``(iii) Distributions to pay medical 
                        expenses.--Distributions made to the individual 
                        for amounts paid during the year for medical 
                        care, but only to the extent that the amounts 
                        paid for medical care exceed 7.5% of the 
                        adjusted gross income of the taxpayer 
                        (determined without regard to whether the 
                        employee itemizes deductions for such taxable 
                        year).
                            ``(iv) QDROS.--Any distribution to an 
                        alternate payee pursuant to a qualified 
                        domestic relations order (within the meaning of 
                        section 414(p)(1)).
                            ``(v) Distributions to unemployed 
                        individuals for health insurance premiums.--
                        Distributions to an individual--
                                    ``(I) if such individual has 
                                received unemployment compensation for 
                                12 consecutive weeks under any Federal 
                                or State unemployment compensation law 
                                by reason of such separation (or in the 
                                case of a self-employed individual, to 
                                the extent provided in regulations, if 
                                the individual would have received 
                                unemployment compensation but for the 
                                fact the individual was self-employed),
                                    ``(II) if such distributions are 
                                made during any taxable year during 
                                which such unemployment compensation is 
                                paid or the succeeding taxable year,
                                    ``(III) to the extent such 
                                distributions do not exceed the amount 
                                paid during the taxable year for 
                                insurance for the diagnosis, cure, 
                                mitigation, treatment, or prevention of 
                                disease, or for the purpose of 
                                affecting any structure or function of 
                                the body (or for transportation 
                                primarily for and essential to such 
                                medical care) (including amounts paid 
                                as premiums under part B of title XVIII 
                                of the Social Security Act, relating to 
                                supplementary medical insurance for the 
                                aged) or for any qualified long-term 
                                care insurance contract (as defined in 
                                section 7702B(b)) with respect to the 
                                individual and the individual's spouse 
                                and dependents, and
                                    ``(IV) such distributions are not 
                                made after the individual has been 
                                employed for at least 60 days after the 
                                separation from employment to which 
                                clause (I) applies.
                            ``(vi) Distributions to pay higher 
                        education expenses.--Distributions to the 
                        extent such distributions do not exceed the 
                        qualified higher education expenses (as defined 
                        in section 10(a)(2)) of--
                                    ``(I) the taxpayer,
                                    ``(II) the taxpayer's spouse, or
                                    ``(III) any child or grandchild of 
                                the taxpayer or the taxpayer's spouse.
                            ``(vii) Distributions for first home 
                        purchases.--Distributions which are qualified 
                        first-time homebuyer distributions (as defined 
                        in paragraph (6)).
            ``(7) Qualified first-time homebuyer distributions.--
                    ``(A) In general.--`Qualified first-time homebuyer 
                distribution' means any payment or distribution 
                received by an individual to the extent such payment or 
                distribution is used by the individual before the close 
                of the 120th day after the day on which such payment or 
                distribution is received to pay qualified acquisition 
                costs with respect to a principal residence of a first-
                time homebuyer who is such individual, the spouse of 
                such individual, or any child, grandchild, or ancestor 
                of such individual or the individual's spouse.
                    ``(B) Lifetime dollar limitation.--The aggregate 
                amount of payments or distributions received by an 
                individual which may be treated as qualified first-time 
                homebuyer distributions for any taxable year shall not 
                exceed the excess (if any) of--
                            ``(i) $10,000, over
                            ``(ii) the aggregate amounts treated as 
                        qualified first-time homebuyer distributions 
                        with respect to such individual for all prior 
                        taxable years.
                    ``(C) Qualified acquisition costs.--`Qualified 
                acquisition costs' means the costs of acquiring, 
                constructing, or reconstructing a residence. Such term 
                includes any usual or reasonable settlement, financing, 
                or other closing costs.
                    ``(D) First-time homebuyer; other definitions.--For 
                purposes of this paragraph--
                            ``(i) First-time homebuyer.--`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 2-year period 
                        ending on the date of acquisition of the 
                        principal residence to which this paragraph 
                        applies, and
                            ``(ii) Date of acquisition.--`Date of 
                        acquisition' means the date--
                                    ``(I) on which a binding contract 
                                to acquire the principal residence to 
                                which subparagraph (A) applies is 
                                entered into, or
                                    ``(II) on which construction or 
                                reconstruction of such a principal 
                                residence is commenced.
                    ``(E) Special rule where delay in acquisition.--The 
                Secretary shall prescribe rules under which a 
                distribution will not be penalized if made in 
                anticipation of being a qualified first-time homeowner 
                distribution but construction delays or other 
                unanticipated factors delay the closing.
    ``(e) Qualified Rollover Contribution.--For purposes of this 
section, the term qualified rollover contribution means a rollover 
contribution to a Roth IRA from another such account, or from an 
individual retirement plan, but only if such rollover contribution 
meets the requirements of section 408(d)(3). For purposes of section 
408(d)(3)(B), there shall be disregarded any qualified rollover 
contribution from an individual retirement plan (other than a Roth IRA) 
to a Roth IRA.
    ``(f) Permitted Investments.--
            ``(1) Investment permitted.--A Roth IRA shall not cease to 
        be an individual retirement account pursuant to section 
        408(e)(2) solely because funds from such account are used to 
        make a debt or equity investment in a controlled business 
        entity.
            ``(2) Loans to a controlled business entity.--
                    ``(A) Excess return.--If funds in a Roth IRA are 
                loaned to a controlled business entity, any return on 
                such loans in excess of a fair return shall be treated 
                as gross income of the beneficiary that is then 
                deposited in the Roth IRA.
                    ``(B) Loan.--For purposes of this section, an 
                amount shall be treated as loaned to a controlled 
                business entity only if--
                            ``(i) the amount is treated in the books 
                        and records of the business entity as a loan,
                            ``(ii) the transaction is reflected in a 
                        written note or other evidence of indebtedness, 
                        and
                            ``(iii) the business entity is required to 
                        pay interest at least once per year and at the 
                        time such loan is made it is reasonable to 
                        expect that such interest will be paid on a 
                        timely basis.
                    ``(C) Fair return.--For purposes of this 
                subsection, a `fair return' with respect to a loan is 
                interest at a rate not in excess of 3 percentage points 
                plus the minimum rate of interest that would have to be 
                charged with respect to such loan to prevent it from 
                being a below-market loan for purposes of section 7872 
                (determined as if section 7872 applied to such loan).
            ``(3) Equity investment in a controlled business entity.--
        If funds in a Roth IRA are contributed to the capital of, 
        applied to acquire stock or other equity interest in, or 
        otherwise transferred to, a controlled business entity in a 
        transaction that is not considered a loan for purposes of this 
        subsection, any return on such equity shall be treated as gross 
        income of the beneficiary that is then deposited in the Roth 
        IRA. The preceding sentence shall not apply to--
                    ``(A) the proceeds of the sale of such equity 
                interest to a third party, or
                    ``(B) the proceeds received by the Roth IRA as the 
                result of a complete redemption of the beneficiary's 
                interest in the business entity (including any 
                interests held through a Roth IRA).
            ``(4) Controlled business entity.--`Controlled business 
        entity' means any business entity in which the beneficiary of 
        the Roth IRA holds at least a 5 percent interest in the profits 
and losses (after taking into account the investment through the Roth 
IRA) and in which an investment would cause the Roth IRA to cease to be 
an individual retirement account by reason of section 408(e)(2) but for 
this subsection.
            ``(5) Application of section 4975.--Section 4975 shall not 
        apply to a loan or equity investment by a Roth IRA in a 
        controlled business entity.
            ``(6) Tax and penalty avoidance.--The Secretary shall 
        prescribe regulations that prohibit the provisions of this 
        subsection to be used to circumvent the application of 
        subsection (d)(2) (relating to taxable distributions). The 
        regulations shall not prohibit bona fide investments in 
        controlled business entities. The regulations shall address 
        loans to and investments in a controlled business entity that 
        are used to fund distributions or dividends from the business 
        entity to the account beneficiary or a member of the 
        beneficiary's family.

``SEC. 31. DEDUCTIBLE IRAS.

    ``(a) Allowance of Deduction.--The `qualified IRA deduction' shall 
be an amount equal to the qualified retirement contributions of the 
individual for the taxable year, except as limited by subsection (b).
    ``(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) $2,000, 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) Grandfathered plans.--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) of the Internal Revenue Code of 
        1986 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).
    ``(c) Special Rules for Certain Married Individuals.--
            ``(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, and
                                    ``(II) the amount of any 
                                contribution on behalf of such spouse 
                                to a Roth IRA under section 30 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 70\1/2\.--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 70\1/2\ 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), or 
        408(d)(3).
            ``(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) of the Internal Revenue 
        Code of 1986.
    ``(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. The term 
        `compensation' shall include any alimony, child support and 
        separate maintenance payments includible in the individual's 
        gross income with respect to a divorce or separation 
        instrument. 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).
            ``(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 during a year if 
        the contribution is made on account of such year and is made 
        not later than April 15 of the following year.
            ``(4) Reports.--The Secretary shall prescribe regulations 
        which prescribe the time and the manner in which reports to the 
        Secretary and plan participants shall be made by the plan 
        administrator of a qualified employer or government plan 
        receiving qualified voluntary employee contributions.
            ``(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) 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 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 for a taxable year beginning after 
                        December 31, 2011).
                    ``(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 without regard to 
                the qualified IRA deduction.
                    ``(B) Applicable dollar amount.--The term 
                `applicable dollar amount' means the following:
                            ``(i) In the case of a taxpayer filing a 
                        joint return:

``For taxable years beginning in:   ``The applicable dollar amount is:
    2004...........................
                                        $51,000
    2005...........................
                                        $52,000
    2006...........................
                                        $53,000
    2007...........................
                                        $54,000
    2008...........................
                                        $60,000
    2009...........................
                                        $65,000
    2010...........................
                                        $70,000
    2011...........................
                                        $75,000
    2012 and thereafter............
                                        $80,000.
                            ``(ii) In the case of any other taxpayer 
                        (other than a married individual filing a 
                        separate return):

      
``For taxable years beginning in:   ``The applicable dollar amount is:
    2004...........................
                                        $31,000
    2005...........................
                                        $32,000
    2006...........................
                                        $33,000
    2007...........................
                                        $34,000
    2008...........................
                                        $40,000
    2009...........................
                                        $45,000
    2010 and thereafter............
                                        $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 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,
                            ``(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) of the Internal Revenue Code of 
        1986) 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 certain spouses.--In the case of an 
        individual who is an active participant at no time during any 
        plan year ending with or within the taxable year but whose 
spouse is an active participant for any part of any such plan year--
                    ``(A) the applicable dollar amount under paragraph 
                (3)(B)(i) with respect to the taxpayer shall be 
                $150,000, and
                    ``(B) the amount applicable under paragraph 
                (2)(A)(ii) shall be $10,000.
    ``(h) Cross Reference.--For failure to provide required reports, 
see section 6652(g).

``SEC. 32. EFFECT OF REPEAL OF SPECIAL SAVINGS PROVISIONS.

    ``(a) Education IRA's.--
            ``(1) In general.--An account that qualifies as an 
        education IRA under the Internal Revenue Code of 1986 as in 
        effect immediately before adoption of the Simplified USA Tax 
        Act shall be treated as a Roth IRA for purposes of this chapter 
(including rules allowing for tax-free rollover).
            ``(2) No new contributions.--Neither paragraph (1) nor 
        section 530 of the Internal Revenue Code of 1986 shall apply to 
        an education IRA to which contributions are made after December 
        31, 2003.
            ``(3) Special rule.--For purposes of applying section 30 to 
        an account that was an educational IRA, the designated 
        beneficiary of such account shall be treated as described in a 
        subclause of clause (vi) of section 30(d)(5).
    ``(b) Medical Savings Accounts.--
            ``(1) Equivalent of deductible ira.--A medical savings 
        account shall be treated as an individual retirement plan other 
        than a Roth IRA for purposes of this chapter and chapter 3.
            ``(2) Special rollover rules.--
                    ``(A) No income limit.--The income limits of 
                section 30(c)(3)(B) shall not apply to the rollover of 
                a medical savings account into a Roth IRA.
                    ``(B) Medical distributions.--For purposes of 
                applying section 30 to the amount of any medical 
                savings account rolled over to a Roth IRA, subclause 
                (iii) of section 30(d)(5) shall apply without regard to 
                the limitation based on adjusted gross income.
            ``(3) Medical savings account.--`Medical savings account' 
        means an account established under section 220 of the Internal 
        Revenue Code of 1986.
    ``(c) Qualified State Tuition Programs.--
            ``(1) Education savings account programs.--No account shall 
        fail to qualify as a Roth IRA merely because in addition to the 
        beneficiary of the account, there is a `designated beneficiary' 
        whose education expenses the beneficiary expects to pay or have 
        paid with the proceeds of the account. The payment of such 
        expenses with the proceeds of an account shall be treated as a 
        distribution from the account.
            ``(2) Prepaid tuition certificates.--
                    ``(A) Contribution to accounts.--An individual may 
                contribute prepaid tuition certificates to a Roth IRA 
                before January 1, 2007, without recognizing gross 
                income on the contribution of such certificates. For 
                purposes of section 30, the amount contributed shall 
                equal the cost of the certificates.
                    ``(B) Purchase of prepaid tuition certificates.--A 
                Roth IRA account may purchase prepaid tuition 
                certificates without violating section 408.
                    ``(C) Prepaid tuition certificates.--`Prepaid 
                tuition certificates' means credits or certificates 
                that entitle a designated beneficiary of such 
                certificates to the waiver or payment of qualified 
higher education expenses of the designated beneficiary.
            ``(3) Rollover of accounts.--An account to which section 
        529 of the Internal Revenue Code of 1986 (before adoption of 
        the Simplified USA Tax Act) shall be treated as a Roth IRA for 
        purposes of rules relating to qualified rollovers (except that 
        in the case of any such rollover, any contributions made to the 
        section 529 account after July 1, 2003, shall be treated as 
        contributions to the Roth IRA in the year of the rollover for 
        purposes of section 30(c)(2)).
            ``(4) Transition.--
                    ``(A) Transition period.--Subsections (a) and (c) 
                of section 529 of the Internal Revenue Code of 1986 
                shall apply until January 1, 2007.
                    ``(B) Transition.--The Secretary shall prescribe 
                rules to facilitate use of the Roth IRA rules to exempt 
                earnings on accounts and certificates previously 
                exempted under section 529 of the Internal Revenue Code 
                of 1986.
            ``(5) Qualified higher education expenses.--For purposes of 
        this subsection, the definition `qualified higher education 
        expenses' in section 529(e)(3) of the Internal Revenue Code of 
        1986 shall apply.

``SEC. 33. ANNUITIES, CERTAIN PROCEEDS OF ENDOWMENT AND LIFE INSURANCE 
              CONTRACTS.

    ``(a) General Rule for Annuities.--Except as otherwise provided in 
this chapter, gross income includes any amount received as an annuity 
(whether for a period certain or during one or more lives) under an 
annuity, endowment, or life insurance contract.
    ``(b) Exclusion Ratio.--
            ``(1) In general.--Gross income does not include that part 
        of any amount received as an annuity under an annuity, 
        endowment, or life insurance contract which bears the same 
        ratio to such amount as the investment in the contract (as of 
        the annuity starting date) bears to the expected return under 
        the contract (as of such date).
            ``(2) Exclusion limited to investment.--The portion of any 
        amount received as an annuity which is excluded from gross 
        income under paragraph (1) shall not exceed the unrecovered 
        investment in the contract immediately before the receipt of 
        such amount.
            ``(3) Deduction where annuity payments cease before entire 
        investment recovered.--
                    ``(A) In general.--If--
                            ``(i) after the annuity starting date, 
                        payments as an annuity under the contract cease 
                        by reason of the death of an annuitant, and
                            ``(ii) as of the date of such cessation, 
                        there is unrecovered investment in the 
                        contract,
                the amount of such unrecovered investment (in excess of 
                any amount specified in subsection (e)(5) which was not 
                included in gross income) shall be allowed as a 
                deduction from adjusted gross income in determining 
                taxable income of the annuitant for his last taxable 
                year.
                    ``(B) Payments to other persons.--In the case of 
                any contract which provides for payments meeting the 
                requirements of subparagraphs (B) and (C) of subsection 
                (c)(2), the deduction under subparagraph (A) shall be 
                allowed to the person entitled to such payments for the 
                taxable year in which such payments are received.
    ``(c) Definitions.--
            ``(1) Investment in the contract.--For purposes of 
        subsection (b), the investment in the contract as of the 
        annuity starting date is--
                    ``(A) the aggregate amount of premiums or other 
                consideration paid for the contract (including any 
                amounts earned on the contract which were included in 
                gross income and reinvested in the contract), minus
                    ``(B) the aggregate amount received under the 
                contract before such date, to the extent that such 
                amount was excludable from gross income under this 
                subtitle or prior income tax laws.
            ``(2) Other terms used in subsection (b).--Calculations 
        under subsections (a) and (b) shall be made in accordance with 
        regulations prescribed by the Secretary, which regulations 
        shall generally be consistent with the section 72 of the 
        Internal Revenue Code of 1986.
    ``(d) Special Rules for Qualified Employer Retirement Plans.--
            ``(1) Simplified method of taxing annuity payments.--
                    ``(A) In general.--In the case of any amount 
                received as an annuity under a qualified employer 
                retirement plan--
                            ``(i) subsection (b) shall not apply, and
                            ``(ii) the investment in the contract shall 
                        be recovered as provided in this paragraph.
                    ``(B) Method of recovering investment in 
                contract.--
                            ``(i) In general.--Gross income shall not 
                        include so much of any monthly annuity payment 
                        under a qualified employer retirement plan as 
                        does not exceed the amount obtained by 
                        dividing--
                                    ``(I) the investment in the 
                                contract (as of the annuity starting 
                                date), by
                                    ``(II) the number of anticipated 
                                payments determined under the table 
                                contained in clause (iii) (or, in the 
                                case of a contract to which subsection 
                                (c)(3)(B) applies, the number of 
                                monthly annuity payments under such 
                                contract).
                            ``(ii) Certain rules made applicable.--
                        Rules similar to the rules of paragraphs (2) 
                        and (3) of subsection (b) shall apply for 
                        purposes of this paragraph.
                            ``(iii) Number of anticipated payments.--If 
                        the annuity is payable over the life of a 
                        single individual, the number of anticipated 
                        payments shall be determined as follows:

If the age of the annuitant on the  The number:
        annuity starting date is:
    Not more than 55...............
                                        360
    More than 55 but not more than 
        60.
                                        310
    More than 60 but not more than 
        65.
                                        260
    More than 65 but not more than 
        70.
                                        210
    More than 70...................
                                        160
                            ``(iv) Number of anticipated payments where 
                        more than one life.--If the annuity is payable 
                        over the lives of more than 1 individual, the 
                        number of anticipated payments shall be 
                        determined as follows:
If the combined ages of the         The number:
        annuitants are:
    Not more than 110..............
                                        410
    More than 110 but not more than 
        120.
                                        360
    More than 120 but not more than 
        130.
                                        310
    More than 130 but not more than 
        140.
                                        260
    More than 140..................
                                        210
                    ``(C) Special rule where lump sum paid in 
                connection with commencement of annuity payments.--If, 
                in connection with the commencement of annuity payments 
                under any qualified employer retirement plan, the 
                taxpayer receives a lump sum payment--
                            ``(i) such payment shall be taxable under 
                        subsection (e) as if received before the 
                        annuity starting date, and
                            ``(ii) the investment in the contract for 
                        purposes of this paragraph shall be determined 
                        as if such payment had been so received.
                    ``(D) Exception.--This paragraph shall not apply in 
                any case where the primary annuitant has attained age 
                75 on the annuity starting date unless there are fewer 
                than 5 years of guaranteed payments under the annuity.
                    ``(E) Adjustment where annuity payments not on a 
                monthly basis.--In any case where the annuity payments 
are not made on a monthly basis, appropriate adjustments in the 
application of this paragraph shall be made to take into account the 
period on the basis of which such payments are made.
                    ``(F) Qualified employer retirement plan.--For 
                purposes of this paragraph, the  term `qualified 
employer retirement plan' means any plan or contract described in 
paragraph (1), (2), or (3) of section 4974(c).
            ``(2) Treatment of employee contributions under defined 
        contribution plans.--For purposes of this section, employee 
        contributions (and any income allocable thereto) under a 
        defined contribution plan may be treated as a separate 
        contract.
    ``(e) Amounts Not Received as Annuities.--
            ``(1) Application of subsection.--
                    ``(A) In general.--This subsection shall apply to 
                any amount which--
                            ``(i) is received under an annuity, 
                        endowment, or life insurance contract, and
                            ``(ii) is not received as an annuity,
                if no provision of this subtitle (other than this 
                subsection) applies with respect to such amount.
                    ``(B) Dividends.--For purposes of this section, any 
                amount received which is in the nature of a dividend or 
                similar distribution shall be treated as an amount not 
                received as an annuity.
            ``(2) General rule.--Any amount to which this subsection 
        applies--
                    ``(A) if received on or after the annuity starting 
                date, shall be included in gross income, or
                    ``(B) if received before the annuity starting 
                date--
                            ``(i) shall be included in gross income to 
                        the extent allocable to income on the contract, 
                        and
                            ``(ii) shall not be included in gross 
                        income to the extent allocable to the 
                        investment in the contract.
            ``(3) Allocation of amounts to income and investment.--For 
        purposes of paragraph (2)(B):
                    ``(A) Any amount to which this subsection applies 
                shall be treated as allocable to income on the contract 
                to the extent that such amount does not exceed the 
                excess (if any) of--
                            ``(i) the cash value of the contract 
                        (determined without regard to any surrender 
                        charge) immediately before the amount is 
                        received, over
                            ``(ii) the investment in the contract at 
                        such time.
                    ``(B) Any amount to which this subsection applies 
                shall be treated as allocable to investment in the 
                contract to the extent that such amount is not 
                allocated to income under subparagraph (A).
            ``(4) Special rules for application of paragraph (2)(b).--
        For purposes of paragraph (2)(B):
                    ``(A) Loans treated as distributions.--If, during 
                any taxable year, an individual--
                            ``(i) receives (directly or indirectly) any 
                        amount as a loan under any contract to which 
                        this subsection applies, or
                            ``(ii) assigns or pledges (or agrees to 
                        assign or pledge) any portion of the value of 
                        any such contract,
                such amount or portion shall be treated as received 
                under the contract as an amount not received as an 
                annuity. The preceding sentence shall not apply for 
                purposes of determining investment in the contract, 
                except that the investment in the contract shall be 
                increased by any amount included in gross income by 
                reason of the amount treated as received under the 
                preceding sentence.
                    ``(B) Treatment of transfers without adequate 
                consideration.--
                            ``(i) In general.--If an individual who 
                        holds an annuity contract transfers it without 
                        full and adequate consideration, such 
                        individual shall be treated as receiving an 
                        amount equal to the excess of--
                                    ``(I) the cash surrender value of 
                                such contract at the time of transfer, 
                                over
                                    ``(II) the investment in such 
                                contract at such time,
                        under the contract as an amount not received as 
                        an annuity.
                            ``(ii) Exception for certain transfers 
                        between spouses or former spouses.--Clause (i) 
                        shall not apply to any transfer to which 
                        section 77(c) (relating to transfers of 
                        property between spouses or incident to 
                        divorce) applies.
                            ``(iii) Adjustment to investment in 
                        contract of transferee.--If under clause (i) an 
                        amount is included in the gross income of the 
                        transferor of an annuity contract, the 
                        investment in the contract of the transferee in 
                        such contract shall be increased by the amount 
                        so included.
            ``(5) Retention of existing rules in certain cases.--
        Paragraph (5) of section 72(e) of the Internal Revenue Code of 
        1986 shall apply to contracts described in subparagraph (B) of 
        such paragraph to the extent provided therein.
            ``(6) Investment in the contract.--For purposes of this 
        subsection, the investment in the contract as of any date is--
                    ``(A) the aggregate amount of premiums or other 
                consideration paid for the contract before such date, 
                minus
                    ``(B) the aggregate amount received under the 
                contract before such date, to the extent that such 
                amount was excludable from gross income under this 
                subtitle or prior income tax laws.
            ``(7) Application of paragraph (2)(b) to qualified plans.--
                    ``(A) In general.--Notwithstanding any other 
                provision of this subsection, in the case of any amount 
                received before the annuity starting date from a trust 
                or contract described in paragraph (5)(D), paragraph 
                (2)(B) shall apply to such amounts.
                    ``(B) Allocation of amount received.--For purposes 
                of paragraph (2)(B), the amount allocated to the 
                investment in the contract shall be the portion of the 
                amount described in subparagraph (A) which bears the 
                same ratio to such amount as the investment in the 
                contract bears to the account balance. The 
                determination under the preceding sentence shall be 
                made as of the time of the distribution or at such 
                other time as the Secretary may prescribe.
                    ``(C) Treatment of forfeitable rights.--If an 
                employee does not have a nonforfeitable right to any 
                amount under any trust or contract to which 
                subparagraph (A) applies, such amount shall not be 
                treated as part of the account balance.
                    ``(D) Investment in the contract before 1987.--In 
                the case of a plan which on May 5, 1986, permitted 
withdrawal of any employee contributions before separation from 
service, subparagraph (A) shall apply only to the extent that amounts 
received before the annuity starting date (when increased by amounts 
previously received under the contract after December 31, 1986) exceed 
the investment in the contract as of December 31, 1986.
            ``(8) Treatment of modified endowment contracts.--
                    ``(A) In general.--Notwithstanding paragraph 
                (5)(C), in the case of any modified endowment contract 
                (as defined in section 7702A)--
                            ``(i) paragraphs (2)(B) and (4)(A) shall 
                        apply, and
                            ``(ii) in applying paragraph (4)(A), `any 
                        person' shall be substituted for `an 
                        individual'.
                    ``(B) Treatment of certain burial contracts.--
                Notwithstanding subparagraph (A), paragraph (4)(A) 
                shall not apply to any assignment (or pledge) of a 
                modified endowment contract if such assignment (or 
                pledge) is solely to cover the payment of expenses 
                referred to in section 7702(e)(2)(C)(iii) and if the 
                maximum death benefit under such contract does not 
                exceed $25,000.
            ``(9) Anti-abuse rules.--
                    ``(A) In general.--For purposes of determining the 
                amount includible in gross income under this 
                subsection--
                            ``(i) all modified endowment contracts 
                        issued by the same company to the same 
                        policyholder during any calendar year shall be 
                        treated as 1 modified endowment contract, and
                            ``(ii) all annuity contracts issued by the 
                        same company to the same policyholder during 
                        any calendar year shall be treated as 1 annuity 
                        contract.
                The preceding sentence shall not apply to any contract 
                described in paragraph (5)(D).
                    ``(B) Regulatory authority.--The Secretary may by 
                regulations prescribe such additional rules as may be 
                necessary or appropriate to prevent avoidance of the 
                purposes of this subsection through serial purchases of 
                contracts or otherwise.
    ``(f) Special Rules for Computing Employees' Contributions.--In 
computing, for purposes of subsection (c)(1)(A), the aggregate amount 
of premiums or other consideration paid for the contract, and for 
purposes of subsection (e)(6), the aggregate premiums or other 
consideration paid, amounts contributed by the employer shall be 
included, but only to the extent that--
            ``(1) such amounts were includible in the gross income of 
        the employee under this subtitle or prior income tax laws; or
            ``(2) if such amounts had been paid directly to the 
        employee at the time they were contributed, they would not have 
        been includible in the gross income of the employee under the 
        law applicable at the time of such contribution.
    ``(g) Rules for Transferee Where Transfer Was for Value.--Where any 
contract (or any interest therein) is transferred (by assignment or 
otherwise) for a valuable consideration, to the extent that the 
contract (or interest therein) does not, in the hands of the 
transferee, have a basis which is determined by reference to the basis 
in the hands of the transferor, then--
            ``(1) for purposes of this section, only the actual value 
        of such consideration, plus the amount of the premiums and 
        other consideration paid by the transferee after the transfer, 
        shall be taken into account in computing the aggregate amount 
        of the premiums or other consideration paid for the contract;
            ``(2) for purposes of subsection (c)(1)(B), there shall be 
        taken into account only the aggregate amount received under the 
        contract by the transferee before the annuity starting date, to 
        the extent that such amount was excludable from gross income 
        under this subtitle or prior income tax laws; and
            ``(3) the annuity starting date is January 1, 1954, or the 
        first day of the first period for which the transferee received 
        an amount under the contract as an annuity, whichever is the 
        later.
    ``(h) Option To Receive Annuity in Lieu of Lump Sum.--If--
            ``(1) a contract provides for payment of a lump sum in full 
        discharge of an obligation under the contract, subject to an 
        option to receive an annuity in lieu of such lump sum;
            ``(2) the option is exercised within 60 days after the day 
        on which such lump sum first became payable; and
            ``(3) part or all of such lump sum would (but for this 
        subsection) be includible in gross income by reason of 
        subsection (e)(1),
then, for purposes of this subtitle, no part of such lump sum shall be 
considered as includible in gross income at the time such lump sum 
first became payable.
    ``(i) Interest.--Notwithstanding any other provision of this 
section, if any amount is held under an agreement to pay interest 
thereon, the interest payments shall be included in gross income.
    ``(j) Face-Amount Certificates.--For purposes of this section, the 
term `endowment contract' 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), issued after December 31, 1954.
    ``(k) Special Rules Applicable to Employee Annuities and 
Distributions Under Employee Plans.--
            ``(1) Computation of consideration paid by the employee.--
        In computing--
                    ``(A) the aggregate amount of premiums or other 
                consideration paid for the contract for purposes of 
                subsection (c)(1)(A) (relating to the investment in the 
                contract), and
                    ``(B) the aggregate premiums or other consideration 
                paid for purposes of subsection (e)(6) (relating to 
                certain amounts not received as an annuity),
        any amount allowed as a deduction with respect to the contract 
        under section 404 which was paid while the employee was an 
        employee within the meaning of section 401(c)(1) shall be 
        treated as consideration contributed by the employer, and there 
        shall not be taken into account any portion of the premiums or 
        other consideration for the contract paid while the employee 
        was an owner-employee which is properly allocable (as 
        determined under regulations prescribed by the Secretary) to 
        the cost of life, accident, health, or other insurance.
            ``(2) Life insurance contracts.--
                    ``(A) This paragraph shall apply to any life 
                insurance contract--
                            ``(i) purchased as a part of a plan 
                        described in section 403(a), or
                            ``(ii) purchased by a trust described in 
                        section 401(a) which is exempt from tax if the 
                        proceeds of such contract are payable directly 
                        or indirectly to a participant in such trust or 
                        to a beneficiary of such participant.
                    ``(B) Any contribution to a plan described in 
                subparagraph (A)(i) or a trust described in 
                subparagraph (A)(ii) which is allowed as a deduction 
                under section 404, and any income of a trust described 
                in subparagraph (A)(ii), which is determined in 
                accordance with regulations prescribed by the Secretary 
                to have been applied to purchase the life insurance 
                protection under a contract described in subparagraph 
                (A), is includible in the gross income of the 
                participant for the taxable year when so applied.
                    ``(C) In the case of the death of an individual 
                insured under a contract described in subparagraph (A), 
                an amount equal to the cash surrender value of the 
                contract immediately before the death of the insured 
                shall be treated as a payment under such plan or a 
                distribution by such trust, and the excess of the 
                amount payable by reason of the death of the insured 
                over such cash surrender value shall not be includible 
                in gross income under this section and shall be treated 
                as provided in section 101.
            ``(3) Penalties applicable to certain amounts received by 
        5-percent owners.--
                    ``(A) This paragraph applies to amounts which are 
                received from a qualified trust described in section 
                401(a) or under a plan described in section 403(a) at 
                any time by an individual who is, or has been, a 5-
                percent owner, or by a successor of such an individual, 
                but only to the extent such amounts are determined, 
                under regulations prescribed by the Secretary, to 
                exceed the benefits provided for such individual under 
                the plan formula.
                    ``(B) If a person receives an amount to which this 
                paragraph applies, his tax under this chapter for the 
                taxable year in which such amount is received shall be 
                increased by an amount equal to 10 percent of the 
                portion of the amount so received which is includible 
                in his gross income for such taxable year.
                    ``(C) For purposes of this paragraph, the term `5-
                percent owner' means any individual who, at any time 
                during the 5 plan years preceding the plan year ending 
                in the taxable year in which the amount is received, is 
                a 5-percent owner (as defined in section 416(i)(1)(B).
            ``(4) Owner-employee defined.--For purposes of this 
        subsection, the term `owner-employee' has the meaning assigned 
        to it by section 401(c)(3) and includes an individual for whose 
        benefit an individual retirement account or annuity described 
        in section 408(a) or (b) is maintained. For purposes of the 
        preceding sentence, the term `owner-employee' shall include an 
        employee within the meaning of section 401(c)(1).
            ``(5) Meaning of disabled.--For purposes of this section, 
        an individual shall be considered to be 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 to be of long-
        continued and indefinite duration. An individual shall not be 
        considered to be disabled unless he furnishes proof of the 
existence thereof in such form and manner as the Secretary may require.
            ``(6) Determination of investment in the contract in the 
        case of qualified domestic relations orders.--Under regulations 
        prescribed by the Secretary, in the case of a distribution or 
        payment made to an alternate payee who is the spouse or former 
        spouse of the participant pursuant to a qualified domestic 
        relations order (as defined in section 414(p)), the investment 
        in the contract as of the date prescribed in such regulations 
        shall be allocated on a pro rata basis between the present 
        value of such distribution or payment and the present value of 
        all other benefits payable with respect to the participant to 
        which such order relates.
    ``(l) Annuities Under Retired Serviceman's Family Protection Plan 
or Survivor Benefit Plan.--Subsection (b) shall not apply in the case 
of amounts received after December 31, 1965, as an annuity under 
chapter 73 of title 10 of the United States Code, but all such amounts 
shall be excluded from gross income until there has been so excluded 
(under section 122(b)(1) of the Internal Revenue Code of 1986, section 
93, or this section, including amounts excluded before January 1, 1966) 
an amount equal to the consideration for the contract (as defined by 
section 122(b)(2) of the Internal Revenue Code of 1986). Thereafter all 
amounts so received shall be included in gross income.
    ``(m) Special Rules for Distributions From Qualified Plans to Which 
Employee Made Deductible Contributions.--
            ``(1) Treatment of contributions.--For purposes of this 
        section and sections 402 and 403, notwithstanding section 
414(h), any deductible employee contribution made to a qualified 
employer plan or government plan shall be treated as an amount 
contributed by the employer which is not includible in the gross income 
of the employee.
            ``(2) amounts constructively received.--
                    ``(A) In general.--For purposes of this subsection, 
                rules similar to the rules provided by subsection (n) 
                (other than the exception contained in paragraph (2) 
                thereof) shall apply.
                    ``(B) Purchase of life insurance.--To the extent 
                any amount of accumulated deductible employee 
                contributions of an employee are applied to the 
                purchase of life insurance contracts, such amount shall 
                be treated as distributed to the employee in the year 
                so applied.
            ``(3) Special rule for treatment of rollover amounts.--For 
        purposes of sections 402(c), 403(a)(4), and 408(d)(3), the 
        Secretary shall prescribe regulations providing for such 
        allocations of amounts attributable to accumulated deductible 
employee contributions, and for such other rules, as may be necessary 
to insure that such accumulated deductible employee contributions do 
not become eligible for additional tax benefits (or freed from 
limitations) through the use of rollovers.
            ``(4) Ordering rules.--Unless the plan specifies otherwise, 
        any distribution from such plan shall not be treated as being 
        made from the accumulated deductible employee contributions, 
        until all other amounts to the credit of the employee have been 
        distributed.
    ``(n) Loans Treated as Distributions.--For purposes of this 
section--
            ``(1) Treatment as distributions.--
                    ``(A) Loans.--If during any taxable year a 
                participant or beneficiary receives (directly or 
                indirectly) any amount as a loan from a qualified 
                employer plan, such amount shall be treated as having 
                been received by such individual as a distribution 
                under such plan.
                    ``(B) Assignments or pledges.--If during any 
                taxable year a participant or beneficiary assigns (or 
                agrees to assign) or pledges (or agrees to pledge) any 
                portion of his interest in a qualified employer plan, 
                such portion shall be treated as having been received 
                by such individual as a loan from such plan.
            ``(2) Exception for certain loans.--
                    ``(A) General rule.--Paragraph (1) shall not apply 
                to any loan to the extent that such loan (when added to 
                the outstanding balance of all other loans from such 
                plan whether made on, before, or after August 13, 
                1982), does not exceed the lesser of--
                            ``(i) $50,000, reduced by the excess (if 
                        any) of--
                                    ``(I) the highest outstanding 
                                balance of loans from the plan during 
                                the 1-year period ending on the day 
                                before the date on which such loan was 
                                made, over
                                    ``(II) the outstanding balance of 
                                loans from the plan on the date on 
                                which such loan was made, or
                            ``(ii) the greater of (I) one-half of the 
                        present value of the nonforfeitable accrued 
                        benefit of the employee under the plan, or (II) 
                        $10,000.
                for purposes of clause (ii), the present value of the 
                nonforfeitable accrued benefit shall be determined 
                without regard to any accumulated deductible employee 
                contributions (as defined in subsection (m)(5)(B)).
                    ``(B) Requirement that loan be repayable within 5 
                years.--
                            ``(i) In general.--Subparagraph (A) shall 
                        not apply to any loan unless such loan, by its 
                        terms, is required to be repaid within 5 years.
                            ``(ii) Exception for home loans.--Clause 
                        (i) shall not apply to any loan used to acquire 
                        any dwelling unit which within a reasonable 
                        time is to be used (determined at the time the 
                        loan is made) as the principal residence of the 
                        participant.
                    ``(C) Requirement of level amortization.--Except as 
                provided in regulations, this paragraph shall not apply 
                to any loan unless substantially level amortization of 
                such loan (with payments not less frequently than 
quarterly) is required over the term of the loan.
                    ``(D) Related employers and related plans.--For 
                purposes of this paragraph--
                            ``(i) the rules of subsections (b), (c), 
                        and (m) of section 414 shall apply, and
                            ``(ii) all plans of an employer (determined 
                        after the application of such subsections) 
                        shall be treated as 1 plan.
    ``(o) 10-Percent Penalty for Premature Distributions From Annuity 
Contracts.--
            ``(1) Imposition of penalty.--If any taxpayer receives any 
        amount under an annuity contract, the taxpayer's tax under this 
        chapter for the taxable year in which such amount is received 
        shall be increased by an amount equal to 10 percent of the 
        portion of such amount which is includible in gross income.
            ``(2) Subsection not to apply to certain distributions.--
        Paragraph (1) shall not apply to any distribution--
                    ``(A) made on or after the date on which the 
                taxpayer attains age 59\1/2\,
                    ``(B) made on or after the death of the holder (or, 
                where the holder is not an individual, the death of the 
                primary annuitant),
                    ``(C) attributable to the taxpayer's becoming 
                disabled within the meaning of subsection (k)(5),
                    ``(D) which is a part of a series of substantially 
                equal periodic payments (not less frequently than 
                annually) made for the life (or life expectancy) of the 
                taxpayer or the joint lives (or joint life 
                expectancies) of such taxpayer and his designated 
                beneficiary,
                    ``(E) from a plan, contract, account, trust, or 
                annuity described in section 72(e)(5)(D) of the 
                Internal Revenue Code of 1986,
                    ``(F) allocable to investment in the contract 
                before August 14, 1982,
                    ``(G) under a qualified funding asset,
                    ``(H) to which subsection (r) applies (without 
                regard to paragraph (2) thereof),
                    ``(I) under an immediate annuity contract, or
                    ``(J) which is purchased by an employer upon the 
                termination of a plan described in section 401(a) or 
                403(a) and which is held by the employer until such 
                time as the employee separates from service.
            ``(3) Change in substantially equal payments.--If--
                    ``(A) paragraph (1) does not apply to a 
                distribution by reason of paragraph (2)(D), and
                    ``(B) the series of payments under such paragraph 
                are subsequently modified (other than by reason of 
                death or disability)--
                            ``(i) before the close of the 5-year period 
                        beginning on the date of the first payment and 
                        after the taxpayer attains age 59\1/2\, or
                            ``(ii) before the taxpayer attains age 
                        59\1/2\,
        the taxpayer's tax for the 1st taxable year in which such 
        modification occurs shall be increased by an amount, determined 
        under regulations, equal to the tax which (but for paragraph 
        (2)(D)) would have been imposed, plus interest for the deferral 
        period (within the meaning of subsection (r)(4)(B)).
    ``(p) Certain Railroad Retirement Benefits Treated as Received 
Under Employer Plans.--
            ``(1) In general.--Notwithstanding any other provision of 
        law, any benefit provided under the Railroad Retirement Act of 
        1974 (other than a tier 1 railroad retirement benefit) shall be 
        treated for purposes of this title as a benefit provided under 
        an employer plan which meets the requirements of section 
        401(a).
            ``(2) Tier 2 taxes treated as contributions.--For purposes 
        of paragraph (1)--
                    ``(A) In general.--
                            ``(i) the tier 2 portion of the tax imposed 
                        by section 3201 (relating to tax on employees) 
                        shall be treated as an employee contribution,
                            ``(ii) the tier 2 portion of the tax 
                        imposed by section 3211 (relating to tax on 
                        employee representatives) shall be treated as 
                        an employee contribution, and
                            ``(iii) the tier 2 portion of the tax 
                        imposed by section 3221 (relating to tax on 
                        employers) shall be treated as an employer 
                        contribution.
                    ``(B) Tier 2 portion.--For purposes of subparagraph 
                (A)--
                            ``(i) After 1984.--With respect to 
                        compensation paid after 1984, the tier 2 
                        portion shall be the taxes imposed by sections 
                        3201(b), 3211(a)(2), and 3221(b).
                            ``(ii) Before 1985.--With respect to 
                        compensation paid before 1985, see section 
                        72(r) of Internal Revenue Code of 1986 for the 
                        definition of tier 2 portion.
                    ``(C) Contributions not allocable to supplemental 
                annuity or windfall benefits.--For purposes of 
                paragraph (1), no amount treated as an employee 
                contribution under this paragraph shall be allocated 
                to--
                            ``(i) any supplemental annuity paid under 
                        section 2(b) of the Railroad Retirement Act of 
                        1974, or
                            ``(ii) any benefit paid under section 3(h), 
                        4(e), or 4(h) of such Act.
            ``(3) Tier 1 railroad retirement benefit.--For purposes of 
        paragraph (1), the term `tier 1 railroad retirement benefit' 
        has the meaning given such term by section 3(b)(2)(B).
    ``(q) Required Distributions Where Holder Dies Before Entire 
Interest Is Distributed.--
            ``(1) In general.--A contract shall not be treated as an 
        annuity contract for purposes of this chapter unless it 
        provides that--
                    ``(A) if any holder of such contract dies on or 
                after the annuity starting date and before the entire 
interest in such contract has been distributed, the remaining portion 
of such interest will be distributed at least as rapidly as under the 
method of distributions being used as of the date of his death, and
                    ``(B) if any holder of such contract dies before 
                the annuity starting date, the entire interest in such 
                contract will be distributed within 5 years after the 
                death of such holder.
            ``(2) Exception for certain amounts payable over life of 
        beneficiary.--If--
                    ``(A) any portion of the holder's interest is 
                payable to (or for the benefit of) a designated 
                beneficiary,
                    ``(B) 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
                    ``(C) such distributions begin not later than 1 
                year after the date of the holder's death or such later 
                date as the Secretary may by regulations prescribe,
        then for purposes of paragraph (1), the portion referred to in 
        subparagraph (A) shall be treated as distributed on the day on 
        which such distributions begin.
            ``(3) Special rule where surviving spouse beneficiary.--If 
        the designated beneficiary referred to in paragraph (2)(A) is 
        the surviving spouse of the holder of the contract, paragraphs 
        (1) and (2) shall be applied by treating such spouse as the 
        holder of such contract.
            ``(4) Designated beneficiary.--For purposes of this 
        subsection, the term `designated beneficiary' means any 
        individual designated a beneficiary by the holder of the 
        contract.
            ``(5) Exception for certain annuity contracts.--This 
        subsection shall not apply to any annuity contract--
                    ``(A) which is provided--
                            ``(i) under a plan described in section 
                        401(a) which includes a trust exempt from tax 
                        under section 501, or
                            ``(ii) under a plan described in section 
                        403(a),
                    ``(B) which is described in section 403(b),
                    ``(C) which is an individual retirement annuity or 
                provided under an individual retirement account or 
                annuity, or
                    ``(D) which is a qualified funding asset.
            ``(6) Special rule where holder is corporation or other 
        non-individual.--
                    ``(A) In general.--For purposes of this subsection, 
                if the holder of the contract is not an individual, the 
                primary annuitant shall be treated as the holder of the 
                contract.
                    ``(B) Primary annuitant.--For purposes of 
                subparagraph (A), the term `primary annuitant' means 
                the individual, the events in the life of whom are of 
                primary importance in affecting the timing or amount of 
                the payout under the contract.
            ``(7) Treatment of changes in primary annuitant where 
        holder of contract is not an individual.--For purposes of this 
        subsection, in the case of a holder of an annuity contract 
which is not an individual, if there is a change in a primary annuitant 
(as defined in paragraph (6)(B)), such change shall be treated as the 
death of the holder.
    ``(s) 10-Percent Additional Tax on Early Distributions From 
Qualified Retirement Plans.--
            ``(1) Imposition of additional tax.--If any taxpayer 
        receives any amount from a qualified retirement plan (as 
        defined in section 4974(c)), the taxpayer's tax under this 
        chapter for the taxable year in which such amount is received 
        shall be increased by an amount equal to 10 percent of the 
        portion of such amount which is includible in gross income.
            ``(2) Subsection not to apply to certain distributions.--
        Except as provided in paragraphs (3) and (4), paragraph (1) 
        shall not apply to any of the following distributions:
                    ``(A) In general.--Distributions which are--
                            ``(i) made on or after the date on which 
                        the employee attains age 59\1/2\,
                            ``(ii) made to a beneficiary (or to the 
                        estate of the employee) on or after the death 
                        of the employee,
                            ``(iii) attributable to the employee's 
                        being disabled within the meaning of subsection 
                        72(m)(7) of the Internal Revenue Code of 1986,
                            ``(iv) part of a series of substantially 
                        equal periodic payments (not less frequently 
                        than annually) made for the life (or life 
                        expectancy) of the employee or the joint lives 
(or joint life expectancies) of such employee and his designated 
beneficiary,
                            ``(v) made to an employee after separation 
                        from service after attainment of age 55,
                            ``(vi) dividends paid with respect to stock 
                        of a corporation which are described in section 
                        404(k), or
                            ``(vii) made from a Roth IRA (other than a 
                        distribution described in section 30(d)(2)).
                    ``(B) Medical expenses.--Distributions made to the 
                employee (other than distributions described in 
                subparagraph (A), (C), or (D)) to the extent such 
                distributions do not exceed the amount allowable as a 
                deduction under section 31 to the employee for amounts 
                paid during the taxable year for medical care 
                (determined without regard to whether the employee 
                itemizes deductions for such taxable year).
                    ``(C) Payments to alternate payees pursuant to 
                qualified domestic relations orders.--Any distribution 
                to an alternate payee pursuant to a qualified domestic 
                relations order (within the meaning of section 
                414(p)(1)).
                    ``(D) Distributions to unemployed individuals for 
                health insurance premiums.--
                            ``(i) In general.--Distributions from an 
                        individual retirement plan to an individual 
                        after separation from employment--
                                    ``(I) if such individual has 
                                received unemployment compensation for 
                                12 consecutive weeks under any Federal 
                                or State unemployment compensation law 
                                by reason of such separation,
                                    ``(II) if such distributions are 
                                made during any taxable year during 
                                which such unemployment compensation is 
                                paid or the succeeding taxable year, 
                                and
                                    ``(III) to the extent such 
                                distributions do not exceed the amount 
                                paid during the taxable year for 
                                insurance described in section 
                                213(d)(1)(D) of the Internal Revenue 
                                Code of 1986 with respect to the 
                                individual and the individual's spouse 
                                and dependents.
                            ``(ii) Distributions after reemployment.--
                        Clause (i) shall not apply to any distribution 
                        made after the individual has been employed for 
                        at least 60 days after the separation from 
                        employment to which clause (i) applies.
                            ``(iii) Self-employed individuals.--To the 
                        extent provided in regulations, a self-employed 
                        individual shall be treated as meeting the 
                        requirements of clause (i)(I) if, under Federal 
                        or State law, the individual would have 
                        received unemployment compensation but for the 
                        fact the individual was self-employed.
                    ``(E) Distributions from individual retirement 
                plans for higher education expenses.--Distributions to 
                an individual from an individual retirement plan to the 
                extent such distributions do not exceed the qualified 
                higher education expenses (as defined in paragraph (7)) 
                of the taxpayer for the taxable year. Distributions 
                shall not be taken into account under the preceding 
                sentence if such distributions are described in 
                subparagraph (A), (C), or (D) or to the extent 
                paragraph (1) does not apply to such distributions by 
                reason of subparagraph (B).
                    ``(F) Distributions from certain plans for first 
                home purchases.--Distributions to an individual from an 
                individual retirement plan which are qualified first-
                time homebuyer distributions (as defined in paragraph 
                (8)). Distributions shall not be taken into account 
                under the preceding sentence if such distributions are 
                described in subparagraph (A), (C), (D), or (E) or to 
                the extent paragraph (1) does not apply to such 
                distributions by reason of subparagraph (B).
            ``(3) Limitations.--
                    ``(A) Certain exceptions not to apply to individual 
                retirement plans.--Subparagraphs (A)(v), and (C) of 
                paragraph (2) shall not apply to distributions from an 
                individual retirement plan.
                    ``(B) Periodic payments under qualified plans must 
                begin after separation.--Paragraph (2)(A)(iv) shall not 
                apply to any amount paid from a trust described in 
                section 401(a) which is exempt from tax under section 
                501(a) or from a contract described in section 
                72(e)(5)(D)(ii) of the Internal Revenue Code of 1986 
                unless the series of payments begins after the employee 
separates from service.
            ``(4) Change in substantially equal payments.--
                    ``(A) In general.--If--
                            ``(i) paragraph (1) does not apply to a 
                        distribution by reason of paragraph (2)(A)(iv), 
                        and
                            ``(ii) the series of payments under such 
                        paragraph are subsequently modified (other than 
                        by reason of death or disability)--
                                    ``(I) before the close of the 5-
                                year period beginning with the date of 
                                the first payment and after the 
                                employee attains age 59\1/2\, or
                                    ``(II) before the employee attains 
                                age 59\1/2\, the taxpayer's tax for the 
                                1st taxable year in which such 
                                modification occurs shall be increased 
                                by an amount, determined under 
                                regulations, equal to the tax which 
                                (but for paragraph (2)(A)(iv)) would 
have been imposed, plus interest for the deferral period.
                    ``(B) Deferral period.--For purposes of this 
                paragraph, the term `deferral period' means the period 
                beginning with the taxable year in which (without 
                regard to paragraph (2)(A)(iv)) the distribution would 
                have been includible in gross income and ending with 
                the taxable year in which the modification described in 
                subparagraph (A) occurs.
            ``(5) Employee.--For purposes of this subsection, the term 
        `employee' includes any participant, and in the case of an 
        individual retirement plan, the individual for whose benefit 
        such plan was established.
            ``(6) Special rules for simple retirement accounts.--In the 
        case of any amount received from a simple retirement account 
        (within the meaning of section 408(p) during the 2-year period 
        beginning on the date such individual first participated in any 
        qualified salary reduction arrangement maintained by the 
        individual's employer under section 408(p)(2), paragraph (1) 
        shall be applied by substituting `25 percent' for `10 percent'.
            ``(7) Qualified higher education expenses.--For purposes of 
        paragraph (2)(E)--
                    ``(A) In general.--The term `qualified higher 
                education expenses' means qualified higher education 
                expenses (as defined in section 10(b)(2)) for education 
                furnished to--
                            ``(i) the taxpayer,
                            ``(ii) the taxpayer's spouse, or
                            ``(iii) any child or grandchild of the 
                        taxpayer or the taxpayer's spouse, at an 
                        eligible educational institution (as defined in 
                        section 10(b)(2)(B)).
                    ``(B) Coordination with other provisions.--For 
                purposes of this subsection, section 30 and section 32, 
                qualified higher education expenses in any taxable year 
                shall be treated as first paid with distributions under 
                section 32, next with distributions to which section 
                30(d)(5)(v) (relating to early withdrawals from Roth 
                IRAs to pay higher education expenses) applies, and 
                finally from withdrawals to which this subsection 
                applies.
            ``(8) Qualified first-time homebuyer distributions.--For 
        purposes of this subsection, the term `qualified first-time 
        homebuyer distribution' has the meaning given to it in section 
        30(d)(6) and the limits contained in such section shall apply 
        on a combined basis to this subsection and section 30. 
        Qualified acquisition costs (as defined in section 30(d)(6)) 
        taken into account for purposes of section 30(d)(5)(vi) shall 
        not also be taken into account separately for purposes of this 
        subsection. A taxpayer may elect to treat distributions from an 
        account other than Roth IRAs to which this subsection applies 
        as a qualified first-time homeowner distribution before 
        determining whether a distribution from a Roth IRA is a 
        qualified first-time homeowner distribution.
    ``(s) 10-Percent Additional Tax for Taxable Distributions From 
Modified Endowment Contracts.--
            ``(1) Imposition of additional tax.--If any taxpayer 
        receives any amount under a modified endowment contract (as 
        defined in section 7702A), the taxpayer's tax under this 
        chapter for the taxable year in which such amount is received 
        shall be increased by an amount equal to 10 percent of the 
        portion of such amount which is includible in gross income.
            ``(2) Subsection not to apply to certain distributions.--
        Paragraph (1) shall not apply to any distribution--
                    ``(A) made on or after the date on which the 
                taxpayer attains age 59\1/2\,
                    ``(B) which is attributable to the taxpayer's 
                becoming disabled (within the meaning of subsection 
                (m)(7)), or
                    ``(C) which is part of a series of substantially 
                equal periodic payments (not less frequently than 
                annually) made for the life (or life expectancy) of the 
                taxpayer or the joint lives (or joint life 
                expectancies) of such taxpayer and his beneficiary.

