I

104TH CONGRESS

1ST SESSION H. R. 1748

To amend the Internal Revenue Code of 1986 to provide for farmers and

closely held businesses a one-time exclusion of gain from certain sales

or exchanges, for self-employed individuals a 100 percent deduction of

health insurance costs, and for farmers a carryover of unused standard

deductions and personal exemptions, and for other purposes.

IN THE HOUSE OF REPRESENTATIVES

JUNE 6, 1995

Mr. JOHNSON of South Dakota introduced the following bill; which was

referred to the Committee on Ways and Means

A BILL

To amend the Internal Revenue Code of 1986 to provide

for farmers and closely held businesses a one-time exclusion of gain from certain sales or exchanges, for selfemployed individuals a 100 percent deduction of health

insurance costs, and for farmers a carryover of unused

standard deductions and personal exemptions, and for

other purposes.

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

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Tax Fairness for

5 Farmers, Ranchers, and Small Businesses Act’’.
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1 SEC. 2. ONE-TIME EXCLUSION OF GAIN FROM SALE OR EX2 CHANGE OF LAND USED IN TRADE OR BUSI3 NESS OF FARMING OR SALE OR EXCHANGE

4 OF CLOSELY HELD BUSINESS.

5 (a) IN GENERAL.—Part III of subchapter B of chap6 ter 1 of the Internal Revenue Code of 1986 (relating to

7 items specifically excluded from gross income) is amended

8 by inserting after section 121 the following new section:

9 ‘‘SEC. 121A. ONE-TIME EXCLUSION OF GAIN FROM SALE OR

10 EXCHANGE OF LAND USED IN TRADE OR

11 BUSINESS OF FARMING OR SALE OR EX12 CHANGE OF CLOSELY HELD BUSINESS.

13 ‘‘(a) IN GENERAL.—At the election of the taxpayer,

14 gross income does not include gain from the sale or ex15 change of a qualified property if—

16 ‘‘(1) the taxpayer has attained age 55 as of the

17 close of the taxable year,

18 ‘‘(2) the taxpayer or a member of the tax19 payer’s family has been actively engaged, throughout

20 the 10-year period ending on the date of the sale or

21 exchange, in the trade or business to which the

22 qualified property relates, and

23 ‘‘(3) the individual acquiring the qualified prop24 erty is a qualified buyer.

25 ‘‘(b) LIMITATIONS.—
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1 ‘‘(1) DOLLAR LIMITATION.—The amount ex2 cluded from gross income under subsection (a) shall

3 not exceed $500,000 ($250,000 in the case of a sep4 arate return of a married individual).

5 ‘‘(2) APPLICATION TO ONLY 1 SALE OR EX6 CHANGE.—Subsection (a) shall not apply to any sale

7 or exchange by the taxpayer if an election by the

8 taxpayer or the taxpayer’s spouse is in effect under

9 subsection (a) with respect to any other sale or ex10 change.

11 ‘‘(c) ELECTION.—An election under subsection (a)

12 may be made or revoked at any time before the expiration

13 of the period for making a claim for credit or refund of

14 the tax imposed by this chapter for the taxable year in

15 which the sale or exchange referred to in subsection (a)

16 occurs, and shall be made or revoked in such manner as

17 the Secretary shall by regulations prescribe. In the case

18 of a taxpayer who is married, an election under subsection

19 (a) or a revocation thereof may be made only if his spouse

20 joins in such election or revocation.

21 ‘‘(d) RECAPTURE OF TAX BENEFIT IN CASE OF

22 EARLY CESSATION OF FARMING OR BUSINESS PARTICI23 PATION.—

24 ‘‘(1) IN GENERAL.—If, at any time during the

25 10-year period beginning on the date of the sale or
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1 exchange referred to in subsection (a), the qualified

2 buyer fails to actively engage in the trade or busi3 ness to which the qualified property relates, then the

4 taxpayer’s tax under this chapter for the taxable

5 year in which such failure begins shall be increased

6 by the recapture amount.

7 ‘‘(2) EXCEPTIONS.—

8 ‘‘(A) BANKRUPTCY.—Paragraph (1) shall

9 not apply to any failure that begins while the

10 qualified buyer is a debtor in a case under title

11 11, United States Code (relating to bank12 ruptcy), if such case is commenced after the

13 date of the sale or exchange referred to in sub14 section (a) and a discharge of indebtedness is

15 granted under such title in such case.

16 ‘‘(B) FAILURE TO REDUCE NET TAX.—

17 Paragraph (1) shall not apply to the extent that

18 the exclusion under subsection (a) did not re19 duce the net income tax of the taxpayer for the

20 taxable year to which the exclusion applied.