    ``Subchapter C--Basis, Business Transactions and Nonrecognition 
                              Transactions

``Sec. 71. Gain or loss on the sale of an asset.
``Sec. 72. Basis.
``Sec. 73. Basis in business entities.
``Sec. 74. Gratuitous transfers.
``Sec. 75. Transactions involving business entities.
``Sec. 76. Rollover on residence sale.
``Sec. 77. Other nonrecognition transactions.
``Sec. 78. Wash sales and straddles.

``SEC. 71. GAIN OR LOSS ON THE SALE OF AN ASSET.

    ``(a) In General.--Except as otherwise provided in this chapter, 
the amount of gross income to be recognized on the sale, exchange, or 
other disposition of property equals the excess of--
            ``(1) the amount realized from the disposition, over
            ``(2) the taxpayer's adjusted basis in the property.
    ``(b) Amount Realized.--The amount realized from the disposition of 
property shall be the sum of money received plus the fair market value 
of the property (other than money) received. See section 122(c) for the 
treatment of installment sales.
    ``(c) Nonrecognition Transaction.--Subsection (a) shall not apply 
to nonrecognition transactions described in this chapter.
    ``(d) Contracts Marked to Market.--
            ``(1) In general.--Under regulations prescribed by the 
        Secretary, a markable contract held by the taxpayer at the end 
        of the year shall be treated as sold and reacquired for its 
        fair market value on the last business day of the taxable year. 
        The regulations shall adopt principles and definitions similar 
        to those that applied under section 1256 of the Internal 
        Revenue Code of 1986.
            ``(2) Markable contract.--For purposes of this subsection, 
        `markable contract' means--
                    ``(A) any regulated futures contract,
                    ``(B) any foreign currency contract,
                    ``(C) any nonequity option,
                    ``(D) any dealer equity option
        as such terms were defined for purposes of section 1256 of the 
        Internal Revenue Code of 1986.

``SEC. 72. BASIS.

    ``(a) Basis, Sale, or Exchange.--Except to the extent inconsistent 
with provisions of this chapter, adjusted basis and the existence of a 
sale or exchange shall be determined in accordance with principles 
applicable under the Internal Revenue Code of 1986.
    ``(b) Definition of Basis.--For purposes of this chapter, `basis' 
means the adjusted basis of property. The adjusted basis of property is 
generally its cost, as adjusted for actions or transactions that 
increase or decrease the basis of property. Except as provided in 
section 73 (relating to business entities and basis in business 
entities), the taxpayer's adjusted basis on January 1, 2004, in an 
asset acquired before that date, shall be its adjusted basis as of 
December 31, 2003, as determined under the Internal Revenue Code of 
1986.

``SEC. 73. BASIS IN BUSINESS ENTITIES.

    ``(a) Rules for All Business Entities.--
            ``(1) In general.--A taxpayer's basis in an interest in a 
        business entity shall equal--
                    ``(A) the cost of acquiring the interest,
                    ``(B) increased by the amount of cash and basis of 
                any property contributed to the entity, and
                    ``(C) decreased by the portion of any liquidating 
                distributions from the entity that are treated as 
                returns of capital in accordance with rules prescribed 
                by the Secretary.
            ``(2) Initial basis.--Except as otherwise provided in this 
        section, a taxpayer's basis on January 1, 2004, or any interest 
        in a business entity held as of December 31, 2003, shall be the 
        basis of such interest as of December 31, 2003, as determined 
        under the Internal Revenue Code of 1986.
            ``(3) Cross references.--See section 75 for rules relating 
        to the effect of certain business transactions on a taxpayer's 
        basis.
            ``(4) Special rule for contribution of personal use 
        property.--If a taxpayer contributes personal-use property (as 
        defined in section 210(b)(3)(B)), the taxpayer's basis in the 
        property shall not be increased by an amount in excess of the 
        fair market value of the property contributed.
    ``(b) Special Rules for Partnership Interests.--
            ``(1) Initial basis in old partnerships.--A partner's basis 
        in a partnership interest as of January 1, 2004, equals--
                    ``(A) the partner's basis in the partnership as of 
                the end of the taxable year ending on December 31, 
                2003, minus
                    ``(B) the amount of the partner's share of the 
                indebtedness of the partnership taken into account in 
                determining such basis.
            ``(2) Negative basis.--If the amount determined under 
        paragraph (1) is negative, the taxpayer has a negative basis in 
        the partnership and such negative basis shall increase the gain 
        on the sale or disposition of the partnership interest (except 
        to the extent such negative basis has been adjusted by reason 
        of capital contributions).
            ``(3) Adjustment to basis.--Except as otherwise provided in 
        this section, a partner's basis in a partnership interest shall 
        be determined in accordance with the general principles of this 
        chapter applicable to an individual's basis in an interest in a 
        business entity. A partner's basis in a partnership shall not 
        be adjusted by reason of any--
                    ``(A) distribution from the partnership (except to 
                the extent such distribution is treated as distribution 
                of basis in accordance with the general principles of 
                this chapter applicable to an individual's basis in an 
                interest in a business entity),
                    ``(B) income, earnings, or loss of the partnership, 
                or
                    ``(C) any change in the partner's share of the 
                partnership's indebtedness.
            ``(4) Special rule for transition distributions.--
                    ``(A) Effect of transition distribution.--A 
                transition distribution from partnership to a partner 
                shall--
                            ``(i) reduce the partner's basis in the 
                        partnership, and
                            ``(ii) not be included in gross income.
                    ``(B) Definition.--A `transition distribution' is a 
                distribution by a business entity to an individual made 
                during the first three months of 2004 but only to the 
                extent that such distribution, when added to all other 
                distributions of the entity to the individual after 
                March 31, 2003, does not exceed the amount of taxable 
                income allocated by the entity to the individual during 
                the taxable year of the entity ending on December 31, 
                2003.
            ``(5) Partnership.--For purposes of this section, 
        `partnership' includes a limited liability company that was 
        taxable as a partnership under the Internal Revenue Code of 
        1986.
    ``(c) Special Rules for Shares of S Corporations.--Rules similar to 
those contained in subsection (b) shall apply with respect to the basis 
of stock of a corporation that was treated as an S corporation under 
the Internal Revenue Code of 1986.
    ``(d) Special Rules for Proprietorships.--
            ``(1) Old proprietorship.--A proprietor's basis in any 
        business activity conducted before January 1, 2004, which is 
        treated as a business activity as of such date equals--
                    ``(A) the proprietor's adjusted basis in the assets 
                of such business entity as of the end of the taxable 
                year ending on December 31, 2003, minus
                    ``(B) the balance of any indebtedness the interest 
                on which the proprietor had treated as business 
                interest under section 163(h)(2)(A) of the Internal 
                Revenue Code of 1986.
            ``(2) Negative basis.--If the amount determined under 
        paragraph (1) is negative, the proprietor has a negative basis 
        in the proprietorship and such negative basis shall increase 
        the gain on the sale or disposition of the entity (except to 
        the extent such negative basis has been adjusted by reason of 
        capital contributions).
            ``(3) Adjustment to basis.--Except as otherwise provided in 
        this section, a proprietor's basis in a proprietorship shall be 
        determined in accordance with the general principles of this 
        chapter applicable to an individual's basis in an interest in a 
        business entity.
            ``(4) Proprietorship.--`Proprietorship' includes--
                    ``(A) any family business that is not a 
                partnership, and
                    ``(B) any business activity conducted by a taxpayer 
                other than as an employee if such activity constitutes 
                a business entity.
    ``(e) Anti-Avoidance Rule.--
            ``(1) In general.--If a pass-through entity's distributions 
        to an individual in its taxable year or taxable years ending in 
        2003 exceeds 125 percent of the individual's distributive share 
        of income for such period, the amount of such excess 
        distribution shall be treated as a cash distribution to the 
        partner on January 1, 2004, and shall not reduce the partner's 
        basis in his partnership interest.
            ``(2) Pass through entity.--`Pass through entity' means a 
        partnership, proprietorship, or S corporation.

``SEC. 74. GRATUITOUS TRANSFERS.

    ``(a) In General.--If after December 31, 2003, a taxpayer receives 
any property by gift, inheritance, or other gratuitous transfer, the 
taxpayer's basis in the property shall be the lesser of--
            ``(1) the fair market value of the property at the time of 
        transfer, or
            ``(2) the transferee's basis in the property at the time of 
        transfer.
    ``(b) Proof Required.--A taxpayer's basis in an asset received by 
gift, inheritance, or other gratuitous transfer shall be presumed to be 
zero unless the taxpayer can demonstrate to the satisfaction of the 
Secretary the basis claimed by the taxpayer.

``SEC. 75. DISTRIBUTIONS FROM BUSINESS ENTITIES.

    ``(a) In General.--Except as otherwise provided in this section or 
in regulations issued by the Secretary in accordance with this 
section--
            ``(1) Cash distributions.--Distributions of cash by a 
        business entity with respect to its equity ownership shall be 
        treated as dividends and included in gross income.
            ``(2) Distributions of property.--If a business entity 
        distributes property (other than stock or other equity 
        ownership described in paragraph (3) in connection with a 
        merger, acquisition or reorganization), the fair market value 
        of the property received shall be treated as a dividend and 
        included in gross income.
            ``(3) Distributions of stock or other equity ownership.--If 
        a taxpayer receives with respect to its ownership interest in a 
        business entity stock or other ownership interests in such 
        business entity (as reorganized) or in another business entity 
        that is controlled by such business entity or is acquiring or 
        merging with such business entity, no gain or loss shall be 
        recognized on the distribution.
    ``(b) Basis in Business Divisions.--In the case of a spin-off, 
split-off, or split-up of a business entity in which a taxpayer has 
basis, the taxpayer's basis in the original business entity shall be 
allocated among the new and surviving entities in accordance with the 
relative fair market values of the taxpayer's interests in those 
entities. If interests in the entities are publicly traded, fair market 
values shall be based on public trading prices. In other cases, the 
Secretary shall accept any reasonable allocation made by the taxpayer 
if the taxpayer notifies the Secretary of the allocation in an 
attachment to its tax return for the taxable year of the transaction.
    ``(c) Distributions Constituting Return of Basis.--
            ``(1) Complete liquidations.--
                    ``(A) In general.--In the case of a distribution in 
                complete liquidation of a business entity, a taxpayer 
                shall be treated as receiving cash and assets of the 
                entity in exchange for the taxpayer's equity in the 
                business entity. In such case, the taxpayer shall 
                recognize gain to the extent that the sum of the cash 
                and fair market value of assets received exceeds the 
                taxpayer's basis in its interest in the business entity 
                or shall recognize loss to the extent that the basis 
                exceeds the fair market value of cash and assets 
                received.
                    ``(B) Distribution of equity interests.--In the 
                case of a complete liquidation in which at least 90 
                percent of the value of assets and cash distributed to 
                an equity holder is equity interests in other business 
                entities controlled by the distributing entity--
                            ``(i) subparagraph (A) shall not apply,
                            ``(ii) paragraph (3) of subsection (a) 
                        shall apply,
                            ``(iii) the cash and fair market value of 
                        assets other than equity interests in 
                        controlled entities shall be applied to reduce 
                        the taxpayer's basis in the distributing entity 
                        and gain will be recognized only to the extent 
                        that the cash and such fair market value 
                        exceeds the taxpayer's basis in the 
                        distributing entity, and
                            ``(iv) the taxpayer's remaining basis shall 
                        be allocated among the distributed equity 
                        interests in controlled entities in accordance 
                        with the relative fair market values of such 
                        interests.
                    ``(C) Distribution of business property.--Under 
                regulations prescribed by the Secretary, rules similar 
                to those that applied to partnerships under the 
                Internal Revenue Code of 1986 shall apply in lieu of 
                subparagraph (A) to distributions that include property 
                used in a trade or business if such property is 
                contributed to a new business entity within 180 days of 
the distribution.
            ``(2) Transition rules.--See subsections (b) and (d) of 
        section 73 for transition rules relating to partnerships and 
        proprietorships.
    ``(d) Definitions and Special Rules.--
            ``(1) Certain rules of application.--
                    ``(A) Principles applicable to internal revenue 
                code.--This section shall be applied without regard 
                to--
                            ``(i) continuity of business interest,
                            ``(ii) continuity of ownership interest,
                            ``(iii) requirements of section 355 of the 
                        Internal Revenue Code of 1986 for spin-offs, 
                        split-offs and split-ups,
                            ``(iv) business purposes for a corporate 
                        reorganization or restructuring (except if the 
                        transaction is potentially abusive), and
                            ``(v) except as provided in paragraph (3), 
                        rules treating dividends as returns of capital 
                        because of the absence of earnings and profits.
                    ``(B) Constructive receipt.--If a taxpayer is given 
                the choice of receiving cash or an equity interest in a 
                business entity, the taxpayer will be treated for 
                purposes of this section as if he received the cash and 
                purchased the equity interest.
                    ``(C) Debt versus equity.--The principles 
                distinguishing debt and equity that applied prior to 
                the adopt of the Simplified USA Tax generally shall 
                apply for purposes of applying this section. An 
                investment in a business entity shall not be considered 
                debt unless--
                            ``(i) it is reflected in the books and 
                        records of the business entity as debt, and
                            ``(ii) there is written evidence of the 
                        investment that treats such investment as 
                        indebtedness.
            ``(2) Control.--For purposes of this section, `control' of 
        a business entity means--
                    ``(A) ownership of more than 50% of the voting 
                power held by equity holders of such entity, or
                    ``(B) ownership of rights to more than 50% of the 
                periodic distributions that the business entity may 
                make to its equity holders and 50% of the distributions 
                if the business entity were liquidated.
            ``(3) Regulations.--
                    ``(A) Significant downsizing and partial 
                liquidations.--The Secretary is authorized to issue 
                regulations under which distributions resulting from a 
                significant downsizing of a business entity will be 
                treated in part as return of equity holders' capital.
                    ``(B) Assumption and release of liability.--The 
                Secretary shall prescribe regulations addressing the 
                consequences of a distributee's assumption of the 
                liabilities of the distributor.

``SEC. 76. 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) $500,000 limitation for certain joint returns.--
        Paragraph (1) shall be applied by substituting `$500,000' for 
        `$250,000' if--
                    ``(A) a husband and wife make a joint return for 
                the taxable year of the sale or exchange of the 
                property,
                    ``(B) either spouse meets the ownership 
                requirements of subsection (a) with respect to such 
                property,
                    ``(C) both spouses meet the use requirements of 
                subsection (a) with respect to such property, and
                    ``(D) neither spouse is ineligible for the benefits 
                of subsection (a) with respect to such property by 
                reason of paragraph (3).
            ``(3) Application to only 1 sale or exchange every 2 
        years.--
                    ``(A) In general.--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.
                    ``(B) Pre-may 7, 1997, sales not taken into 
                account.--Subparagraph (A) shall be applied without 
                regard to any sale or exchange before May 7, 1997.
    ``(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) shall not apply and subsection 
        (b)(3) shall not apply; but the amount of gain excluded from 
        gross income under subsection (a) with respect to such sale or 
        exchange shall not exceed--
                    ``(A) the amount which bears the same ratio to the 
                amount which would be so excluded under this section if 
                such requirements had been met, as
                    ``(B) 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 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 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 by such 
                individual's spouse or former spouse in a transaction 
                incident to divorce, 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.
            ``(4) Tenant-stockholder in cooperative housing 
        corporation.--For purposes of this section, if the taxpayer 
        holds stock as a tenant-stockholder in a cooperative housing 
        corporation--
                    ``(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.--For purposes of this 
        section, the destruction, theft, seizure, requisition, or 
        condemnation of property shall be treated as the sale of such 
        property.
            ``(6) 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.
            ``(7) 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, a related party (as defined in section 
                171).
    ``(e) Denial of Exclusion for Expatriates.--This section shall not 
apply to any sale or exchange by an individual if rules relating to 
expatriation to avoid tax apply 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 of the Internal 
Revenue Code of 1986 (as in effect on the day before the date of the 
enactment of the Taxpayer Relief Act of 1997) 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 in determining the holding 
period of such property) had been so owned and used.

``SEC. 77. OTHER NONRECOGNITION TRANSACTIONS.

    ``(a) Involuntary Conversions.--Under regulations prescribed by the 
Secretary, the involuntary conversion of property held by an individual 
shall not result in gross income to the individual to the extent that 
the individual receives property in exchange for the involuntarily 
converted property. To the extent that income is not recognized under 
this subsection, the taxpayer's basis in the converted property shall 
carry over to the new property.
    ``(b) Certain Reacquisitions of Real Property.--Under regulations 
prescribed by the Secretary, gross income shall not be recognized in 
the case of certain reacquisitions of real property. The regulations 
shall adopt principles similar to those under section 1038 of the 
Internal Revenue Code of 1986.
    ``(c) Transfers of Property Between Spouses or Incident to 
Divorce.--
            ``(1) General rule.--Gross income shall not be recognized 
        on the transfer of property from an individual to (or in trust 
        for the benefit of)--
                    ``(A) a spouse, or
                    ``(B) a former spouse, but only if the transfer is 
                incident to divorce.
            ``(2) Transfer treated as a gift.--Any transfer described 
        in paragraph (1) shall be treated as a gift.
    ``(d) Certain Exchanges of Insurance Policies.--Under regulations 
prescribed by the Secretary, gross income shall not be recognized on 
the exchange of insurance policies or another life insurance policy or 
an annuity contract or the exchange of  annuity contracts. The 
regulations shall adopt principles similar to those under section 1035 
of the Internal Revenue Code of 1986.
    ``(e) Certain Exchanges of United States Obligations.--When so 
provided by regulations promulgated by the Secretary in connection with 
the issue of obligations of the United States, no gain or loss shall be 
recognized on the surrender to the United States of obligations of the 
United States issued under chapter 31 of title 31 in exchange solely 
for other obligations issued under such chapter.

``SEC. 78. WASH SALES AND STRADDLES.

    ``(a) Losses From Wash Sales of Stock or Securities.--Under 
regulations prescribed by the Secretary, no loss shall be recognized on 
the wash sale of stock or securities. The regulations shall adopt 
principles similar to those under section 1091 of the Internal Revenue 
Code of 1986.
    ``(b) Straddles.--Under regulations prescribed by the Secretary, 
the loss that can be taken into account from 1 or more straddle 
positions shall be limited. The regulations shall adopt principles 
similar to those under section 1038 of the Internal Revenue Code of 
1986.

``SEC. 79. LIMITATION ON LOSSES FROM CAPITAL TRANSACTIONS.

    ``(a) No Loss on Personal Use Property.--No loss shall be 
recognized on the sale or exchange of personal use property (as defined 
in section 210(b)(3)(B)).
    ``(b) Limitation on Net Capital Loss.--
            ``(1) In general.--Losses from sales or exchanges of 
        capital assets in a taxable year shall be allowed only to the 
        extent of the gains from such sales or exchanges, plus $3,000 
        ($1,500 in the case of a married individual filing a separate 
        return).
            ``(2) Capital loss carryovers.--Under regulations 
        prescribed by the Secretary, any loss not allowed by reason of 
        paragraph (1) shall be carried over to the following taxable 
        year and treated as a capital loss incurred in such year. There 
        shall be no limit on the number of years that a capital loss 
        can be carried forward.
            ``(3) Capital assets.--Under regulations prescribed by the 
        Secretary, the principles of the Internal Revenue Code of 1986 
        (including, without limitation, sections 1234 (relating to 
        options), 1234A (relating to gains or losses from certain 
        terminations), 1253 (relating to franchises and trademarks) and 
        1258 (gain from certain financial transactions) shall apply for 
        purposes of determining what is a capital asset and whether an 
        event is to be treated as a sale or exchange of capital assets, 
        except to the extent inconsistent with principles of this 
        chapter.
            ``(4) Recapture.--If a taxpayer claimed depreciation, 
        amortization or other cost recovery deductions under the 
        Internal Revenue Code of 1986 with respect to property which is 
        subsequently sold or exchanged in a transaction that is not 
        treated as transaction of a business entity, the amount of gain 
        on the exchange of such property which is treated as gain from 
        the sale or exchange of a capital asset shall be reduced (but 
        not below zero) by the amount of such deductions claimed with 
        respect to the property.

         ``Subchapter D--Rules for Exclusions from Gross Income

``Sec. 91. Interest on tax-exempt bonds.
``Sec. 92. Combat pay.
``Sec. 93. Qualified military benefits.
``Sec. 94. Qualified foster care payments.
``Sec. 95. Compensation for injury and sickness.
``Sec. 96. Meals or lodging for convenience of employer.
``Sec. 97. Certain fringe benefits.

``SEC. 91. INTEREST ON TAX-EXEMPT BONDS.

    ``(a) Exclusion.--Except as provided in subsection (b), gross 
income does not include interest on any State or local bond.
    ``(b) Exceptions.--Subsection (a) shall not apply to--
            ``(1) Private activity bond which is not a qualified 
        bond.--Any private activity bond which is not a qualified bond 
        (within the meaning of paragraph (3) of subsection (c)).
            ``(2) Arbitrage bond.--Any arbitrage bond.
            ``(3) Bond not in registered form, etc.--Any bond unless 
        such bond meets the applicable requirements set forth in 
        regulations.
    ``(c) Definitions--For purposes of this section--
            ``(1) State or local bond.--`State or local bond' means an 
        obligation of a State or political subdivision thereof.
            ``(2) State.--`State' includes the District of Columbia and 
        any possession of the United States.
            ``(3) Qualified bond.--`Qualified bond' means any private 
        activity bond if--
                    ``(A) In general.--Such bond is--
                            ``(i) an exempt facility bond,
                            ``(ii) a qualified mortgage bond,
                            ``(iii) a qualified veterans' mortgage 
                        bond,
                            ``(iv) a qualified small issue bond,
                            ``(v) a qualified student loan bond,
                            ``(vi) a qualified 253(c)(3) bond.
                    ``(B) Volume cap.--Such bond is issued as part of 
                an issue which meets the applicable volume cap 
requirements set forth in regulations.
                    ``(C) Other requirements.--Such bond meets the 
                applicable requirements set forth in regulations.
    ``(d) Regulations.--
            ``(1) Statutory regulations.--The Secretary shall publish 
        as regulations governing the application of this section the 
        text of part IV of subchapter B of chapter 1 of the Internal 
        Revenue Code of 1986 (sections 141 through 149) with only such 
        changes as are required to conform cross references.
            ``(2) Other regulations.--The Secretary shall have the 
        authority to promulgate such other regulations as he deems 
        necessary or proper to implement this section, except that no 
        such regulations shall conflict with the regulations mandated 
        by paragraph (1) except as provided in this subtitle.

``SEC. 92. COMBAT PAY.

    ``(a) Enlisted Personnel.--Gross income does not include 
compensation received for active service as a member below the grade of 
commissioned officer in the Armed Forces of the United States for any 
month during any part of which such member--
            ``(1) served in a combat zone, or
            ``(2) was hospitalized as a result of wounds, disease, or 
        injury incurred while serving in a combat zone; but this 
        paragraph shall not apply for any month beginning more than 2 
        years after the date of the termination of combatant activities 
        in such zone.
    ``(b) Commissioned Officers.--Gross income does not include so much 
of the compensation as does not exceed $500 received for active service 
as a commissioned officer in the Armed Forces of the United States for 
any month during any part of which such officer--
            ``(1) served in a combat zone, or
            ``(2) was hospitalized as a result of wounds, disease, or 
        injury incurred while serving in a combat zone; but this 
        paragraph shall not apply for any month beginning more than 2 
        years after the date of the termination of combatant activities 
        in such zone.
    ``(c) Definitions.--For purposes of this section--
            ``(1) `Commissioned officer' does not include a 
        commissioned warrant officer.
            ``(2) `Combat zone' means any area which the President of 
        the United States by Executive Order designates, for purposes 
        of this section or corresponding provisions of prior income tax 
        laws, an area in which Armed Forces of the United States are or 
        have (after June 24, 1950) engaged in combat.
            ``(3) Service is performed in a combat zone only if 
        performed on or after the date designated by the President by 
        Executive Order as the date of the commencing of combatant 
        activities in such zone, and on or before the date designated 
        by the President by Executive Order as the date of the 
        termination of combatant activities in such zone; except that 
        June 25, 1950, shall be considered the date of the commencing 
        of combatant activities in the combat zone designated in 
        Executive Order 10195.
            ``(4) The term `compensation' does not include pensions and 
        retirement pay.

``SEC. 93. QUALIFIED MILITARY BENEFIT.

    ``(a) In General.--`Qualified military benefit' means any allowance 
or in-kind benefit (other than personal use of a vehicle) which--
            ``(1) is received by any member or former member of the 
        uniformed service of the United States or any dependent of such 
        member by reason of such member's status or service as a member 
        of such uniformed services, and
            ``(2) was excludable from gross income on September 9, 
        1986, under any provision of law, regulation, or administrative 
        practice which was in effect on such date (other than a 
        provision of this title).
    ``(b) No Other Benefit To Be Excludable as Provided by This 
Title.--Notwithstanding any other provision of law, no benefit shall be 
treated as a qualified military benefit unless such benefit--
            ``(1) is a benefit described in subsection (a), or
            ``(2) is excludable from gross income under this title 
        without regard to any provision of law which is not contained 
        in this title and which is not contained in a revenue Act.
    ``(c) Limitations on Modifications.--
            ``(1) In general.--Except as provided in paragraph (2), no 
        modification or adjustment of any qualified military benefit 
        after September 9, 1986, shall be taken into account.
            ``(2) Exception for certain adjustments to cash benefits.--
        Paragraph (1) shall not apply to any adjustment to any 
        qualified military benefit payable in cash which--
                    ``(A) is pursuant to a provision of law or 
                regulation (as in effect on September 9, 1986), and
                    ``(B) is determined by reference to any fluctuation 
                in cost, price, currency, or other similar index.

``SEC. 94. QUALIFIED FOSTER CARE PAYMENTS.

    ``(a) Qualified Foster Care Payment Defined.--
            ``(1) In general.--`Qualified foster care payment' means 
        any amount--
                    ``(A) which is paid by a state or political 
                subdivision thereof or by a placement agency which is 
                described in section 253(c)(3) and exempt from tax 
                under section 253(a), and
                    ``(B) which is--
                            ``(i) paid to the foster care provider for 
                        caring for a qualified foster individual in the 
                        foster care provider's home, or
                            ``(ii) a difficulty of care payment.
            ``(2) Qualified foster individual.--`Qualified foster 
        individual' means any individual who is living in a foster 
        family home in which such individual was placed by--
                    ``(A) an agency of a State or a political 
                subdivision thereof, or
                    ``(B) in the case of an individual who has not 
                attained age 19, an organization which is licensed by a 
                State (or political subdivision thereof) as a placement 
                agency and which is described in section 253(c)(3) and 
                exempt from tax under section 253(a).
            ``(3) Limitation based on number of individuals over the 
        age of 18.--In the case of any foster home in which there is a 
        qualified foster care individual who has attained age 19, 
        foster care payments (other than difficulty of care payments) 
        for any period to which such payments relate shall not be 
        excludable from gross income under subsection (a) to the extent 
        such payments are made for more than 5 such qualified foster 
        individuals.
    ``(b) Difficulty of Care Payments.--For purposes of this section--
            ``(1) Difficulty of care payments.--`Difficulty of care 
        payments' means payments to individuals which are not described 
        in subsection (a)(1)(B)(i), and which--
                    ``(A) are compensation for providing the additional 
                care of a qualified foster individual which is--
                            ``(i) required by reason of a physical, 
                        mental, or emotional handicap of such 
                        individual with respect to which the State has 
                        determined that there is a need for additional 
                        compensation, and
                            ``(ii) provided in the home of the foster 
                        care provider, and
                    ``(B) are designated by the payor as compensation 
                described in subparagraph (A).
            ``(2) Limitation based on number of individuals.--In the 
        case of any foster home, difficulty of care payments for any 
        period to which such payments relate shall not be excludable 
        from gross income under subsection (a) to the extent such 
        payments are made for more than--
                    ``(A) 10 qualified foster individuals who have not 
                attained age 19, and
                    ``(B) 5 qualified foster individuals not described 
                in subparagraph (A).

``SEC. 95. COMPENSATION FOR INJURIES OR SICKNESS.

    ``(a) In General.--Gross income does not include--
            ``(1) amounts received under workers' compensation acts as 
        compensation for personal injuries or sickness;
            ``(2) the amount of any damages received (whether by suit 
        or agreement and whether as lump sums or as periodic payments) 
        on account of personal injuries or sickness;
            ``(3) amounts received through accident or health insurance 
        for medical care;
            ``(4) amounts received through accident or health insurance 
        for personal injuries or sickness (other than for medical 
        care), but only to the extent such amounts (A) are not 
        attributable to contributions by the employer which were not 
        includible in the gross income of the employee, and are (B) not 
        paid by the employer;
            ``(5) amounts received as pension, annuity, or similar 
        allowance for personal injuries or sickness resulting from 
        active service in the armed forces of any country or in the 
        Coast and Geodetic Survey or the Public Health Service, or as a 
        disability annuity payable under the provisions of section 808 
        of the Foreign Service Act of 1980; and
            ``(6) amounts received by an individual as disability 
        income attributable to injuries incurred as a direct result of 
        a violent attack which the Secretary of State determines to be 
        a terrorist attack and which occurred while such individual was 
        an employee of the United States engaged in the performance of 
        his official duties outside the United States.
        Paragraph (2) shall not apply to any punitive damages in 
        connection with a case not involving physical injury or 
        physical sickness.
    ``(b) Termination of Application of Subsection (a)(4) in Certain 
Cases.--
            ``(1) In general.--Subsection (a)(4) shall not apply in the 
        case of an individual who is not described in paragraph (2).
            ``(2) Individuals to whom subsection (a)(4) continues to 
        apply.--An individual is described in this paragraph if--
                    ``(A) on or before September 24, 1975, he was 
                entitled to receive any amount described in subsection 
                (a)(4),
                    ``(B) on September 24, 1975, he was a member of any 
                organization (or reserve component thereof) referred to 
                in subsection (a)(4) or under a binding written 
                commitment to become such a member,
                    ``(C) he receives an amount described in subsection 
                (a)(4) by reason of a combat-related injury, or
                    ``(D) on application therefore, he would be 
                entitled to receive disability compensation from the 
                Veterans' Administration.
            ``(3) Special rules for combat-related injuries.--For 
        purposes of this subsection, the term `combat-related injury' 
        means personal injury or sickness--
                    ``(A) which is incurred--
                            ``(i) as a direct result of armed conflict,
                            ``(ii) while engaged in extrahazardous 
                        service, or
                            ``(iii) under conditions simulating war; or
                    ``(B) which is caused by an instrumentality of war.
        In the case of an individual who is not described in 
        subparagraph (A) or (B) of paragraph (2), except as provided in 
        paragraph (4), the only amounts taken into account under 
        subsection (a)(4) shall be the amounts which he receives by 
        reason of a combat-related injury.
            ``(4) Amount excluded to be not less than veterans' 
        disability compensation.--In the case of any individual 
        described in paragraph (2), the amounts excludable under 
        subsection (a)(4) for any period with respect to any individual 
        shall not be less than the maximum amount which such 
        individual, on application therefor, would be entitled to 
        receive as disability compensation from the Veterans' 
        Administration.

``SEC. 96. MEALS OR LODGING FURNISHED FOR THE CONVENIENCE OF THE 
              EMPLOYER.

    ``(a) Meals and Lodging Furnished to Employee, His Spouse, and His 
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 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 employer as 
        a condition of his employment.
    ``(b) Special Rules.--For the 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.
    ``(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 by or on behalf of such 
                institution for use as a residence.
            ``(4) Educational institution.--For purposes of this 
        paragraph, the term `educational institution' means an eligible 
        educational institution as defined in section 10(b)(2)(B).

    ``SEC. 97. CERTAIN FRINGE BENEFITS.

    ``(a) Purpose.--This section includes definitions and rules 
applicable to the exclusion from gross income for certain fringe 
benefits.
    ``(b) No-Additional-Cost Service Defined.--`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.--
            ``(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.--`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 sales 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.--`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.--`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.
    ``(c) De Minimis Fringe Defined.--
            ``(1) In general.--`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.
            ``(3) On-premises gyms and other athletic facilities.--
                    ``(A) In general.--De minimis fringe benefits 
                include the provision of on-premises athletic facility 
                by an employer to its employees.
                    ``(B) On-premises athletic facility.--For purposes 
                of this paragraph, `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.
    ``(d) Certain Educational Training Benefits.--Amounts paid or 
expenses incurred by the employer for education or training provided to 
the employee shall be excluded from gross income under section 4 if 
(and only if) such amounts or expenses are ordinary and necessary 
business expenses and are not for an advanced degree or to qualify an 
employee for a new line of work.
    ``(e) Regulations.--The Secretary shall prescribe regulations under 
this section, including regulations that continue certain rules 
contained in section 132 to the Internal Revenue Code of 1986 related 
to the fringe benefits described in this section.

              ``Subchapter E--Rules Relating to Deductions

``Sec. 101. Charitable, etc. organizations.
``Sec. 102. Private foundations.

``SEC. 101. CHARITABLE, ETC. ORGANIZATIONS.

    ``(a) Purpose.--This section provides definitions for purposes of 
determining the philanthropic transfer deduction and for other purposes 
of this chapter and chapter 2.
    ``(b) Regular Charity.--
            ``(1) In general.--
                    ``(A) Regular charity.--`Regular charity' means--
                            ``(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,
                            ``(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 253(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 
253(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 (C), or
                            ``(viii) an organization described in 
                        section 102(a) (2) or (3).
                    ``(B) Special rule for medical research 
                organizations.--For purposes of determining whether a 
                contribution is to a regular charity, a medical 
                research organization shall not be treated as described 
                in clause (iii) of paragraph (2) unless 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,
                    ``(C) 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 102(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 
                        102(a)(3) but for the right of any substantial 
                        contributor (hereafter in this clause called 
                        `donor') or his spouse to designate annually 
                        the recipients, from among organizations 
                        described in paragraph (1) of section 102(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 has the right to designate the 
recipients of such corpus.
            ``(2) References.--Any reference in other law or in legal 
        documents to an organization described in a clause of section 
        170(b)(1)(A) of the Internal Revenue Code of 1986 shall 
        constitute a reference to an organization described in the same 
clause of section 101(b)(1)(A).
    ``(c) Charity.--For purposes of determining the deductibility of a 
philanthropic transfer, `charitable contribution' means a contribution 
or gift 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 (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 qualifies for exemption from the 
                business tax under section 253(c) and is not 
                disqualified for tax exemption 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.
            ``(3) [intentionally deleted]
            ``(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.
    ``(d) Rules for Subsection (c).--
            ``(1) Limitations.--A contribution or gift by a corporation 
        to a trust, chest, fund, or foundation shall be deductible by 
        reason of subsection (c)(2)(B) only if it is to be used within 
        the United States or any of its possessions exclusively for 
        purposes specified in subparagraph (B).
            ``(2) References.--Any reference in other law or in legal 
        documents to an organization described in a paragraph of 
        section 170(c) of the Internal Revenue Code of 1986 shall 
        constitute a reference to an organization described in the same 
        paragraph number of section 101(c) if an organization is 
        described in such paragraph.
    ``(e) Qualified Conservation Contribution.--
            ``(1) In general.--`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.--`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 253(c)(3) and--
                            ``(i) meets the requirements of section 
                        102(a)(2), or
                            ``(ii) meets the requirements of section 
                        102(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) Certified historic structure.--For purposes 
                of subparagraph (A)(iv), the term `certified historic 
                structure' means any building, structure, or land area 
                which--
                            ``(i) is listed in the National Register, 
                        or
                            ``(ii) is located in a registered historic 
                        district 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 
                        were separated before June 13, 1976, and remain 
                        so 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.
    ``(f) Denial of Deduction for Certain Travel Expenses.--No 
deduction shall be allowed under section 211 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.
    ``(g) Treatment of Certain Amounts Paid to or for the Benefit of 
Institutions of Higher Education.--For purposes of section 11, if as 
the result of a contribution to or for the benefit of an educational 
organization--
            ``(1) which is described in subsection (b)(1)(A)(ii), and
            ``(2) which is an institution of higher education (as 
        defined in section 3304(f))
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, 80 percent of such 
contribution shall be treated as a charitable contribution (but only if 
such amount would be allowable as a deduction but for the fact that the 
taxpayer received the right to purchase tickets). 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.

              ``Subchapter F--Special Business Activities

``Sec. 111. Rules for rental of real estate.

``SEC. 111. RULES FOR RENTAL OF REAL ESTATE.

    ``(a) In General.--Except as provided in subsection (b)--
            ``(1) the activity of rental of real estate is a business 
        activity to which the Simplified USA Tax for businesses under 
        chapter 2 applies,
            ``(2) a taxpayer shall not be entitled to any deductions 
        under this chapter with respect to rental property, and
            ``(3) a taxpayer shall recognize gross income only with 
        respect to distributions from the rental activity.
    ``(b) Insubstantial Rental Activity.--
            ``(1) Not rental property.--If an individual or individuals 
        own property, such individual or individuals and their families 
        use the property on more than 14 days during the taxable year 
        for nonbusiness purposes, the property is rented for no more 
        than 14 days during the taxable year, and the total rental 
        received by the individuals with respect to such property does 
        not exceed $10,000, the property shall not be considered rental 
        property or used in the activity of rental of real estate 
        during the taxable year for purposes of subsection (a) and the 
        Simplified USA Tax for businesses under chapter 2.
            ``(2) Rents from nonrental property.--Any rent from 
        property described in paragraph (1) shall be included in gross 
income for purposes of the Simplified USA Income Tax.
    ``(c) Use for a Nonbusiness Purpose.--For purposes of this section, 
`use for a nonbusiness purpose' means use other than--
            ``(1) use for which fair rent is paid,
            ``(2) use in connection with the preparation of the 
        property for rental, or
            ``(3) use that serves a clear business purpose.
Use during any part of a day shall constitute use for that day.

             ``Subchapter G--Accounting Methods and Periods

``Sec. 121. Taxable year.
``Sec. 122. Cash method of accounting; installment sales.

``SEC. 121. TAXABLE YEAR.

    ``(a) In General.--The taxable year for all individuals subject to 
tax under this chapter shall be the calendar year except as provided in 
subsection (b).
    ``(b) Short Taxable Years.--
            ``(1) Birth.--An individual's taxable year in the year of 
        his birth shall begin on the date of his birth.
            ``(2) Death.--An individual's taxable year in the year of 
        his death shall end on the date of his death.

``SEC. 122. CASH METHOD OF ACCOUNTING; INSTALLMENT SALES.

    ``(a) In General.--All individuals shall determine their income and 
deductions using the cash receipts and disbursement method.
    ``(b) OID Rules.--
            ``(1) In general.--Original issue discount shall not be 
        included in gross income until received.
            ``(2) Previously recognized oid.--Original issue discount 
        included in income under the Internal Revenue Code of 1986 
        shall increase the adjusted basis of the instrument to which 
        the original issue discount related and shall not again be 
        included in income when received.
    ``(c) Installment Sales.--
            ``(1) In general.--Taxpayers shall take into account income 
        from installment sales when received.
            ``(2) Regulations.--The Secretary shall promulgate 
        regulations implementing paragraph (1). Such regulations shall 
        generally follow the principles of sections 453, 453A and 453B 
        of the Internal Revenue Code of 1986, except to the extent such 
        principles are inconsistent with other provisions of this 
        chapter.
    ``(d) Constructive Receipt.--Income shall be treated as received 
when constructively received.
    ``(e) Effect of Change of Accounting Method.--Rules similar to 
those under section 226 shall apply to ensure that a taxpayer does not 
deduct the same expense twice or include the same item in income twice.

                   ``Subchapter H--Nonresident Aliens

``Sec. 131. Tax on nonresident alien individuals.
``Sec. 132. Tax treatment of certain community income of nonresident 
                            aliens.

``SEC. 131. TAX ON NONRESIDENT ALIEN INDIVIDUALS.

    ``(a) Nonbusiness Income.--
            ``(1) Income other than certain gains.--There is hereby 
        imposed for each taxable year a tax of 30 percent of the amount 
        received from sources within the United States by a nonresident 
        alien individual as--
                    ``(A) interest (other than portfolio interest (as 
                defined in subsection (b)(2)), deposit interest (as 
                defined in subsection (b)(3)) and original issue 
                discount, dividends, rents, salaries, wages, premiums, 
                annuities, compensations, remunerations, emoluments, 
                and other fixed or determinable annual periodical 
                gains, profits and income,
                    ``(B) gains from the disposal of timber, coal, or 
                iron ore with a retained economic interest,
                    ``(C) in the case of the sale of an original 
                discount obligation or payment on an original issue 
                discount obligation, the interest accrued while the 
                individual was a nonresident alien, and
                    ``(D) includible social security benefits (as 
                defined in section 3(b)(2)).
            ``(2) Capital gains of certain aliens.--In the case of a 
        nonresident alien individual present in the United States for a 
        period or periods aggregating 183 days or more during the 
        taxable year, there is hereby imposed a tax of 30 percent of 
        the amount by which the gains, derived from sources within 
the United States, from the sale or exchange at any time during such 
year exceeds his losses, allocable to sources within the United States, 
from the sale or exchange at any time during such year of capital 
assets.
            ``(3) Tax does not apply to business income.--The taxes 
        imposed by this section shall not apply to the income of any 
        business entity, except to the extent such income is 
        distributed as compensation, dividends, or interest.
    ``(b) Special Rules and Definitions.--
            ``(1) Certain annuities.--The taxes imposed by subsection 
        (a) shall not apply to any amount received as an annuity under 
        a qualified annuity plan described in section 403(a)(1), or 
        from a qualified trust described in section 401(a) and exempt 
        under section 253(a) if--
                    ``(A) all of the personal services by reason of 
                which the annuity is payable were either--
                            ``(i) personal services performed outside 
                        the United States by an individual who, at the 
                        time of performance of such personal services, 
                        was a nonresident alien, or
                            ``(ii) personal services by a nonresident 
                        alien temporarily present in the United States 
                        for a period or periods not exceeding 90 days 
                        during a taxable year, whose compensation for 
                        such services did not exceed $3,000, and who 
                        performed such services for--
                                    ``(I) a nonresident alien 
                                individual, foreign partnership, or 
                                foreign corporation, not engaged in a 
trade or business within the United States, or
                                    ``(II) for an office or place of 
                                business maintained in a foreign 
                                country or in a possession of the 
                                United States by an individual who is a 
                                citizen or resident of the United 
                                States or by a domestic partnership or 
                                a domestic corporation, and
                    ``(B) at the time the first amount is paid as 
                annuity under the annuity plan or by the trust, 90 
                percent or more of the employees for whom contributions 
                or benefits are provided under such plan are citizens 
                or residents of the United States.
            ``(2) Portfolio interest.--
                    ``(A) In general.--`Portfolio interest' means--
                            ``(i) interest on obligations in registered 
                        form if the United States person who would 
                        otherwise be required to withhold tax on such 
                        interest under section 1441(a) receives a 
                        statement that the beneficial owner of the 
                        obligation is not a United States person, and
                            ``(ii) interest on obligations in 
                        nonregistered form if appropriate precautions 
                        are taken to ensure that such obligations will 
                        be sold only to persons who are not United 
                        States persons and such interest is paid 
                        outside the United States.
                    ``(B) Exceptions.--Under rules to be prescribed by 
                the Secretary, portfolio interest does not include--
                            ``(i) interest received by a 10-percent 
                        equity owner, or
                            ``(ii) contingent interest.
            ``(3) Deposit interest.--`Deposit interest' means interest 
        on deposits which are--
                    ``(A) deposits with persons carrying on a banking 
                business (including savings and loans), and
                    ``(B) amounts held by an insurance company under an 
                agreement to pay interest thereon.
            ``(4) Other exceptions.--The taxes imposed by subsection 
        (a) shall not apply to--
                    ``(A) a percentage of any dividend paid by a 
                business entity, 80 percent of whose gross receipts are 
                not taken into account under chapter 1 because they are 
                from outside the United States, equal to the percentage 
                of gross receipts not so taken into account,
                    ``(B) gambling winnings (except to the extent that 
                the Secretary determines by regulation that the 
                collection of the tax is administratively feasible),
                    ``(C) compensation paid by a foreign employer to a 
                nonresident alien individual for the period he is 
                temporarily present in the United States as a 
                nonimmigrant under subparagraph (F) or (J) of section 
                101(a)(15) of the Immigration and Nationality Act, as 
                amended,
                    ``(D) interest from a series E or series H savings 
                bond if the individual acquired the bond while a 
                resident of the Ryuku Islands or the Trust Territory of 
                the Pacific Islands, or
                    ``(E) amounts earned or payable to any person who 
                is a bona fide resident of Puerto Rico, Guam, American 
                Samoa, or the Northern Mariana Islands (and, therefore, 
                is subject to the tax imposed by subchapter A).
    ``(c) Expatriation To Avoid Tax.--
            ``(1) In general.--A nonresident alien individual who at 
        any time within the 10-year period immediately preceding the 
        close of the taxable year lost United States citizenship shall 
        be taxable in the manner described in paragraph (2) unless none 
        of the principal purposes of losing citizenship was avoidance 
        of tax under subchapter A or subtitle B.
            ``(2) Alternative tax.--A nonresident alien individual 
        described in paragraph (1) shall be subject to tax on the items 
        taxable under subsection (a) as determined without regard to 
        exceptions listed or based on definitions contained in 
        subsection (b) using the rate schedule for single individuals 
        under section 215. If the taxes determined under subsection (a) 
        are greater than the tax determined under this subsection, the 
        greater tax shall apply.

``SEC. 132. TAX TREATMENT OF CERTAIN COMMUNITY INCOME OF NONRESIDENT 
              ALIENS.

    ``(a) General Rule.--In the case of a married couple one or both of 
whom are nonresident alien individuals and who have community income 
for the taxable year, such community income shall be treated as 
follows:
            ``(1) Compensation income shall be treated as income of the 
        spouse who rendered the services,
            ``(2) Partnership distributions shall be treated as the 
        related distributive shares of partnership income would be 
        treated under section 1402(a)(5),
            ``(3) Community income which is derived from the separate 
        property of a spouse shall be treated as income of that spouse, 
        and
            ``(4) All other such community income shall be treated as 
        provided in the applicable community property law.
    ``(b) Exception Where Election Under Section 6013(g) Is in 
Effect.--Subsection (a) shall not apply if an election under subsection 
(g) or (h) of section 6013 (relating to election to treat nonresident 
alien individuals as residents of the United States) is in effect.

``SEC. 133. RELATIONSHIP WITH TREATIES.

    ``(a) Statement of Policy.--It is the intention of the USA Tax Code 
to promote a worldwide tax system in which each nation taxes--
            ``(1) under an individual tax, only the income of 
        individuals who are residents or citizens of that nation, and
            ``(2) under a business tax only the business activity in 
        such nation.
    ``(b) Effect of Treaties.--No tax shall be imposed under section 
131(a) on income that is exempt from tax by reason of a treaty between 
the nation of which the nonresident alien is a citizen or resident and 
the United States. If any such treaty requires that a lower rate of tax 
be imposed on some or all of the items of income subject to tax under 
section 331(a), such lower rate shall apply to such items in the case 
of persons to whom such treaty applies.
    ``(c) Effect of Unilateral Action by Foreign Nation.--No tax shall 
be imposed under section 331(a) on nonresident aliens who are citizens 
or residents of another nation if--
            ``(1) such nation exempts from its income and withholding 
        taxes nonresident alien individuals who are residents or 
        citizens of the United States,
            ``(2) such nation has entered into a tax information 
        sharing agreement with the United States, and
            ``(3) the Secretary certifies that the preceding two 
        requirements have been satisfied.

                   ``Subchapter I--Trusts and Estates

``Sec. 140. Prepayment of tax by trusts and estates.
``Sec. 141. Application of tax.
``Sec. 142. Special rules for credits and deductions.
``Sec. 143. Definitions and rules applicable to subchapter I.
``Sec. 144. Deduction for trusts distributing current income only.
``Sec. 145. Inclusion of amounts in gross income of beneficiaries of 
                            trusts distributing current income only.
``Sec. 146. Deduction for estates and trusts accumulating income or 
                            distributing corpus.
``Sec. 147. Inclusion of amounts in gross income of beneficiaries of 
                            estates and trusts accumulating income or 
                            distributing corpus.
``Sec. 148. Special rules applicable to sections 146 and 147.
``Sec. 149. Charitable remainder trusts.
``Sec. 150. Definitions applicable to excess distribution rules.
``Sec. 151. Accumulation distribution allocated to preceding years.
``Sec. 152. Treatment of amounts deemed distributed by trust in 
                            preceding years.
``Sec. 153. Trust income, deductions, and credits attributable to 
                            grantors and others as substantial owners.
``Sec. 154. Definitions and rules.
``Sec. 155. Reversionary interests.
``Sec. 156. Power to control beneficial enjoyment.
``Sec. 157. Administrative powers.
``Sec. 158. Power to revoke.
``Sec. 159. Income for benefit of grantor.
``Sec. 160. Person other than grantor treated as substantial owner.
``Sec. 161. Foreign trusts having one or more United States 
                            beneficiaries.
``Sec. 162. Limitation on charitable deduction.
``Sec. 163. Income of an estate or trust in case of divorce, etc.
``Sec. 164. Recognition of gain on certain transfers to certain foreign 
                            persons and estates.
``Sec. 165. Treatment of funeral trusts.
``Sec. 166. Income in respect of a decedent.

``SEC. 140. PREPAYMENT OF TAX BY TRUSTS AND ESTATES.

    ``(a) Prepayment of Tax.--A trust or estate shall prepay the 
Simplified USA Tax for individuals in accordance with the provisions of 
this subchapter.
    ``(b) Imposition of Tax.--There is hereby imposed a tax on the 
taxable income of trusts and estates (as determined in accordance with 
this subchapter) a tax determined as follows:

``If taxable income is:             ``The tax is:
    Not over $1,600................
                                        15% of taxable income.
    Over $1,600, but not over 
        $3,800.
                                        $240, plus 25% of the excess 
                                                over $1,600.
    Over $3,800....................
                                        $790, plus 30% of the excess 
                                                over $3,800.
    ``(c) Inflation Adjustment.--The schedule in subsection (b) shall 
be adjusted for inflation in accordance with section 23.
    ``(d) Business Activities.--
            ``(1) Tax on business activity determined at business 
        level.--If a trust engages in business activity (as defined in 
        section 206(b)), it shall be considered a business entity with 
        respect to such activities for purposes of the business tax 
        under chapter 2. The business entity shall be considered an 
        asset of the trust.
            ``(2) Business entity as sole beneficiary.--If the only 
        beneficiaries of a trust are business entities, no tax shall be 
        imposed on such trust under this subchapter.

``SEC. 141. APPLICATION OF TAX.

    ``(a) In General.--The tax imposed by section 140 shall apply to 
the taxable income of estates or of any kind of property held in trust, 
including--
            ``(1) income accumulated in trust for the benefit of unborn 
        or unascertained persons or persons with contingent interests, 
        and income accumulated or held for future distribution under 
        the terms of the will or trust;
            ``(2) income which is to be distributed currently by the 
        fiduciary to the beneficiaries, and income collected by a 
        guardian of an infant which is to be held or distributed as the 
        court may direct;
            ``(3) income received by estates of deceased persons during 
        the period of administration or settlement of the estate; and
            ``(4) income which, in the discretion of the fiduciary, may 
        be either distributed to the beneficiaries or accumulated.
    ``(b) Computation and Payment.--The taxable income of an estate or 
trust shall be computed in the same manner as in the case of an 
individual, except as otherwise provided in this subchapter. The tax 
shall be computed on such taxable income and shall be paid by the 
fiduciary. For purposes of this subsection, a foreign trust or foreign 
estate shall be treated as a nonresident alien individual who is not 
present in the United States at any time.
    ``(c) Exclusion of Includible Gain From Taxable Income.--The 
taxable income of a trust does not include the amount of any includible 
gain as defined in section 144(b) reduced by any deductions properly 
allocable thereto.

``SEC. 142. SPECIAL RULES FOR CREDITS AND DEDUCTIONS.

    ``(a) USA Deduction and Family Living Allowance.--
            ``(1) No deduction or allowance.--A trust or estate shall 
        not be allowed any USA Deductions or a Family Living Allowance.
            ``(2) Special deduction.--For purposes of determining 
        taxable income, trusts and estates shall be entitled to the 
following deductions from gross income--
                    ``(A) Estate.--An estate shall be allowed a 
                deduction of $600.
                    ``(B) Distributing trust.--A trust which, under its 
                governing instrument, is required to distribute all of 
                its income currently shall be allowed a deduction of 
                $300.
                    ``(C) Other trusts.--Trusts not described in 
                subparagraph (B) shall be allowed a deduction of $100.
    ``(b) Deduction for Amounts Paid or Permanently Set Aside for a 
Charitable Purpose.--
            ``(1) General rule.--In the case of an estate or trust, 
        there shall be allowed as a deduction in computing its taxable 
        income (in lieu of the philanthropic transfer deduction) any 
        amount of the gross income, without limitation, which pursuant 
        to the terms of the governing instrument is, during the taxable 
        year, paid for a purpose specified in section 101(c) 
        (determined without regard to section 101(c)(2)(A)). If a 
        charitable contribution is paid after the close of such taxable 
        year and on or before the last day of the year following the 
        close of such taxable year, then the trustee or administrator 
        may elect to treat such contribution as paid during such 
taxable year. The election shall be made at such time and in such 
manner as the Secretary prescribes by regulations.
            ``(2) Pooled income funds.--In the case of a pooled income 
        fund (as defined in paragraph (3)), there shall also be allowed 
        as a deduction in computing its taxable income any amount of 
        the gross income attributable to gain from the sale of a 
        capital asset held for more than 1 year, without limitation, 
        which pursuant to the terms of the governing instrument is, 
        during the taxable year, permanently set aside for a purpose 
        specified in section 101(c).
            ``(3) Definition of pooled income fund.--For purposes of 
        paragraph (2), a pooled income fund is a trust--
                    ``(A) to which each donor transfers property, 
                contributing an irrevocable remainder interest in such 
                property to or for the use of an organization described 
                in section 101(b)(1)(A) (other than in clauses (vii) or 
                (viii)), and retaining an income interest for the life 
                of one or more beneficiaries (living at the time of 
                such transfer),
                    ``(B) in which the property transferred by each 
                donor is commingled with property transferred by other 
                donors who have made or make similar transfers,
                    ``(C) which cannot have investments in securities 
                which are exempt from taxes imposed by this subtitle,
                    ``(D) which includes only amounts received from 
                transfers which meet the requirements of this 
                paragraph,
                    ``(E) which is maintained by the organization to 
                which the remainder interest is contributed and of 
                which no donor or beneficiary of an income interest is 
                a trustee, and
                    ``(F) from which each beneficiary of an income 
                interest receives income, for each year for which he is 
                entitled to receive the income interest referred to in 
                subparagraph (A), determined by the rate of return 
                earned by the trust for such year.
        For purposes of determining the amount of any charitable 
        contribution allowable by reason of a transfer of property to a 
        pooled fund, the value of the income interest shall be 
        determined on the basis of the highest rate of return earned by 
        the fund for any of the 3 taxable years immediately preceding 
        the taxable year of the fund in which the transfer is made. In 
        the case of funds in existence less than 3 taxable years 
        preceding the taxable year of the fund in which a transfer is 
        made the rate of return shall be deemed to be 6 percent per 
        annum, except that the Secretary may prescribe a different rate 
        of return.
    ``(c) Unused Loss Carryovers.--If on the termination of an estate 
or trust, the estate or trust has a loss carryover then such carryover 
shall be allowed as a deduction, in accordance with regulations 
prescribed by the Secretary, to the beneficiaries succeeding to the 
property of the estate or trust.
    ``(d) Certain Distributions by Cemetery Perpetual Care Funds.--In 
the case of a cemetery perpetual care fund which--
            ``(1) was created pursuant to local law by a taxable 
        cemetery corporation for the care and maintenance of cemetery 
        property, and
            ``(2) is treated for the taxable year as a trust for 
        purposes of this subchapter,
any amount distributed by such fund for the care and maintenance of 
gravesites which have been purchased from the cemetery corporation 
before the beginning of the taxable year of the trust and with respect 
to which there is an obligation to furnish care and maintenance shall 
be considered to be a distribution solely for purposes of sections 144 
and 146, but only to the extent that the aggregate amount so 
distributed during the taxable year does not exceed $5 multiplied by 
the aggregate number of such gravesites.

``SEC. 143. DEFINITIONS AND RULES APPLICABLE TO SUBCHAPTER I.

    ``For purposes of this subchapter--
    ``(a) Distributable Net Income.--`Distributable net income' means, 
with respect to any taxable year, the taxable income of the estate or 
trust computed with the following modifications--
            ``(1) No deduction shall be taken under sections 144 and 
        146 (relating to additional deductions).
            ``(2) No deduction shall be taken under section 142(a)(2) 
        (relating to deduction for personal exemptions).
            ``(3) 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 142(b). 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.
            ``(4) For purposes only of rules under section ____, 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) There shall be included any tax-exempt interest.
            ``(6) 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.
If the estate or trust is allowed a deduction under section 142(b), 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 142(b) 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.--`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.--`Beneficiary' includes heir, legatee, devisee.
    ``(d) 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 146(a)(2) and 147(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 146(a)(2) and 147(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 
        148(a).--This subsection shall not apply to any distribution 
        described in section 148(a).
    ``(e) 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 shall be 
treated as 1 person.
    ``(f) Certain Payments of Estimated Tax Treated as Paid by 
Beneficiary.--Under rules prescribed by the Secretary, a 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. This rule shall also apply in the case of a 
taxable year reasonably expected to be the last taxable year of an 
estate.
    ``(g) Foreign Trusts and Foreign Income.--The Secretary shall 
prescribe special rules for foreign trusts and foreign income of 
trusts. Those rules should generally be consistent with the rules under 
subchapter J of chapter 1 of the Internal Revenue Code of 1986, except 
that they shall take into account the principles of the Simplified USA 
Tax.
    ``(h) Certain Revocable Trusts Treated as Part of Estate.--
            ``(1) In general.--If both the executor (if any) of an 
        estate and the trustee of a qualified revocable trust elect the 
        treatment provided in this section, such trust shall be treated 
        and taxed as part of such estate (and not as a separate trust) 
        for all taxable years of the estate ending after the date of 
        the decedent's death and before the applicable date.
            ``(2) Qualified revocable trust.--For purposes of this 
        subsection, `qualified revocable trust' means any trust (or 
        portion thereof) which was treated under section 158 as owned 
        by the decedent of the estate referred to in paragraph (1) by 
        reason of a power in the grantor (determined without regard to 
        section 154(e).
            ``(3) Applicable date.--For purposes of this subsection, 
        `applicable date' means--
                    ``(A) if no return of tax imposed by chapter 11 is 
                required to be filed, the date which is 2 years after 
the date of the decedent's death, and
                    ``(B) if such a return is required to be filed, the 
                date which is 6 months after the date of the final 
                determination of the liability for tax imposed by 
                chapter 11.
            ``(4) Election.--The election under this subsection shall 
        be made not later than the time prescribed for filing the 
        return of tax imposed by this chapter for the first taxable 
        year of the estate (determined with regard to extensions) and, 
        once made, shall be irrevocable.