21 ‘‘(3) RECAPTURE AMOUNT.—

22 ‘‘(A) IN GENERAL.—For purposes of para23 graph (1), the term ‘recapture amount’ means

24 the sum of—
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1 ‘‘(i) the applicable percentage of the

2 excess of—

3 ‘‘(I) the amount which would

4 (but for subsection (a)) have been the

5 taxpayer’s net income tax for the tax6 able year in which the sale or ex7 change referred to in subsection (a)

8 occurred, over

9 ‘‘(II) the taxpayer’s net income

10 tax for such taxable year, plus

11 ‘‘(ii) interest on the applicable per12 centage of such excess at the overpayment

13 rate established under section 6621, for

14 the period beginning on the due date for

15 filing the return for the taxable year re16 ferred to in clause (i) and ending on the

17 date on which the recapture amount is

18 paid.

19 No deduction shall be allowed under this chap20 ter for interest described in clause (ii).

21 ‘‘(B) APPLICABLE PERCENTAGE.—For

22 purposes of this paragraph, the term ‘applicable

23 percentage’ means 100 percent reduced (but

24 not below zero) by the product of—

25 ‘‘(i) 10 percentage points, and
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1 ‘‘(ii) the number of years (if any) oc2 curring within the period beginning on the

3 date of the sale or exchange referred to in

4 subsection (a) and ending on the earliest

5 subsequent date on which the qualified

6 buyer fails to actively engage in the trade

7 or business to which the qualified property

8 relates.

9 ‘‘(4) STATUTE OF LIMITATIONS EXTENDED.—

10 The statutory period for the assessment of an in11 crease in tax under paragraph (1) shall not expire

12 before the close of the 3-year period beginning on

13 the date that the taxpayer certifies to the Secretary

14 that no increase applies to the taxpayer under such

15 subsection. Such increase may be assessed before the

16 expiration of such 3-year period notwithstanding the

17 provisions of any law or rule of law which would oth18 erwise prevent such assessment.

19 ‘‘(e) DEFINITIONS.—For purposes of this section—

20 ‘‘(1) MEMBER OF FAMILY.—The term ‘member

21 of the family’ has the meaning given such term by

22 section 2032A(e)(2).

23 ‘‘(2) NET INCOME TAX.—The term ‘net income

24 tax’ has the meaning given such term in section

25 38(c)(1).
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1 ‘‘(3) QUALIFIED BUYER.—The term ‘qualified

2 buyer’ means—

3 ‘‘(A) with respect to qualified property de4 scribed in paragraph (4)(A)—

5 ‘‘(i) a qualified beginning farmer or

6 rancher (as defined in section 343(a)(11)

7 of the Consolidated Farm and Rural De8 velopment Act (7 U.S.C. 1991(a)(11)), or

9 ‘‘(ii) a lineal descendant of the tax10 payer who, at the time of the sale or ex11 change referred to in subsection (a), meets

12 the requirements of section

13 343(a)(11)(D)(ii)(I) of such Act, or

14 ‘‘(B) with respect to qualified property de15 scribed in paragraph (4)(B), a lineal descendant

16 of the taxpayer.

17 ‘‘(4) QUALIFIED PROPERTY.—The term ‘quali18 fied property’ means—

19 ‘‘(A) land, including improvements on such

20 land, used in the trade or business of farming

21 (within the meaning of section 2032A(e)(4) or

22 (5)), or

23 ‘‘(B) any interest in a closely held business

24 (as defined in section 6166(b)(1)).

25 ‘‘(f) SPECIAL RULES.—For purposes of this section—
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1 ‘‘(1) ACTIVELY ENGAGED IN TRADE OR BUSI2 NESS OF FARMING.—An individual shall be treated

3 as actively engaged in the trade or business of farm4 ing (within the meaning of section 2032A(e)(4) or

5 (5)) if such individual would not be treated as a lim6 ited partner or limited entrepreneur under subpara7 graphs (A) through (D) of section 464(c)(2).

8 ‘‘(2) ADDITIONAL RULES.—Rules similar to the

9 rules of paragraphs (1), (2), (4), (6), (7), and (8)

10 of section 121(d) (relating to one-time exclusion of

11 gain from sale of principal residence by individual

12 who has attained age 55) shall apply.’’

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

14 for such part III is amended by inserting after the item

15 relating to section 121 the following new item:

‘‘Sec. 121A. One-time exclusion of gain from sale or exchange of

land used in trade or business of farming or sale

or exchange of closely held business.’’