``SEC. 144. DEDUCTION FOR TRUSTS DISTRIBUTING CURRENT INCOME ONLY.

    ``(a) Deduction.--In the case of any trust the terms of which--
            ``(1) provide that all of its income is required to be 
        distributed currently, and
            ``(2) do not provide that any amounts are to be paid, 
        permanently set aside, or used for the purposes specified in 
        section 142(b) (relating to deduction for charitable, etc., 
        purposes),
there shall be allowed as a deduction in computing the taxable income 
of the trust the amount of the income for the taxable year which is 
required to be distributed currently. This section shall not apply in 
any taxable year in which the trust distributes amounts other than 
amounts of income described in paragraph (1).
    ``(b) Limitation on Deduction.--If the amount of income required to 
be distributed currently exceeds the distributable net income of the 
trust for the taxable year, the deduction shall be limited to the 
amount of the distributable net income. For this purpose, the 
computation of distributable net income shall not include items of 
income which are not included in the gross income of the trust and the 
deductions allocable thereto.

``SEC. 145. INCLUSION OF AMOUNTS IN GROSS INCOME OF BENEFICIARIES OF 
              TRUSTS DISTRIBUTING CURRENT INCOME ONLY.

    ``(a) Inclusion.--Subject to subsection (b), the amount of income 
for the taxable year required to be distributed currently by a trust 
described in section 144 shall be included in the gross income of the 
beneficiaries to whom the income is required to be distributed, whether 
distributed or not. If such amount exceeds the distributable net 
income, there shall be included in the gross income of each beneficiary 
an amount which bears the same ratio to distributable net income as the 
amount of income required to be distributed to such beneficiary bears 
to the amount of income required to be distributed to all 
beneficiaries.
    ``(b) Character of Amounts.--The amounts specified in subsection 
(a) shall have the same character in the hands of the beneficiary as in 
the hands of the trust. For this purpose, the amounts shall be treated 
as consisting of the same proportion of each class of items entering 
into the computation of distributable net income of the trust as the 
total of each class bears to the total distributable net income of the 
trust, unless the terms of the trust specifically allocate different 
classes of income to different beneficiaries. In the application of the 
preceding sentence, the items of deduction entering into the 
computation of distributable net income shall be allocated among the 
items of distributable net income in accordance with regulations 
prescribed by the Secretary.

``SEC. 146. DEDUCTION FOR ESTATES AND TRUSTS ACCUMULATING INCOME OR 
              DISTRIBUTING CORPUS.

    ``(a) Deduction.--In any taxable year there shall be allowed as a 
deduction in computing the taxable income of an estate or trust (other 
than a trust described in section 144), the sum of--
            ``(1) any amount of income for such taxable year required 
        to be distributed currently (including any amount required to 
        be distributed which may be paid out of income or corpus to the 
        extent such amount is paid out of income for such taxable 
        year); and
            ``(2) any other amounts properly paid or credited or 
        required to be distributed for such taxable year;
        but such deduction shall not exceed the distributable net 
        income of the estate or trust.
    ``(b) Character of Amounts Distributed.--The amount determined 
under subsection (a) shall be treated as consisting of the same 
proportion of each class of items entering into the computation of 
distributable net income of the estate or trust as the total of each 
class bears to the total distributable net income of the estate or 
trust in the absence of the allocation of different classes of income 
under the specific terms of the governing instrument. In the 
application of the preceding sentence, the items of deduction entering 
into the computation of distributable net income (including the 
deduction allowed under section 142(b)) shall be allocated among the 
items of distributable net income in accordance with regulations 
prescribed by the Secretary.
    ``(c) Limitation on Deduction.--No deduction shall be allowed under 
subsection (a) in respect of any portion of the amount allowed as a 
deduction under that subsection (without regard to this subsection) 
which is treated under subsection (b) as consisting of any item of 
distributable net income which is not included in the gross income of 
the estate or trust.

``SEC. 147. INCLUSION OF AMOUNTS IN GROSS INCOME OF BENEFICIARIES OF 
              ESTATES AND TRUSTS ACCUMULATING INCOME OR DISTRIBUTING 
              CORPUS.

    ``(a) Inclusion.--Subject to subsection (b), there shall be 
included in the gross income of a beneficiary to whom an amount 
specified in section 146(a) is paid, credited, or required to be 
distributed (by an estate or trust described in section 146), the sum 
of the following amounts:
            ``(1) Amounts required to be distributed currently.--The 
        amount of income for the taxable year required to be 
        distributed currently to such beneficiary, whether distributed 
        or not. If the amount of income required to be distributed 
        currently to all beneficiaries exceeds the distributable net 
        income (computed without the deduction allowed by section 
        142(b), relating to deduction for charitable, etc., purposes) 
        of the estate or trust, then, in lieu of the amount provided in 
        the preceding sentence, there shall be included in the gross 
        income of the beneficiary an amount which bears the same ratio 
        to distributable net income (as so computed) as the amount of 
        income required to be distributed currently to such beneficiary 
        bears to the amount required to be distributed currently to all 
        beneficiaries. For purposes of this section, the phrase `the 
        amount of income for the taxable year required to be 
        distributed currently' includes any amount required to be paid 
        out of income or corpus to the extent such amount is paid out 
        of income for such taxable year.
            ``(2) Other amounts distributed.--All other amounts 
        properly paid, credited, or required to be distributed to such 
        beneficiary for the taxable year. If the sum of--
                    ``(A) the amount of income for the taxable year 
                required to be distributed currently to all 
                beneficiaries, and
                    ``(B) all other amounts properly paid, credited, or 
                required to be distributed to all beneficiaries
        exceeds the distributable net income of the estate or trust, 
        then, in lieu of the amount provided in the preceding sentence, 
        there shall be included in the gross income of the beneficiary 
        an amount which bears the same ratio to distributable net 
income (reduced by the amounts specified in (A)) as the other amounts 
properly paid, credited or required to be distributed to the 
beneficiary bear to the other amounts properly paid, credited, or 
required to be distributed to all beneficiaries.
    ``(b) Character of Amounts.--The amounts determined under 
subsection (a) shall have the same character in the hands of the 
beneficiary as in the hands of the estate or trust. For this purpose, 
the amounts shall be treated as consisting of the same proportion of 
each class of items entering into the computation of distributable net 
income as the total of each class bears to the total distributable net 
income of the estate or trust unless the terms of the governing 
instrument specifically allocate different classes of income to 
different beneficiaries. In the application of the preceding sentence, 
the items of deduction entering into the computation of distributable 
net income (including the deduction allowed under section 142(b)) shall 
be allocated among the items of distributable net income in accordance 
with regulations prescribed by the Secretary. In the application of 
this subsection to the amount determined under paragraph (1) of 
subsection (a), distributable net income shall be computed without 
regard to any portion of the deduction under section 142(b) which is 
not attributable to income of the taxable year.

``SEC. 148. SPECIAL RULES APPLICABLE TO SECTIONS 146 AND 147.

    ``(a) Exclusions.--There shall not be included as amounts falling 
within section 146(a) or 147(a)--
            ``(1) Gifts, bequests, etc.--Any amount which, under the 
        terms of the governing instrument, is properly paid or credited 
        as a gift or bequest of a specific sum of money or of specific 
        property and which is paid or credited all at once or in not 
        more than 3 installments. For this purpose an amount which can 
        be paid or credited only from the income of the estate or trust 
        shall not be considered as a gift or bequest of a specific sum 
        of money.
            ``(2) Charitable, etc., distributions.--Any amount paid or 
        permanently set aside or otherwise qualifying for the deduction 
        provided in section 142(b) (computed without regard to sections 
        508(d), 162, and 4948(c)(4)).
            ``(3) Denial of double deduction.--Any amount paid, 
        credited, or distributed in the taxable year, if section 144 or 
        section 146 applied to such amount for a preceding taxable year 
        of an estate or trust because credited or required to be 
        distributed in such preceding taxable year.
    ``(b) Distributions in First Sixty-Five Days of Taxable Year.--
            ``(1) General rule.--If within the first 65 days of any 
        taxable year of an estate or a trust, an amount is properly 
        paid or credited, such amount shall be considered paid or 
        credited on the last day of the preceding taxable year.
            ``(2) Limitation.--Paragraph (1) shall apply with respect 
        to any taxable year of an estate or a trust only if the 
        executor of such estate or the fiduciary of such trust (as the 
        case may be) elects, in such manner and at such time as the 
        Secretary prescribes by regulations, to have paragraph (1) 
        apply for such taxable year.
    ``(c) Separate Shares Treated as Separate Estates or Trusts.--For 
the sole purpose of determining the amount of distributable net income 
in the application of sections 146 and 147, in the case of a single 
trust having more than one beneficiary, substantially separate and 
independent shares of different beneficiaries in the trust shall be 
treated as separate trusts. Rules similar to the rules of the preceding 
provisions of this subsection shall apply to treat substantially 
separate and independent shares of different beneficiaries in an estate 
having more than 1 beneficiary as separate estates. The existence of 
such substantially separate and independent shares and the manner of 
treatment as separate trusts or estates, including the application of 
sections 150 through 152, shall be determined in accordance with 
regulations prescribed by the Secretary.

``SEC. 149. CHARITABLE REMAINDER TRUSTS.

    ``(a) General Rule.--Notwithstanding any other provision of this 
subchapter, the provisions of this section shall, in accordance with 
regulations prescribed by the Secretary, apply in the case of a 
charitable remainder annuity trust and a charitable remainder unitrust.
    ``(b) Character of Distributions.--Amounts distributed by a 
charitable remainder annuity trust or by a charitable remainder 
unitrust shall be considered as having the following characteristics in 
the hands of a beneficiary to whom is paid the annuity described in 
subsection (d)(1)(A) or the payment described in subsection (d)(2)(A):
            ``(1) First, as amounts of income (other than gains, and 
        amounts treated as gains, from the sale or other disposition of 
        capital assets) includible in gross income to the extent of 
        such income of the trust for the year and such undistributed 
income of the trust for prior years;
            ``(2) Second, as a capital gain to the extent of the 
        capital gain of the trust for the year and the undistributed 
        capital gain of the trust for prior years;
            ``(3) Third, as other income to the extent of such income 
        of the trust for the year and such undistributed income of the 
        trust for prior years; and
            ``(4) Fourth, as a distribution of trust corpus.
For purposes of this section, the trust shall determine the amount of 
its undistributed capital gain on a cumulative net basis.
    ``(c) Exemption From Income Taxes.--A charitable remainder annuity 
trust and a charitable remainder unitrust shall, for any taxable year, 
not be subject to any tax imposed by this chapter. Any such trust shall 
be liable for tax on its unrelated business taxable income (within the 
meaning of section 255).
    ``(d) Definitions.--
            ``(1) Charitable remainder annuity trust.--For purposes of 
        this section, a charitable remainder annuity trust is a trust--
                    ``(A) from which a sum certain (which is not less 
                than 5 percent nor more than 50 percent of the initial 
                net fair market value of all property placed in trust) 
is to be paid, not less often than annually, to one or more persons (at 
least one of which is not an organization described in section 101(c) 
and, in the case of individuals, only to an individual who is living at 
the time of the creation of the trust) for a term of years (not in 
excess of 20 years) or for the life or lives of such individual or 
individuals,
                    ``(B) from which no amount other than the payments 
                described in subparagraph (A) and other than qualified 
                gratuitous transfers described in subparagraph (C) may 
                be paid to or for the use of any person other than an 
                organization described in section 101(c),
                    ``(C) following the termination of the payments 
                described in subparagraph (A), the remainder interest 
                in the trust is to be transferred to, or for the use 
                of, an organization described in section 101(c) or is 
                to be retained by the trust for such a use or, to the 
                extent the remainder interest is in qualified employer 
                securities (as defined in subsection (g)(4)), all or 
                part of such securities are to be transferred to an 
                employee stock ownership plan (as defined in section 
                4975(e)(7) in a qualified gratuitous transfer (as 
                defined by subsection (g)).
                    ``(D) the value (determined under section 7520 of 
                such remainder interest is at least 10 percent of the 
                initial net fair market value of all property placed in 
                the trust.
            ``(2) Charitable remainder unitrust.--For purposes of this 
        section, a charitable remainder unitrust is a trust--
                    ``(A) from which a fixed percentage (which is not 
                less than 5 percent nor more than 50 percent) of the 
                net fair market value of its assets, valued annually, 
                is to be paid, not less often than annually, to one or 
                more persons (at least one of which is not an 
                organization described in section 101(c) and, in the 
                case of individuals, only to an individual who is 
                living at the time of the creation of the trust) for a 
                term of years (not in excess of 20 years) or for the 
                life or lives of such individual or individuals,
                    ``(B) from which no amount other than the payments 
                described in subparagraph (A) and other than qualified 
                gratuitous transfers described in subparagraph (C) may 
                be paid to or for the use of any person other than an 
                organization described in section 101(c),
                    ``(C) following the termination of the payments 
                described in subparagraph (A), the remainder interest 
                in the trust is to be transferred to, or for the use 
                of, an organization described in section 101(c) or is 
                to be retained by the trust for such a use or, to the 
                extent the remainder interest is in qualified employer 
                securities (as defined in subsection (g)(4)), all or 
                part of such securities are to be transferred to an 
                employee stock ownership plan (as defined in section 
                4975(e)(7) in a qualified gratuitous transfer (as 
                defined by subsection (g)).
                    ``(D) with respect to each contribution of property 
                to the trust, the value (determined under section 7520 
                of such remainder interest in such property is at least 
                10 percent of the net fair market value of such 
                property as of the date such property is contributed to 
                the trust.
            ``(3) Exception.--Notwithstanding the provisions of 
        paragraphs (2)(A) and (B), the trust instrument may provide 
        that the trustee shall pay the income beneficiary for any 
        year--
                    ``(A) the amount of the trust income, if such 
                amount is less than the amount required to be 
                distributed under paragraph (2)(A), and
                    ``(B) any amount of the trust income which is in 
                excess of the amount required to be distributed under 
                paragraph (2)(A), to the extent that (by reason of 
                subparagraph (A)) the aggregate of the amounts paid in 
                prior years was less than the aggregate of such 
                required amounts.
            ``(4) Severance of certain additional contributions.--If--
                    ``(A) any contribution is made to a trust which 
                before the contribution is a charitable remainder 
                unitrust, and
                    ``(B) such contribution would (but for this 
                paragraph) result in such trust ceasing to be a 
                charitable unitrust by reason of paragraph (2)(D), such 
                contribution shall be treated as a transfer to a 
                separate trust under regulations prescribed by the 
                Secretary.
    ``(e) Valuation for Purposes of Charitable Contribution.--For 
purposes of determining the amount of any charitable contribution, the 
remainder interest of a charitable remainder annuity trust or 
charitable remainder unitrust shall be computed on the basis that an 
amount equal to 5 percent of the net fair market value of its assets 
(or a greater amount, if required under the terms of the trust 
instrument) is to be distributed each year.
    ``(f) Certain Contingencies Permitted.--
            ``(1) General rule.--If a trust would, but for a qualified 
        contingency, meet the requirements of paragraph (1)(A) or 
        (2)(A) of subsection (d), such trust shall be treated as 
        meeting such requirements.
            ``(2) Value determined without regard to qualified 
        contingency.--For purposes of determining the amount of any 
        charitable contribution (or the actuarial value of any 
        interest), a qualified contingency shall not be taken into 
        account.
            ``(3) Qualified contingency.--For purposes of this 
        subsection, the term `qualified contingency' means any 
        provision of a trust which provides that, upon the happening of 
        a contingency, the payments described in paragraph (1)(A) or 
        (2)(A) of subsection (d) (as the case may be) will terminate 
        not later than such payments would otherwise terminate under 
        the trust.
    ``(g) Qualified Gratuitous Transfer of Qualified Employer 
Securities.--
            ``(1) In general.--For purposes of this section, the term 
        `qualified gratuitous transfer' means a transfer of qualified 
        employer securities to an employee stock ownership plan (as 
        defined in section 4975(e)(7) but only to the extent that--
                    ``(A) the securities transferred previously passed 
                from a decedent dying before January 1, 2004, to a 
                trust described in paragraph (1) or (2) of subsection 
                (d),
                    ``(B) no deduction under section 404 is allowable 
                with respect to such transfer,
                    ``(C) such plan contains the provisions required by 
                paragraph (3),
                    ``(D) such plan treats such securities as being 
                attributable to employer contributions but without 
                regard to the limitations otherwise applicable to such 
                contributions under section 404, and
                    ``(E) the employer whose employees are covered by 
                the plan described in this paragraph files with the 
                Secretary a verified written statement consenting to 
                the application of sections 4978 and 4979A with respect 
                to such employer.
            ``(2) Exception.--The term `qualified gratuitous transfer' 
        shall not include a transfer of qualified employer securities 
        to an employee stock ownership plan unless--
                    ``(A) such plan was in existence on August 1, 1996,
                    ``(B) at the time of the transfer, the decedent and 
                members of the decedent's family (within the meaning of 
                section 171(a)(6)(D)) own (directly or through 
                constructive ownership rules) no more than 10 percent 
                of the value of the stock of the corporation referred 
                to in paragraph (4), and
                    ``(C) immediately after the transfer, such plan 
                owns (after the application of section 318(a)(4) at 
                least 60 percent of the value of the outstanding stock 
                of the corporation.
            ``(3) Plan requirements.--A plan contains the provisions 
        required by this paragraph if such plan provides that--
                    ``(A) the qualified employer securities so 
                transferred are allocated to plan participants in a 
                manner consistent with section 401(a)(4),
                    ``(B) plan participants are entitled to direct the 
                plan as to the manner in which such securities which 
                are entitled to vote and are allocated to the account 
                of such participant are to be voted,
                    ``(C) an independent trustee votes the securities 
                so transferred which are not allocated to plan 
                participants,
                    ``(D) each participant who is entitled to a 
                distribution from the plan has the rights described in 
                subparagraphs (A) and (B) of section 409(h)(1),
                    ``(E) such securities are held in a suspense 
                account under the plan to be allocated each year, up to 
                the limitations under section 415(c), after first 
                allocating all other annual additions for the 
                limitation year, up to the limitations under sections 
                415 (c) and (e), and
                    ``(F) on termination of the plan, all securities so 
                transferred which are not allocated to plan 
                participants as of such termination are to be 
                transferred to, or for the use of, an organization 
                described in section 101(c). For purposes of the 
                preceding sentence, the term `independent trustee' 
                means any trustee who is not a member of the family 
                (within the meaning of section 171(a)(6)(D)) of the 
                decedent or a 5-percent shareholder. A plan shall not 
                fail to be treated as meeting the requirements of 
section 401(a) by reason of meeting the requirements of this 
subsection.
            ``(4) Qualified employer securities.--For purposes of this 
        section, the term `qualified employer securities' means 
        employer securities (as defined in section 409(l)) which are 
        issued by a domestic corporation--
                    ``(A) which has no outstanding stock which is 
                readily tradable on an established securities market, 
                and
                    ``(B) which has only 1 class of stock.
            ``(5) Treatment of securities allocated by employee stock 
        ownership plan to persons related to decedent or 5-percent 
        shareholders.--
                    ``(A) In general.--If any portion of the assets of 
                the plan attributable to securities acquired by the 
                plan in a qualified gratuitous transfer are allocated 
                to the account of--
                            ``(i) any person who is related to the 
                        decedent (within the meaning of section 
                        171(a)(5) or a member of the decedent's family 
                        (within the meaning of section 171(a)(6)(D), or
                            ``(ii) any person who, at the time of such 
                        allocation or at any time during the 1-year 
                        period ending on the date of the acquisition of 
                        qualified employer securities by the plan, is a 
                        5-percent shareholder of the employer 
                        maintaining the plan, the plan shall be treated 
                        as having distributed (at the time of such 
                        allocation) to such person or shareholder the 
                        amount so allocated.
                    ``(B) 5-percent shareholder.--For purposes of 
                subparagraph (A), the term `5-percent shareholder' 
                means any person who owns (directly or through the 
                application of constructive ownership rules) more than 
                5 percent of the outstanding stock of the corporation 
                which issued such qualified employer securities or of 
                any corporation which is a member of the same 
                controlled group of corporations (within the meaning of 
                section 409(l)(4)) as such corporation.
                    ``(C) Cross reference.--For excise tax on 
                allocations described in subparagraph (A), see section 
                4979A.
            ``(6) Tax on failure to transfer unallocated securities to 
        charity on termination of plan.--If the requirements of 
        paragraph (3)(F) are not met with respect to any securities, 
        there is hereby imposed a tax on the employer maintaining the 
        plan in an amount equal to the sum of--
                    ``(A) the amount of the increase in the tax which 
                would be imposed by chapter 11 if such securities were 
                not transferred as described in paragraph (1), and
                    ``(B) interest on such amount at the underpayment 
                rate under section 6621 (and compounded daily) from the 
                due date for filing the return of the tax imposed by 
                chapter 11.

``SEC. 150. DEFINITIONS APPLICABLE TO EXCESS DISTRIBUTION RULES.

    ``(a) Undistributed Net Income.--For purposes of sections 150 
through 152, the term `undistributed net income' for any taxable year 
means the amount by which the distributable net income of the trust for 
such taxable year exceeds the sum of--
            ``(1) the amounts for such taxable year specified in 
        paragraphs (1) and (2) of section 146(a), and
            ``(2) the amount of taxes imposed on the trust attributable 
        to such distributable net income.
    ``(b) Accumulation Distribution.--For purposes of sections 150 
through 152, except as provided in subsection (c), the term 
`accumulation distribution' means, for any taxable year of the trust, 
the amount by which--
            ``(1) the amounts specified in paragraph (2) of section 
        146(a) for such taxable year, exceed
            ``(2) distributable net income for such year reduced (but 
        not below zero) by the amounts specified in paragraph (1) of 
        section 146(a).
For purposes of section 152 (other than subsection (c) thereof, 
relating to multiple trusts), the amounts specified in paragraph (2) 
of section 146(a) shall not include amounts properly paid, credited, or 
required to be distributed to a beneficiary from a trust (other than a 
foreign trust) as income accumulated before the birth of such 
beneficiary or before such beneficiary attains the age of 21. If the 
amounts properly paid, credited, or required to be distributed by the 
trust for the taxable year do not exceed the income of the trust for 
such year, there shall be no accumulation distribution for such year.
    ``(c) Exception for Accumulation Distributions From Certain 
Domestic Trusts.--For purposes of sections 150 through 152--
            ``(1) In general.--In the case of a qualified trust, any 
        distribution in any taxable year beginning after the date of 
the enactment of this subsection shall be computed without regard to 
any undistributed net income.
            ``(2) Qualified trust.--For purposes of this subsection, 
        the term `qualified trust' means any trust other than--
                    ``(A) a foreign trust (or, except as provided in 
                regulations, a domestic trust which at any time was a 
                foreign trust), or
                    ``(B) a trust created before March 1, 1984, unless 
                it is established that the trust would not be 
                aggregated with other trusts under section 143(f) if 
                such section applied to such trust.
    ``(d) Taxes Imposed on the Trust.--For purposes of sections 150 
through 152--
            ``(1) In general.--The term `taxes imposed on the trust' 
        means the amount of the taxes which are imposed for any taxable 
        year of the trust under this chapter (without regard to 
        sections 150 through 152) and which, under regulations 
        prescribed by the Secretary, are properly allocable to the 
        undistributed portions of distributable net income and gains in 
        excess of losses from sales or exchanges of capital assets. The 
        amount determined in the preceding sentence shall be reduced by 
        any amount of such taxes deemed distributed under section 
        151(b) and (c) to any beneficiary.
            ``(2) Foreign trusts.--In the case of any foreign trust, 
        the term `taxes imposed on the trust' includes the amount, 
        reduced as provided in the last sentence of paragraph (1), of 
        any income, war profits, and excess profits taxes imposed by 
        any foreign country or possession of the United States on such 
        foreign trust which, as determined under paragraph (1), are so 
        properly allocable. Under rules or regulations prescribed by 
        the Secretary, in the case of any foreign trust of which the 
        settlor or another person would be treated as owner of any 
        portion of the trust but for section 154(f), the term `taxes 
        imposed on the trust' includes the allocable amount of any 
        income, war profits, and excess profits taxes imposed by any 
        foreign country or possession of the United States on the 
        settlor or such other person in respect of trust income.

``SEC. 151. ACCUMULATION DISTRIBUTION ALLOCATED TO PRECEDING YEARS.

    ``(a) Amount Allocated.--In the case of a trust which is subject to 
sections 146 through 149, the amount of the accumulation distribution 
of such trust for a taxable year shall be deemed to be an amount within 
the meaning of paragraph (2) of section 146(a) distributed on the last 
day of each of the preceding taxable years, commencing with the 
earliest of such years, to the extent that such amount exceeds the 
total of any undistributed net income for all earlier preceding taxable 
years. The amount deemed to be distributed in any such preceding 
taxable year under the preceding sentence shall not exceed the 
undistributed net income for such preceding taxable year. For purposes 
of this subsection, undistributed net income for each of such preceding 
taxable years shall be computed without regard to such accumulation 
distribution and without regard to any accumulation distribution 
determined for any succeeding taxable year.
    ``(b) Total Taxes Deemed Distributed.--If any portion of an 
accumulation distribution for any taxable year is deemed under 
subsection (a) to be an amount within the meaning of paragraph (2) of 
section 146(a) distributed on the last day of any preceding taxable 
year, and such portion of such distribution is not less than the 
undistributed net income for such preceding taxable year, the trust 
shall be deemed to have distributed on the last day of such preceding 
taxable year an additional amount within the meaning of paragraph (2) 
of section 146(a). Such additional amount shall be equal to the taxes 
imposed on the trust for such preceding taxable year attributable 
to the undistributed net income. For purposes of this subsection, the 
undistributed net income and the taxes imposed on the trust for such 
preceding taxable year attributable to such undistributed net income 
shall be computed without regard to such accumulation distribution and 
without regard to any accumulation distribution determined for any 
succeeding taxable year.
    ``(c) Pro Rata Portion of Taxes Deemed Distributed.--If any portion 
of an accumulation distribution for any taxable year is deemed under 
subsection (a) to be an amount within the meaning of paragraph (2) of 
section 146(a) distributed on the last day of any preceding taxable 
year and such portion of the accumulation distribution is less than the 
undistributed net income for such preceding taxable year, the trust 
shall be deemed to have distributed on the last day of such preceding 
taxable year an additional amount within the meaning of paragraph (2) 
of section 146(a). Such additional amount shall be equal to the taxes 
imposed on the trust for such taxable year attributable to the 
undistributed net income multiplied by the ratio of the portion of the 
accumulation distribution to the undistributed net income of the trust 
for such year. For purposes of this subsection, the undistributed net 
income and the taxes imposed on the trust for such preceding taxable 
year attributable to such undistributed net income shall be computed 
without regard to the accumulation distribution and without regard to 
any accumulation distribution determined for any succeeding taxable 
year.
    ``(d) Rule When Information Is Not Available.--If adequate records 
are not available to determine the proper application of this 
subchapter to an amount distributed by a trust, such amount shall be 
deemed to be an accumulation distribution consisting of undistributed 
net income earned during the earliest preceding taxable year of the 
trust in which it can be established that the trust was in existence.
    ``(e) Denial of Refund to Trusts and Beneficiaries.--No refund or 
credit shall be allowed to a trust or a beneficiary of such trust for 
any preceding taxable year by reason of a distribution deemed to have 
been made by such trust in such year under this section.

``SEC. 152. TREATMENT OF AMOUNTS DEEMED DISTRIBUTED BY TRUST IN 
              PRECEDING YEARS.

    ``(a) General Rule.--The total of the amounts which are treated 
under section 151 as having been distributed by a trust in a preceding 
taxable year shall be included in the income of a beneficiary of the 
trust when paid, credited, or required to be distributed to the extent 
that such total would have been included in the income of such 
beneficiary under section 147(a)(2) (and, with respect to any tax-
exempt interest to which section 103 applies, under section 147(b)) if 
such total had been paid to such beneficiary on the last day of such 
preceding taxable year. The tax imposed by this subtitle on a 
beneficiary for a taxable year in which any such amount is included in 
his income shall be determined only as provided in this section and 
shall consist of the sum of--
            ``(1) a partial tax computed on the taxable income reduced 
        by an amount equal to the total of such amounts, at the rate 
        and in the manner as if this section had not been enacted,
            ``(2) a partial tax determined as provided in subsection 
        (b) of this section, and
            ``(3) in the case of a foreign trust, the interest charge 
        determined as provided in section 152.
    ``(b) Tax on Distribution.--
            ``(1) In general.--The partial tax imposed by subsection 
        (a)(2) shall be determined.
                    ``(A) by determining the number of preceding 
                taxable years of the trust on the last day of which an 
                amount is deemed under section 151(a) to have been 
                distributed,
                    ``(B) by taking from the 5 taxable years 
                immediately preceding the year of the accumulation 
                distribution the 1 taxable year for which the 
                beneficiary's taxable income was the highest and the 1 
                taxable year for which his taxable income was the 
                lowest,
                    ``(C) by adding to the beneficiary's taxable income 
                for each of the 3 taxable years remaining after the 
                application of subparagraph (B) an amount determined by 
                dividing the amount deemed distributed under section 
                151 and required to be included in income under 
                subsection (a) by the number of preceding taxable years 
                determined under subparagraph (A), and
                    ``(D) by determining the average increase in tax 
                for the 3 taxable years referred to in subparagraph (C) 
                resulting from the application of such subparagraph.
        The partial tax imposed by subsection (a)(2) shall be the 
        excess (if any) of the average increase in tax determined under 
        subparagraph (D), multiplied by the number of preceding taxable 
        years determined under subparagraph (A), over the amount of 
        taxes (other than the amount of taxes described in section 
        150(d)(2)) deemed distributed to the beneficiary under sections 
        151 (b) and (c).
            ``(2) Treatment of loss years.--For purposes of paragraph 
        (1), the taxable income of the beneficiary for any taxable year 
shall be deemed to be not less than zero.
            ``(3) Certain preceding taxable years not taken into 
        account.--For purposes of paragraph (1), if the amount of the 
        undistributed net income deemed distributed in any preceding 
        taxable year of the trust is less than 25 percent of the amount 
        of the accumulation distribution divided by the number of 
        preceding taxable years to which the accumulation distribution 
        is allocated under section 151(a), the number of preceding 
        taxable years of the trust with respect to which an amount is 
        deemed distributed to a beneficiary under section 151(a) shall 
        be determined without regard to such year.
            ``(4) Effect of other accumulation distributions.--In 
        computing the partial tax under paragraph (1) for any 
        beneficiary, the income of such beneficiary for each of his 
        prior taxable years shall include amounts previously deemed 
        distributed to such beneficiary in such year under section 151 
        as a result of prior accumulation distributions (whether from 
        the same or another trust).
            ``(5) Multiple distributions in the same taxable year.--In 
        the case of accumulation distributions made from more than one 
        trust which are includible in the income of a beneficiary in 
        the same taxable year, the distributions shall be deemed to 
        have been made consecutively in whichever order the beneficiary 
        shall determine. Generation-skipping transfer bears to the 
        total accumulation distribution.
    ``(c) Special Rule for Multiple Trusts.--
            ``(1) In general.--If, in the same prior taxable year of 
        the beneficiary in which any part of the accumulation 
        distribution from a trust (hereinafter in this paragraph 
        referred to as ``third trust'') is deemed under section 151(a) 
        to have been distributed to such beneficiary, some part of 
        prior distributions by each of 2 or more other trusts is deemed 
        under section 151(a) to have been distributed to such 
        beneficiary, then subsections (b) and (c) of section 151 shall 
        not apply with respect to such part of the accumulation 
        distribution from such third trust.
            ``(2) Accumulation distributions from trust not taken into 
        account unless they equal or exceed $1,000.--For purposes of 
        paragraph (1), an accumulation distribution from a trust to a 
        beneficiary shall be taken into account only if such 
        distribution, when added to any prior accumulation 
        distributions from such trust which are deemed under section 
151(a) to have been distributed to such beneficiary for the same prior 
taxable year of the beneficiary, equals or exceeds $1,000.

``SEC. 153. TRUST INCOME, DEDUCTIONS, AND CREDITS ATTRIBUTABLE TO 
              GRANTORS AND OTHERS AS SUBSTANTIAL OWNERS.

    ``Where it is specified in sections 153 through 161 that the 
grantor or another person shall be treated as the owner of any portion 
of a trust, there shall then be included in computing the taxable 
income and credits of the grantor or the other person those items of 
income, deductions, and credits against tax of the trust which are 
attributable to that portion of the trust to the extent that such items 
would be taken into account under this chapter in computing taxable 
income or credits against the tax of an individual. Any remaining 
portion of the trust shall be subject to sections 140 through 152. No 
items of a trust shall be included in computing the taxable income and 
credits of the grantor or of any other person solely on the grounds of 
his dominion and control over the trust under section 61 (relating to 
definition of gross income) or any other provision of this title, 
except as specified in this subpart.

``SEC. 154. DEFINITIONS AND RULES.

    ``(a) Adverse Party.--For purposes of sections 153 through 160, 
`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 sections 153 through 160, 
`nonadverse party' means any person who is not an adverse party.
    ``(c) Related or Subordinate Party.--For purposes of sections 153 
through 161, `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 156 and 157, 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 sections 153 through 
161 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 sections 153 through 
        160, 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 under a decree of 
        divorce or of separate maintenance shall not be considered as 
        married.
    ``(f) Rules Not To Result in Foreign Ownership.--
            ``(1) In general.--Notwithstanding any other provision in 
        sections 153 through 160, sections 153 through 160 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 controlled foreign 
        corporation shall be treated as a domestic corporation for 
        purposes of paragraph (1).
            ``(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.
            ``(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.

``SEC. 155. REVERSIONARY INTERESTS.

    ``(a) General Rule.--The grantor shall be treated as the owner of 
any portion of a trust in which he has a reversionary interest in 
either the corpus or the income therefrom, if, as of the inception of 
that portion of the trust, the value of such interest exceeds 5 percent 
of the value of such portion.
    ``(b) Reversionary Interest Taking Effect at Death of Minor Lineal 
Descendant Beneficiary.--In the case of any beneficiary who--
            ``(1) is a lineal descendant of the grantor, and
            ``(2) holds all of the present interests in any portion of 
        a trust,
the grantor shall not be treated under subsection (a) as the owner of 
such portion solely by reason of a reversionary interest in such 
portion which takes effect upon the death of such beneficiary before 
such beneficiary attains age 21.
    ``(c) Special Rule for Determining Value of Reversionary 
Interest.--For purposes of subsection (a), the value of the grantor's 
reversionary interest shall be determined by assuming the maximum 
exercise of discretion in favor of the grantor.
    ``(d) Postponement of Date Specified for Reacquisition.--Any 
postponement of the date specified for the reacquisition of possession 
or enjoyment of the reversionary interest shall be treated as a new 
transfer in trust commencing with the date on which the postponement is 
effective and terminating with the date prescribed by the postponement. 
However, income for any period shall not be included in the income of 
the grantor by reason of the preceding sentence if such income would 
not be so includible in the absence of such postponement.

``SEC. 156. POWER TO CONTROL BENEFICIAL ENJOYMENT.

    ``(a) General Rule.--The grantor shall be treated as the owner of 
any portion of a trust in respect of which the beneficial enjoyment of 
the corpus or the income therefrom is subject to a power of 
disposition, exercisable by the grantor or a nonadverse party, or both, 
without the approval or consent of any adverse party.
    ``(b) Exceptions for Certain Powers.--Subsection (a) shall not 
apply to the following powers regardless of by whom held:
            ``(1) Power to apply income to support of a dependent.--A 
        power described in section 159(b) to the extent that the 
        grantor would not be subject to tax under that section.
            ``(2) Power affecting beneficial enjoyment only after 
        occurrence of event.--A power, the exercise of which can only 
        affect the beneficial enjoyment of the income for a period 
        commencing after the occurrence of an event such that a grantor 
        would not be treated as the owner under section 155 if the 
        power were a reversionary interest; but the grantor may be 
        treated as the owner after the occurrence of the event unless 
        the power is relinquished.
            ``(3) Power exercisable only by will.--A power exercisable 
        only by will, other than a power in the grantor to appoint by 
        will the income of the trust where the income is accumulated 
        for such disposition by the grantor or may be so accumulated in 
        the discretion of the grantor or a nonadverse party, or both, 
        without the approval or consent of any adverse party.
            ``(4) Power to allocate among charitable beneficiaries.--A 
        power to determine the beneficial enjoyment of the corpus or 
        the income therefrom if the corpus or income is irrevocably 
        payable for a purpose specified in section 101(c) (relating to 
        definition of charitable contributions) or to an employee stock 
        ownership plan (as defined in section 4975(e)(7)) in a 
        qualified gratuitous transfer (as defined in section 
        149(g)(1)).
            ``(5) Power to distribute corpus.--A power to distribute 
        corpus either--
                    ``(A) to or for a beneficiary or beneficiaries or 
                to or for a class of beneficiaries (whether or not 
                income beneficiaries) provided that the power is 
                limited by a reasonably definite standard which is set 
                forth in the trust instrument; or
                    ``(B) to or for any current income beneficiary, 
                provided that the distribution of corpus must be 
                chargeable against the proportionate share of corpus 
                held in trust for the payment of income to the 
                beneficiary as if the corpus constituted a separate 
                trust.
        A power does not fall within the powers described in this 
        paragraph if any person has a power to add to the beneficiary 
        or beneficiaries or to a class of beneficiaries designated to 
        receive the income or corpus, except where such action is to 
        provide for after-born or after-adopted children.
            ``(6) Power to withhold income temporarily.--A power to 
        distribute or apply income to or for any current income 
beneficiary or to accumulate the income for him, provided that any 
accumulated income must ultimately be payable--
                    ``(A) to the beneficiary from whom distribution or 
                application is withheld, to his estate, or to his 
                appointees (or persons named as alternate takers in 
                default of appointment) provided that such beneficiary 
                possesses a power of appointment which does not exclude 
                from the class of possible appointees any person other 
                than the beneficiary, his estate, his creditors, or the 
                creditors of his estate, or
                    ``(B) on termination of the trust, or in 
                conjunction with a distribution of corpus which is 
                augmented by such accumulated income, to the current 
                income beneficiaries in shares which have been 
                irrevocably specified in the trust instrument.
        Accumulated income shall be considered so payable although it 
        is provided that if any beneficiary does not survive a date of 
        distribution which could reasonably have been expected to occur 
        within the beneficiary's lifetime, the share of the deceased 
        beneficiary is to be paid to his appointees or to one or more 
        designated alternate takers (other than the grantor or the 
        grantor's estate) whose shares have been irrevocably specified. 
        A power does not fall within the powers described in this 
        paragraph if any person has a power to add to the beneficiary 
        or beneficiaries or to a class of beneficiaries designated to 
        receive the income or corpus except where such action is to 
        provide for after-born or after-adopted children.
            ``(7) Power to withhold income during disability of a 
        beneficiary.--A power exercisable only during--
                    ``(A) the existence of a legal disability of any 
                current income beneficiary, or
                    ``(B) the period during which any income 
                beneficiary shall be under the age of 21 years,
        to distribute or apply income to or for such beneficiary or to 
        accumulate and add the income to corpus. A power does not fall 
        within the powers described in this paragraph if any person has 
        a power to add to the beneficiary or beneficiaries or to a 
        class of beneficiaries designated to receive the income or 
        corpus, except where such action is to provide for after-born 
        or after-adopted children.
            ``(8) Power to allocate between corpus and income.--A power 
        to allocate receipts and disbursements as between corpus and 
        income, even though expressed in broad language.
    ``(c) Exception for Certain Powers of Independent Trustees.--
Subsection (a) shall not apply to a power solely exercisable (without 
the approval or consent of any other person) by a trustee or trustees, 
none of whom is the grantor, and no more than half of whom are related 
or subordinate parties who are subservient to the wishes of the 
grantor--
            ``(1) to distribute, apportion, or accumulate income to or 
        for a beneficiary or beneficiaries, or to, for, or within a 
        class of beneficiaries; or
            ``(2) to pay out corpus to or for a beneficiary or 
        beneficiaries or to or for a class of beneficiaries (whether or 
        not income beneficiaries).
A power does not fall within the powers described in this subsection if 
any person has a power to add to the beneficiary or beneficiaries or to 
a class of beneficiaries designated to receive the income or corpus, 
except where such action is to provide for after-born or after-adopted 
children. For periods during which an individual is the spouse of the 
grantor (within the meaning of section 154(e)(2)), any reference in 
this subsection to the grantor shall be treated as including a 
reference to such individual.
    ``(d) Power To Allocate Income if Limited by a Standard.--
Subsection (a) shall not apply to a power solely exercisable (without 
the approval or consent of any other person) by a trustee or trustees, 
none of whom is the grantor or spouse living with the grantor, to 
distribute, apportion, or accumulate income to or for a beneficiary or 
beneficiaries, or to, for, or within a class of beneficiaries, whether 
or not the conditions of paragraph (6) or (7) of subsection (b) are 
satisfied, if such power is limited by a reasonably definite external 
standard which is set forth in the trust instrument. A power does not 
fall within the powers described in this subsection if any person has a 
power to add to the beneficiary or beneficiaries or to a class of 
beneficiaries designated to receive the income or corpus except where 
such action is to provide for after-born or after-adopted children.

``SEC. 157. ADMINISTRATIVE POWERS.

    ``The grantor shall be treated as the owner of any portion of a 
trust in respect of which--
            ``(1) Power to deal for less than adequate and full 
        consideration.--A power exercisable by the grantor or a 
        nonadverse party, or both, without the approval or consent of 
        any adverse party enables the grantor or any person to 
        purchase, exchange, or otherwise deal with or dispose of the 
        corpus or the income therefrom for less than an adequate 
        consideration in money or money's worth.
            ``(2) Power to borrow without adequate interest or 
        security.--A power exercisable by the grantor or a nonadverse 
        party, or both, enables the grantor to borrow the corpus or 
        income, directly or indirectly, without adequate interest or 
        without adequate security except where a trustee (other than 
        the grantor) is authorized under a general lending power to 
make loans to any person without regard to interest or security.
            ``(3) Borrowing of the trust funds.--The grantor has 
        directly or indirectly borrowed the corpus or income and has 
        not completely repaid the loan, including any interest, before 
        the beginning of the taxable year. The preceding sentence shall 
        not apply to a loan which provides for adequate interest and 
        adequate security, if such loan is made by a trustee other than 
        the grantor and other than a related or subordinate trustee 
        subservient to the grantor. For periods during which an 
        individual is the spouse of the grantor (within the meaning of 
        section 154(e)(2)), any reference in this paragraph to the 
        grantor shall be treated as including a reference to such 
        individual.
            ``(4) General powers of administration.--A power of 
        administration is exercisable in a nonfiduciary capacity by any 
        person without the approval or consent of any person in a 
        fiduciary capacity. For purposes of this paragraph, the term 
        `power of administration' means any one or more of the 
        following powers: (A) a power to vote or direct the voting of 
        stock or other securities of a corporation in which the 
        holdings of the grantor and the trust are significant from the 
viewpoint of voting control; (B) a power to control the investment of 
the trust funds either by directing investments or reinvestments, or by 
vetoing proposed investments or reinvestments, to the extent that the 
trust funds consist of stocks or securities of corporations in which 
the holdings of the grantor and the trust are significant from the 
viewpoint of voting control; or (C) a power to reacquire the trust 
corpus by substituting other property of an equivalent value.

``SEC. 158. POWER TO REVOKE.

    ``(a) General Rule.--The grantor shall be treated as the owner of 
any portion of a trust, whether or not he is treated as such owner 
under any other provision of this part, where at any time the power to 
revest in the grantor title to such portion is exercisable by the 
grantor or a non-adverse party, or both.
    ``(b) Power Affecting Beneficial Enjoyment Only After Occurrence of 
Event.--Subsection (a) shall not apply to a power the exercise of which 
can only affect the beneficial enjoyment of the income for a period 
commencing after the occurrence of an event such that a grantor would 
not be treated as the owner under section 155 if the power were a 
reversionary interest. But the grantor may be treated as the owner 
after the occurrence of such event unless the power is relinquished.

``SEC. 159. INCOME FOR BENEFIT OF GRANTOR.

    ``(a) General Rule.--The grantor shall be treated as the owner of 
any portion of a trust, whether or not he is treated as such owner 
under section 156, whose income without the approval or consent of any 
adverse party is, or, in the discretion of the grantor or a nonadverse 
party, or both, may be--
            ``(1) distributed to the grantor or the grantor's spouse;
            ``(2) held or accumulated for future distribution to the 
        grantor or the grantor's spouse; or
            ``(3) applied to the payment of premiums on policies of 
        insurance on the life of the grantor or the grantor's spouse 
        (except policies of insurance irrevocably payable for a purpose 
        specified in section 101(c) (relating to definition of 
        charitable contributions)).
This subsection shall not apply to a power the exercise of which can 
only affect the beneficial enjoyment of the income for a period 
commencing after the occurrence of an event such that the grantor would 
not be treated as the owner under section 153 if the power were a 
reversionary interest; but the grantor may be treated as the owner 
after the occurrence of the event unless the power is relinquished.
    ``(b) Obligations of Support.--Income of a trust shall not be 
considered taxable to the grantor under subsection (a) or any other 
provision of this chapter merely because such income in the discretion 
of another person, the trustee, or the grantor acting as trustee or co-
trustee, may be applied or distributed for the support or maintenance 
of a beneficiary (other than the grantor's spouse) whom the grantor is 
legally obligated to support or maintain, except to the extent that 
such income is so applied or distributed. In cases where the amounts so 
applied or distributed are paid out of corpus or out of other than 
income for the taxable year, such amounts shall be considered to be an 
amount paid or credited within the meaning of paragraph (2) of section 
146(a) and shall be taxed to the grantor under section 147.

``SEC. 160. PERSON OTHER THAN GRANTOR TREATED AS SUBSTANTIAL OWNER.

    ``(a) General Rule.--A person other than the grantor shall be 
treated as the owner of any portion of a trust with respect to which:
            ``(1) such person has a power exercisable solely by himself 
        to vest the corpus or the income therefrom in himself, or
            ``(2) such person has previously partially released or 
        otherwise modified such a power and after the release or 
        modification retains such control as would, within the 
        principles of sections 153 to 159, inclusive, subject a grantor 
        of a trust to treatment as the owner thereof.
    ``(b) Exception Where Grantor Is Taxable.--Subsection (a) shall not 
apply with respect to a power over income, as originally granted or 
thereafter modified, if the grantor of the trust or a transferor (to 
whom section 161 applies) is otherwise treated as the owner under 
sections 153 through 159 or section 161.
    ``(c) Obligations of Support.--Subsection (a) shall not apply to a 
power which enables such person, in the capacity of trustee or 
cotrustee, merely to apply the income of the trust to the support or 
maintenance of a person whom the holder of the power is obligated to 
support or maintain except to the extent that such income is so 
applied. In cases where the amounts so applied or distributed are paid 
out of corpus or out of other than income of the taxable year, such 
amounts shall be considered to be an amount paid or credited within the 
meaning of paragraph (2) of section 146(a) and shall be taxed to the 
holder of the power under section 147.
    ``(d) Effect of Renunciation or Disclaimer.--Subsection (a) shall 
not apply with respect to a power which has been renounced or 
disclaimed within a reasonable time after the holder of the power first 
became aware of its existence.

``SEC. 161. FOREIGN TRUSTS HAVING ONE OR MORE UNITED STATES 
              BENEFICIARIES.

    ``(a) Transferor Treated as Owner.--
            ``(1) In general.--A United States person who directly or 
        indirectly transfers property to a foreign trust (other than a 
        trust described in section 6048(a)(3)(B)(ii)) shall be treated 
        as the owner for his taxable year of the portion of such trust 
        attributable to such property if for such year there is a 
        United States beneficiary of any portion of such trust.
            ``(2) Exceptions.--Paragraph (1) shall not apply--
                    ``(A) Transfers by reason of death.--To any 
                transfer by reason of the death of the transferor.
                    ``(B) Transfers at fair market value.--To any 
                transfer of property to a trust in exchange for 
                consideration of at least the fair market value of the 
                transferred property. For purposes of the preceding 
sentence, consideration other than cash shall be taken into account at 
its fair market value.
            ``(3) Certain obligations not taken into account under fair 
        market value exception.--
                    ``(A) In general.--In determining whether paragraph 
                (2)(B) applies to any transfer by a person described in 
                clause (ii) or (iii) of subparagraph (C), there shall 
                not be taken into account--
                            ``(i) except as provided in regulations, 
                        any obligation of a person described in 
                        subparagraph (C), and
                            ``(ii) to the extent provided in 
                        regulations, any obligation which is guaranteed 
                        by a person described in subparagraph (C).
                    ``(B) Treatment of principal payments on 
                obligation.--Principal payments by the trust on any 
                obligation referred to in subparagraph (A) shall be 
                taken into account on and after the date of the payment 
                in determining the portion of the trust attributable to 
                the property transferred.
                    ``(C) Persons described.--The persons described in 
                this subparagraph are--
                            ``(i) the trust,
                            ``(ii) any grantor, owner, or beneficiary 
                        of the trust, and
                            ``(iii) any person who is related (within 
                        the meaning of section 143(i)(2)(B) to any 
                        grantor, owner, or beneficiary of the trust.
            ``(4) Special rules applicable to foreign grantor who later 
        becomes a united states person.--
                    ``(A) In general.--If a nonresident alien 
                individual has a residency starting date within 5 years 
                after directly or indirectly transferring property to a 
                foreign trust, this section and section 6048 shall be 
                applied as if such individual transferred to such trust 
                on the residency starting date an amount equal to the 
                portion of such trust attributable to the property 
                transferred by such individual to such trust in such 
                transfer.
                    ``(B) Treatment of undistributed income.--For 
                purposes of this section, undistributed net income for 
                periods before such individual's residency starting 
                date shall be taken into account in determining the 
                portion of the trust which is attributable to property 
                transferred by such individual to such trust but shall 
                not otherwise be taken into account.
                    ``(C) Residency starting date.--For purposes of 
                this paragraph, an individual's residency starting date 
                is the residency starting date determined under section 
                7701(b)(2)(A).
            ``(5) Outbound trust migrations.--If--
                    ``(A) an individual who is a citizen or resident of 
                the United States transferred property to a trust which 
                was not a foreign trust, and
                    ``(B) such trust becomes a foreign trust while such 
                individual is alive, then this section and section 6048 
                shall be applied as if such individual transferred to 
                such trust on the date such trust becomes a foreign 
                trust an amount equal to the portion of such trust 
                attributable to the property previously transferred by 
                such individual to such trust. A rule similar to the 
                rule of paragraph (4)(B) shall apply for purposes of 
                this paragraph.
    ``(b) Trusts Acquiring United States Beneficiaries.--If--
            ``(1) subsection (a) applies to a trust for the 
        transferor's taxable year, and
            ``(2) subsection (a) would have applied to the trust for 
        his immediately preceding taxable year but for the fact that 
        for such preceding taxable year there was no United States 
        beneficiary for any portion of the trust,
then, for purposes of this chapter, the transferor shall be treated as 
having income for the taxable year (in addition to his other income for 
such year) equal to the undistributed net income (at the close of such 
immediately preceding taxable year) attributable to the portion of the 
trust referred to in subsection (a).
    ``(c) Trusts Treated as Having a United States Beneficiary.--
            ``(1) In general.--For purposes of this section, a trust 
        shall be treated as having a United States beneficiary for the 
        taxable year unless--
                    ``(A) under the terms of the trust, no part of the 
                income or corpus of the trust may be paid or 
                accumulated during the taxable year to or for the 
                benefit of a United States person, and
                    ``(B) if the trust were terminated at any time 
                during the taxable year, no part of the income or 
                corpus of such trust could be paid to or for the 
                benefit of a United States person.
            ``(2) Attribution of ownership.--For purposes of paragraph 
        (1), an amount shall be treated as paid or accumulated to or 
        for the benefit of a United States person if such amount is 
        paid to or accumulated for a foreign corporation, foreign 
        partnership, or foreign trust or estate, and--
                    ``(A) in the case of a foreign corporation, such 
                corporation is a controlled foreign corporation,
                    ``(B) in the case of a foreign partnership, a 
                United States person is a partner of such partnership, 
                or
                    ``(C) in the case of a foreign trust or estate, 
                such trust or estate has a United States beneficiary 
                (within the meaning of paragraph (1)).
            ``(3) Certain united states beneficiaries disregarded.--A 
        beneficiary shall not be treated as a United States person in 
        applying this section with respect to any transfer of property 
        to foreign trust if such beneficiary first became a United 
        States person more than 5 years after the date of such 
        transfer.
    ``(d) Regulations.--The Secretary shall prescribe such regulations 
as may be necessary or appropriate to carry out the purposes of this 
section.

``SEC. 162. LIMITATION ON CHARITABLE DEDUCTION.

    ``In computing the deduction allowable under section 142(c) to a 
trust, no amount otherwise allowable under section 142(c) as a 
deduction shall be allowed as a deduction with respect to income of the 
taxable year which is allocable to unrelated business income for such 
year.

``SEC. 163. INCOME OF AN ESTATE OR TRUST IN CASE OF DIVORCE, ETC.

    ``(a) Inclusion in Gross Income of Wife.--There shall be included 
in the gross income of a wife who is divorced or legally separated 
under a decree of divorce or of separate maintenance (or who is 
separated from her husband under a written separation agreement) the 
amount of the income of any trust which such wife is entitled to 
receive and which, except for this section, would be includible in the 
gross income of her husband, and such amount shall not, despite any 
other provision of this subtitle, be includible in the gross income of 
such husband. This subsection shall not apply to that part of any such 
income of the trust which the terms of the decree, written separation 
agreement, or trust instrument fix, in terms of an amount of money or a 
portion of such income, as a sum which is payable for the support of 
minor children of such husband. In case such income is less than the 
amount specified in the decree, agreement, or instrument, for the 
purpose of applying the preceding sentence, such income, to the extent 
of such sum payable for such support, shall be considered a payment for 
such support.
    ``(b) Wife Considered a Beneficiary.--For purposes of computing the 
taxable income of the estate or trust and the taxable income of a wife 
to whom subsection (a) applies, such wife shall be considered as the 
beneficiary.
    ``(c) Cross Reference.--For definitions of `husband' and `wife', as 
used in this section, see section 7701(a)(17).

``SEC. 164. RECOGNITION OF GAIN ON CERTAIN TRANSFERS TO CERTAIN FOREIGN 
              TRUSTS AND ESTATES.

    ``(a) In General.--Except as provided in regulations, in the case 
of any transfer of property by a United States person to a foreign 
estate or trust, for purposes of this subtitle, such transfer shall be 
treated as a sale or exchange for an amount equal to the fair market 
value of the property transferred, and the transferor shall recognize 
as gain the excess of--
            ``(1) the fair market value of the property so transferred, 
        over
            ``(2) the adjusted basis (for purposes of determining gain) 
        of such property in the hands of the transferor.
    ``(b) Exception.--Subsection (a) shall not apply to a transfer to a 
trust by a United States person to the extent that any person is 
treated as the owner of such trust under section 153.
    ``(c) Treatment of Trusts Which Become Foreign Trusts.--If a trust 
which is not a foreign trust becomes a foreign trust, such trust shall 
be treated for purposes of this section as having transferred, 
immediately before becoming a foreign trust, all of its assets to a 
foreign trust.

``SEC. 165. TREATMENT OF FUNERAL TRUSTS.

    ``(a) In General.--In the case of a qualified funeral trust, 
sections 144 through 161 shall not apply, and no deduction shall be 
allowed by section 142(b).
    ``(b) Qualified Funeral Trust.--`Qualified funeral trust' means any 
trust (other than a foreign trust) if--
            ``(1) the trust arises as a result of a contract with a 
        person engaged in the trade or business of providing funeral or 
        burial services or property necessary to provide such services,
            ``(2) the sole purpose of the trust is to hold, invest, and 
        reinvest funds in the trust and to use such funds solely to 
        make payments for such services or property for the benefit of 
        the beneficiaries of the trust,
            ``(3) the only beneficiaries of such trust are individuals 
        with respect to whom such services or property are to be 
        provided at their death under contracts described in paragraph 
        (1),
            ``(4) the only contributions to the trust are contributions 
        by or for the benefit of such beneficiaries,
            ``(5) the trustee elects the application of this 
        subsection, and
            ``(6) the trust would (but for the election described in 
        paragraph (5)) be treated as owned under sections 153 through 
        161 by the purchasers of the contracts described in paragraph 
        (1).
    ``(c) Dollar Limitation on Contributions.--
            ``(1) In general.--Any trust which accepts aggregate 
        contributions by or for the benefit of an individual in excess 
        of $7,000 shall not be a qualified funeral trust.
            ``(2) Related trusts.--For purposes of paragraph (1), all 
        trusts having trustees which are related persons shall be 
        treated as 1 trust. For purposes of the preceding sentence, 
        persons are related if--
                    ``(A) the relationship between such persons is 
                described in section 171(a)(5), or
                    ``(B) the Secretary determines that treating such 
                persons as related is necessary to prevent avoidance of 
                the purposes of this section.
          ``(3) Inflation adjustment.--In the case of any contract 
        referred to in subsection (b)(1) which is entered into during 
        any calendar year after 2003, the dollar amount referred to in 
        paragraph (1) shall be adjusted for inflation in accordance 
        with section 23.
    ``(d) Application of Rate Schedule.--Section 140(b) shall be 
applied to each qualified funeral trust by treating each beneficiary's 
interest in each such trust as a separate trust.
    ``(e) Treatment of Amounts Refunded to Purchaser on Cancellation.--
No gain or loss shall be recognized to a purchaser of a contract 
described in subsection (b)(1) by reason of any payment from such trust 
to such purchaser by reason of cancellation of such contract. If any 
payment referred to in the preceding sentence consists of property 
other than money, the basis of such property in the hands of such 
purchaser shall be the same as the trust's basis in such property 
immediately before the payment.
    ``(f) Simplified Reporting.--The Secretary may prescribe rules for 
simplified reporting of all trusts having a single trustee.

``SEC. 166. INCOME IN RESPECT OF A DECEDENT.

    ``(a) Inclusion in Gross Income.--
            ``(1) General use.--The amount of all items of gross income 
        in respect of a decedent which are not properly includible in 
        respect of a taxable period in which falls the date of his 
        death, or a prior period, shall be included in gross income, 
        for the taxable year when received, of--
                    ``(A) the estate of the decedent, if the right to 
                receive the amount is acquired by the decedent's 
                estate,
                    ``(B) the person who, by reason of the death of the 
                decedent, acquires the right to receive the amount, if 
                the right to receive the amount is not acquired by the 
                decedent's estate from the decedent,
                    ``(C) the person who acquires from the decedent the 
                right to receive the amount by bequest, devise or 
                inheritance, if the amount is received after a 
                distribution by the decedent's estate of such right.
            ``(2) Definition.--The Secretary shall prescribe 
        regulations on the treatment of income from sales of rights to 
        receive income and installment sales.
    ``(b) The amount of any homeowner deduction or foreign tax credit 
in respect of a decedent which is not properly allowable to the 
decedent with respect to the taxable period in which falls the date of 
his death, or a prior period, shall be allowed in accordance with 
regulations that reflect the principles of section 691(b) of the 
Internal Revenue Code of 1986.

          ``Subchapter J--Definitions and Rules of Application

``Sec. 171. Definitions.
``Sec. 172. Rules of application.

``SEC. 171. DEFINITIONS.

    ``(a) In General.--When used in this chapter, where not otherwise 
distinctly expressed or manifestly incompatible with the intent 
thereof--
            ``(1) Business entity.--The definition of `business entity' 
        in section 206 (relating to the business tax) shall apply.
            ``(2) Business tax.--`Business tax' and `Simplified USA Tax 
        for businesses' mean the tax imposed by section 201 and, to the 
        extent required by the context, the provisions of chapter 2.
            ``(3) Internal revenue code of 1986.--`Internal Revenue 
        Code of 1986' means the Internal Revenue Code of 1986 as in 
        effect immediately before the enactment of the Simplified USA 
        Tax Act of 2003.
            ``(4) United states.--`United States' means the States and 
        the District of Columbia.
            ``(5) Related party.--`Related party' means--
                    ``(A) Members of a family, as defined in paragraph 
                (6)(D);
                    ``(B) An individual and a business entity more than 
                50 percent in value of which is owned, directly or 
                indirectly, by or for such individual (applying rules 
                of constructive ownership);
                    ``(C) Two business entities that are eligible to 
                file a consolidated return under chapter 2;
                    ``(D) A grantor and a fiduciary of any trust;
                    ``(E) A fiduciary of a trust and a fiduciary of 
                another trust, if the same person is a grantor of both 
                trusts;
                    ``(F) A fiduciary of a trust and a beneficiary of 
                such trust;
                    ``(G) A fiduciary of a trust and a beneficiary of 
                another trust, if the same person is a grantor of both 
                trusts;
                    ``(H) 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;
                    ``(I) A person and an organization to which section 
                251 (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;
                    ``(J) Two business entities if the same persons own 
                more than 50 percent of the value of each (applying 
                rules of constructive ownership), with value measured 
                by--
                            ``(i) the value of the outstanding stock in 
                        the case of a corporation,
                            ``(ii) the capital interest or the profits 
                        interest, whichever is greater, in the case of 
a partnership or limited liability company;
                    ``(K) 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.
            ``(6) Constructive ownership.--For purposes of determining, 
        in applying paragraph (5), the ownership of a business entity--
                    ``(A) Stock or other equity interest 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;
                    ``(B) An individual shall be considered as owning 
                the stock or other equity interest owned, directly or 
                indirectly, by or for his family;
                    ``(C) An individual owning (otherwise than by the 
                application of subparagraph (B)) any stock in a 
                corporation or other equity interest in another form of 
                business entity shall be considered as owning the stock 
                owned, directly or indirectly, by or for his partner;
                    ``(D) The family of an individual shall include 
                only his brothers and sisters (whether by the whole or 
half blood), spouse, ancestors, and lineal descendants; and
                    ``(E) Stock or other equity interest constructively 
                owned by a person by reason of the application of 
                subparagraph (A) shall, for the purpose of applying 
                subparagraph (A), (B), or (C), be treated as actually 
                owned by such person, but stock or other equity 
                interest constructively owned by an individual by 
                reason of the application of subparagraph (B) or (C) 
                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 or 
                equity interest.
            ``(7) Earned income.--
                    ``(A) In general.--`Earned income' means--
                            ``(i) wages, salaries, tips, and other 
                        employee compensation, plus
                            ``(ii) the amount of the taxpayer's net 
                        earnings from self-employment for the taxable 
                        year (within the meaning of section 1402(a)).
                    ``(B) Special rules.--For purposes of subparagraph 
                (A)--
                            ``(i) the earned income of an individual 
                        shall be computed without regard to any 
                        community property laws,
                            ``(ii) no amount received as a pension or 
                        annuity shall be taken into account,
                            ``(iii) no income of nonresident alien 
                        individuals not connected with United States 
                        business shall be taken into account, and
                            ``(iv) no amount received for services 
                        provided by an individual while the individual 
                        is an inmate at a penal institution shall be 
                        taken into account.
    ``(b) Terms Defined in Chapter 1.--If a term that is used but not 
defined in this chapter or in section 7701 is defined in chapter 2, the 
definition in chapter 2 shall apply except if manifestly incompatible 
with the intent of the provision in which the term is used.

``SEC. 172. RULES OF APPLICATION.

    ``(a) Definitions.--Any definition included in this chapter shall 
apply for all purposes of this chapter unless--
            ``(1) such definition is limited to the purposes of a 
        particular chapter, section, or subsection, or
            ``(2) the definition clearly would not be applicable in a 
        particular context.
    ``(b) Interpretations Consistent With Internal Revenue Code of 
1986.--Terms not defined in this chapter or elsewhere in this title, 
but defined in the Internal Revenue Code of 1986, shall be interpreted 
in a manner consistent with the Internal Revenue Code of 1986, except 
to the extent such interpretation would be inconsistent with the 
principles and purposes of this chapter.''
    (c) Exemption From Prohibited Transaction Tax.--Section 4975(g) of 
the Code is amended by--
            (1) striking ``or'' at the end of paragraph (2),
            (2) deleting the period at the end of paragraph (3) and 
        inserting ``; or'',
            (3) and inserting the following new paragraph (4):
            ``(4) to a Roth IRA in the case of a loan to or equity 
        investment in a controlled business entity as permitted by 
        section 30(f)).''

              TITLE III--SIMPLIFIED USA TAX FOR BUSINESSES

SEC. 301. REPEAL OF CORPORATE INCOME TAX; NEW TAX PAID BY CORPORATIONS 
              AND OTHER BUSINESSES.

    (a) In General.--Chapter 2 of the Internal Revenue Code is 
renumbered chapter 3 and following new chapter is inserted after 
chapter 1:

             ``CHAPTER 2--SIMPLIFIED USA TAX FOR BUSINESSES

``Subchapter A. Imposition of tax.
``Subchapter B. Basic rules for business tax.
``Subchapter C. Capital contributions, mergers, acquisitions, and 
                            distributions.
``Subchapter D. Accounting methods.
``Subchapter E. Land and rental property.
``Subchapter F. Insurance and financial products.
``Subchapter G. Financial intermediation and financial institutions.
``Subchapter H. Tax-exempt organizations.
``Subchapter I. Cooperatives.
``Subchapter J. Sourcing rules.
``Subchapter K. Business conducted in a possession.
``Subchapter L. Payroll tax credit.
``Subchapter M. Import tax.
``Subchapter N. Transition rules.
``Subchapter O. Rules for administration, consolidated returns.
``Subchapter P. Definitions and rules of applications.

                   ``Subchapter A--Imposition of Tax

``Sec. 201. Tax imposed.

``SEC. 201. TAX IMPOSED.

    ``(a) Taxable Business Activity.--A tax is imposed on the sale of 
goods and services in the United States by a business entity. The 
amount of the tax equals the amount by which--
            ``(1) the business tax exceeds,
            ``(2) the payroll tax credit.
    ``(b) Business Tax Imposed.--
            ``(1) In general.--The `business tax' imposed on a business 
        entity that sells or leases property or sells services in the 
        United States equals the sum of--
                    ``(A) 8 percent of the portion of the gross profits 
                of the business entity for the taxable year that does 
                not exceed $150,000, and
                    ``(B) 12 percent of such portion of the gross 
                profits of the business entity for the taxable year 
                that exceeds $150,000.
            ``(2) Limitation on application of benefits of graduated 
        rate schedule.--The Secretary shall prescribe rules under which 
        the gross profits of business entities under common control are 
        aggregated for purposes of applying the benefit of the lower 
        rate described in subparagraph (A) of paragraph (1). Such rules 
        shall be similar to rules applicable under sections 1551 and 
        1561 of the Internal Revenue Code of 1986.
    ``(c) Payroll Tax Credit.--The `payroll tax credit' is a credit for 
the social security, railroad retirement and hospital insurance taxes 
paid by an employer, as determined in accordance with subchapter L 
(sections 281 through 283).
    ``(d) Import Tax.--For rules relating to the import tax imposed by 
this chapter, see subchapter M (sections 286 through 288).

              ``Subchapter B--Basic Rules for Business Tax

``Sec. 202. Gross profits.
``Sec. 203. Taxable receipts.
``Sec. 204. Deductible amounts.
``Sec. 205. Cost of business purchases.
``Sec. 206. Business entity and business activity.
``Sec. 207. Loss carryover deduction.

``SEC. 202. GROSS PROFITS.

    ```Gross profits' means for a taxable year of a business entity the 
amount by which--
            ``(1) the taxable receipts of the business entity for the 
        taxable year exceed,
            ``(2) the deductible amounts for the business entity for 
        the taxable year.

``SEC. 203. TAXABLE RECEIPTS.

    ``(a) In General.--`Taxable receipts' means all receipts from the 
sale of property, use of property, and performance of services in the 
United States.
    ``(b) Games of Chance.--Amounts received for playing games of 
chance by business entities engaging in the activity of providing such 
games shall be treated as receipts from the sale of property or 
services.
    ``(c) In-Kind Receipts.--The taxable receipts attributable to the 
receipt of property, use of property or services in whole or partial 
exchange for property, use of property or services equal the fair 
market value of the services or property received.
    ``(d) Taxes.--Taxable receipts do not include any excise tax, sales 
tax, custom duty, or other separately stated levy imposed by a Federal, 
State, or local government received by a business entity in connection 
with the sale of property or services or the use of property.
    ``(e) Financial Receipts.--
            ``(1) In general.--Except as provided in subchapter G 
        (relating to financial intermediation and financial 
        institutions), taxable receipts do not include financial 
        receipts.
            ``(2) Financial receipts.--`Financial receipts' include--
                    ``(A) interest,
                    ``(B) dividends and other distributions by a 
                business entity,
                    ``(C) proceeds from the sale of stock, other 
                ownership interests in business entities, or other 
                financial instruments (as defined in section 
                242(b)(3)),
                    ``(D) proceeds from life insurance policies,
                    ``(E) proceeds from annuities,
                    ``(F) proceeds from currency hedging or exchanges, 
                and
                    ``(G) proceeds from other financial transactions.
    ``(f) Cross References.--
            ``(1) Financial intermediation.--See subchapters F and G 
        for rules relating to financial intermediation.
            ``(2) Exports, sales in the united states.--See subchapter 
        J for the exclusion from gross receipts for export sales and 
        for rules on sales of property and services in the United 
        States.
            ``(3) Land.--See subchapter E for rules relating to certain 
        sales of land.
            ``(4) Insurance proceeds.--See section 237 for rules on the 
        inclusion of certain insurance proceeds in taxable receipts.

``SEC. 204. DEDUCTIBLE AMOUNTS.

    ``(a) In General.--`Deductible amounts' for a business entity in a 
taxable year include--
            ``(1) the cost of business purchases in the taxable year 
        (as determined under section 205),
            ``(2) such entity's loss carryover deduction (as determined 
        under section 207) , and
            ``(3) the transition basis deduction (as determined under 
        section 290).
    ``(b) Financial Intermediation.--See subchapters F and G for 
special rules for business entities engaging in financial 
intermediation.

``SEC. 205. COST OF BUSINESS PURCHASES.

    ``(a) Business Purchases.--
            ``(1) In general.--`Business purchases' means the 
        acquisition of--
                    ``(A) property,
                    ``(B) the use of property, or
                    ``(C) services
        in the United States for use in a business activity.
            ``(2) Examples.--Business purchases include (without 
        limitation) the--
                    ``(A) purchase or rental of real property,
                    ``(B) purchase or rental of capital equipment,
                    ``(C) purchase of supplies and inventory,
                    ``(D) purchase of services from independent 
                contractors,
                    ``(E) purchase of financial intermediation services 
                (as determined in accordance with section 236),
                    ``(F) purchase of a business loss policy (as 
                determined in accordance with section 237), and
                    ``(G) imports for use in a business activity.
            ``(3) Exclusions.--Business purchases do not include--
                    ``(A) payments for use of money or capital, such as 
                interest or dividends (except to the extent that a 
                portion so paid is a fee for financial intermediation 
                services),
                    ``(B) premiums for life insurance,
                    ``(C) the acquisition of savings assets or other 
                financial instruments (as defined in section 
                242(b)(3)).
                    ``(D) property acquired outside the United States 
                (but such property shall be taken into account as an 
                import if imported),
                    ``(E) services performed outside the United States 
                (unless treated as imported into the United States),
                    ``(F) compensation expenses for an individual 
                (other than amounts paid to an individual in his 
                capacity as a business entity), or
                    ``(G) taxes (except as provided in subsection 
                (b)(2) relating to product taxes).
            ``(4) Compensation expenses.--`Compensation expenses' 
        means--
                    ``(A) wages, salaries or other cash payable for 
                services,
                    ``(B) any taxes imposed on the recipient that are 
                withheld by the business entity,
                    ``(C) the cost of property purchased to provide 
                employees with compensation (other than property 
                incidental to the provision of fringe benefits that are 
                excluded from income under the individual tax),
                    ``(D) the cost of fringe benefits which are 
                includible in an employee's, partner's, or proprietor's 
                income under the Simplified USA Income Tax (or are 
                excluded solely because they constitute employee 
                savings), including (without limitation)--
                            ``(i) contributions to retirement and 
                        severance benefit plans,
                            ``(ii) premiums for the cost of life, 
                        health, accident, disability and other 
                        insurance policies for which the service 
                        provider, members of his family, or persons 
                        designated by him or members of his family are 
                        the beneficiaries,
                            ``(iii) rental of parking spaces or parking 
                        fees (unless the parking space is used for a 
                        vehicle that is regularly used in a business 
                        activity);
                            ``(iv) employer paid educational benefits;
                            ``(v) employer paid housing (other than 
                        housing provided for the convenience of the 
                        employer); and
                            ``(vi) employer paid meals (other than 
                        meals provided for the convenience of the 
                        employer).
    ``(b) Cost of Business Purchases.--
            ``(1) In general.--The `cost of a business purchase' is the 
        amount paid or to be paid for the business purchase.
            ``(2) Taxes.--
                    ``(A) In general.--The `cost of business purchases' 
                includes any product taxes paid with respect to the 
                property or services purchased.
                    ``(B) Product tax.--`Product tax' means any excise 
                tax, sales or use tax, custom duty, or other separately 
                stated levy imposed by a Federal, State, or local 
                government on the production, severance or consumption 
                of property or on the provision of services, whether or 
not separately stated, and including any such taxes that are 
technically imposed on the seller of property or services.
                    ``(C) Taxes not product taxes.--Product taxes do 
                not include--
                            ``(i) the import tax,
                            ``(ii) state and local property taxes,
                            ``(iii) franchise or income taxes,
                            ``(iv) payroll taxes and self-employment 
                        taxes, or
                            ``(v) the business tax.
            ``(3) Imports.--In the case of an import by a business 
        entity, the cost of the import is the import price for purposes 
        of the import tax. The import tax is not part of the cost of 
        the import.
    ``(c) Property and Services Acquired for Property.--If a business 
entity receives property or services from a business entity in whole or 
partial exchange for property or services, the property or services 
acquired shall be treated as if they were purchased for an amount equal 
to the fair market value of the services or property received. For 
purposes of this section, property includes stock and other equity 
interests in business other than stock or an equity interest in the 
business entity acquiring the property or services. See section 210(b) 
for rules on property or services received in exchange for an equity 
interest in the recipient.
    ``(d) Gambling Payments.--In the case of a business involving 
gambling, lotteries, or other games of chance, business purchases 
include amounts paid to winners.
    ``(e) Savings Assets.--`Savings assets' means stocks, bonds, 
securities, certificates of deposits, investments in partnerships and 
limited liability companies, shares of mutual funds, life insurance 
policies, annuities, and other similar savings or investment assets.
    ``(f) Cross References.--
            ``(1) Financial intermediation and insurance.--For rules 
        relating to fees for financial intermediation services and 
        insurance, see subchapter F.
            ``(2) Land.--For special rules relating to the acquisition 
        of land, see subchapter E.
            ``(3) Rental real estate.--For special rules relating to 
        the rental of real estate previously occupied by an owner of 
        the real estate, see section 232.
            ``(4) Outside the united states.--For special rules 
        relating to services performed outside the United States but 
        used inside the United States and international services, see 
        subchapter J.