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

17 this section shall apply to sales and exchanges occurring

18 after the date of the enactment of this Act in taxable years

19 ending after such date.

20 SEC. 3. 100 PERCENT DEDUCTION FOR HEALTH INSURANCE

21 COSTS OF SELF-EMPLOYED INDIVIDUALS.

22 (a) INCREASE IN AMOUNT OF DEDUCTION.—Para23 graph (1) of section 162(l) of the Internal Revenue Code

24 of 1986 is amended by striking ‘‘30 percent of’’.
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1 (b) EFFECTIVE DATE.—The amendment made by

2 subsection (a) shall apply to taxable years beginning after

3 December 31, 1994.

4 SEC. 4. CARRYOVER OF UNUSED STANDARD DEDUCTION

5 AND PERSONAL EXEMPTION FOR FARMERS.

6 (a) IN GENERAL.—Subsection (d) of section 172 of

7 the Internal Revenue Code of 1986 is amended by adding

8 at the end the following new paragraph:

9 ‘‘(7) FARMERS ALLOWED CARRYOVER OF UN10 USED PERSONAL EXEMPTION AND STANDARD DE11 DUCTION.—

12 ‘‘(A) IN GENERAL.—In the case of a quali13 fied farmer, paragraphs (3) and (4) shall not

14 apply with respect to any personal exemption

15 allowed under section 151 or any standard de16 duction (as defined in section 63(c)).

17 ‘‘(B) QUALIFIED FARMER.—For purposes

18 of this paragraph—

19 ‘‘(i) IN GENERAL.—The term ‘quali20 fied farmer’ means an individual—

21 ‘‘(I) who is actively engaged in

22 the trade or business of farming

23 (within the meaning of section

24 2032A(e) (4) or (5)), and
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1 ‘‘(II) 50 percent or more of the

2 average annual gross income of whom

3 for the 3 preceding taxable years is

4 attributable to such trade or business.

5 ‘‘(ii) ACTIVELY ENGAGED.—A tax6 payer shall be treated as actively engaged

7 in the trade or business of farming only if

8 the taxpayer is involved in the operation of

9 such trade or business on a regular, con10 tinuous, and substantial basis.’’

11 (b) EFFECTIVE DATE.—The amendment made by

12 this section shall apply to deductions allowable under sec13 tions 63 and 151 for taxable years ending after the date

14 of the enactment of this Act.

15 SEC. 5. POSSESSIONS TAX CREDIT

16 (a) IN GENERAL.—Section 936 of the Internal Reve17 nue Code of 1986 (relating to Puerto Rico and possession

18 tax credit) is hereby repealed.

19 (b) CLERICAL AMENDMENT.—The table of sections

20 for subpart D of part III of subchapter N of chapter 1

21 of such Code is amended by striking the item relating to

22 section 936.

23 (c) EFFECTIVE DATE.—The amendment made by

24 this section shall apply to taxable years beginning after

25 the date of the enactment of this Act.
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1 SEC. 5. REVISION OF TAX RULES ON EXPATRIATION.

2 (a) IN GENERAL.—Subpart A of part II of sub3 chapter N of chapter 1 of the Internal Revenue Code of

4 1986 is amended by inserting after section 877 the follow5 ing new section:

6 ‘‘SEC. 877A. TAX RESPONSIBILITIES OF EXPATRIATION.

7 ‘‘(a) GENERAL RULE.—For purposes of this subtitle,

8 if any United States citizen relinquishes his citizenship

9 during a taxable year—

10 ‘‘(1) except as provided in subsection (f)(2), all

11 property held by such citizen at the time imme12 diately before such relinquishment shall be treated

13 as sold at such time for its fair market value, and

14 ‘‘(2) notwithstanding any other provision of this

15 title, any gain or loss shall be taken into account for

16 such taxable year.

17 Paragraph (2) shall not apply to amounts excluded from

18 gross income under part III of subchapter B.

19 ‘‘(b) EXCLUSION FOR CERTAIN GAIN.—The amount

20 which would (but for this subsection) be includible in the

21 gross income of any individual by reason of subsection (a)

22 shall be reduced (but not below zero) by $600,000.

23 ‘‘(c) PROPERTY TREATED AS HELD.—For purposes

24 of this section, except as otherwise provided by the Sec25 retary, an individual shall be treated as holding—
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1 ‘‘(1) all property which would be includible in

2 his gross estate under chapter 11 were such individ3 ual to die at the time the property is treated as sold,

4 ‘‘(2) any other interest in a trust which the in5 dividual is treated as holding under the rules of sub6 section (f)(1), and

7 ‘‘(3) any other interest in property specified by

8 the Secretary as necessary or appropriate to carry

9 out the purposes of this section.