``SEC. 206. BUSINESS ENTITY AND BUSINESS ACTIVITY.

    ``(a) Business Entity.--For purposes of the business tax, `business 
entity' means any corporation, unincorporated association, partnership, 
limited liability company, proprietorship, independent contractor, 
individual, or any other person engaging in business activity in the 
United States. An individual shall be considered a business entity only 
with respect to the individual's business activities.
    ``(b) Business Activity.--`Business activity' means the sale of 
property or services, the leasing of property, the development of 
property or services for subsequent sale or use in producing property 
or services for subsequent sale. `Business activity' does not include 
casual or occasional sales of property used by an individual (other 
than in a business activity), such as the sale by an individual of a 
vehicle used by the individual.
    ``(c) Exception for Certain Employees.--
            ``(1) In general.--`Business activity' does not include--
                    ``(A) the performance of services by an employee 
                for an employer that is a business entity with respect 
                to the activity in which the employee is engaged, or
                    ``(B) the performance of regular domestic household 
                services (including babysitting, housecleaning, and 
                lawn cutting) by an employee of an employer that is an 
                individual or family.
            ``(2) Employee defined.--For purposes of this subsection, 
        `employee' includes an individual partner who provides services 
        to a partnership or an individual member who provides services 
        to a limited liability company, or a proprietor with respect to 
        compensation for services from his proprietorship.

``SEC. 207. LOSS CARRYOVER DEDUCTION.

    ``(a) Deduction.--The `loss carryover deduction' for a taxable year 
is the lesser of--
            ``(1) the business entity's gross profits for the taxable 
        year (determined without the loss carryover deduction), or
            ``(2) the amount of the loss carryover to the taxable year.
    ``(b) Loss Carryover.--
            ``(1) General rule.--A loss for any taxable year shall be a 
        loss carryover to each of the 215 taxable years following the 
        taxable year of the loss.
            ``(2) Loss carryovers to a taxable year.--The loss 
        carryover to a taxable year is the sum of the loss carryovers 
        from all prior taxable years beginning on or after January 1, 
        2004, that can be carried over to the taxable year.
            ``(3) Reduction of loss carryovers as a result of the 
        deduction.--A business entity's loss carryovers shall be 
        reduced each year by the amount of the loss carryover deduction 
        for the year. Loss carryovers shall be reduced in the order 
        that they arose.
     ``(c) Loss for Taxable Year.--A business entity's loss (if any) 
for the taxable year equals the excess (if any) of--
            ``(1) the sum of--
                    ``(A) the cost of business purchases for the 
                taxable year, and
                    ``(B) the transition basis adjustment for the 
                taxable year, over
            ``(2) taxable receipts for the taxable year.
    ``(d) Special Rules.--
            ``(1) Consolidated returns.--In the case of a consolidated 
        return, the loss for a taxable year shall be determined on a 
        consolidated group basis. In the case of a deconsolidation, the 
        loss carryovers from the consolidated group shall be allocated 
        in accordance with rules to be prescribed by the Secretary.
            ``(2) Loss carryovers of acquired business entity.--
                    ``(A) In general.--If a business entity acquires 
                another business entity in a transaction that is 
                considered the acquisition of a business entity and the 
                two entities file a consolidated return or if two 
                business entities merge, the loss carryovers will 
                survive and can be applied against the taxable receipts 
                attributable to the business activities carried on (or 
                in the case of a merger formerly carried on) by either 
                entity.
                    ``(B) Asset acquisition.--If a business entity 
                acquires all or substantially all of the assets of 
                another entity in a transaction that is considered an 
                asset acquisition rather than the acquisition of a 
                business entity, the acquirer will be treated as if it 
                acquired the loss carryovers of the selling entity. For 
                purposes of this rule, the assets of a business entity 
                include ownership interests in other business entities.
                    ``(C) Substantially all.--For purposes of this 
                paragraph `substantially all' means more than 80 
                percent of the fair market value of a business entity's 
                net assets. Under rules prescribed by the Secretary, 
                the parties to a transaction may elect to treat 
                acquisitions in excess of 70 percent of the fair market 
                value of a business entity's net assets as acquisitions 
                of `substantially all' of a business entity's net 
                assets.

   ``Subchapter C--Capital Contributions, Mergers, Acquisitions, and 
                             Distributions

``Sec. 210. Contributions to a business entity.
``Sec. 211. Distributions of property.
``Sec. 212. Asset acquisitions.
``Sec. 213. Mergers and stock acquisitions.
``Sec. 214. Spin-offs, split-off, etc.
``Sec. 215. Allocation of certain tax attributes.

``SEC. 210. CONTRIBUTIONS TO A BUSINESS ENTITY.

    ``(a) By Business Entity.--
            ``(1) Cash.--If a business entity contributes cash to a 
        business entity of which it is or becomes a partial or full 
        owner, the amount contributed is not a deductible amount to the 
        contributor or a taxable receipt to the recipient.
            ``(2) Property or services.--If a business entity 
        contributes property or services to a business entity of which 
        it is or becomes a partial or full owner, the transaction will 
        not result in taxable receipts to the contributor or a 
        deduction for a business purchase for the recipient and will 
        not constitute a sale resulting in taxable receipts to the 
        contributor.
    ``(b) By Individual.--
            ``(1) Cash.--If an individual contributes cash to a 
        business entity, the cash received is not a taxable receipt.
            ``(2) New property.--If an individual contributes to a 
        business entity property that the individual purchased for the 
        business entity but which was not used by any person after its 
        purchase, the property shall be considered purchased by such 
        business entity from the person from which the individual 
        purchased the property.
            ``(3) Personal use property.--
                    ``(A) In general.--If an individual contributes 
                personal use property to a business entity in which the 
                individual has an ownership interest or for which the 
                individual receives an ownership interest, the business 
                entity shall not be permitted to deduct the value of 
                the property received as a business expense. The 
                business entity will have a tax basis in the 
                contributed property equal to the contributor's basis.
                    ``(B) Personal use property.--`Personal use 
                property' means any property used by an individual at 
                any time other than in a business activity.
            ``(4) Services.--If an individual contributes services to a 
        business entity in which the individual has an ownership 
        interest or receives an ownership interest, the business entity 
        shall not be permitted to deduct the value of the services 
        received (or the value of the equity interest provided to the 
        services provider).

``SEC. 211. DISTRIBUTIONS OF PROPERTY.

    ``(a) Distributions Other Than to Controlling Business.--If a 
business entity distributes all or a portion of its assets to its 
owners (other than a controlling business entity), the business entity 
will be treated as if it sold the assets to its owners at fair market 
value. The fair market value will be determined by the distributing 
corporation and those determinations, unless unreasonable, will be 
binding on the recipients.
    ``(b) Distributions to a Controlling Business.--If a business 
entity distributes all or a portion of its assets to a controlling 
business, the controlling business will assume the distributing 
entity's tax attributes with respect to the assets and neither entity 
will have taxable receipts or a deduction as a result of the 
transaction.
    ``(c) Distribution of Personal Use Property.--If personal use 
property is distributed to the individual who contributed the personal 
use property to a business entity, the fair market value of the 
property for purposes of paragraph (a) shall equal the basis of the 
property plus any enhancement in value of the property attributable to 
business purchases with respect to the property.
    ``(d) Controlling Business Entity.--A business entity is a 
`controlling business entity' with respect to another business entity 
if it owns directly or indirectly more than 50 percent of the profits 
or capital interest in the other business entity.
    ``(e) Application of This Section.--This section applies to both 
liquidating and nonliquidating distributions. Property shall be treated 
as distributed if the property is used for a nonbusiness purpose (as 
defined in section 232) for more than an insubstantial period of time 
during a taxable year. See section 232 for rules relating to certain 
rental property.

``SEC. 212. ASSET ACQUISITIONS.

    ``(a) In General.--If a business entity transfers some or all of 
its assets, the consideration received for such assets shall be 
allocated among the assets transferred in the same manner as was 
required by section 1060 of the Internal Revenue Code of 1986. If the 
transferee and transferor agree in writing on the allocation of any 
consideration, or as to the fair market value of any of the assets, 
such agreement shall be binding on both the transferor and transferee 
unless the Secretary determines that such allocation (or fair market 
value) is not appropriate.
    ``(b) Tax Consequences.--The tax consequences of an asset 
acquisition shall be determined in accordance with the rules of this 
chapter and shall be dependent upon allocations made under subsection 
(a). In general, consideration allocable to savings assets, such as 
stock in another business entity, would not be included in taxable 
receipts of the transferor and would not be a business purchase of the 
purchaser, but consideration allocable to the sale of tangible property 
and intangible property (other than savings assets) will constitute 
taxable receipts of the seller and a business purchase of the 
purchaser.
    ``(c) Election To Treat Asset Acquisition as a Stock Acquisition.--
In the case of the sale of substantially all of the assets of a 
business entity or substantially all of the assets of a line of 
business or a separately standing business of a business entity, the 
transferee and transferor can jointly elect to treat the acquisition as 
if it were an acquisition of the stock of a business entity holding the 
assets so transferred. In such case, the rules of section 213 shall 
apply.
    ``(d) Authority To Require Allocation Agreement and Notice to the 
Secretary.--If the Secretary determines that certain types of asset 
acquisitions have significant possibilities of tax avoidance, the 
Secretary may require--
            ``(1) parties to such types of acquisitions to enter into 
        agreements allocating consideration,
            ``(2) parties to acquisitions involving certain kinds of 
        assets to enter into agreements allocating part of the 
        consideration to those assets, or
            ``(3) parties to certain acquisitions to report information 
        to the Secretary.
    ``(e) Asset Acquisition Rules Do Not Apply if Consideration 
Includes Equity in Purchaser.--
            ``(1) In general.--If a business entity issues its own 
        equity or equity in a subsidiary or other controlled entity as 
        part of the consideration for the transfer of assets to it, the 
        transaction shall not be treated as an asset acquisition and 
        the rules of section 13 shall apply.
            ``(2) Equity.--For purposes of this subsection, equity 
        means--
                    ``(A) stock, in the case of a corporation,
                    ``(B) partnership or similar interest, in the case 
                of a partnership or limited liability company, and
                    ``(C) an ownership interest or interest in profits 
                in the case of any other business entity.

``SEC. 213. MERGERS AND STOCK ACQUISITIONS.

    ``(a) Mergers.--A merger of one business entity into another or two 
businesses entities into a third business entity or any other similar 
transaction shall have no direct consequences under the business tax. 
The surviving entity shall assume the tax attributes of the merged 
corporations, including any loss carryovers and credit carryovers.
    ``(b) Stock Acquisition.--The acquisition of all or substantially 
all of the ownership interest in one business entity either for cash or 
in exchange for ownership in the acquiring entity or an entity 
controlled by the acquired entity shall have no direct consequences 
under the business tax.

``SEC. 214. SPIN-OFFS, SPLIT-OFFS, ETC.

    ``A spin-off, split-off or split-up of a business entity shall have 
no direct tax consequences under the business tax.

``SEC. 215. ALLOCATION OF CERTAIN TAX ATTRIBUTES.

    ``The Secretary shall prescribe rules for allocation of loss 
carryovers and payroll tax credit carryovers in cases of substantial 
shifts of assets from one business entity to another business entity. 
Under such rules, a portion of a business entity's carryovers may be 
deemed transferred when assets are transferred.

                ``Subchapter D--Accounting Method Rules

``Sec. 220. General accounting rules.
``Sec. 221. Use of the cash method of accounting.
``Sec. 222. Taxable year.
``Sec. 223. Long-term contracts.
``Sec. 224. Post-sale price adjustments and refunds.
``Sec. 225. Bad debts.
``Sec. 226. Transition rules.

``SEC. 220. GENERAL ACCOUNTING RULES.

    ``(a) In General.--Except as provided in section 221, a business 
entity shall use an accrual method of accounting for purposes of 
determining the timing of recognition of taxable receipts and deduction 
of business purchases. All business purchases shall be deducted when 
incurred (in the case of a business entity using the accrual method of 
accounting) or when paid (in case of a business entity using the cash 
method of accounting) without regard to whether the business purchases 
are for or relate to--
            ``(1) inventory,
            ``(2) assets with a useful life of more than one year, or
            ``(3) property that will be used to produce other property.
    ``(b) Economic Performance.--For purposes of determining whether an 
amount has been incurred, the all events test shall not be treated as 
met any earlier than when economic performance with respect to such 
item occurs.
    ``(c) Consistent Accounting Methods.--Except as otherwise expressly 
provided in this chapter, a business entity shall secure the consent of 
the Secretary before changing the method of accounting by which it 
determines gross profits. This provision shall not apply to changes 
required by the adoption of the business tax.

``SEC. 221. USE OF THE CASH METHOD OF ACCOUNTING.

    ``(a) In General.--A business entity that was permitted to use and 
used the cash method of accounting under the Internal Revenue Code of 
1986 shall be permitted to continue to use the cash method of 
accounting.
    ``(b) New Business Entities.--A new business entity shall be 
permitted to use the cash method of accounting if permitted to under 
regulations prescribed by the Secretary.
    ``(c) Change or Expansion of Business.--Subsection (a) shall cease 
to apply to a business entity that changes or expands its business such 
that under regulations prescribed by the Secretary it is no longer 
eligible to use the cash method of accounting.
    ``(d) Regulations.--
            ``(1) Use of cash method.--The Secretary shall prescribe 
        regulations defining which business entities may use the cash 
        method of accounting. In general, those regulations shall be 
        consistent with the rules under sections 447 and 448 of the 
        Internal Revenue Code of 1986, except that all corporations 
        shall be treated as C corporations were treated under those 
        sections. The regulations shall not require a business entity 
        described in subsection (a) to convert to the accrual method 
        prior to January 1, 2005.
            ``(2) Change in accounting method.--The Secretary shall 
        prescribe regulations to prevent double counting of taxable 
        receipts and deductible expenses in the case of a change in 
        accounting method.

``SEC. 222. TAXABLE YEAR.

    ``(a) Computation of Gross Profits.--Gross profits shall be 
computed on the basis of a business entity's taxable year.
    ``(b) Taxable Year.--`Taxable year' means--
            ``(1) the taxpayer's annual accounting period, if it is a 
        calendar year or a fiscal year;
            ``(2) the calendar year, if subsection (g) applies; or
            ``(3) the period for which the return is made if the return 
        is made for a period of less than 12 months.
    ``(c) Annual Accounting Period.--`Annual accounting period' means 
the annual period on the basis of which the business entity regularly 
keeps its books.
    ``(d) Calendar Year.--`Calendar year' means a period of 12 months 
ending on December 31.
    ``(e) Fiscal Year.--`Fiscal year' means a period of 12 months 
ending on the last day of any month other than December. In the case of 
any business entity that has made the election provided by subsection 
(f), the term means the annual period (varying from 52 to 53 weeks) so 
elected.
    ``(f) Election of 52-53 Week Year.--
            ``(1) General rule.--A business entity which, in keeping 
        its books, regularly computes its income or profits on a basis 
        of an annual period which varies from 52 to 53 weeks and ends 
        always on the same day of the week and ends always--
                    ``(A) on whatever date such same day of the week 
                last occurs in a calendar month, or
                    ``(B) on whatever date such same day of the week 
                falls which is nearest to the last day of a calendar 
                month,
        may elect to compute its gross profits on the basis of such 
        annual period.
            ``(2) Regulations.--The Secretary shall prescribe such 
        regulations as he deems necessary for the application of this 
        subsection, including regulations relating to the application 
        of effective dates to taxpayers using a 52-53 week year.
    ``(g) Calendar Year Required.--
            ``(1) No accounting period.--A business entity's taxable 
        year shall be the calendar year if the business entity does not 
        have an annual accounting period or has an annual accounting 
        period that does not qualify as a fiscal year.
            ``(2) New business entity.--The taxable year of a business 
        entity that begins business activity after December 31, 2003, 
        shall be the calendar year (or a 52-53 week fiscal year ending 
        in December) unless the business entity can demonstrate a 
        business reason for selecting an accounting period other than 
        the calendar year.
    ``(h) Transition Rule for Business Entities With a Fiscal Year.--
            ``(1) In general.--A business entity with a taxable year 
        that is not the calendar year shall have a short taxable year 
        ending on December 31, 2003, and a subsequent taxable year 
        beginning on January 1, 2004, and ending on the day immediately 
        preceding the beginning of the business entity's next fiscal 
        year.
            ``(2) Business entities with 52-53 week year ending in 
        december.--
                    ``(A) In general.--If a business entity has a 52-53 
                week taxable year (under the Internal Revenue Code of 
                1986) that ends in December 2003, it may elect to begin 
                its first taxable year for the business tax on the 
                first day immediately following the last day of such 
                taxable year.
                    ``(B) No election.--If a business entity that has a 
                52-53 week taxable year that ends in December 2003, 
                does not make the election under subparagraph (A) or is 
                prohibited from making such election by subparagraph 
                (C), the business entity's taxable year under the 
                Internal Revenue Code of 1986 that would end in 
                December 2003 shall end on December 31, 2003.
                    ``(C) Anti-abuse rule.--Subparagraph (A) shall not 
                apply to any taxpayer that enters into business 
                transactions in 2003 following the scheduled end of its 
                fiscal year with business entities that are not subject 
                to the business tax at the time of such transactions if 
                such transactions deviate from the normal course of 
                business in order to achieve some tax benefit.

``SEC. 223. LONG-TERM CONTRACTS.

    ``(a) In General.--In the case of a long-term contract--
            ``(1) Contractor expenses.--The contractor shall be 
        entitled to deduct its business purchases when paid or 
        incurred.
            ``(2) Contractor receipts.--The contractor shall recognize 
        taxable receipts--
                    ``(A) in the case of a project in which the 
                acquirer has no ownership interest in the project until 
                delivery--
                            ``(i) upon delivery of the project, in the 
                        case of an accrual basis contractor, or
                            ``(ii) upon the later of delivery of the 
                        project or the receipt of payment, in the case 
                        of cash-basis contractor.
                    ``(B) in the case of a project in which the 
                acquirer obtains an ownership interest as the project 
                is constructed--
                            ``(i) when the contractor has the right to 
                        payments, in the case of an accrual basis 
                        contractor, or
                            ``(ii) upon the later of when the 
                        contractor receives the cash or has the right 
                        to payments, in the case of a cash basis 
                        contractor.
            ``(3) Acquirer expenses.--The acquirer that is a business 
        entity shall be entitled to deduct its costs of the business 
        purchase--
                    ``(A) in the case of a cash-basis acquirer, at such 
                time as a cash basis contractor would be required to 
                treat the amounts paid as taxable receipts, or
                    ``(B) in the case of an accrual-basis acquirer, at 
                such time as an accrual basis contractor would be 
                required to treat the amounts paid or due as taxable 
                receipts.
    ``(b) Right to Payments.--
            ``(1) In general.--A contractor shall be treated as having 
        a right to payments with respect to a project at any time to 
        the extent that the contractor would not be required to return 
        payments received (or would be entitled to collect payments not 
        yet received) if the project were terminated at such time by 
        the contractor.
            ``(2) Contractual provisions.--If a long-term contract 
        includes a procedure for paying the contractor as work is 
        completed (for example, by reason of a draw down from a trust 
        account), the contractual provisions shall generally govern 
        when a contractor has a right to payment.
            ``(3) Percentage completion method of accounting.--If a 
        long-term contract does not include a mechanism for paying the 
        contractor as work is completed, the percentage-of-completion 
        method of accounting shall be used to determine the timing of 
        taxable receipts of the contractor and business purchases of 
        the acquirer.
    ``(c) Long-Term Contract.--
            ``(1) In general.--`Long-term contract' means--
                    ``(A) any contract that covers service or 
                production through parts of two different calendar 
                years if the contract includes a formal deposit and 
                draw-down mechanism, and
                    ``(B) any contract for the manufacture, building, 
                installation, or construction of property if such 
                contract is not completed within the taxable year of 
                the contractor in which such contract is entered into.
            ``(2) Exception.--A contract for the manufacture of 
        property shall not be treated as a long-term contract unless 
such contract involves the manufacture of--
                    ``(A) any unique item of a type which is not 
                normally included in the finished goods inventory of 
                the taxpayer, or
                    ``(B) any item which normally requires more than 12 
                calendar months to complete.
    ``(d) Consistency.--The Secretary may require business entities to 
file statements containing such information with respect to long-term 
contracts as the Secretary may prescribe to ensure consistency in 
reporting.
    ``(e) Foreign Contracts.--This section shall not be construed to 
permit a deduction for a business purchase for the cost of property 
produced outside the United States pursuant to a long-term contract at 
any time prior to the import of such property into the United States.

``SEC. 224. POST-SALE PRICE ADJUSTMENTS AND REFUNDS.

    ``(a) Receipt of Price Adjustment.--In the case of a post-sale 
price adjustment attributable to a business purchase which was taken 
into account in computing gross profits for a prior taxable year, the 
amount of such adjustment shall be treated as a reduction or increase, 
as the case may be, in the cost of business purchases for the taxable 
year in which the adjustment is made or incurred.
    ``(b) Issuance of Price Adjustment.--In the case of a post-sale 
price adjustment attributable to a sale the receipts from which were 
taken into account in determining taxable receipts for a prior taxable 
year, the amount of such adjustment shall be treated as a reduction or 
increase, as the case may be, in taxable receipts for the taxable year 
in which the adjustment is made or incurred.
    ``(c) Post-Sale Price Adjustment.--`Post-sale price adjustment' 
means a refund, rebate, or other price allowance attributable to a sale 
of property or services or an upward adjustment in price that was not 
previously taken into account under the business entity's method of 
accounting.

``SEC. 225. BAD DEBTS.

    ``(a) Seller.--If an amount owed to an accrual basis business 
entity for property or services sold--
            ``(1) was taken into account as a taxable receipt in a 
        prior taxable year, and
            ``(2) becomes wholly or partially uncollectible during the 
        taxable year, then the seller shall treat the amount as a 
        reduction in taxable receipts for the taxable year in which it 
        becomes wholly or partially uncollectible.
    ``(b) Notice Requirement.--No reduction shall be allowed under 
subsection (a) unless the seller notifies the purchaser of the amount 
which the seller has treated as wholly or partially uncollectible.
    ``(c) Subsequent Collection.--If an amount which was treated as 
uncollectible under subsection (a) is subsequently collected, it shall 
be treated as a taxable receipt when collected.
    ``(d) Purchaser.--If a purchaser receives notice under subsection 
(b) from a seller and the purchaser has treated the amount labeled 
uncollectible as a business purchase in a prior taxable year, then the 
purchaser shall treat such amount as a reduction in the cost of 
business purchases in the taxable year to which the notice relates. If 
the purchaser subsequently repays such amount, the repayment shall 
constitute the cost of a business purchase.

``SEC. 226. TRANSITION RULES.

    ``(a) No Double Deductions.--A business entity shall not be 
entitled to treat as a `cost of business purchase' any amount that the 
business entity deducted in computing taxable income under the income 
tax in effect prior the effective date of the business tax.
    ``(b) No Double Inclusion.--A business entity shall not be required 
to include in taxable receipts any receipt that the business entity 
took into account in computing taxable income under the income tax in 
effect prior to the effect date of the business tax.
    ``(c) No Loss of Deduction.--An expense which--
            ``(1) a business entity would have been able to deduct as a 
        cost of a business purchase in an accounting period before the 
        effective date of the business tax if the business tax had been 
        in effect in such period, and
            ``(2) the business entity would have been able to deduct as 
        an expense in computing taxable income in a period after the 
        business tax is effective if the income tax had continued in 
        effect,
shall be treated as a cost of a business purchase incurred or paid at 
the time that it would have been paid or incurred under the income tax 
if the income tax had continued in effect. This subsection shall not 
apply to any amount which is to be taken into account under subchapter 
N (relating to amortization of transition basis, inventory costs, and 
safe harbor leases), any amounts which would have been deducted under 
the income tax through loss carryover deductions, or any deductions 
deferred by the uniform capitalization rules under section 263A of the 
Internal Revenue Code of 1986.
    ``(d) All Taxable Receipts Taxed.--A receipt which--
            ``(1) a business entity would have been required to treat 
        as a taxable receipt in an accounting period before the 
        effective date of the business tax if the business tax had been 
        in effect in such period, and
            ``(2) the business entity would have been required to 
        include in gross income in a period after the business tax is 
        effective if the income tax had continued in effect
shall be treated as a taxable receipt at the time that it would have 
been included in income if the income tax had continued in effect.

                ``Subchapter E--Land and Rental Property

``Sec. 230. No deduction for land purchased for nonbusiness use.
``Sec. 231. Taxable receipts for land held for nonbusiness use.
``Sec. 232. Certain rental property.

``SEC. 230. NO DEDUCTION FOR LAND PURCHASED FOR NONBUSINESS USE.

    ``(a) In General.--The acquisition of unimproved land shall not 
constitute a business purchase if the unimproved land is not acquired 
to be used in a business activity or if the land is acquired for--
            ``(1) speculation,
            ``(2) development (including subdivision), or
            ``(3) temporary leasing or other use not commensurate with 
        the value of the land,
            ``(4) indefinite future use in a business activity, or
            ``(5) use in compensating employees.
    ``(b) Future Use in Business Activity.--Unimproved land will not be 
considered held for `indefinite future use in a business activity' if 
promptly upon acquisition, the purchaser or the lessee begins 
construction of improvements on the land (other than improvements, such 
as paving or sewage lines, intended for indefinite future development) 
that will be used in a business activity. Such improvement must be 
commensurate with the value of the land.
    ``(c) Unimproved Land.--`Unimproved land' means--
            ``(1) land with no buildings on it,
            ``(2) land with improvements if the value of the 
        improvements is relatively small in comparison to the value of 
        the land and it is anticipated that the improvements will be 
        demolished and not used,
            ``(3) land in excess of the amount reasonably needed for 
        the buildings located on it.
    ``(d) Conversion to Business Use.--If the acquisition of land is 
not treated as a business purchase by reason of subsection (a) and the 
land is subsequently used in a manner for which it could have been 
treated as a business purchase, the cost of the land will be treated as 
a business purchase when the improvements on the land are placed in 
service (or in the case of construction for sale, substantially 
completed and advertised for sale).

``SEC. 231. TAXABLE RECEIPTS FROM SALE OF LAND HELD FOR NONBUSINESS 
              USE.

    ``(a) Tax Basis.--A business entity shall have a tax basis in land 
equal to the cost of the land if such cost is not deductible by reason 
of section 230(a) and the land has not been converted to business use 
for purposes of section 230(d).
    ``(b) Taxable Receipts of a Land Sale.--The taxable receipts from 
the sale of land (or portion thereof) in which a business entity has a 
tax basis by reason of subsection (a) shall be the amount by which the 
proceeds exceed the basis of such land (or portion thereof).

``SEC. 232. CERTAIN RENTAL PROPERTY.

    ``(a) In General.--Except as provided in subsection (b), the 
activity of rental of real estate is a business activity to which the 
business tax applies.
    ``(b) Not Rental Property.--Subsection (a) shall not apply to 
property described in section 111(b)(1) (relating to property owned by 
individuals and used for at least 14 days for a nonbusiness purpose and 
rented for no more than 14 days during the taxable year).
    ``(c) Rental Property Becomes Nonrental Property.--If property 
which is considered rental property for purposes of subsection (a) in 
one taxable year ceases to be rental property (by reason of subsection 
(b)) in the following taxable year, the property (and any associated 
debt) shall be treated as distributed by the business entity to its 
owners. Section 211(a) shall apply to such distribution.

            ``Subchapter F--Insurance and Financial Products

``Sec. 235. General rules.
``Sec. 236. Fees for financial intermediation services.
``Sec. 237. Deductible insurance premiums.
``Sec. 238. Nondeductible insurance premiums.
``Sec. 239. Certain implicit fees for financial intermediate services.

``SEC. 235. GENERAL RULES.

    ``(a) Taxable Receipts.--Except in the case of a financial 
intermediation business, taxable receipts do not include financial 
receipts (as defined in section 203(e)(2)).
    ``(b) Business Purchases.--Except in the case of a financial 
intermediation business, business purchases do not include the cost of 
financial instruments (as defined in section 242(b)(3)) or payments for 
use of money or capital, other than fees for financial intermediation 
services.

``SEC. 236. FEES FOR FINANCIAL INTERMEDIATION SERVICES.

    ``(a) Business Purchase.--Business purchases include explicit fees 
and implicit fees for financial intermediation services (except to the 
extent that such fees are for services treated as performed outside the 
United States and not imported into the United States or for services 
treated as exported.).
    ``(b) Financial Intermediation Services.--The definition of 
`financial intermediation service' in section 241 applies for purposes 
of this section.
    ``(c) Explicit Fees.--
            ``(1) In general.--`Explicit fees for financial 
        intermediation services' means separately stated fees for 
        services provided by a business entity in the financial 
        intermediation business. Explicit fees do not include fees for 
        use of money or capital.
            ``(2) Examples.--Explicit fees for financial intermediation 
        services include (without limitation)--
                    ``(A) separately listed maintenance and service 
                charges of providers of financial intermediation 
                services,
                    ``(B) loan documentation fees,
                    ``(C) brokerage fees,
                    ``(D) loan origination fees,
                    ``(E) underwriting fees,
                    ``(F) trustees' fees, and
                    ``(G) fees for credit checks.
            ``(3) Exclusions.--Explicit fees for financial 
        intermediation services do not include prepaid interest and 
        other fees for use of money or capital even if such fees are 
        separately stated or are labeled as service fees.
    ``(d) Implicit Fees.--
            ``(1) Implicit fees attributable to borrowing.--
                    ``(A) In general.--Implicit fees attributable to 
                borrowing from banks and other financial institutions 
                shall include the portion of interest payments that the 
                Secretary designates as constituting service fees.
                    ``(B) Timing.--Implicit fees determined under this 
                paragraph shall not be deductible in any taxable year 
                prior to the taxable year in which the interest is 
                paid. If the amount of the interest to which implicit 
                fees relate was deducted as original issue discount 
                under the Internal Revenue Code of 1986, the implicit 
                fees with respect to such interest shall not constitute 
                a deductible business purchase.
                    ``(C) Designation by secretary.--
                            ``(i) Estimate of differential.--The 
                        Secretary shall estimate for each calendar year 
                        the difference between the cost of funds for 
                        banks and the rates of interest (including 
discount points) charged to the most credit-worthy depositors of banks. 
The determinations shall be made separately for--
                                    ``(I) loans with terms of not more 
                                than 3 years,
                                    ``(II) loans with terms of over 3 
                                but not over 9 years, and
                                    ``(III) loans with terms of over 9 
                                years.
                            ``(ii) Designation of implicit fees.--The 
                        Secretary shall designate the differences 
                        determined under clause (i) as the portion of 
                        interest expense on loans from banks and other 
                        financial institutions that constitutes an 
                        implicit fee for term loans originated during 
                        the following calendar year for the respective 
                        periods listed in subclauses (I) through (III) 
                        of clause (i). The difference determined for 
                        loans described in subclause (I) of clause (i) 
                        shall apply to determine the implicit fee 
                        portion of interest on demand loans outstanding 
                        during the following calendar year.
                            ``(iii) Historical determination.--The 
                        Secretary shall make an historical 
                        determination in accordance with the principles 
                        of this subparagraph to designate the portion 
                        of interest on term loans made before January 
                        1, 2003, that will constitute implicit fees.
            ``(2) Implicit fees for other financial intermediation 
        activity.--Implicit fees for financial intermediation services 
        include the portion of the fees or other charges paid to a 
        provider of financial intermediation services (other than 
        lending) as such provider designates in accordance with section 
        39.

``SEC. 237. DEDUCTIBLE INSURANCE PREMIUMS.

    ``(a) In General.--The cost of insurance premiums on business loss 
policies that insure risks in the United States constitute costs of 
business purchases. Proceeds from such policies constitute taxable 
receipts.
    ``(b) Business Loss Policy.--A `business loss policy' is an 
insurance policy--
            ``(1) owned by a business entity,
            ``(2) the beneficiary of which is the business entity or 
        another business entity doing business with the owner of the 
        policy,
            ``(3) that has no inside buildup or other savings 
        component,
            ``(4) that covers losses on a loss incurred or claims made 
        basis during the term of the policy,
            ``(5) that has a term of not more than 2 years,
            ``(6) that is not a direct or indirect form of 
        compensation, and
            ``(7) that covers direct losses of the business, such as--
                    ``(A) damage to or theft of property used in 
                business activity,
                    ``(B) tort claims against the business,
                    ``(C) loss of use of business premises or services,
                    ``(D) malpractice, or
                    ``(E) alleged or actual breach of fiduciary 
                obligations.

``SEC. 238. NONDEDUCTIBLE INSURANCE PREMIUMS.

    ``(a) Nondeductibility.--The cost of insurance policies that are 
not business loss policies are not deductible costs of business 
purchases.
    ``(b) Proceeds of Nondeductible Policies.--Insurance proceeds from 
policies described in subsection (a) do not constitute taxable 
receipts.
    ``(c) Application of This Section to Certain Insurance.--This 
section shall apply to life insurance policies.

``SEC. 239. CERTAIN IMPLICIT FEES FOR FINANCIAL INTERMEDIATION 
              SERVICES.

    ``(a) Deductibility of Fees.--If a financial intermediation 
business (as defined in section 241(b)) elects to determine implicit 
fees for financial intermediation services pursuant to this section and 
notify its business customers of their share of the implicit fees in 
accordance with this section, a business entity which receives such 
notice may treat the amount reported in the notice as an implicit fee 
for financial intermediation services in the calendar year to which 
such notice relates.
    ``(b) Allocation and Reporting.--
            ``(1) In general.--A financial intermediation business 
        may--
                    ``(A) allocate fees received for services for which 
                no separately stated fees (or implicit fees for 
                borrowing determined under section 236(d)(1)) are 
                charged among recipients of such services on a 
                reasonable and consistent basis, and
                    ``(B) report to each recipient not later than 
                February 15th of each year the amount so allocated to 
                it with respect to the immediately preceding calendar 
                year.
            ``(2) Maximum fees allocated.--The maximum amount that may 
        be allocated by a financial intermediation business for a 
        calendar is the excess of--
                    ``(A) the gross profits of the financial 
                intermediation business for the calendar year (as 
                reasonably estimated by the financial intermediation 
                business), over
                    ``(B) the explicit fees for financial 
                intermediation services received by the financial 
                intermediation business.
            ``(3) Reasonable allocation.--An allocation will not be 
        considered reasonable unless it takes into account and 
        allocates fees to--
                    ``(A) both services provided to business entities 
                and services provided to individuals (other than in a 
                business capacity), and
                    ``(B) both persons who receive money from the 
                financial intermediation business and persons who pay 
                money to the financial intermediation business (even 
                though amounts allocated to the former do not 
                constitute implicit fees).
            ``(4) Regulations.--The Secretary shall prescribe 
        regulations relating to the allocations under this subsection, 
        including regulations addressing--
                    ``(A) rules for timing of deductions of implicit 
                fees paid by fiscal year recipients,
                    ``(B) subsequent year adjustments if a financial 
                intermediation business allocates too much in a 
                calendar year,
                    ``(C) rules for advance approval from the Secretary 
                for allocation procedures, and
                    ``(D) safe-harbor alternatives to the allocation 
                procedures described in this subsection.
    ``(c) Not Applicable to Lending Services.--This section shall not 
apply to lending services.

  ``Subchapter G--Financial Intermediation and Financial Institutions

``Sec. 241. Activities constituting a financial intermediation 
                            business.
``Sec. 242. General rule for taxation.
``Sec. 243. Special rule for banks.
``Sec. 244. Insurance companies.
``Sec. 245. Financial pass-through entities.
``Sec. 246. Financial intermediation by other businesses.

``SEC. 241. ACTIVITIES CONSTITUTING A FINANCIAL INTERMEDIATION 
              BUSINESS.

    ``(a) Financial Intermediation Business.--The providing of 
financial intermediation services shall be considered a business 
activity. The gross profit of a business entity providing financial 
intermediation services shall be determined by taking into account the 
rules of this subchapter.
    ``(b) Separate Business Activity.--The provision of financial 
intermediation services for unrelated persons shall be considered a 
separate business activity and a business shall be considered a 
separate entity with respect to such activity. An entity engaging in 
such business is referred to in this chapter as a `financial 
intermediation business'.
    ``(c) Financial Intermediation by a Business.--Section 246 shall 
apply to a business that provides financial intermediation services for 
itself and related parties but generally does not provide such services 
for unrelated parties.
    ``(d) Definitions.--
            ``(1) Financial intermediation services.--`Financial 
        intermediation services' include--
                    ``(A) lending services,
                    ``(B) insurance services,
                    ``(C) market-making and dealer services, and
                    ``(D) any other service provided as business 
                activity in which a person acts as an intermediary in--
                            ``(i) the transfer of property, services, 
                        or financial assets, liabilities, risks or 
                        instruments (or income or expense derived 
                        therefrom) between two or more persons, or
                            ``(ii) the pooling of economic risk among 
                        other persons
                and derives all or a portion of such person's gross 
                receipts from streams of income or expense, discounts, 
                or other financial flows associated with the matter 
                with respect to which such person is acting as an 
                intermediary.
            ``(2) Lending services.--`Lending services' means the 
        regular making of loans and providing credit to, or taking 
        deposits from customers, but does not include an installment or 
        delayed payment arrangement provided by a seller of property 
or services under which additional charges or fees are imposed by the 
seller for the late payment.
            ``(3) Market-making or dealer services.--`Market-making or 
        dealer services' means services provided by a person who--
                    ``(A) regularly purchases financial instruments 
                from or sells financial instruments to customers in the 
                ordinary course of a trade or business,
                    ``(B) regularly offers to enter into, assume, 
                offset, assign, or otherwise terminate positions in 
                financial instruments with customers in the ordinary 
                course of a trade or business.

``SEC. 242. GENERAL RULE FOR TAXATION.

    ``(a) In General.--In the case of a financial intermediation 
business, gross profits shall be computed by--
            ``(1) substituting financial receipts for taxable receipts, 
        and
            ``(2) including financial expenses as business purchases.
    ``(b) Definitions.--
            ``(1) Financial receipts.--`Financial receipts' means all 
        receipts other than amounts received as contributions to 
        capital.
            ``(2) Financial expenses.--`Financial expenses' include--
                    ``(A) payments for principal and interest that is 
                properly allocable to the provision of financial 
                intermediation services,
                    ``(B) the cost of and payments under financial 
                instruments (other than financial instruments in the 
                person subject to the tax imposed under this chapter 
                and any person related to such person),
                    ``(C) claims and cash surrender values paid in 
                connection with insurance or reinsurance services, and
                    ``(D) amounts paid for reinsurance.
            ``(3) Financial instrument.--`Financial instrument' means 
        any--
                    ``(A) share of stock in a corporation,
                    ``(B) equity ownership in any widely held or 
                publicly traded partnership, trust, or other business 
                entity,
                    ``(C) note, bond, debenture, or other evidence of 
                indebtedness,
                    ``(D) interest rate, currency, or equity notional 
                principal contract,
                    ``(E) evidence or interest in, or a derivative 
                financial instrument in, any financial instrument 
                described in subparagraph (A), (B), (C), or (D), or any 
                currency, including any option, forward contract, short 
                position, and any similar financial instrument in such 
                a financial instrument or currency, and
                    ``(F) a position which--
                            ``(i) is not a financial instrument 
                        described in subparagraph (A), (B), (C), (D) or 
                        (E),
                            ``(ii) is a hedge with respect to such a 
                        financial instrument, and
                            ``(iii) is clearly identified in the 
                        dealer's records as being described in this 
                        subparagraph before the close of the day on 
                        which it was acquired or entered into.
    ``(c) International Matters.--For purposes of this section in the 
case of a financial intermediation business with activity in and 
outside the United States--
            ``(1) Inclusion regardless of source.--
                    ``(A) Financial receipts shall be determined 
                without regard to whether they are received for 
                property or service provided in or outside the United 
                States, except that financial receipts do not include 
                amounts that--
                            ``(i) are not taxable receipts (as 
                        determined without regard to this section), but
                            ``(ii) would have been taxable receipts (as 
                        determined without regard to this section) if 
                        they had been received for services or property 
                        in the United States.
                    ``(B) Financial expenses shall be determined 
                without regard to whether they are received for 
                property or services acquired in or outside the United 
                States.
            ``(2) Allocation.--Under regulations prescribed by the 
        Secretary, gross profits (as determined without regard to this 
        paragraph) shall be reduced by the amount of financial 
        intermediation gross profit attributable to financial 
        intermediation activity provided outside the United States.
            ``(3) Gross profit attributable to financial intermediation 
        activity.--`Gross profits attributable to financial 
        intermediation activity' means the excess of--
                    ``(A) gross profits as determined under this 
                section (but without regard to paragraph (2)), over
                    ``(B) gross profits as determined without regard to 
                this subchapter.

``SEC. 243. SPECIAL RULES FOR BANKS.

    ``(a) In General.--In the case of a bank, gross profits shall be 
determined in accordance with section 242, except that--
            ``(1) Financial receipts.--Financial receipts shall include 
        only--
                    ``(A) taxable receipts (as determined without 
                regard to this subchapter),
                    ``(B) interest on loans made or acquired by the 
                bank,
                    ``(C) gain on the sale of loans,
                    ``(D) discount points received, and
                    ``(E) any explicit fees for financial or fiduciary 
                services not included in subparagraphs (A) through (E).
            ``(2) Financial expenses.--Financial expenses shall include 
        only--
                    ``(A) interest paid to depositors and on other 
                funds borrowed by the bank, and
                    ``(B) reasonable additions to reserves for bad 
                debts.
            ``(3) Foreclosure property.--Gross profits shall properly 
        take into account proceeds from the operation or sale of 
        foreclosure property.
    ``(b) Bank.--
            ``(1) In general.--`Bank' means a bank or trust company 
        incorporated and doing business under the laws of the United 
        States, the District of Columbia, or any State, a substantial 
        part of the business of which consists of receiving deposits 
        and making loans and discounts, or of exercising fiduciary 
        powers similar to those exercised by national banks under the 
        authority of the Comptroller of the Currency, and which is 
        subject by law to supervision and examination by State or 
        Federal authority having supervision over banking institutions 
        or credit unions. Such term includes domestic building and loan 
        associations and credit unions.
            ``(2) Other activities.--If a bank is engaged in 
        significant amounts of activities other than those described in 
        paragraph (1), the bank shall be considered as a separate 
        business entity with respect to such other activity.

``SEC. 244. INSURANCE COMPANIES.

    ``(a) In General.--In the case of companies providing insurance 
services, gross profits shall be determined in accordance with section 
242, except--
            ``(1) subsection (c) of section 242 (relating to 
        international operations) shall not apply, and
            ``(2) the rules of subchapter J (sourcing rules) shall 
        apply to determine financial receipts and financial expenses.
    ``(b) Result Inconsistent With Statutory Intent.--If an insurance 
company determines that the application of subsection (a) produces 
results inconsistent with the territorial approach of the business tax, 
it may apply to the Secretary for permission to apply section 242(c) in 
lieu of subsection (a).

``SEC. 245. FINANCIAL PASS-THROUGH ENTITIES.

    ``(a) In General.--In the case of a financial pass-thru entity, 
gross profits shall be determined in accordance with section 242, 
except--
            ``(1) financial receipts shall include contributions to 
        capital,
            ``(2) financial expenses shall include--
                    ``(A) distributions to persons holding interests in 
                the pass-thru entity,
                    ``(B) investments in related entities (including 
                wholly owned entities) engaging in real estate 
                investment.
    ``(b) Pass-Thru Entity.--
            ``(1) In general.--`Pass-thru entity' means a business 
        entity that is intended to serve as a conduit. The Secretary 
        shall prescribe regulations defining pass-thru entity. Such 
        term shall include--
                    ``(A) entities that would qualify as regulated 
                investment companies under the Internal Revenue Code of 
                1986,
                    ``(B) entities that would qualify as real estate 
                investment trusts under the Internal Revenue Code of 
                1986,
                    ``(C) entities that would qualify as REMICs under 
                the Internal Revenue Code of 1986, and
                    ``(D) partnerships whose purposes are to invest the 
                funds of the partners in financial instruments, 
                distribute or reinvest the income from such 
                investments, and distribute or reinvest the proceeds 
                from the sale of such instruments.
            ``(2) Engagement in business activity.--An entity will not 
        qualify as a pass-thru entity if it engages in more than an 
        insubstantial amount of rental or other business activity 
        (other than investing in and selling financial instruments). 
        The preceding sentence will not apply if the business entity 
        treats the business activity as engaged in by a separate 
        business entity (separately subject to tax under this chapter).

``SEC. 246. FINANCIAL INTERMEDIATION BY OTHER BUSINESSES.

    ``(a) In General.--If a business entity that is not regularly in 
the business of providing financial intermediation services to 
unrelated parties engages in significant financial intermediation 
activity, its gross profits shall be increased by its gross profits 
from financial intermediation activity (determined as if such activity 
were activity of a pass-thru entity that paid all costs of such 
financial intermediation activity including--
            ``(1) compensation for persons engaging in such activity,
            ``(2) equipment involved in such activity, and
            ``(3) office space for persons involved in such activity).
    ``(b) Proxy.--A business entity to which subsection (a) applies 
will be treated as satisfying the requirements of that subsection if it 
increases its gross receipts by the portion of employee compensation 
properly allocable to the provision of financial intermediation 
services.
    ``(c) Significant Financial Intermediation.--A business will be 
considered as engaging in substantial financial intermediation if--
            ``(1) more than 5 percent of the compensation paid by the 
        business to its employees is for employees whose primary 
        activity is the management of the business's investments in 
        financial instruments, or
            ``(2) at all times during the taxable year and the 
        immediately preceding full taxable year, more than 10 percent 
        of its assets are financial instruments other than--
                    ``(A) equity interests in business entities in 
                which it holds more than 50 percent in value of the 
                outstanding equity,
                    ``(B) equity interests in joint ventures in which 
                the company is actively participating,
                    ``(C) purchase money loans to its customers, and
                    ``(D) business loans and equity investments that 
                serve a direct business purpose.

                ``Subchapter H--Tax-Exempt Organizations

``Sec. 251. Exemption for governmental entities.
``Sec. 252. Taxable activity of governmental entities.
``Sec. 253. Tax-exempt organizations.
``Sec. 254. Special rules for (c)(3) organizations.
``Sec. 255. Tax on unrelated business activity.
``Sec. 256. Unrelated business activity.

``SEC. 251. EXEMPTION FOR GOVERNMENTAL ENTITIES.

    ``(a) States.--Except as provided in section 252, a state, 
political subdivision thereof and the District of Columbia shall be 
exempt from taxation under this chapter on any gross profits derived 
from the exercise of any essential governmental function.
    ``(b) Possessions.--The government of any possession of the United 
States shall be exempt from taxation under this chapter on any gross 
profits earned by the possession.

``SEC. 252. TAXABLE ACTIVITY OF GOVERNMENTAL ENTITIES.

    ``(a) Certain Activities Taxable.--A governmental entity shall be 
considered a business and subject to tax on any business activity of a 
type frequently provided by business entities subject to tax under this 
chapter.
    ``(b) Certain Activities Treated as Essential Government 
Functions.--Subsection (a) shall not apply to the following activities, 
which shall be treated as essential government functions:
            ``(1) Provision of mass transportation services.
            ``(2) Provision of public utility services.

``SEC. 253. TAX-EXEMPT ORGANIZATIONS.

    ``(a) Exemption From Taxation.--An organization described in 
subsection (c) or (d) shall be exempt from taxation under this chapter.
    ``(b) Tax on Unrelated Business Activity.--An organization exempt 
from taxation under subsection (a) shall be subject to tax to the 
extent provided in sections 255 and 256, but shall be considered a tax-
exempt organization for purposes of any law that refers to tax-exempt 
organizations.
    ``(c) List of Exempt Organizations.--The following organizations 
are referred to in subsection (a):
            ``(1) Instrumentality of the united states.--Any 
        corporation organized under Act of Congress which is an 
        instrumentality of the United States but only if such 
        corporation--
                    ``(A) is exempt from Federal income taxes--
                            ``(i) under such Act as amended and 
                        supplemented before July 18, 1984, or
                            ``(ii) under this title without regard to 
                        any provision of law which is not contained in 
                        this title and which is not contained in a 
                        revenue Act, or
                    ``(B) is described in subsection (h).
            ``(2) Title holding companies.--Corporations organized for 
        the exclusive purpose of holding title to property, collecting 
        income therefrom, and turning over the entire amount thereof, 
        less expenses, to an organization which itself is exempt under 
        this section. Rules similar to the rules of subparagraph (G) of 
        paragraph (25) shall apply for purposes of this paragraph.
            ``(3) Charitable, educational and religious 
        organizations.--Corporations, and any community chest, fund, or 
        foundation, organized and operated exclusively for religious, 
        charitable, scientific, testing for public safety, 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, no part of the net earnings of which inures to the 
        benefit of any private shareholder or individual, no 
        substantial part of the activities of which is carrying on 
        propaganda, or otherwise attempting, to influence legislation 
        (except as otherwise provided in subsection (g)), 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.
            ``(4) Social welfare organizations, etc.--
                    ``(A) Civic leagues or organizations not organized 
                for profit but operated exclusively for the promotion 
                of social welfare, or local associations of employees, 
                the membership of which is limited to the employees of 
                a designated person or persons in a particular 
                municipality, and the net earnings of which are devoted 
                exclusively to charitable, educational, or recreational 
                purposes.
                    ``(B) Subparagraph (A) shall not apply to an entity 
                unless no part of the net earnings of such entity 
                inures to the benefit of any private shareholder or 
                individual.
            ``(5) Labor and agricultural organizations.--Labor, 
        agricultural, or horticultural organizations.
            ``(6) Trade associations.--Business leagues, chambers of 
        commerce, real-estate boards, boards of trade, or professional 
        football leagues (whether or not administering a pension fund 
        for football players) not organized for profit and no part of 
        the net earnings of which inures to the benefit of any private 
        shareholder or individual.
            ``(7) Social clubs.--Clubs organized for pleasure, 
        recreation, and other nonprofitable purposes, substantially all 
        of the activities of which are for such purposes and no part of 
        the net earnings of which inures to the benefit of any private 
        shareholder.
            ``(8) Certain fraternal societies.--Fraternal beneficiary 
        societies, orders, or associations--
                    ``(A) operating under the lodge system or for the 
                exclusive benefit of the members of a fraternity itself 
operating under the lodge system, and
                    ``(B) providing for the payment of life, sick, 
                accident, or other benefits to the members of such 
                society, order, or association or their dependents.
            ``(9) VEBA's.--Voluntary employees' beneficiary 
        associations providing for the payment of life, sick, accident, 
        or other benefits to the members of such association or their 
        dependents or designated beneficiaries, if no part of the net 
        earnings of such association inures (other than through such 
        payments) to the benefit of any private shareholder or 
        individual.
            ``(10) Other fraternal organizations.--Domestic fraternal 
        societies, orders, or associations, operating under the lodge 
        system--
                    ``(A) the net earnings of which are devoted 
                exclusively to religious, charitable, scientific, 
                literary, educational, and fraternal purposes, and
                    ``(B) which do not provide for the payment of life, 
                sick, accident, or other benefits.
            ``(11) Local teachers' retirement funds.--Teachers' 
        retirement fund associations of a purely local character, if--
                    ``(A) no part of their net earnings inures (other 
                than through payment of retirement benefits) to the 
                benefit of any private shareholder or individual, and
                    ``(B) the income consists solely of amounts 
                received from public taxation, amounts received from 
                assessments on the teaching salaries of members, and 
                income in respect of investments.
            ``(12) Certain cooperatives.--
                    ``(A) Benevolent life insurance associations of a 
                purely local character, mutual ditch or irrigation 
                companies, mutual or cooperative telephone companies, 
or like organizations; but only if 85 percent or more of the income 
consists of amounts collected from members for the sole purpose of 
meeting losses and expenses.
                    ``(B) In the case of a mutual or cooperative 
                telephone company, subparagraph (A) shall be applied 
                without taking into account any income received or 
                accrued--
                            ``(i) from a nonmember telephone company 
                        for the performance of communication services 
                        which involve members of the mutual or 
                        cooperative telephone company,
                            ``(ii) from qualified pole rentals,
                            ``(iii) from the sale of display listings 
                        in a directory furnished to the members of the 
                        mutual or cooperative telephone company, or
                            ``(iv) from the prepayment of a loan under 
                        section 306A, 306B, or 311 of the Rural 
                        Electrification Act of 1936 (as in effect on 
                        January 1, 1987).
                    ``(C) In the case of a mutual or cooperative 
                electric company, subparagraph (A) shall be applied 
                without taking into account any income received or 
                accrued--
                            ``(i) from qualified pole rentals, or
                            ``(ii) from the prepayment of a loan under 
                        section 306A, 306B, or 311 of the Rural 
                        Electrification Act of 1936 (as in effect on 
                        January 1, 1987).
                    ``(D) For purposes of this paragraph, the term 
                `qualified pole rental' means any rental of a pole (or 
                other structure used to support wires) if such pole (or 
                other structure)--
                            ``(i) is used by the telephone or electric 
                        company to support one or more wires which are 
                        used by such company in providing telephone or 
                        electric services to its members, and
                            ``(ii) is used pursuant to the rental to 
                        support one or more wires (in addition to the 
                        wires described in clause (i)) for use in 
                        connection with the transmission by wire of 
                        electricity or of telephone or other 
                        communications.
                For purposes of the preceding sentence, the term 
                `rental' includes any sale of the right to use the pole 
                (or other structure).
            ``(13) Nonprofit cemeteries.--Cemetery companies owned and 
        operated exclusively for the benefit of their members or which 
        are not operated for profit; and any corporation chartered 
        solely for the purpose of the disposal of bodies by burial or 
        cremation which is not permitted by its charter to engage in 
        any business not necessarily incident to that purpose and no 
        part of the net earnings of which inures to the benefit of any 
        private shareholder or individual.
            ``(14) Grandfathered mutual financial institutions.--
                    ``(A) Credit unions without capital stock organized 
                and operated for mutual purposes and without profit, 
                but only if organized before July 1, 2003.
                    ``(B) Certain corporations or associations 
                organized before September 1, 1957, and described in 
                subparagraphs (B) or (C) of section 501(c)(14) of the 
                Internal Revenue Code of 1986.
            ``(15) Grandfathered small insurance companies.--Insurance 
        companies organized before July 1, 2003, and described in 
        section 501(c)(15) of the Internal Revenue Code of 1986.
            ``(16) Crop financing associations.--Corporations organized 
        by an association subject to part IV of this subchapter or 
        members thereof, for the purpose of financing the ordinary crop 
        operations of such members or other producers, and operated in 
        conjunction with such association. Exemption shall not be 
        denied any such corporation because it has capital stock, if 
        the dividend rate of such stock is fixed at not to exceed the 
        legal rate of interest in the State of incorporation or 8 
        percent per annum, whichever is greater, on the value of the 
        consideration for which the stock was issued, and if 
        substantially all such stock (other than nonvoting preferred 
        stock, the owners of which are not entitled or permitted to 
        participate, directly or indirectly, in the profits of the 
        corporation, on dissolution or otherwise, beyond the fixed 
        dividends) is owned by such association, or members thereof; 
        nor shall exemption be denied any such corporation because 
        there is accumulated and maintained by it a reserve required by 
        State law or a reasonable reserve for any necessary purpose.
            ``(17) Supplemental employment benefit trust.--
                    ``(A) A trust or trusts forming part of a plan 
                providing for the payment of supplemental unemployment 
                compensation benefits, if--
                            ``(i) under the plan, it is impossible, at 
                        any time prior to the satisfaction of all 
                        liabilities, with respect to employees under 
                        the plan, for any part of the corpus or income 
                        to be (within the taxable year or thereafter) 
                        used for, or diverted to, any purpose other 
                        than the providing of supplemental unemployment 
                        compensation benefits,
                            ``(ii) such benefits are payable to 
                        employees under a classification which is set 
                        forth in the plan and which is found by 
the Secretary not to be discriminatory in favor of employees who are 
highly compensated employees (within the meaning of section 414(q)), 
and
                            ``(iii) such benefits do not discriminate 
                        in favor of employees who are highly 
                        compensated employees (within the meaning of 
                        section 414(q). A plan shall not be considered 
                        discriminatory within the meaning of this 
                        clause merely because the benefits received 
                        under the plan bear a uniform relationship to 
                        the total compensation, or the basic or regular 
                        rate of compensation, of the employees covered 
                        by the plan.
                    ``(B) Rules similar to those contained in 
                subparagraphs (B) through (E) of section 501(c)(7) of 
                the Internal Revenue Code of 1986 shall apply to 
                subparagraph (A).
            ``(18) Grandfathered trusts.--A trust or trusts created 
        before June 25, 1959, and described in section 501(c)(18) of 
        the Internal Revenue Code of 1986.
            ``(19) Certain veterans' organizations.--A post or 
        organization of past or present members of the Armed Forces of 
        the United States, or an auxiliary unit or society of, or a 
trust or foundation for, any such post or organization--
                    ``(A) organized in the United States or any of its 
                possessions,
                    ``(B) at least 75 percent of the members of which 
                are past or present members of the Armed Forces of the 
                United States and substantially all of the other 
                members of which are individuals who are cadets or are 
                spouses, widows, or widowers of past or present members 
                of the Armed Forces of the United States or of cadets, 
                and
                    ``(C) no part of the net earnings of which inures 
                to the benefit of any private shareholder or 
                individual.
            ``(20) Legal service plan trusts.--An organization or trust 
        created or organized in the United States, the exclusive 
        function of which is to form part of a qualified group legal 
        services plan or plans.
            ``(21) Black lung act trusts.--A trust or trusts 
        established in writing, created or organized in the United 
        States, and contributed to by any person (except an insurance 
        company) if--
                    ``(A) the purpose of such trust or trusts is 
                exclusively--
                            ``(i) to satisfy, in whole or in part, the 
                        liability of such person for, or with respect 
                        to, claims for compensation for disability or 
                        death due to pneumoconiosis under Black Lung 
                        Acts,
                            ``(ii) to pay premiums for insurance 
                        exclusively covering such liability,
                            ``(iii) to pay administrative and other 
                        incidental expenses of such trust in connection 
                        with the operation of the trust and the 
                        processing of claims against such person under 
                        Black Lung Acts, and
                            ``(iv) to pay accident or health benefits 
                        for retired miners and their spouses and 
                        dependents (including administrative and other 
                        incidental expenses of such trust in connection 
                        therewith) or premiums for insurance 
                        exclusively covering such benefits; and
                    ``(B) such trusts meets requirements similar to 
                those contained in section 501(c)(21) of the Internal 
                Revenue Code of 1986.
            ``(22) Multiemployer erisa trust.--A trust created or 
        organized in the United States and established in writing by 
        the plan sponsors of multiemployer plans if--
                    ``(A) the purpose of such trust is exclusively--
                            ``(i) to pay any amount described in 
                        section 4223(c) or (h) of the Employee 
                        Retirement Income Security Act of 1974, and
                            ``(ii) to pay reasonable and necessary 
                        administrative expenses in connection with the 
                        establishment and operation of the trust and 
the processing of claims against the trust,
                    ``(B) no part of the assets of the trust may be 
                used for, or diverted to, any purpose other than--
                            ``(i) the purposes described in 
                        subparagraph (A), or
                            ``(ii) prudent investment in securities, 
                        obligations, or time or demand deposits,
                    ``(C) such trust meets the requirements of 
                paragraphs (2), (3), and (4) of section 4223(b), 
                4223(h), or, if applicable, section 4223(c) of the 
                Employee Retirement Income Security Act of 1974, and
                    ``(D) the trust instrument provides that, on 
                dissolution of the trust, assets of the trust may not 
                be paid other than to plans which have participated in 
                the plan or, in the case of a trust established under 
                section 4223(h) of such Act, to plans with respect to 
                which employers have participated in the fund.
            ``(23) Grandfathered veterans' insurance organization.--Any 
        association organized before 1880 more than 75 percent of the 
        members of which are present or past members of the Armed 
        Forces and a principal purpose of which is to provide insurance 
        and other benefits to veterans or their dependents.
            ``(24) ERISA trust.--A trust described in section 4049 of 
        the Employee Retirement Income Security Act of 1974 (as in 
        effect on the date of the enactment of the Single-Employer 
        Pension Plan Amendments Act of 1986).
            ``(25) Real title holding corporation or trust.--
                    ``(A) Any corporation or trust which--
                            ``(i) has no more than 35 shareholders or 
                        beneficiaries,
                            ``(ii) has only 1 class of stock or 
                        beneficial interest, and
                            ``(iii) is organized for the exclusive 
                        purposes of--
                                    ``(I) acquiring real property and 
                                holding title to, and collecting income 
                                from, such property, and
                                    ``(II) remitting the entire amount 
                                of income from such property (less 
                                expenses) to 1 or more organizations 
                                described in subparagraph (C) which are 
                                shareholders of such corporation or 
                                beneficiaries of such trust.
                ``For purposes of clause (iii), the term `real 
                property' shall not include any interest as a tenant in 
                common (or similar interest) and shall not include any 
                indirect interest.
                    ``(B) A corporation or trust shall be described in 
                subparagraph (A) without regard to whether the 
                corporation or trust is organized by 1 or more 
                organizations described in subparagraph (C).
                    ``(C) An organization is described in this 
                subparagraph if such organization is--
                            ``(i) a qualified pension, profit sharing, 
                        or stock bonus plan that meets the requirements 
                        of section 401(a),
                            ``(ii) a governmental plan (within the 
                        meaning of section 414(d)),
                            ``(iii) the United States, any State or 
                        political subdivision thereof, or any agency or 
                        instrumentality of any of the foregoing, or
                            ``(iv) any organization described in 
                        paragraph (3).
                    ``(D) A corporation or trust shall in no event be 
                treated as described in subparagraph (A) unless such 
                corporation or trust permits its shareholders or 
                beneficiaries--
                            ``(i) to dismiss the corporation's or 
                        trust's investment adviser, following 
                        reasonable notice, upon a vote of the 
                        shareholders or beneficiaries holding a 
                        majority of interest in the corporation or 
                        trust, and
                            ``(ii) to terminate their interest in the 
                        corporation or trust by either, or both, of the 
                        following alternatives, as determined by the 
                        corporation or trust:
                                    ``(I) by selling or exchanging 
                                their stock in the corporation or 
                                interest in the trust (subject to any 
                                Federal or State securities law) to any 
                                organization described in subparagraph 
                                (C) so long as the sale or exchange 
                                does not increase the number of 
                                shareholders or beneficiaries in such 
                                corporation or trust above 35, or
                                    ``(II) by having their stock or 
                                interest redeemed by the corporation or 
                                trust after the shareholder or 
                                beneficiary has provided 90 days notice 
                                to such corporation or trust.
                    ``(E)(i) For purposes of this paragraph--
                            ``(I) a corporation which is a qualified 
                        subsidiary shall not be treated as a separate 
                        corporation, and
                            ``(II) all assets, liabilities, and items 
                        of income, deduction, and credit of a qualified 
                        subsidiary shall be treated as assets, 
                        liabilities, and such items (as the case may 
                        be) of the corporation or trust described in 
                        subparagraph (A).
                    ``(ii) For purposes of this subparagraph, the term 
                `qualified subsidiary' means any corporation if, at all 
                times during the period such corporation was in 
                existence, 100 percent of the stock of such corporation 
                is held by the corporation or trust described in 
                subparagraph (A).
                    ``(iii) For purposes of this subtitle, if any 
                corporation which was a qualified subsidiary ceases to 
                meet the requirements of clause (ii), 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 corporation 
                or trust described in subparagraph (A) in exchange for 
                its stock.
                    ``(F) For purposes of subparagraph (A), the term 
                `real property' includes any personal property which is 
                leased under, or in connection with, a lease of real 
                property, but only if the rent attributable to such 
                personal property for the taxable year does not exceed 
                15 percent of the total rent for the taxable year 
                attributable to both the real and personal property 
                leased under, or in connection with, such lease.
                    ``(G)(i) An organization shall not be treated as 
                failing to be described in this paragraph merely by 
                reason of the receipt of any otherwise disqualifying 
                income which is incidentally derived from the holding 
                of real property.
                    ``(ii) Clause (i) shall not apply if the amount of 
                gross income described in such clause exceeds 10 
                percent of the organization's gross income for the 
                taxable year unless the organization establishes to the 
                satisfaction of the Secretary that the receipt of gross 
                income described in clause (i) in excess of such 
                limitation was inadvertent and reasonable steps are 
                being taken to correct the circumstances giving rise to 
                such income.
            ``(26) State established medical care insurer.--Any 
        membership organization if--
                    ``(A) such organization is established by a State 
                exclusively to provide coverage for medical care on a 
                not-for-profit basis to individuals described in 
                subparagraph (B) through--
                            ``(i) insurance issued by the organization, 
                        or
                            ``(ii) a health maintenance organization 
                        under an arrangement with the organization,
                    ``(B) the only individuals receiving such coverage 
                through the organization are individuals--
                            ``(i) who are residents of such State, and
                            ``(ii) who, by reason of the existence or 
                        history of a medical condition--
                                    ``(I) are unable to acquire medical 
                                care coverage for such condition 
                                through insurance or from a health 
                                maintenance organization, or
                                    ``(II) are able to acquire such 
                                coverage only at a rate which is 
                                substantially in excess of the rate for 
                                such coverage through the membership 
                                organization,
                    ``(C) the composition of the membership in such 
                organization is specified by such State, and
                    ``(D) no part of the net earnings of the 
                organization inures to the benefit of any private 
                shareholder or individual. A spouse and any qualifying 
child) of an individual described in subparagraph (B) (without regard 
to this sentence) shall be treated as described in subparagraph (B).
            ``(27) Grandfathered workers compensation organization.--
        Any membership organization established before June 1, 1996, by 
        a State exclusively to reimburse its members for losses arising 
        under workmen's compensation acts, and described in section 
        501(c)(27) of the Internal Revenue Code of 1986.
    ``(d) Religious and Apostolic Organizations.--The following 
organizations are referred to in subsection (a): Religious or apostolic 
associations or corporations, if such associations or corporations have 
a common treasury or community treasury, even if such associations or 
corporations engage in business for the common benefit of the members, 
but only if such activity is treated as unrelated business activity.
    ``(e) Cooperative Hospital Service Organizations.--For purposes of 
this chapter, an organization shall be treated as an organization 
organized and operated exclusively for charitable purposes, if--
            ``(1) such organization is organized and operated solely--
                    ``(A) to perform, on a centralized basis, one or 
                more of the following services which, if performed on 
                its own behalf by a hospital which is an organization 
                described in subsection (c)(3) and exempt from taxation 
                under subsection (a), would constitute activities in 
                exercising or performing the purpose or function 
                constituting the basis for its exemption: data 
                processing, purchasing (including the purchasing of 
                insurance on a group basis), warehousing, billing and 
                collection, food, clinical, industrial engineering, 
                laboratory, printing, communications, record center, 
                and personnel (including selection, testing, training, 
                and education of personnel) services; and
                    ``(B) to perform such services solely for two or 
                more hospitals each of which is--
                            ``(i) an organization described in 
                        subsection (c)(3) which is exempt from taxation 
                        under subsection (a),
                            ``(ii) a constituent part of an 
                        organization described in subsection (c)(3) 
                        which is exempt from taxation under subsection 
                        (a) and which, if organized and operated as a 
                        separate entity, would constitute an 
                        organization described in subsection (c)(3), or
                            ``(iii) owned and operated by the United 
                        States, a State, the District of Columbia, or a 
                        possession of the United States, or a political 
                        subdivision or an agency or instrumentality of 
                        any of the foregoing;
            ``(2) such organization is organized and operated on a 
        cooperative basis and allocates or pays, within 8\1/2\ months 
        after the close of its taxable year, all net earnings to 
        patrons on the basis of services performed for them; and
            ``(3) if such organization has capital stock, all of such 
        stock outstanding is owned by its patrons.
``For purposes of this title, any organization which, by reason of the 
preceding sentence, is an organization described in subsection (c)(3) 
and exempt from taxation under subsection (a), shall be treated as a 
hospital and as an organization referred to in section 
101(b)(1)(A)(iii).
    ``(f) Cooperative Service Organizations of Operating Educational 
Organizations.--For purposes of this chapter, if an organization is--
            ``(1) organized and operated solely to hold, commingle, and 
        collectively invest and reinvest (including arranging for and 
        supervising the performance by independent contractors of 
        investment services related thereto) in stocks and securities, 
        the moneys contributed thereto by each of the members of such 
        organization, and to collect income therefrom and turn over the 
        entire amount thereof, less expenses, to such members,
            ``(2) organized and controlled by one or more such members, 
        and
            ``(3) comprised solely of members that are organizations 
        described in clause (ii) or (iv) of section 101(b)(1)(A)--
                    ``(A) which are exempt from taxation under 
                subsection (a), or
                    ``(B) the gross profits of which are excluded from 
                taxation under section 251(a),
then such organization shall be treated as an organization organized 
and operated exclusively for charitable purposes.
    ``(g) Expenditures by Public Charities To Influence Legislation.--
            ``(1) General rule.--In the case of an organization to 
        which this subsection applies, exemption from taxation under 
        subsection (a) shall be denied because a substantial part of 
        the activities of such organization consists of carrying on 
        propaganda, or otherwise attempting, to influence legislation, 
but only if such organization normally--
                    ``(A) makes lobbying expenditures in excess of the 
                lobbying ceiling amount for such organization for each 
                taxable year, or
                    ``(B) makes grass roots expenditures in excess of 
                the grass roots ceiling amount for such organization 
                for each taxable year.
            ``(2) Definitions.--For purposes of this subsection--
                    ``(A) Lobbying expenditures.--`Lobbying 
                expenditures' means expenditures for the purpose of 
                influencing legislation (as defined in section 
                4911(d)).
                    ``(B) Lobbying ceiling amount.--The lobbying 
                ceiling amount for any organization for any taxable 
                year is 150 percent of the lobbying nontaxable amount 
                for such organization for such taxable year, determined 
                under section 4911.
                    ``(C) Grass roots expenditures.--`Grass roots 
                expenditures' means expenditures for the purpose of 
                influencing legislation (as defined in section 4911(d) 
                without regard to paragraph (1)(B) thereof).
                    ``(D) Grass roots ceiling amount.--The grass roots 
                ceiling amount for any organization for any taxable 
                year is 150 percent of the grass roots nontaxable 
                amount for such organization for such taxable year, 
                determined under section 4911.
            ``(3) Organizations to which this subsection applies.--This 
        subsection shall apply to any organization which has elected 
        (in such manner and at such time as the Secretary may 
        prescribe) to have the provisions of this subsection apply to 
        such organization and which, for the taxable year which 
        includes the date the election is made, is described in 
        subsection (c)(3) and is not described in paragraph (4) and is 
        not a private foundation.
            ``(4) Disqualified organizations.--This subsection does not 
        apply to--
                    ``(A) a church,
                    ``(B) an integrated auxiliary of a church or of a 
                convention or association of churches, or
                    ``(C) a member of an affiliated group of 
                organizations (within the meaning of section 
                4911(f)(2)) if one or more members of such group is 
                described in subparagraph (A) or (B).
            ``(5) Years for which election is effective.--An election 
        by an organization under this subsection shall be effective for 
        all taxable years of such organization which--
                    ``(A) end after the date the election is made, and
                    ``(B) begin before the date the election is revoked 
                by such organization (under regulations prescribed by 
                the Secretary).
            ``(6) No effect on certain organizations.--With respect to 
        any organization for a taxable year for which--
                    ``(A) such organization is described in paragraph 
                (5), or
                    ``(B) an election under this subsection is not in 
                effect for such organization, nothing in this 
                subsection or in section 4911 shall be construed to 
                affect the interpretation of the phrase, `no 
                substantial part of the activities of which is carrying 
                on propaganda, or otherwise attempting, to influence 
                legislation,' under subsection (c)(3).
    ``(h) Government Corporations Exempt Under Subsection (c)(1).--For 
purposes of subsection (c)(1), the following organizations are 
described in this subsection:
            ``(1) The Central Liquidity Facility established under 
        title III of the Federal Credit Union Act (12 U.S.C. 1795 et 
        seq.).
            ``(2) The Resolution Trust Corporation established under 
        section 21A of the Federal Home Loan Bank Act.
            ``(3) The Resolution Funding Corporation established under 
        section 21B of the Federal Home Loan Bank Act.
    ``(i) Certain Educational Organizations.--An organization shall not 
be eligible for exemption as an educational organization under 
subsection (c)(3) if a substantial amount of its activities and funds 
are devoted to--
            ``(1) conducting seminars and other similar programs,
            ``(2) conducting research to educate Congress or the 
        general public about public policy issues,
            ``(3) producing books and pamphlets, or
            ``(4) a combination of the foregoing.

``SEC. 254. SPECIAL RULES FOR (C)(3) ORGANIZATIONS.

    ``(a) New Organizations Must Notify Secretary.--Except as provided 
in subsection (c), an organization shall not be treated as an 
organization described in section 253(c)(3)--
            ``(1) unless that it has given notice to the Secretary, in 
        such manner as the Secretary may prescribe, that it is applying 
        for recognition of such status, or
            ``(2) for any period before giving of such notice, if such 
        notice is given after the time prescribed by the Secretary by 
        regulations for giving notice under this subsection.
    ``(b) Presumption That Organizations Are Private Foundations.--
Except as provided in subsection (c), any organization described in 
section 253(c)(3) and which does not notify the Secretary, at such time 
and in such manner as the Secretary may by regulations prescribe, that 
it is not a private foundation (as defined in section 102) shall be 
presumed to be a private foundation.
    ``(c) Exceptions.--Subsections (a) and (b) shall not apply to--
            ``(1) organizations organized before October 10, 1969;
            ``(2) organizations which obtained recognition of tax-
        exempt status under section 501(c)(3) of the Internal Revenue 
        Code of 1986 (in the case of subsection (a) only);
            ``(3) organizations which were determined not to be private 
        foundations under the Internal Revenue Code of 1986;
            ``(4) churches, their integrated auxiliaries, and 
        conventions and associations of churches;
            ``(5) any organization that is not a private foundation and 
        the gross receipts of which in each taxable year are not more 
        than $25,000, or
            ``(6) such other classes of organizations which the 
        Secretary may exempt.

``SEC. 255. TAX ON UNRELATED BUSINESS ACTIVITY.

    ``(a) In General.--Each organization described in subsection (b) 
shall be subject to the Simplified USA Tax for businesses under section 
201 on its gross profits from its unrelated business activity.
    ``(b) Organizations Subject to Tax.--This section shall apply to--
            ``(1) organizations exempt from the business tax under 
        section 253(a), other than instrumentalities of the United 
        States described in section 253(c)(1).
            ``(2) colleges and universities which are instrumentalities 
        of any government and corporations owned by one or more such 
        colleges or universities.

``SEC. 256. UNRELATED BUSINESS ACTIVITY.