10 ‘‘(d) EXCEPTIONS.—The following property shall not

11 be treated as sold for purposes of this section:

12 ‘‘(1) UNITED STATES REAL PROPERTY INTER13 ESTS.—Any United States real property interest (as

14 defined in section 897(c)(1)), other than stock of a

15 United States real property holding corporation

16 which does not, on the date the individual relin17 quishes his citizenship, meet the requirements of sec18 tion 897(c)(2).

19 ‘‘(2) INTEREST IN CERTAIN RETIREMENT

20 PLANS.—

21 ‘‘(A) IN GENERAL.—Any interest in a

22 qualified retirement plan (as defined in section

23 4974(c)), other than any interest attributable to

24 contributions which are in excess of any limita-
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1 tion or which violate any condition for tax2 favored treatment.

3 ‘‘(B) FOREIGN PENSION PLANS.—

4 ‘‘(i) IN GENERAL.—Under regulations

5 prescribed by the Secretary, interests in

6 foreign pension plans or similar retirement

7 arrangements or programs.

8 ‘‘(ii) LIMITATION.—The value of prop9 erty which is treated as not sold by reason

10 of this subparagraph shall not exceed

11 $500,000.

12 ‘‘(e) RELINQUISHMENT OF CITIZENSHIP.—For pur13 poses of this section, a citizen shall be treated as relin14 quishing his United States citizenship on the earliest of—

15 ‘‘(1) the date the individual renounces his

16 United States nationality before a diplomatic or con17 sular officer of the United States pursuant to para18 graph (5) of section 349(a) of the Immigration and

19 Nationality Act (8 U.S.C. 1481(a)(5)),

20 ‘‘(2) the date the individual furnishes to the

21 United States Department of State a signed state22 ment of voluntary relinquishment of United States

23 nationality confirming the performance of an act of

24 expatriation specified in paragraph (1), (2), (3), or
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1 (4) of section 349(a) of the Immigration and Na2 tionality Act (8 U.S.C. 1481(a)(1)–(4)),

3 ‘‘(3) the date the United States Department of

4 State issues to the individual a certificate of loss of

5 nationality, or

6 ‘‘(4) the date a court of the United States can7 cels a naturalized citizen’s certificate of naturaliza8 tion.

9 Paragraph (1) or (2) shall not apply to any individual un10 less the renunciation or voluntary relinquishment is subse11 quently approved by the issuance to the individual of a

12 certificate of loss of nationality by the United States De13 partment of State.

14 ‘‘(f) SPECIAL RULES APPLICABLE TO BENE15 FICIARIES’ INTERESTS IN TRUST.—

16 ‘‘(1) DETERMINATION OF BENEFICIARIES’ IN17 TEREST IN TRUST.—For purposes of this section—

18 ‘‘(A) GENERAL RULE.—A beneficiary’s in19 terest in a trust shall be based upon all relevant

20 facts and circumstances, including the terms of

21 the trust instrument and any letter of wishes or

22 similar document, historical patterns of trust

23 distributions, and the existence of and functions

24 performed by a trust protector or any similar

25 advisor.
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1 ‘‘(B) SPECIAL RULE.—In the case of bene2 ficiaries whose interests in a trust cannot be de3 termined under subparagraph (A)—

4 ‘‘(i) the beneficiary having the closest

5 degree of kinship to the grantor shall be

6 treated as holding the remaining interests

7 in the trust not determined under subpara8 graph (A) to be held by any other bene9 ficiary, and

10 ‘‘(ii) if 2 or more beneficiaries have

11 the same degree of kinship to the grantor,

12 such remaining interests shall be treated

13 as held equally by such beneficiaries.

14 ‘‘(C) CONSTRUCTIVE OWNERSHIP.—If a

15 beneficiary of a trust is a corporation, partner16 ship, trust, or estate, the shareholders, part17 ners, or beneficiaries shall be deemed to be the

18 trust beneficiaries for purposes of this section.

19 ‘‘(D) TAXPAYER RETURN POSITION.—A

20 taxpayer shall clearly indicate on its income tax

21 return—

22 ‘‘(i) the methodology used to deter23 mine that taxpayer’s trust interest under

24 this section, and
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1 ‘‘(ii) if the taxpayer knows (or has

2 reason to know) that any other beneficiary

3 of such trust is using a different methodol4 ogy to determine such beneficiary’s trust

5 interest under this section.

6 ‘‘(2) DEEMED SALE IN CASE OF TRUST INTER7 EST.—If an individual who relinquishes his citizen8 ship during the taxable year is treated under para9 graph (1) as holding an interest in a trust for pur10 poses of this section—

11 ‘‘(A) the individual shall not be treated as

12 having sold such interest,

13 ‘‘(B) such interest shall be treated as a

14 separate share in the trust, and

15 ‘‘(C)(i) such separate share shall be treat16 ed as a separate trust consisting of the assets

17 allocable to such share,

18 ‘‘(ii) the separate trust shall be treated as

19 having sold its assets immediately before the re20 linquishment for their fair market value and as

21 having distributed all of its assets to the indi22 vidual as of such time, and

23 ‘‘(iii) the individual shall be treated as hav24 ing recontributed the assets to the separate

25 trust.
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1 Subsection (a)(2) shall apply to any income, gain, or

2 loss of the individual arising from a distribution de3 scribed in subparagraph (B)(ii).

4 ‘‘(g) TERMINATION OF DEFERRALS, ETC.—On the

5 date any property held by an individual is treated as sold

6 under subsection (a), notwithstanding any other provision

7 of this title—

8 ‘‘(1) any period during which recognition of in9 come or gain is deferred shall terminate, and

10 ‘‘(2) any extension of time for payment of tax

11 shall cease to apply and the unpaid portion of such

12 tax shall be due and payable at the time and in the

13 manner prescribed by the Secretary.

14 ‘‘(h) RULES RELATING TO PAYMENT OF TAX.—

15 ‘‘(1) IMPOSITION OF TENTATIVE TAX.—

16 ‘‘(A) IN GENERAL.—If an individual is re17 quired to include any amount in gross income

18 under subsection (a) for any taxable year, there

19 is hereby imposed, immediately before the indi20 vidual relinquishes United States citizenship, a

21 tax in an amount equal to the amount of tax

22 which would be imposed if the taxable year were

23 a short taxable year ending on the date of such

24 relinquishment.
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1 ‘‘(B) DUE DATE.—The due date for any

2 tax imposed by subparagraph (A) shall be the

3 90th day after the date the individual relin4 quishes United States citizenship.

5 ‘‘(C) TREATMENT OF TAX.—Any tax paid

6 under subparagraph (A) shall be treated as a

7 payment of the tax imposed by this chapter for

8 the taxable year to which subsection (a) applies.

9 ‘‘(2) DEFERRAL OF TAX.—The provisions of

10 section 6161 shall apply to the portion of any tax at11 tributable to amounts included in gross income

12 under subsection (a) in the same manner as if such

13 portion were a tax imposed by chapter 11.

14 ‘‘(i) REGULATIONS.—The Secretary shall prescribe

15 such regulations as may be necessary or appropriate to

16 carry out the purposes of this section, including regula17 tions providing appropriate adjustments to basis to reflect

18 gain recognized by reason of subsection (a) and the exclu19 sion provided by subsection (b).

20 ‘‘(j) CROSS REFERENCE.—

‘‘For termination of United States citizenship for

tax purposes, see section 7701(a)(47).’’

21 (b) DEFINITION OF TERMINATION OF UNITED

22 STATES CITIZENSHIP.—Section 7701(a) of the Internal

23 Revenue Code of 1986 is amended by adding at the end

24 the following new paragraph:
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1 ‘‘(47) TERMINATION OF UNITED STATES CITI2 ZENSHIP.—An individual shall not cease to be treat3 ed as a United States citizen before the date on

4 which the individual’s citizenship is treated as relin5 quished under section 877A(e).’’

6 (c) CONFORMING AMENDMENT.—Section 877 of the

7 Internal Revenue Code of 1986 is amended by adding at

8 the end the following new subsection:

9 ‘‘(f) APPLICATION.—This section shall not apply to

10 any individual who relinquishes (within the meaning of

11 section 877A(e)) United States citizenship on and after

12 the date of the enactment of this subsection.’’

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

14 for subpart A of part II of subchapter N of chapter 1

15 of the Internal Revenue Code of 1986 is amended by in16 serting after the item relating to section 877 the following

17 new item:

‘‘Sec. 877A. Tax responsibilities of expatriation.’’

18 (e) EFFECTIVE DATE.—

19 (1) IN GENERAL.—The amendments made by

20 this section shall apply to United States citizens who

21 relinquish (within the meaning of section 877A(e) of

22 the Internal Revenue Code of 1986, as added by this

23 section) United States citizenship on or after the

24 date of the enactment of this Act.
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1 (2) DUE DATE FOR TENTATIVE TAX.—The due

2 date under section 877A(h)(1)(B) of such Code shall

3 in no event occur before the 90th day after the date

4 of the enactment of this Act.

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