    ``(a) In General.--`Unrelated business activity' means any trade or 
business the conduct of which is not substantially related (aside from 
the need of such organization for income or funds or the use it makes 
of the profits derived) to the exercise or performance by such 
organization of its charitable, educational, or other purpose or 
function constituting the basis for its exemption under section 253, 
except that such term does not include any trade or business--
            ``(1) in which substantially all the work in carrying on 
        such trade or business is performed for the organization 
        without compensation; or
            ``(2) which is carried on, in the case of an organization 
        described in section 253(c)(3) or in the case of a college or 
        university described in section 255(b), by the organization 
        primarily for the convenience of its members, students, 
        patients, officers, or employees, which is the selling by the 
        organization of items of work-related clothes and equipment and 
        items normally sold through vending machines, through food 
        dispensing facilities, or by snack bars, for the convenience of 
        its members at their usual places of employment; or
            ``(3) which is the selling of merchandise, substantially 
        all of which has been received by the organization as gifts or 
        contributions.
    ``(b) Advertising, etc., Activities.--For purposes of this section, 
`trade or business' includes any activity which is carried on for the 
production of income from the sale of goods or the performance of 
services. For purposes of the preceding sentence, an activity does not 
lose identity as a trade or business merely because it is carried on 
within a larger aggregate of similar activities or within a larger 
complex of other endeavors which may, or may not, be related to the 
exempt purposes of the organization. Where an activity carried on for 
profit constitutes an unrelated trade or business, no part of such 
trade or business shall be excluded from such classification merely 
because it does not result in profit.
    ``(c) Trade or Business.--
            ``(1) Certain business activities.--An activity shall not 
        be considered a `trade or business' solely because the activity 
        is a business activity (such as certain passive rental 
        activity) that would be subject to the business tax if 
        conducted by a business entity other than a tax-exempt 
        organization.
            ``(2) Regulations.--The Secretary shall prescribe 
        regulations defining a `trade or business.' Such regulations 
        shall be consistent with the provisions under sections 511 
        through 513 of the Internal Revenue Code of 1986, except to the 
extent such provisions are inconsistent with other principles of the 
business tax. The regulations shall include exclusions from the 
definition of `trade or business' similar to those contained in section 
513 of the Internal Revenue Code for--
                    ``(A) certain bingo games,
                    ``(B) certain hospital services, and
                    ``(C) certain public entertainment activity at 
                fairs and expositions by an organization which 
                regularly conducts, as one of its substantial exempt 
                purposes, an agricultural or educational fair or 
                exhibition.
            ``(3) Trade shows.--The conduct of trade shows and 
        conventions shall not be excluded from the definition of trade 
        or business.

                      ``Subchapter I--Cooperatives

``Sec. 260. Patronage dividends of cooperatives.

``SEC. 260. PATRONAGE DIVIDENDS OF COOPERATIVES.

    ``(a) Patronage Dividends Paid by Supply Cooperatives.--A qualified 
patronage dividend paid by a supply cooperative to a patron shall be 
treated as if it is a refund of a portion of the amounts paid by the 
patron for goods, services, or use of capital. In general, if the 
supply cooperative included the amount received from the patron in 
taxable receipts, the dividend shall reduce taxable receipts in the 
year incurred. If the recipient of the dividend is a business entity 
which deducted the cost of business purchases to which the dividend 
related, the recipient will reduce its cost of business purchases by 
the amount of the dividend in the year the dividend is paid or 
incurred.
    ``(b) Patronage Dividends Paid by Marketing Cooperatives.--A 
qualified patronage dividend paid to a patron by a marketing 
cooperative shall be treated as an upward price adjustment in the 
amount received by the patron for its goods marketed by the 
cooperative. In general, the cooperative will increase its cost of 
business purchases by the amount of the qualified patronage dividend 
and the recipient will increase its taxable receipts by the amount of 
the qualified patronage dividend.
    ``(c) Dividend Treatment.--Only the portion of a patronage dividend 
that is not a qualified patronage dividend shall be treated as a 
dividend under this chapter and chapter 2.
    ``(d) Definitions.--
            ``(1) Qualified patronage dividend.--A `qualified patronage 
        dividend' is that part of a patronage dividend that is 
        attributable to the patron's allocable share of patronage 
        earnings of a marketing cooperative or a supply cooperative.
            ``(2) Supply cooperative.--A `supply cooperative' is a 
        cooperative that sells goods or service to patrons and provided 
        patronage dividends with respect to the quantity of purchases 
        of the patrons.
            ``(3) Marketing cooperative.--A `marketing cooperative' is 
        a cooperative that sells goods produced by its members and 
        provides patronage dividends to the members based on the 
        quantities of goods sold or provided for sale.
    ``(e) Special Rules.--
            ``(1) Notices of allocation and per-unit retain 
        certificates.--Except as provided in paragraph (2), a notice of 
        allocation, per-unit retain certificate, or other similar 
        document shall not be treated as a patronage dividend until it 
        is redeemed in cash or property.
            ``(2) Opportunity to receive cash.--If a patron is given an 
        opportunity to receive a patronage dividend in cash, but 
        instead chooses to accept a per-unit retain certificate or a 
        qualified notice of allocation, the patron will be treated as 
        receiving cash and simultaneously contributing to the capital 
of the cooperative.
            ``(3) Application limited to qualified cooperatives.--Under 
        rules to be prescribed by the Secretary, this section shall 
        apply only to cooperatives to which one of the following 
        provisions of the Internal Revenue Code of 1986 would have 
        applied:
                    ``(A) Section 501(c)(12) (relating to cooperative 
                telephone companies and similar organizations).
                    ``(B) Section 501(c)(14) (relating to certain 
                cooperative banks).
                    ``(C) Section 521 (relating to farm cooperatives).
                    ``(D) Section 1381 (relating to cooperatives 
                generally).
            ``(4) Regulations.--The Secretary shall prescribe 
        regulations for the application of this section. The 
        regulations shall generally be consistent with subchapter T of 
        chapter 1 of the Internal Revenue Code of 1986 except to the 
        extent that such rules are inconsistent with provisions of this 
        chapter.

                     ``Subchapter J--Sourcing Rules

``Sec. 265. Exports of property or services.
``Sec. 266. Imports of property or services.
``Sec. 267. Import or export of services.
``Sec. 268. International transportation services.
``Sec. 269. International communications.
``Sec. 270. Insurance.

``SEC. 265. EXPORTS OF PROPERTY OR SERVICES.

    ``(a) General Rule.--Taxable receipts do not include amounts 
received by the exporter thereof for property or services exported from 
the United States for use or consumption outside the United States.
    ``(b) Export Through Nonbusiness Entity.--For purposes of 
subsection (a), if property or services are sold to a governmental 
entity or a tax-exempt organization for export and are exported other 
than in an activity of such entity which is subject to the business 
tax, then the seller of such property or services is deemed to be the 
exporter thereof.
    ``(c) Export of Services.--See section 267 for rules for 
determining whether services are exported or imported.

``SEC. 266. IMPORTS OF PROPERTY OR SERVICES.

    ``(a) In General.--The import of property or services for 
consumption in the United States shall constitute a business purchase 
if such property or service is to be used in a business activity in the 
United States. Property being held for sale or retail by a business 
entity that is in the business of selling goods shall be considered 
held for `use in a business activity'.
    ``(b) Amount of Business Purchase.--
            ``(1) In general.--The cost of business purchases with 
        respect to the import of property or services for use or 
        consumption in the United States is the customs value, price or 
        other amount used for purposes of determining the import tax 
        under section 286 or section 287.
            ``(2) Import tax.--The cost of business purchases does not 
        include any import tax paid. No deduction shall be allowed with 
        respect to property or service imported by a business entity 
        unless the import tax is paid with respect to such import.

``SEC. 267. IMPORT OR EXPORT OF SERVICES.

    ``(a) In General.--Except as otherwise provided in this subchapter 
or in rules prescribed under subchapter G (relating to financial 
intermediation business), services shall not be treated as imported or 
exported from the location in which they are performed.
    ``(b) Import of Services.--A business entity shall be treated as 
importing a service if--
            ``(1) the entire benefit of the service will be realized in 
        the United States, and
            ``(2) the benefit will be realized in connection with the 
        United States business activities of the business entity.
    ``(c) Export of Services.--A business will be treated as exporting 
a service if--
            ``(1) the entire benefit of the service will be realized 
        outside of the United States, and
            ``(2) the benefit will be realized solely in connection 
        with the activities of the purchaser occurring outside the 
        United States.
    ``(d) Services Acquired From Service Provider That Provides 
Services in and Outside the United States.--
            ``(1) In general.--If a business entity acquires services 
        from a service provider that provides services both in and 
        outside the United States and the service provider shows on the 
        invoice where the services are provided--
                    ``(A) the business entity shall treat the services 
                as provided where stated on the invoice, and
                    ``(B) the service provider shall treat as taxable 
                receipts any services listed as provided in the United 
                States.
            ``(2) No invoice.--If a business entity acquires services 
        from a service provider that provides services both in and 
        outside the United States and the service provider does not 
        show on an invoice where such services are provided--
                    ``(A) the business entity shall treat the services 
                as if provided in the location to which payment is 
                sent, and
                    ``(B) the service provider shall treat as taxable 
                receipts any payments received in the United States.
    ``(e) Special Rules Prevail.--See sections 268 and 269 for special 
rule relating to transportation and communication services.

``SEC. 268. INTERNATIONAL TRANSPORTATION SERVICES.

    ``(a) Transportation of Property.--
            ``(1) Taxable receipts.--
                    ``(A) Exports.--Taxable receipts do not include 
                receipts from the transportation of property exported 
                from the United States.
                    ``(B) Imports.--Taxable receipts include receipts 
                from transportation of property imported into the 
                United States only if such costs are not taken into 
                account in determining the import tax.
                    ``(C) Presumptions.--The Secretary shall prescribe 
                regulations describing situations in which a 
                transporter of property must presume that no import tax 
has been paid on the cost of its services.
            ``(2) Business purchases.--
                    ``(A) Exports.--Business purchases do not include 
                amounts paid or incurred for the cost of transportation 
                of property exported from the United States.
                    ``(B) Imports.--Amounts paid or incurred for 
                transportation of goods imported into the United 
                States, shall constitute a cost of business purchase 
                only to the extent that they are taken into account 
in determining the customs value for purposes of section 286(a) 
(relating to the import tax).
    ``(b) Transportation of Passengers.--
            ``(1) Taxable receipts.--Taxable receipts--
                    ``(A) include receipts from the transportation of 
                passengers from the United States to a destination 
                outside the United States, but
                    ``(B) do not include receipts from the 
                transportation of passengers from outside the United 
                States to a destination in the United States.
            ``(2) Business purchases.--Business purchases--
                    ``(A) include amounts paid or incurred in a 
                business activity for the transportation of passengers 
                from the United States to a destination outside the 
                United States, but
                    ``(B) do not include amounts paid or incurred for 
                transportation of passengers from outside the United 
                States to a destination in the United States.
            ``(3) Simplifying rules.--The Secretary may provide rules 
        that simplify this subsection, including rules under which--
                    ``(A) half of receipts attributable to 
                transportation to or from the United States are treated 
                as taxable receipts,
                    ``(B) half of the cost for business trips to and 
                from the United States are treated as business 
                purchases, and
                    ``(C) all transportation expenses of a business 
                entity that has no regular business outside the United 
                States are treated as business purchases.

``SEC. 269. INTERNATIONAL COMMUNICATIONS.

    ``(a) In General.--For purposes of section 266, communications 
services shall be treated as provided at the point of origin of the 
communications and shall not be treated as imported or exported.
    ``(b) Communications Services.--Communications services include--
            ``(1) telephone communications services,
            ``(2) courier services (except in the case of 
        transportation of property that is imported or exported),
            ``(3) satellite transmission services,
            ``(4) telegraph services,
            ``(5) facsimile transmission services, and
            ``(6) other similar services.

``SEC. 270. INSURANCE.

    ``(a) In General.--Insurance services will be treated as provided 
at the location of the insurance company providing the services. Except 
as the Secretary may prescribe by regulations, insurance companies will 
be treated as providing services at the location to which insurance 
payments are made.
    ``(b) Insured Risks in the United States.--If insurance services 
are provided outside the United States and the insured risk is located 
in the United States--
            ``(1) the insurance service shall be treated as imported,
            ``(2) the insurance premiums shall be subject to the import 
        tax, and
            ``(3) payments of insurance benefits shall not be treated 
        as imported.
    ``(c) Insured Risk Outside the United States.--If insurance 
services are provided inside the United States and the insured risk is 
located outside the United States--
            ``(1) insurance services shall be treated as exported,
            ``(2) payments of insurance benefits shall be treated as 
        payments for services outside the United States, and shall not 
        be deducted as business purchases.
    ``(d) Insurance Services.--Insurance services means the provision 
of insurance and services related to insurance other than insurance 
that is treated as a savings asset.

``SEC. 271. BANKING SERVICES.

    ``The Secretary shall prescribe regulations on the location of 
banking services and the extent to which such services are to be 
treated as imported or exported.

           ``Subchapter K--Business Conducted in a Possession

``Sec. 276. Treatment of possessions.

``SEC. 276. TREATMENT OF POSSESSIONS.

    ``(a) In General.--For purposes of the business tax imposed by this 
chapter, the U.S. possessions shall not be treated as part of the 
United States.
    ``(b) Effect on Payroll Tax Credit.--A business entity may not 
claim a payroll tax credit with respect to any payroll taxes paid with 
respect to income of residents of the U.S. possessions.
    ``(c) Possession.--For purposes of this subchapter, `U.S. 
possession' or `possession' means a possession of the United States and 
includes the Commonwealth of Puerto Rico and the Virgin Islands.

                   ``Subchapter L--Payroll Tax Credit

``Sec. 281. Amount of credit.
``Sec. 282. Current-year payroll tax credit.
``Sec. 283. Credit carryover.

``SEC. 281. AMOUNT OF CREDIT.

    ``(a) Amount of Credit.--The payroll tax credit for a business 
entity for a taxable year is the lesser of--
            ``(1) the sum of--
                    ``(A) the current-year payroll tax credit, and
                    ``(B) the credit carryovers to the taxable year, or
            ``(2) the business entity's business tax for the taxable 
        year (determined without regard to the payroll tax credit).
    ``(b) Consolidated Returns.--In the case of business entities 
filing consolidated returns, the amount of the credit shall be 
determined using the combined payroll tax credits and credit carryovers 
of the business entities and the combined business tax of the business 
entities.

``SEC. 282. CURRENT-YEAR PAYROLL TAX CREDIT.

    ``(a) In General.--The `current-year payroll tax credit' is an 
amount equal to the sum of--
            ``(1) the employer's share of the FICA tax imposed on wages 
        of its employees during the taxable year,
            ``(2) the employer's share of the tier 1 railroad 
        retirement tax for its employees during the taxable year,
            ``(3) one-half of the allocable portion of the SECA tax 
        imposed on individuals (other than independent contractors and 
        other business entities) who provide services to the business 
        entity.
    ``(b) Definitions.--
            ``(1) Employer's share of the fica tax.--`Employer's share 
        of the FICA tax' means the old-age, survivors, disability and 
        hospital insurance taxes imposed by section 3111.
            ``(2) Employer's share of the tier 1 railroad retirement 
        tax.--`Employer's share of the tier 1 railroad retirement tax' 
        means--
                    ``(A) the tier 1 railroad retirement tax imposed by 
                section 3221(a), and
                    ``(B) the portion of the tax imposed by section 
                3211(a)(1) on employee representatives attributable to 
                the tax imposed by section 3111.
            ``(3) One-half of the allocable portion of the seca tax.--
                    ``(A) SECA tax.--`SECA tax' means the self-
                employment tax imposed by section 1401.
                    ``(B) Partnerships.--Until such time as the SECA 
                tax and the Federal Insurance Contributions Acts are 
                amended to treat partners of partnerships as employees, 
                if a partner designates a partnership as a principal 
                source of employment income for the taxable year, one-
                half of the partnership's allocable portion of the SECA 
                tax of such partner equals the FICA tax that the 
                employer would have been required to pay under section 
                3111 with respect to such partner if the partner's 
                self-employment income as reported by the partnership 
                were wages subject to the FICA tax. A partner and 
                partnership can agree to treat no portion of a 
                partner's SECA tax as allocable to the partnership.
                    ``(C) Proprietorship.--In the case of an individual 
                who is a proprietor or sole owner and provider of 
                service to a business entity, the individual shall 
                allocate the portion of one-half of his SECA tax not 
                allocated pursuant to subparagraph (B) to his business 
                entities in accordance with rules prescribed by the 
                Secretary.
    ``(c) Special Rule.--Under rules prescribed by the Secretary, an 
individual subject to the self-employment tax shall pay half of the 
self-employment tax on an amount of self employment income not less 
than the amount of the individual's self-employment income taken into 
account by partnerships under subparagraph (B) of subsection (b)(3).

``SEC. 283. CREDIT CARRYOVER.

    ``(a) Carryover.--A current-year credit that is not applied in the 
taxable year in which earned shall constitute a credit carryover until 
applied but for no more than 15 taxable years.
    ``(b) Order of Use.--For purposes of determining which credits are 
applied under section 281, if the total credit allowable in a taxable 
year is less than the sum of the current-year payroll credit and the 
carryover credits, the current-year payroll credit shall be considered 
applied first and then credit carryovers shall be considered applied in 
the order earned.

                       ``Subchapter M--Import Tax

``Sec. 286. Imposition of tax on property.
``Sec. 287. Imposition of tax on import of services.
``Sec. 288. General rules for the import tax.

``SEC. 286. IMPOSITION OF TAX ON PROPERTY.

    ``(a) General Rule.--There is hereby imposed a tax equal to 11 
percent of the customs value of all property entered into the United 
States for consumption, use or warehousing.
    ``(b) Liability for Tax.--The tax imposed on the import of property 
by subsection (a) shall be paid by the person entering the property 
into the United States for consumption, use or warehousing. Such tax 
shall be due and payable at the time of import.
    ``(c) Imports of Previously Exported Property.--In the case of any 
article that is classified under a heading or subheading of subchapter 
I or II of chapter 98 of the Tariff Schedules of the United States, the 
tax under this section shall be imposed only on that portion of the 
customs value of such article that is dutiable under such heading or 
subheading.
    ``(d) Imports for Personal Consumption.--The import tax imposed by 
this section shall not apply to any article entered into the United 
States duty free under subchapters I through VII of chapter 98 of the 
Tariff Schedules of the United States.

``SEC. 287. IMPOSITION OF TAX ON IMPORT OF SERVICES.

    ``(a) General Rule.--There is hereby imposed a tax equal to 11 
percent of the cost of all services treated as imported into the United 
States during the taxable year of the service recipient.
    ``(b) Liability for the Tax.--The tax on the import of services 
imposed by subsection (a) shall be paid by the person who receives the 
imported services. The tax shall be payable as if it were an addition 
to the business tax imposed by section 201.
    ``(c) Imported Services.--For purposes of this section, services 
shall be treated as imported if they are treated as imported under 
section 267 (general rules on import of services) or section 270 
(related to insurance).
    ``(d) Special Rule for Insurance.--The seller of insurance that is 
treated as imported under section 270 shall be liable for the 
collection of the tax imposed by subsection (a) on the insurance and 
for paying such tax to the Secretary. The first sentence of subsection 
(b) (relating to the person liable for the tax) shall apply to 
insurance only to the extent that the seller of the insurance services 
does not collect such tax.

``SEC. 288. GENERAL RULES FOR THE IMPORT TAX.

    ``(a) Import Tax.--`Import tax' means the tax imposed by section 
286 on the import of property and the tax imposed by section 287 on the 
import of services.
    ``(b) No Payroll Tax Credit.--The payroll tax credit shall not be 
allowed against the import tax.

                    ``Subchapter N--Transition Rules

``Sec. 290. Amortization of transition basis.
``Sec. 291. Sales of transition basis property.
``Sec. 292. Safe harbor leases.
``Sec. 293. Carryovers.
``Sec. 294. Section 481 adjustments.

``SEC. 290. AMORTIZATION OF TRANSITION BASIS.

    ``(a) Transition Basis Deduction.--The `transition basis deduction' 
for a taxable year is the sum of the amortization allowance determined 
under this section for the taxable year.
    ``(b) Amortization Rules.--The amortization allowance for each 
category of amortizable basis shall be determined by amortizing the 
amortizable basis of such category ratably over the amortization period 
for the category beginning January 1, 2004.
    ``(c) Amortization Period.--The amortization periods shall be 
determined in accordance with the following table:

          ``In the case of:
                                          ``The amortization period is:
                  Category I basis...................    15 years      
                  Category II basis..................    30 years      
                  Category III basis.................    40 years      
                  Unrecovered inventory costs........     5 years      

    ``(d) Categories.--
            ``(1) Category i basis.--`Category I basis' is the sum of 
        the unrecovered bases as of January 1, 2004, of all depreciable 
        property placed in service prior to January 1, 2004, and the 
        unamortized portion of amortizable costs incurred before 
        January 1, 2004, if--
                    ``(A) cost recovery or amortization began before 
                January 1, 2004, and
                    ``(B) the remaining recovery period or amortization 
                period as of January 1, 2004, is less than 15 years.
            ``(2) Category ii basis.--`Category II basis' is the sum of 
        the unrecovered bases as of January 1, 2004, of all depreciable 
        property placed in service prior to January 1, 2004, and the 
        unamortized portion of amortizable costs incurred before 
        January 1, 2004, if--
                    ``(A) cost recovery or amortization began before 
                January 1, 2004, and
                    ``(B) the remaining recovery period or amortization 
                period as of January 1, 2004, is 15 years or more.
            ``(3) Category iii basis.--`Category III basis' is the sum 
        of the adjusted basis of each asset satisfying the following 
        requirements:
                    ``(A) The asset was placed in service prior to 
                January 1, 2004,
                    ``(B) The asset was used in a business activity in 
                2004,
                    ``(C) The cost of the asset was capitalized and not 
                depreciable or otherwise recoverable under the Internal 
                Revenue Code of 1986, and
                    ``(D) The cost of the asset would have constituted 
                deductible expenses under the business tax if such cost 
                had been incurred after 2003.
            ``(4) Unrecovered inventory costs.--`Unrecovered inventory 
        costs' means the cost of goods sold (as determined under the 
        Internal Revenue Code of 1986) if a business entity sold all of 
        its inventory (including inventory being produced) on the 
        effective date of the business tax.
    ``(e) Rules of Application.--
            ``(1) Remaining recovery period.--
                    ``(A) Time of measure.--The remaining recovery 
                period shall be determined as of December 31, 2003, and 
                shall include each taxable year ending after such date 
                in which a deduction would have been allowed under the 
                Internal Revenue Code of 1986.
                    ``(B) Accounting method.--The remaining recovery 
                period shall be determined using the cost recovery 
                method and rules applicable for determining taxable 
                income under the Internal Revenue Code of 1986.
            ``(2) Depletable assets.--Under rules prescribed by the 
        Secretary, this section shall apply to the remaining cost basis 
        of depletable property and to other property for which a cost 
        recovery method other than one based on time is used.

``SEC. 291. SALES OF TRANSITION BASIS PROPERTY.

    ``(a) In General.--Except as provided in subsection (b), for 
purposes of determining the tax consequences of a sale, retirement, 
casualty or conversion to personal use of an asset whose basis or cost 
is taken into account under section 90, the amount to be amortized 
shall be treated as fully deducted upon the adoption of the business 
tax.
    ``(b) Substantial Sales.--
            ``(1) In general.--In the case of a substantial sale of 
        assets to which the amortization rules of section 90 apply, the 
        purchaser and seller may jointly elect to have the purchaser 
        assume the amortization deductions attributable to such assets, 
        in which case--
                    ``(A) the seller's taxable receipts from such sale 
                shall be reduced by the amount of unamortized basis or 
                cost assumed by the purchaser,
                    ``(B) the purchaser may treat as a cost of a 
                business purchase only the portion of the purchase 
                price in excess of the amount of unamortized basis or 
                cost assumed,
                    ``(C) the unamortized basis or cost assumed shall 
                continue to be amortized in the manner amortized by the 
                seller.
            ``(2) Substantial sale.--A sale of assets by a business 
        entity to another business entity is a substantial sale if--
                    ``(A) more than 20 percent (in fair market value or 
                in original cost) of the assets of the seller are sold,
                    ``(B) the total consideration for the sale exceeds 
                $1 million or 20 percent of the taxable receipts of the 
                seller for the taxable year preceding the year of the 
                sale, or
                    ``(C) the sale satisfies other criteria established 
                by the Secretary to prevent distortions in gross 
                profits resulting from asset sales.

``SEC. 292. SAFE HARBOR LEASES.

    ``(a) In General.--In the case of a safe harbor lease, rental 
payments deemed to occur under the lease and interest payments deemed 
to be made under the leases shall constitute costs of business 
purchases, and rental income and interest income deemed to be earned 
under the lease shall constitute taxable receipts. The transition basis 
deduction rules shall apply to the lessor's adjusted basis in assets 
subject to a safe harbor lease.
    ``(b) Safe Harbor Lease.--`Safe harbor lease' means a sale and 
leaseback transaction entered into pursuant to section 168(f)(8) of the 
Internal Revenue Code, as added by the Economic Recovery Tax Act of 
1981, when such provision was in effect but only if such transaction 
would not be treated as a sale and leaseback for tax purposes but for 
that provision.

``SEC. 293. CARRYOVERS.

    ``(a) No Loss Carryovers.--No deduction shall be allowed under the 
business tax for net operating loss carryovers, capital loss 
carryovers, or any other loss carryovers from the income tax under the 
Internal Revenue Code of 1986.
    ``(b) No Credit Carryovers.--No credits shall be allowed under the 
business tax for business credit carryovers, minimum tax credit 
carryovers, or any other credit carryovers from the income tax under 
the Internal Revenue Code of 1986.

``SEC. 294. SECTION 481 ADJUSTMENTS.

    ``(a) Positive Net Section 481 Adjustment Amount.--If, as of 
January 1, 2004, a business entity has a positive net section 481 
adjustment amount, the amount shall be applied to reduce the transition 
basis in accounts (for purposes of section 290) in the following order:
            ``(1) First, to reduce the category I basis (but not below 
        zero),
            ``(2) Second, to reduce the category II basis (but not 
        below zero),
            ``(3) Third, to reduce the unrecovered inventory costs.
    ``(b) Negative Net Section 481 Adjustment Amount.--If, as of 
January 1, 2004, a business entity has a negative net section 481 
adjustment amount, the amount shall be applied to increase category I 
basis for purposes of section 290.
    ``(c) Section 481 Adjustment.--A business entity's net section 481 
adjustment is determined by subtracting--
            ``(1) the sum of all additional deductions to which a 
        business entity would be entitled by reason of section 481 of 
        the Internal Revenue Code of 1986 for periods beginning on or 
        after the effective date of the business tax with respect to 
        changes in accounting methods made before such effective date, 
        from
            ``(2) the sum of all additional income which a business 
        entity would recognize by reason of section 481 of the Internal 
        Revenue Code of 1986 for periods beginning on or after the 
        effective date of the business tax with respect to changes in 
        accounting methods made before such effective date,
in each case assuming that the income tax under the Internal Revenue 
Code of 1986 remained in effect.

     ``Subchapter O--Rules for Administration, Consolidated Returns

``Sec. 301. Returns, due dates, etc.
``Sec. 302. Consolidated returns.

``SEC. 301. RETURNS, DUE DATES, ETC.

    ``(a) In General.--Until subtitle F is amended to reflect the 
adoption of this chapter, the rules of subtitle F relating to C 
corporations shall apply to business entities with respect to--
            ``(1) returns and records;
            ``(2) time and place for paying tax;
            ``(3) assessment of taxes;
            ``(4) collections and liens;
            ``(5) abatements, credits, and refunds;
            ``(6) interest on underpayments and overpayments;
            ``(7) additions to tax and penalties;
            ``(8) closing agreements and compromises;
            ``(9) crimes;
            ``(10) judicial proceedings;
            ``(11) discovery of liability and enforcement; and
            ``(12) estimated taxes.
    ``(b) Individuals Engaging in Business Activities.--Under rules 
prescribed by the Secretary, individuals engaging in business 
activities on their own or with their spouses shall be permitted to 
file their business tax returns with their individual tax returns and 
shall be subject to estimated tax rules for individual income tax 
returns.

``SEC. 302. CONSOLIDATED RETURNS.

    ``(a) In General.--Business entities may file consolidated returns 
of business tax if they would have been permitted to file consolidated 
returns under section 1501 of the Internal Revenue Code and such 
section were applied by treating each business entity as a corporation 
and its owners or partners as shareholders.
    ``(b) Financial Institutions.--Financial intermediation businesses 
may be included in consolidated returns, but each financial 
intermediation business must compute its gross profits separately.
    ``(c) Intercompany Transactions.--In computing the gross profits of 
a consolidated group, intercompany transactions can be taken into 
account, or at the election of the filer, be disregarded (except in the 
case of transactions with financial intermediation businesses).

          ``Subchapter P--Definitions and Rules of Application

``Sec. 310. Definitions.
``Sec. 311. Rules of application.

``SEC. 310. DEFINITIONS.

    ``(a) In General.--When used in this chapter, where not otherwise 
distinctly expressed or manifestly incompatible with the intent 
thereof--
            ``(1) USA income tax.--`USA Income Tax' and `Simplified USA 
        Tax' for individuals mean the tax imposed by chapter 1.
            ``(2) Internal revenue code of 1986.--`Internal Revenue 
        Code of 1986' means the Internal Revenue Code of 1986 as in 
        effect immediately before the enactment of the Simplified USA 
        Tax.
            ``(3) United states.--`United States' means the States and 
        the District of Columbia.
    ``(b) Terms Defined in Chapter 2.--If a term that is used but not 
defined in this chapter or in section 7701 is defined in chapter 1, the 
definition in chapter 1 shall apply except if manifestly incompatible 
with the intent of the provision in which the term is used.

``SEC. 311. RULES OF APPLICATION.

    ``(a) Definitions.--Any definition included in this chapter shall 
apply for all purposes of this chapter unless--
            ``(1) such definition is limited to the purposes of a 
        particular chapter, section, or subsection, or
            ``(2) the definition clearly would not be applicable in a 
        particular context.
    ``(b) Interpretations Consistent With Internal Revenue Code of 
1986.--Terms not defined in this chapter or elsewhere in this title, 
but defined in the Internal Revenue Code of 1986, shall be interpreted 
in a manner consistent with the Internal Revenue Code of 1986, except 
to the extent such interpretation would be inconsistent with the 
principles and purposes of this chapter.''
    (b) The amendments made by this section shall be effective on 
January 1, 2004, except to the extent otherwise specifically provided 
in the text of such amendments.

SEC. 302. REPEAL OF CHAPTER 6.

    Chapter 6 of the Code (relating to consolidated returns) is 
repealed as of January 1, 2004.

                 TITLE IV--DEFERRED COMPENSATION PLANS

SEC. 401. PROVISIONS SAVED.

    (a) In General.--Except as otherwise provided in this title, the 
sections contained in subchapter D of chapter 1 of the Code (relating 
to deferred compensation, etc.) are hereby saved as chapter 3.
    (b) Limitations on Chapter 3.--The following new section is 
inserted before section 401 of the Code (as saved by subsection (a)):

``SEC. 400. EFFECT OF CHAPTER 3.

    ``(a) In General.--The provisions of chapter 3 (sections 401 
through 420) are included in this subtitle for purposes of cross-
reference and for purposes of determining whether plans are exempt from 
the business tax and whether contributions to plans are deductible or 
excludable from gross income under chapter 1.
    ``(b) Effect on Business Tax Deductions.--Notwithstanding any 
provision to the contrary in this chapter, no provision of this chapter 
shall cause any amount to be treated as a cost of business purchase or 
to otherwise be deducted from gross receipts for purposes of computing 
the Simplified USA for Tax Businesses under chapter 2.
    ``(c) No Credits.--Notwithstanding any provision to the contrary in 
this chapter, no provision of this chapter shall result in a tax credit 
against any tax imposed by chapter 1 or chapter 2.
    ``(d) Effect of Failure To Comply With Provisions.--A failure to 
comply with applicable provisions in this chapter could cause a plan to 
lose its exemption from the business tax and, thereby subject certain 
business activities of the plan to the business tax and/or result in 
the constructive distribution of plan assets to plan participants.''
    (c) Section 408A Susperseded by Section 30.--Section 408A is 
repealed.

SEC. 402. CLERICAL AMENDMENTS.

    (a) Table of Sections.--The table of sections for subpart A of part 
1 of chapter 3 of the USA Tax Code (formerly subchapter D of chapter 1 
of the Code) is amended by inserting at the beginning of the table:

               ``CHAPTER 3--DEFERRED COMPENSATION, ETC.''

    (b) Renumbering of Chapters.--
            (1) Renumber chapters.--Chapters 2 and 3 of the Code are 
        renumbered 4 and 5 respectively. Such renumbering shall be 
        reflected in all tables and headings in the Code.
            (2) Cross references.--Any cross reference to chapter 2 or 
        3 of the Code contained in any provision of the Code that is 
        not amended by this Act or in any other statute shall be 
        treated as a reference to such chapter as renumbered by 
        paragraph 1.

                TITLE V--REPEAL OF ESTATE AND GIFT TAXES

SEC. 501. REPEAL OF GRATUITOUS TRANSFER TAXES.

    Subtitle B of the Code (relating to estate and gift taxes) is 
repealed.

SEC 502. EFFECTIVE DATE.

    Section 501 shall apply to--
            (1) gifts made after December 31, 2003;
            (2) the estates of decedents dying after December 31, 2003, 
        and
            (3) generating skipping transfers (within the meaning of 
        subchapter B of chapter 13 as in effect before its repeal by 
        this Act) occurring after December 31, 2003.

    TITLE VI--TECHNICAL AND ADMINISTRATIVE CHANGES: EFFECTIVE DATES

SEC. 601. USA TAX CODE.

    (a) Redesignation of the Code.--The Internal Revenue Title enacted 
August 16, 1954, and as heretofore and hereby amended may be cited as 
the ``USA Tax Code''. The USA Tax Code, as hereinafter amended, may be 
cited as the ``USA Tax Code, as amended''.
    (b) References in Laws, Etc.--Except where inappropriate, any 
reference in any law, Executive order, or other document--
            (1) to the Internal Revenue Code of 1954 or the Internal 
        Revenue Code of 1986 shall include a reference to the USA Tax 
        Code or the USA Tax Code, as amended,
            (2) to the USA Tax Code or the USA Tax Code, as amended, 
        shall include a reference, with respect to periods before 
        January 1, 2004, to the Internal Revenue Code of 1954 or the 
        Internal Revenue Code of 1986.

SEC. 602. REVISIONS TO THE CODE.

    Not later than January 1, 2005, the Secretary shall submit to 
Congress proposed changes in the USA Tax Code that--
            (1) eliminate cross-references to the Internal Revenue Code 
        of 1986 (except with respect to transition issues) and insert 
        provisions similar to the cross-referenced sections of the 
        Internal Revenue Code of 1986,
            (2) revise subtitles C through J of the USA Tax Code to 
        fully reflect the amendments to subtitle A of the Code made by 
        this Act and the repeal of subtitle B,
            (3) include statutory definitions or rules in cases where 
        the Secretary concludes that the definitions or rules cannot or 
        should not be addressed by regulation,
            (4) revise chapter 4 of the USA Tax Code (as renumbered by 
        section 402 of this Act) (relating to the self-employment tax) 
        to conform to changes made by this Act, and
            (5) revise chapter 5 of the USA Tax Code (as renumbered by 
        section 402 of this Act) (relating to withholding on 
        nonresident aliens and foreign corporations) to reflect changes 
        made in this Act.

SEC. 603. APPLICATION OF SUBTITLE F.

    Until such time as subtitle F of the Code is amended to reflect the 
amendments made by this Act, the provisions of subtitle F shall be 
treated as generally applying to the Simplified USA Tax--
            (1) without regard to specific cross references,
            (2) without regard to provisions relating to partnerships, 
        and
            (3) as if the business tax under chapter 2 were the 
        corporate income tax and all business entities were 
        corporations (except for purposes of collection, in which case 
        the owners of noncorporate entities shall be obligated for 
        taxes owned by the entities to the same extent as they would if 
        the entity owed the tax prior to the amendment of the Code).

SEC. 604. CLERICAL AMENDMENT.

    The portion of the table at the beginning of the Code listing 
subtitles and chapters of subtitle A is amended to read as follows:

``Subtitle A. Simplified USA Tax.
``Subtitle B. [deleted].
``Subtitle C. Employment taxes.
``Subtitle D. Miscellaneous excise taxes.
``Subtitle E. Alcohol, tobacco and certain other excise taxes.
``Subtitle F. Procedure and administration.
``Subtitle G. The Joint Committee on Taxation.
``Subtitle H. Financing of presidential election campaigns.
``Subtitle I. Trust Fund Code.
``Subtitle K. Group health plan requirements.
                    ``Subtitle A--Simplified USA Tax

``Chapter 1. Simplified USA Tax for individuals.
``Chapter 2. Simplified USA Tax for businesses.
``Chapter 3. Deferred compensation plans.
``Chapter 4. Tax on self-employment income.
``Chapter 5. Withholding of tax on nonresident aliens and foreign 
                            corporations.''

SEC. 605. EFFECTIVE DATES.

    (a) In General.--Except as otherwise provided in this Act, the 
amendments made by this Act shall be effective on January 1, 2004, with 
respect to tax years beginning on such date.
    (b) Special Rules for Businesses With 52-53 Week Year.--If a 
business uses a 52-53 week taxable year the amendments made by this Act 
shall apply to the business with respect to its tax year beginning in 
the last week in December except with respect to any transactions 
occurring during 2003 that were structured to take advantage of the 
application of this Act to such business at a time when this Act did 
not apply to other businesses or to individuals.
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